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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 SEPTEMBER 30, 2002
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 October 31, 2002, there were 17,057,518 shares of Caminus Corporation
common stock outstanding.
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1
CAMINUS CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED September 30, 2002
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
a) Consolidated Balance Sheets as of September 30,
2002 (Unaudited) and December 31, 2001........ 3
b) Consolidated Statements of
Operations for the three and nine months ended
September 30, 2002 and 2001 (Unaudited)....... 4
c) Consolidated Statements of Cash Flows for the
nine months ended September 30, 2002 and 2001
(Unaudited)................................... 5
d) Notes to Consolidated Financial Statements.... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........ 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.......................................... 24
Item 4. Controls and Procedures.................... 24
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.. 25
Item 6. Exhibits and Reports on Form 8-K........... 25
Signatures......................................... 26
Certifications..................................... 26
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents......................... $ 19,225 $ 35,387
Investments in short-term marketable securities... 9,600 6,640
Accounts receivable, net.......................... 14,190 22,002
Prepaid expenses and other current assets......... 3,680 2,361
-------- --------
Total current assets........................... 46,695 66,390
Investments in long-term marketable securities...... 10,222 -
Fixed assets, net................................... 6,958 7,173
Acquired and internally developed technology, net... 13,116 18,441
Other intangibles, net.............................. 12,669 14,936
Goodwill, net....................................... 60,091 58,045
Other assets........................................ 1,739 1,994
-------- --------
Total assets................................... $151,490 $166,979
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 2,976 $ 4,108
Accrued liabilities............................... 12,089 16,044
Income taxes payable.............................. 196 1,515
Deferred revenue.................................. 7,728 12,707
-------- --------
Total current liabilities...................... 22,989 34,374
Long-term debt.................................... - 15,000
-------- --------
Total liabilities.............................. 22,989 49,374
-------- --------
Commitments and contingencies....................... - -
Stockholders' equity:
Common stock, par value $0.01 per share, 50,000
shares authorized; 19,682 shares issued and
17,058 outstanding at September 30, 2002;
19,663 shares issued and 17,901 outstanding
at December 31, 2001............................. 197 197
Additional paid-in capital.......................... 189,738 164,131
Treasury stock, at cost............................. (8,195) (4,911)
Deferred compensation............................... (374) (677)
Accumulated deficit................................. (53,364) (40,676)
Accumulated other comprehensive income (loss)....... 499 (459)
-------- ---------
Total stockholders' equity..................... 128,501 117,605
-------- --------
Total liabilities and stockholders' equity..... $151,490 $166,979
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited)
Revenues:
Licenses .................................................. $ 7,323 $ 5,558 $ 22,587 $ 19,422
Software services ......................................... 12,419 7,786 39,311 23,692
Strategic consulting ...................................... - 1,812 1,919 6,175
----------- ------------- ----------- -----------
Total revenues ...................................... 19,742 15,156 63,817 49,289
----------- ------------- ----------- -----------
Cost of revenues:
Cost of licenses .......................................... 272 361 610 641
Cost of software services ................................. 5,752 4,044 17,075 12,007
Cost of strategic consulting .............................. - 1,150 1,905 3,417
Amortization of acquired technology ....................... 1,368 464 6,844 1,542
----------- ------------- ----------- -----------
Total cost of revenues .............................. 7,392 6,019 26,434 17,607
----------- ------------- ----------- -----------
Gross profit ................................... 12,350 9,137 37,383 31,682
----------- ------------- ----------- -----------
Operating expenses:
Sales and marketing ....................................... 2,067 2,525 7,494 7,960
Research and development .................................. 6,454 3,032 19,587 8,902
General and administrative................................. 6,239 3,965 20,082 12,338
Restructuring charges...................................... 2,629 - 3,486 -
Amortization of intangible assets.......................... 459 2,546 1,558 8,445
----------- ------------- ----------- -----------
Total operating expenses............................. 17,848 12,068 52,207 37,645
----------- ------------- ----------- -----------
Loss from operations.......................................... (5,498) (2,931) (14,824) (5,963)
Interest and other income, net............................. 315 496 314 1,723
----------- ------------- ----------- -----------
Loss before income taxes...................................... (5,183) (2,435) (14,510) (4,240)
Provision for (benefit from) income taxes..................... (59) 690 (1,822) 2,255
------------ ------------- ------------ -----------
Net loss...................................................... $ (5,124) $ (3,125) $ (12,688) $ (6,495)
=========== ============= =========== ===========
Basic and diluted net loss per share.......................... $ (0.29) $ (0.20) $ (0.69) $ (0.41)
=========== ============= =========== ===========
Weighted average shares used in computing net loss per share.. 17,867 15,902 18,487 15,808
=========== ============= =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
CAMINUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Nine Months Ended September 30,
-------------------------------
2002 2001
---------- ----------
Cash flows from operating activities: (Unaudited)
Net loss $(12,688) $ (6,495)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 10,897 11,378
Deferred taxes - 761
Deferred costs - 52
Non-cash compensation expense 303 508
Provision for doubtful accounts 389 261
Changes in operating assets and liabilities:
Accounts receivable 7,423 2,619
Prepaid expenses and other current assets (1,083) (369)
Accounts payable (1,132) (13)
Accrued liabilities (2,894) (1,480)
Income taxes payable (1,319) (42)
Deferred revenue (4,845) (491)
Capitalized software development costs (1,949) -
Other 255 (75)
-------- --------
Net cash provided by (used in) operating activities (6,643) 6,614
-------- --------
Cash flows from investing activities:
Purchase of marketable securities (16,986) (18,278)
Proceeds from sales of marketable securities 3,806 16,303
Purchase of fixed assets (2,476) (2,473)
Acquisition of Altra (1,906) --
Acquisition of Nucleus - (168)
-------- --------
Net cash used in investing activities (17,562) (4,616)
-------- --------
Cash flows from financing activities:
Cash received for stock issued under employee stock
purchase plan 569 842
Repurchase of common stock (8,195) -
Repayment of borrowing under credit facility (15,000) -
Net proceeds received from the issuance of common stock 28,966 -
Cash received from exercises of stock options 748 1,002
-------- --------
Net cash provided by financing activities 7,088 1,844
-------- --------
Effect of exchange rates on cash flows 955 312
-------- --------
Net increase (decrease) in cash and cash equivalents (16,162) 4,154
Cash and cash equivalents, beginning of year 35,387 16,883
-------- --------
Cash and cash equivalents, end of period $ 19,225 $ 21,037
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
CAMINUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. BUSINESS AND ACCOUNTING POLICIES
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 provides software and software services that facilitate energy
trading, transaction processing, risk management, and decision support within
the wholesale energy markets. The Company's integrated software solutions, which
cover all functional areas across the energy value chain and handle all major
energy commodities and financial instruments, enable energy companies to more
efficiently and profitably trade energy, streamline transaction management,
manage complex risk scenarios, and make optimal operational decisions. The
Company's software can be used by any entity that buys, sells, trades, or takes
a position in energy. Caminus serves customers in every segment of the wholesale
energy industry, including traders, marketers, generators, producers, gatherers,
processors, pipelines, utilities, distribution companies, and public agencies.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
Caminus Corporation and its wholly-owned subsidiaries. All intercompany
transactions and balances have been eliminated.
Revenue recognition
The Company generates revenues from licensing its software products,
reselling its products through distributors, providing related implementation
services and support and providing strategic consulting services. The Company
follows the provisions of Statement of Position ("SOP") No. 97-2, "Software
Revenue Recognition," as amended by SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions." Under SOP
No. 97-2, if the license agreement does not provide for significant
customization of or enhancements to the software, software license revenues are
recognized when a license agreement is executed, the product has been delivered,
all significant obligations are fulfilled, the fee is fixed or determinable and
collectibility is probable. For those license agreements where customer
acceptance is required and it is not probable, license revenues are recognized
when the software has been accepted. For those license agreements where the
licensee requires significant enhancements or customization to adapt the
software to the unique specifications of the customer or the service elements of
the arrangement are considered essential to the functionality of the software
products, both the license revenues and services revenues are recognized using
contract accounting. If acceptance of the software and related software services
is probable, the percentage of completion method is used to recognize revenue
for those types of license agreements, where progress towards completion is
measured by comparing software services hours incurred to estimated total hours
for each software license agreement. If acceptance of the software and related
software services is not probable, then the completed contract method is used
and license revenues are recognized only when the Company's obligations under
the license agreement are completed and the software has been accepted.
Accordingly, for these contracts, payments received and software license costs
are deferred until the Company's obligations under the license agreement are
completed. Anticipated losses, if any, on uncompleted contracts are recognized
in the period in which such losses are determined. For non-exclusive software
licenses with distributors to resell the Company's software in exchange for
royalty payments based on the number of software products resold, the Company
recognizes nonrefundable software license fees as revenue when the software
product master is delivered and accepted and the cash is received from the
reseller, assuming all other revenue recognition criteria are met. Subsequent
royalty revenue related to the resale of the software is recognized as earned.
Maintenance and support revenues associated with new product licenses and
renewals are deferred and recognized ratably over the contract period. Software
services revenues, not required to be recognized using contract accounting, and
strategic consulting revenues are typically billed on a time and materials basis
and are recognized as such services are performed. When software licenses,
services and/or maintenance are bundled in one arrangement, the fair value of
the maintenance fees is determined by the contractual renewal rate and the fair
value of the services is based upon the amount the Company invoices customers
for such services when they are sold on a stand alone basis.
Software development costs
Software development costs are expensed as incurred, except that
capitalization of software development costs begins upon establishment of
technological feasibility of the product. After technological feasibility is
established, significant software development costs are capitalized until the
product is available for general release. The capitalized software development
costs are
6
then amortized on a straight-line basis over the estimated product life, which
is primarily four years, or on the ratio of current revenues to total projected
product revenues, whichever is greater. Through 2001, the period between
achieving technological feasibility, which the Company has defined as
establishment of a working model, which typically occurs when beta testing
commences, and the general release of such software has been short, and software
development costs qualifying for capitalization were insignificant. Accordingly,
the Company did not capitalize any software development costs through December
31, 2001. At the end of 2001, the company acquired Altra Software Services, Inc,
which was involved in major software development efforts to create a new
platform for its software products and to create its next generation gas
marketing product. During the six months ended June 30, 2002, the Company
continued the development of this platform, on which the Company expects most of
its future products would reside, and continued the development of its next
generation gas marketing product. Certain elements of these efforts met the
criteria for the capitalization of software development costs, and accordingly
$1,949 of these costs was capitalized during the first six months of 2002. As
the related products were available for general release as of June 30, 2002, no
additional costs were capitalized in the quarter ended September 30, 2002. The
related amortization of these capitalized software development costs for the
three and nine months ended September 30, 2002 was $117 and $129 respectively,
and is included in cost of licenses revenues.
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 from goodwill. Statement 142 requires that effective January 1,
2002 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. Under Statement 142 intangible assets with
definite useful lives are amortized over their respective estimated useful lives
to their estimated residual values, and reviewed for impairment in accordance
with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets.
The Company adopted the provisions of Statements 141 and 142 effective July
1, 2001 and January 1, 2002 respectively. In connection with the adoption of
Statement 142, the Company evaluated its existing intangible assets and goodwill
that were acquired in prior purchase business combinations, and intangible
assets for assembled workforce in place related to certain prior acquisitions
were reclassified to goodwill in order to conform with the new criteria in
Statement 141 for recognition of intangible assets apart from goodwill. The
Company did not modify the useful lives and residual values of its intangible
assets acquired in purchase business combinations. In connection with the
adoption of Statement 142, the Company performed an assessment of whether there
was an indication that goodwill was impaired as of the date of adoption. The
Company assigned the existing goodwill and intangible assets to its North
American reporting unit and as of the date of adoption determined that the fair
value of the reporting unit based on an independent valuation exceeded the
carrying amount and thus the goodwill and other related intangible assets were
not impaired.
As of January 1, 2002, the Company had unamortized goodwill in the amount
of $58,045 and unamortized identifiable intangible assets in the amount of
$33,377, all of which were subject to the transition provisions of Statements
141 and 142. After the reclassification of $708 of intangible assets for an
assembled workforce in place to goodwill and adding contingent consideration
related to the Altra acquisition to goodwill, as of September 30, 2002, the
Company has goodwill and identified intangible assets with definite lives of
$60,091 and $23,965, respectively. Effective January 1, 2002, the Company is not
amortizing goodwill. The following table provides the pro forma results for the
three and nine months ended September 30, 2001 as if the nonamortization
provisions of Statement 142 had been in effect.
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited)
Loss from operations $(5,498) $(2,931) $(14,824) $(5,963)
Add back amortization of goodwill.......................... - 2,155 - 7,152
------- ------- -------- -------
Adjusted profit (loss) from operations ....................... (5,498) (776) (14,824) 1,189
Interest and other income (expense), net .................. 315 496 314 1,723
------- ------- -------- -------
Adjusted income (loss) before provision for income taxes ..... (5,183) (280) (14,510) 2,912
Provision for (benefit from) income taxes..................... (59) 690 (1,822) 2,255
------- ------- -------- -------
Adjusted net income (loss)................................. (5,124) (970) (12,688) 657
======= ======= ======== =======
Adjusted net income (loss) per share ...................... $ (0.29) $ (0.06) $ (0.69) $ 0.04
======= ======= ======== =======
Weighted average shares used in computing adjusted net
income (loss) per share.............................. 17,867 15,902 18,487 15,808
======= ======= ======== ========
7
In July 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. Statement 146, which is effective
prospectively for exit or disposal activities initiated after December 31, 2002,
applies to costs associated with an exit activity, including restructurings, or
with a disposal of long-lived assets. Those activities can include eliminating
or reducing product lines, terminating employees and contracts and relocating
plant facilities or personnel. Statement 146 requires that exit or disposal
costs are recorded as an operating expense when the liability is incurred and
can be measured at fair value. Commitment to an exit plan or a plan of disposal
by itself will not meet the requirement for recognizing a liability and the
related expense under Statement 146. Statement 146 grandfathers the accounting
for liabilities that were previously recorded under EITF Issue 94-3.
Accordingly, Statement 146 will have no effect on the restructuring costs
recorded by the Company in the second and third quarters of 2002.
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 (2,643
outstanding as of September 30, 2002) to purchase common shares, as the effect
of including such options would be antidilutive.
Comprehensive Loss
Total comprehensive loss for the nine months ended September 30, 2002 and
2001 was as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
2002 2001
---- ----
Net loss.................................... $(12,688) $(6,495)
Reclassification from unrealized gains to
realized gains on marketable securities -- (222)
Unrealized gain on marketable securities.... 3 38
Foreign currency translation adjustment..... 955 312
------- -------
Comprehensive loss.......................... $(11,730) $(6,367)
======== =======
2. SUPPLEMENTAL CASH FLOW INFORMATION
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2002 2001
---- ----
Unrealized gains on available-for-sale securities.... 3 38
Reclassification from unrealized gains to
realized gains on available-for-sale
securities........................................ - (222)
Interest paid........................................
522 -
Income taxes paid, net of income tax refunds......... 170 988
3. ACQUISITION OF ALTRA SOFTWARE SERVICES, INC.
On November 20, 2001, Caminus completed its acquisition of Altra Software
Services, Inc. ("Altra"), a provider of software solutions to the energy
industry, by purchasing all of the capital stock of Altra. As a result of the
acquisition, the Company combined Caminus' historical strength in software for
the financial and risk management of power with Altra's expertise in software
for management of physical logistics and transactions in the gas markets to
create a strong suite of integrated applications for the growing number of
participants in both gas and electricity.
The purchase price of $60,794 consisted of $24,947 in cash, the issuance of
1,975 shares of common stock with a fair value of $33,891 and approximately
$1,956 of other direct acquisition costs including liabilities for severance.
The fair value of the common shares issued was determined based upon the average
market price of the Company's common stock over the three-day period before and
after the terms of the acquisition were agreed to and announced. The purchase
price was subject to adjustment, depending on the final determined value of the
tangible net worth, as defined, of Altra, as more fully described in the Stock
Purchase Agreement. As a result, 994 of the shares of common stock issued in the
acquisition were placed in escrow pending the final determination of the
purchase price, and the
8
resolution of certain contingencies. Of these shares, 335 of the 994 shares of
common stock were sold in our secondary offering in March 2002 realizing net
proceeds of $6,273. Such cash proceeds and the remaining 659 shares of common
stock remain in escrow. Subsequent to September 30, 2002, the tangible net worth
of Altra was finalized, which will result in a reduction of goodwill by $2,666.
It has not yet been determined whether the Company will receive cash or stock
from escrow, and, accordingly, the Company will record the entry to give effect
to this purchase price reduction only after such determination is made.
The cash portion of the purchase price was paid for in part from the
proceeds of a $15,000 Term Credit Agreement, dated as of November 20, 2001,
between the Company and Blue Ridge Investments LLC, and in part from Caminus'
cash and cash equivalents. A summary of the allocation of the acquisition
purchase price is as follows:
Fair value of current assets acquired............................. $ 6,428
Fair value of property and equipment acquired..................... 1,519
Fair value of current liabilities assumed......................... (19,195)
Acquired in-process research and development...................... 1,300
Acquired technology............................................... 17,659
Other identifiable intangible assets.............................. 11,100
Goodwill.......................................................... 41,983
--------
$ 60,794
========
The acquisition was accounted for under the purchase method of accounting.
Altra's results of operations are included in the statement of operations from
December 1, 2001. The fair value assigned to intangible assets acquired was
based on an independent appraisal. Acquired technology represents the fair value
of applications and technologies existing at the date of acquisition. The fair
value of the acquired technology was determined based on the future discounted
cash flows method, which will be amortized on a straight line basis over the
estimated product life, or the ratio of current revenue to total projected
product revenue, whichever is greater. Other intangible assets represent the
fair value of customer relationships. Goodwill is the only asset not subject to
amortization, although it will be deductible for tax purposes over fifteen
years.
Acquired in-process research and development ("IPR&D") represents the fair
value of the project under development at the date of acquisition. The
allocation of $1,300 to IPR&D represents the estimated fair value related to an
incomplete project based on a risk-adjusted discount rate applied to projected
cash flows. At the date of the acquisition, the project associated with the
IPR&D efforts had not yet reached technological feasibility and had no
alternative future uses. Accordingly, these costs were expensed upon
acquisition. At the acquisition date, Altra was conducting development
associated with the next generation of its gas marketing product. The project
under development, at the valuation date, is expected to address the functional
limitations of the existing product and to meet the needs of a changing energy
market environment.
At the acquisition date, Altra was approximately 50% complete with the
IPR&D project. Estimated future development costs totaled $2,500 at the time of
acquisition. Actual research and development related to this project was
completed in June 2002 and totaled $2,265.
Had the acquisition of Altra occurred on January 1, 2001 the unaudited pro
forma revenues, net loss and basic and diluted net loss per share for the nine
months ended September 30, 2001 would have been: $72,257, $17,558 and $0.99
respectively. The per share amount was based on a weighted average number of
shares outstanding of 17,737. These results, which give effect to certain
adjustments, including the amortization of Altra's intangible assets excluding
goodwill, interest expense, provision for income taxes and additional shares
outstanding, are not necessarily indicative of results that would have occurred
had the acquisitions been consummated on January 1, 2001 or that may be obtained
in the future.
4. STOCKHOLDERS' EQUITY
In June 2002, the Company approved a repurchase program for up to $10
million of the Company's common stock. Under the program, the Company has
authorized management to purchase shares of its common stock in the open market,
in privately negotiated block trades or in other transactions from time to time.
As of September 30, 2002 the Company had repurchased 2,625 shares for a total of
$8,195, which have been recorded as treasury stock.
At the Company's annual meeting on April 24, 2002, the shareholders
approved an increase in the authorized shares available under the 1999 Employee
Stock Purchase Plan by 500 to 595 shares.
In March 2002, the Company sold 1,593 shares of common stock resulting in
net proceeds of $28,966. The Company used $15,000 of these proceeds to repay its
borrowings under a credit facility with the remainder available for working
capital and general corporate purposes.
In the first quarter of 2002, the Company retired its then held 1,762
treasury shares.
9
5. INCOME TAXES
In 2002, the Company formalized transfer pricing agreements for
intercompany royalties and other charges for 2002, 2001 and 2000. The
application of these intercompany agreements had no impact on pre-tax
consolidated amounts but shifted taxable income for prior years from the U.K. to
the U.S. resulting in a net tax benefit of $1,567. The reduced taxable income in
the U.K. resulted in a reduction of prior taxes of $1,804. The increased taxable
income in the U.S. resulted in no taxes payable and a tax provision of $237 as a
portion of the benefit associated with the utilization of the net operating loss
carryforwards that arose from equity related transactions was allocated to
additional paid-in capital. The Company's U.S. net operating loss carryforwards
as of September 30, 2002 were approximately $22,674 of which the benefit
associated with the utilization of $14,010 of these net operating loss
carryforwards would be allocated to additional paid-in-capital.
6. 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 assistance to regulatory entities in establishing policies
and provides energy market participants with professional advice regarding where
and how to compete in their respective markets. Beginning in the third quarter
of 2002 the Company ceased to operate its strategic consulting business for
energy market participants. The Company will continue to perform consulting
services under a few strategic consulting contracts for regulatory agencies and
the related personnel have been transferred to the software services segment.
Such consulting services are reported in the software services segment beginning
with the third quarter of 2002. Corporate includes general overhead and
administrative expenses not directly related to the operating segments,
including rent and facility costs. 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, amortization,
depreciation 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 three reportable segments.
The following table illustrates the financial results of the three
reportable segments:
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2002 2001
-------------------------------------------- ----------------------------------------------
(IN THOUSANDS)
Strategic Strategic
Software Consulting Corporate Total Software Consulting Corporate Total
-------- ---------- --------- ----- -------- ---------- --------- -----
Operating Results:
Revenues:
Licenses $ 7,323 $ - $ - $ 7,323 $ 5,558 $ - $ - $ 5,558
Software services 12,070 - - 12,070 7,786 - - 7,786
Strategic consulting 349 - - 349 - 1,812 - 1,812
-------- ----- ------- -------- ------- ------ ------- -------
Total revenues $ 19,742 $ - - $ 19,742 $13,344 $1,812 $ - $15,156
======== ===== ======= ======== ======= ====== ======= =======
Adjusted EBITDA 4,159 - (6,910) (2,751) 3,441 630 (3,285) 786
Non-cash compensation
expense - - (90) (90) - - (178) (178)
-------- ----- ------- -------- ------- ------ ------- -------
4,159 - (7,000) (2,841) 3,441 630 (3,463) 608
Amortization and
depreciation (1,827) - (830) (2,657) (3,010) - (529) (3,539)
-------- ----- ------- -------- ------- ------ ------- -------
Operating income (loss) $ 2,332 $ - $(7,830) $ (5,498) $ 431 $ 630 $(3,992) $(2,931)
======== ===== ======= ======== ======= ====== ======= =======
Total Assets $148,552 $ - $ 2,938 $151,490 $60,410 $5,043 $32,429 $97,882
======== ===== ======= ======== ======= ====== ======= =======
10
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------------------
2002 2001
----------------------------------------------- -----------------------------------------------
(IN THOUSANDS)
Strategic Strategic
Software Consulting Corporate Total Software Consulting Corporate Total
-------- ---------- --------- ----- -------- ---------- --------- -----
Operating Results:
Revenues:
Licenses $ 22,587 $ - - $ 22,587 $19,422 $ - $ - $ 19,422
Software services 38,962 - - 38,962 23,692 - - 23,692
Strategic consulting 349 1,919 - 2,268 - 6,175 - 6,175
-------- ------ -------- ------- ------- ------ -------- --------
Total revenues $ 61,898 $1,919 - $ 63,817 $43,114 $6,175 $ - $ 49,289
======== ====== ======== ======== ======= ====== ======== ========
Adjusted EBITDA 16,372 (842) (19,271) (3,741) 13,789 2,599 (10,466) 5,922
Non-cash compensation
expense - - (303) (303) - - (508) (508)
-------- ------ -------- ------- ------- ------ -------- --------
16,372 (842) (19,574) (4,044) 13,789 2,599 (10,974) 5,414
Amortization and
depreciation (8,402) - (2,378) (10,780 (9,296) (691) (1,390) (11,377)
-------- ------ -------- ------- ------- ------ -------- --------
Operating income (loss) $ 7,970 $ (842) $(21,952) $(14,824) $ 4,493 $1,908 $(12,364) $ (5,963)
======== ====== ======== ======== ======= ====== ======== ========
Total Assets $148,552 $ - $ 7,374 $151,490 $60,410 $5,043 $ 32,429 $ 97,882
======== ====== ======== ======== ======= ====== ======== ========
7. RESTRUCTURING CHARGES
In the second quarter of 2002, the Company reduced the number of personnel
and consolidated its European strategic consulting services operations into one
leased facility. The associated costs of $857 were reflected as a restructuring
charge consisting of $496 of severance costs, all of which were paid in the
second quarter of 2002, moving costs incurred and related asset write-downs of
$128 and $233 of lease commitment costs in excess of estimated sublease rental
income for a facility vacated by the Company. In the third quarter of 2002, the
Company further reduced its workforce and ceased a majority of its strategic
consulting operations, which included abandoning certain leased facilities in
the U.K and North America. The associated costs of $2,629 were reflected as a
restructuring charge consisting of $1,899 of severance costs, of which $1,203
were paid in the third quarter of 2002, moving costs incurred and related asset
write-downs of $171 and $559 of lease abandonment costs.
8. STOCK OPTION PLANS
On April 24, 2002, the shareholders approved an increase in the authorized
shares available for issuance under the 1999 stock option plan by 200 to 1,419
shares.
9. SUBSEQUENT EVENTS
On October 28, 2002, the Company filed a Schedule TO with the Securities
and Exchange Commission relating to an offer to exchange for new options all
outstanding stock options to purchase shares of common stock that have an
exercise price greater than $10.00 per share and that were granted to current
employees of the Company or its subsidiaries under the Caminus LLC 1998 Stock
Incentive Plan, the Caminus Corporation 1999 Stock Incentive Plan, the Caminus
Corporation 2001 Non-Officer Employee Stock Incentive Plan, and certain
Nonstatutory Stock Option Agreements, upon the terms and subject to the
conditions described in an Offer to Exchange and a related Letter of
Transmittal. The Company's Chief Executive Officer and members of the Company's
Board of Directors are not eligible to participate in the exchange offer. The
new options will be granted not less than six months and one day after the
Company's acceptance of the old options for exchange and cancellation, and will
have exercise prices equal to the fair value of the Company's common stock on
the grant date of the new options. The number of shares covered by each new
option will be equal to the number of shares covered by the old option that was
exchanged for such new option, subject to adjustments for any stock splits,
stock dividends and other events affecting the Company's capital structure that
occur before the grant date of the new option.
11
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 and software services that
facilitate energy trading, transaction processing, risk management, and decision
support within the North American and European wholesale energy markets. We were
organized as a limited liability company in April 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, Nucleus Corporation and Nucleus
Energy Consulting Corporation (collectively, "Nucleus") in August 2000, and
Altra Software Services, Inc. ("Altra") in November 2001. In February 2000, we
closed the initial public offering of 4.1 million shares of our common stock,
realizing net proceeds from the offering of approximately $59.0 million. In
March 2002, we closed a secondary offering of 1.6 million shares of our common
stock, realizing net proceeds of approximately $29.0 million.
We generate revenues from licensing our software products, reselling
our products through distributors, providing related implementation services and
support, and providing strategic consulting services. We generally license one
or more products to our end user 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 typically 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 twelve months. Our
strategic consulting practice provides assistance to regulatory entities in
establishing policies.
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.
Our critical accounting policies are those that relate to revenue
recognition. The Company follows the provisions of Statement of Position ("SOP")
No. 97-2, "Software Revenue Recognition," as amended by SOP 98-9, "Modification
of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions." Under SOP No. 97-2, if the license agreement does not provide for
significant customization of or enhancements to the software, software license
revenues are recognized when a license agreement is executed, the product has
been delivered, all significant obligations are fulfilled, the fee is fixed or
determinable and collectibility is probable. For those license agreements where
customer acceptance is required and it is not probable, license revenues are
recognized when the software has been accepted. For those license agreements
where the licensee requires significant enhancements or customization to adapt
the software to the unique specifications of the customer or the service
elements of the arrangement are considered essential to the functionality of the
software products, both the license revenues and services revenues are
recognized using contract accounting. If acceptance of the software and related
software services is probable, the percentage of completion method is used to
recognize revenue for those types of license agreements, where progress towards
completion is measured by comparing software services hours incurred to
estimated total hours for each software license agreement. If acceptance of the
software and related software services is not probable, then the completed
contract method is used and license revenues are recognized only when the
Company's obligations under the license agreement are completed and the software
has been accepted. Accordingly, for these contracts, payments received and
software license costs are deferred until the Company's obligations under the
license agreement are completed. Anticipated losses, if any, on uncompleted
contracts are recognized in the period in which such losses are determined. For
non-exclusive software licenses with distributors to resell the Company's
software in exchange for royalty payments based on the number of software
products resold, the Company recognizes nonrefundable software license fees as
revenue when the software product master is delivered and accepted and the cash
is received from the reseller, assuming all other revenue recognition criteria
are met. Subsequent royalty revenue related to the resale of the software is
recognized as earned. Maintenance and support revenues associated with new
product licenses and renewals are deferred and recognized ratably over the
contract period. Software services revenues, not required to be recognized using
contract accounting, and strategic consulting revenues are typically billed on a
time and materials basis and are recognized as such services are performed. When
software licenses, services and/or maintenance are bundled in one arrangement,
the fair value of the maintenance fees is determined by the contractual renewal
rate and the fair value of the services is based upon the amount the Company
invoices customers for such services when they are sold on a stand alone basis.
12
We currently derive substantially all of our revenues from licensing
our software and providing consulting services to participants in the energy
industry. The success of our business is dependant on the success of our
energy-based customers, which is linked to the energy industry itself. Moreover,
because of the capital expenditures required in connection with investing in our
software and services, we believe that demand for our software and services
could be affected by fluctuations, disruptions, instability or downturns in the
energy market, which may cause current and potential customers to leave the
energy industry or delay, cancel or reduce any planned expenditures for our
software solutions and consulting services. In addition, tighter IT spending
budgets and the requirement for higher or multiple level contract approvals by
our customers may affect our revenues.
Revenues from customers outside the United States represented 23% of
our total revenues for the nine months ended September 30, 2002. A significant
portion of our international revenues has historically been derived from sales
of our strategic consulting services and software products in the United
Kingdom. In the third quarter of 2002, the Company ceased to operate its
strategic consulting business for energy market participants. The Company will
continue to perform consulting services under a few strategic consulting
contracts for regulatory agencies. 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.
"Adjusted EBITDA" is defined as earnings before interest and other
income, income taxes, depreciation, amortization, and non-cash compensation
expense. EBITDA is a non-GAAP measure commonly used by investors and analysts to
analyze companies on the basis of operating performance, leverage and liquidity.
We present Adjusted EBITDA, which is also a non-GAAP measure, to enhance the
understanding of our operating results. We believe that Adjusted EBITDA is an
indicator of our operating profitability since it excludes items that are not
directly attributable to our ongoing business operations. However, Adjusted
EBITDA relies upon our management's judgment to determine which items are
directly attributable to our ongoing business operations and as such is
subjective in nature. Adjusted EBITDA should not be construed as an alternative
to net income as an indicator of our operating performance or as an alternative
to cash flow from operations as a measure of our liquidity. For information
about cash flows or results of operations in accordance with generally accepted
accounting principles, please see our consolidated financial statements and
related notes included elsewhere in this quarterly report.
Due to our acquisition of Altra, along with 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. The results of operations of Altra are included in our consolidated
results of operations beginning December 1, 2001.
Results of Operations
Comparison of the Three Months Ended September 30, 2002 to the Three Months
Ended September 30, 2001
The following table sets forth, except for cost of licenses, cost of
software services, and cost of strategic consulting, which are expressed as a
percentage of their related revenues, and amortization of acquired technology,
which is expressed as a percentage of license revenues, the consolidated
financial information expressed as a percentage of revenues for the three months
ended September 30, 2002 and 2001. The consolidated financial information for
the periods presented are derived from the unaudited consolidated financial
statements included elsewhere in this quarterly report.
THREE MONTHS
ENDED
SEPTEMBER 30,
----------------
2002 2001
---- ----
Revenues:
Licenses....................... 37% 37%
Software services.............. 63 51
Strategic consulting........... - 12
--- ---
Total revenues......... 100 100
Cost of revenues:
Cost of licenses............... 4% 6%
Cost of software services 46 52
Cost of strategic consulting - 63
Amortization of acquired
technology................... 19 8
Gross profit..................... 63 60
13
THREE MONTHS
ENDED
SEPTEMBER 30,
----------------
2002 2001
---- ----
Operating expenses:
Sales and marketing................ 10% 17%
Research and development........... 33 20
General and administrative......... 32 26
Restructuring charges.............. 13 -
Amortization of intangible assets.. 2 17
--- ---
Total operating expenses... 90 80
--- ---
Loss from operations................. (28) (19)
Interest and other income, net....... 2 3
Provision for income taxes........... - 5
--- ---
Net loss............................. (26)% (21)%
=== ===
Revenues
Licenses: License revenues represented 37% of the total revenues for
2002 and 2001, and increased $1.8 million, or 32%, from $5.5 million in 2001 to
$7.3 million in 2002. This increase was primarily attributable to increased
demand for new and additional licenses from new and existing customers, larger
average transaction sizes and the addition of revenue recognized from Altra
products. This increase was lessened in part by the lengthening of the purchase
decision process by existing and potential customers, widely publicized adverse
conditions in the energy markets and general softness in IT spending, which may
also impact our fourth quarter of 2002 results and beyond.
Software services: Software services revenues represented 63% and 51%
of the total revenues for 2002 and 2001, respectively, and increased by $4.6
million, or 60%, from $7.8 million in 2001 to $12.4 million in 2002. This
increase was primarily attributable to the growth in our installed customer base
with maintenance contracts and an increase in the number of implementations
partially attributable to our acquisition of Altra.
Strategic consulting: Strategic consulting revenues were 12% of the
total revenues or $1.8 million in 2001. As a result of softness in the market
for these services, the Company ceased to operate a separate strategic
consulting business in North America and Europe for energy market participants
in the third quarter of 2002. The Company will continue to perform consulting
services under a few strategic consulting contracts for regulatory agencies.
Such consulting services, which were $0.3 million in the third quarter of 2002
are reported as software services revenue beginning in the third quarter of
2002.
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, and the amortization of capitalized software development costs. Cost
of licenses as a percentage of license revenue decreased from 6% in 2001 to 4%
in 2002.
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 $1.7 million, or 42%, from $4.0 million in
2001 to $5.7 million in 2002. As a percentage of software services revenue,
costs decreased from 52% in 2001 to 46% in 2002. The decrease as a percentage of
revenue is the result of an increase in our installed customer base with
maintenance contracts and higher implementation consultant utilization
percentages. The increase in absolute dollars was primarily attributable to an
increase in the number of implementations, training and technical support
personnel, including former Altra personnel, to support the growth of the
implementations and the installed customer base. We plan to maintain our
implementation and support services group at levels that allow us to maximize
our utilization percentages. Accordingly, we expect the dollar amount of our
cost of software implementation and support services to fluctuate with the level
of our software services revenue.
Cost of strategic consulting: Cost of strategic consulting consisted
of personnel costs incurred in providing professional consulting services. Cost
of strategic consulting was $1.1 million, or 63% as a percentage of strategic
consulting revenue in 2001. As noted above, the Company ceased to operate a
separate strategic consulting business in North America and Europe for energy
market participants in the third quarter of 2002. The Company will continue to
perform consulting services under a few strategic consulting contracts for
regulatory agencies. Such consulting services costs are reported as cost of
software services beginning in the third quarter of 2002.
14
Amortization of acquired technology: Amortization of acquired
technology represents the amortization of the value placed on the technology
acquired through our acquisitions. Amortization of acquired technology increased
$0.9 million from $0.5 million in 2001 to $1.4 million in 2002. As a percentage
of license revenue, these costs increased from 8% in 2001 to 19% in 2002. Both
the increase in cost and percentage of license revenue was due primarily to our
acquisition of Altra.
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 decreased $0.5 million,
or 18%, from $2.5 million in 2001 to $2.0 million in 2002. As a percentage of
revenue, sales and marketing expenses decreased from 17% in 2001 to 10% in 2002.
The decrease as a percentage of revenue is the result of our increase in revenue
in 2002 compared to 2001 and lower headcount in 2002 partially resulting from
our restructuring in Europe. We do expect, however, to increase our sales
headcount and marketing expenditures over the next few quarters.
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 $3.4 million, or 113%, from $3.0 million in 2001 to $6.4
million in 2002. As a percentage of revenue, research and development expenses
increased from 20% in 2001 to 33% in 2002. The increased cost as a percentage of
revenue was due primarily to an increase in personnel and to other expenses
associated with the development of new products and enhancements of existing
products, due in part to the acquisition of Altra.
General and administrative: General and administrative expenses
consist primarily of personnel costs of executive, financial, legal, human
resources and information services personnel, as well as facility costs and
related office expenses, insurance, and outside professional fees. General and
administrative expenses increased $2.3 million, or 57%, from $3.9 million in
2001 to $6.2 million in 2002. As a percentage of revenue, general and
administrative expenses increased from 26% in 2001 to 32% in 2002. The increase
in cost is due primarily to increased staffing required to support our expanded
operations in North America, along with an increase in rent and other expenses
in 2002 compared to 2001 as a result of our acquisition of Altra.
Restructuring charges: Restructuring charges consist of severance
costs, moving costs and related asset write-downs and lease abandonment costs.
Restructuring costs were $2.6 million in 2002. These restructuring charges in
2002 relate to the ceasing of the majority of our strategic consulting business
and our overall cost reduction program, which is now complete.
Amortization of intangible assets: The amortization of intangible
assets represents the amortization of other intangible assets and for 2001,
goodwill. Amortization of intangibles decreased $2.1 million, or 82%, from $2.6
million in 2001 to $0.5 million in 2002. As a percentage of revenue,
amortization expense decreased from 17% in 2001 to 2% in 2002. Both the decrease
in expense and as a percentage of revenue are the result of the adoption of FAS
No. 142, which eliminated the amortization of goodwill effective January 1,
2002. Had FAS No. 142 been in affect for the three months of 2001, amortization
expense for the period would have been $0.4 million.
Loss From Operations
As a result of the variances described above, operating loss increased
by $2.6 million, from $2.9 million in 2001 to $5.5 million in 2002. Operating
expenses as a percentage of revenues were 90% and 80% for 2002 and 2001,
respectively.
Interest and Other Income, net
Interest and other income, net changed by $0.2 million, from $0.5
million in 2001 to $0.3 million in 2002, due primarily to higher yields on 2001
cash and investments compared to 2002.
Provision for (Benefit from) Income Taxes
Provision for (benefit from) income taxes was $(0.1) million in 2002
compared to $0.7 million in 2001 due primarily to the Company recording a
benefit for U.K. losses incurred in 2002 compared with income tax expense
recorded in 2001. The Company's U.S. net operating loss carryforwards as of
September 30, 2002 were approximately $22.7 million of which the benefit
associated with the utilization of $14.0 million of these net operating loss
carryforwards would be allocated to additional paid-in-capital.
Adjusted EBITDA
Earnings before interest and other income (expense), income taxes,
amortization, depreciation and non-cash compensation expense, or Adjusted
EBITDA, as a percentage of revenues were (14%) and 5% for 2002 and 2001,
respectively. Adjusted EBITDA decreased
15
$3.5 million from $0.8 million in 2001 to $(2.7) million in 2002.
Results of Operations
Comparison of the Nine Months Ended September 30, 2002 to the Nine Months Ended
September 30, 2001
The following table sets forth, except for cost of licenses, cost of
software services, and cost of strategic consulting, which are expressed as a
percentage of their related revenues, and amortization of acquired technology,
which is expressed as a percentage of license revenues, the consolidated
financial information expressed as a percentage of revenues for the nine months
ended September 30, 2002 and 2001. The consolidated financial information for
the periods presented are derived from the unaudited consolidated financial
statements included elsewhere in this quarterly report.
NINE MONTHS
ENDED
SEPTEMBER 30,
-------------
2002 2001
---- ----
Revenues:
Licenses ............................ 35% 39%
Software services ................... 62 48
Strategic consulting ................ 3 13
--- ---
Total revenues .............. 100 100
Cost of revenues:
Cost of licenses .................... 3% 3%
Cost of software services ........... 43 51
Cost of strategic consulting ........ 99 55
Amortization of acquired
Technology ........................ 30 8
Gross profit .......................... 59 64
Operating expenses:
Sales and marketing ................. 12% 16%
Research and development ............ 31 18
General and administrative .......... 32 25
Restructuring charges ............... 5 -
Amortization of intangible assets.... 2 17
--- ---
Total operating expenses..... 82 76
--- ---
Loss from operations .................. (23) (12)
Interest and other income, net ........ -- 4
Provision for (benefit from)
income taxes ........................ (3) 5
--- ---
Net loss .............................. (20)% (13)%
=== ===
Revenues
Licenses: License revenues represented 35% and 39% of the total
revenues for 2002 and 2001, respectively, and increased $3.2 million, or 16%,
from $19.4 million in 2001 to $22.6 million in 2002. This increase was primarily
attributable to increased demand in the third quarter of 2002 for new and
additional licenses from new and existing customers, larger average transaction
sizes and the addition of revenue recognized from Altra. This increase was
lessened in part by the lengthening of the purchase decision process by existing
and potential customers, widely publicized adverse conditions in the energy
markets and general softness in IT spending, which may also impact our fourth
quarter of 2002 results and beyond.
Software services: Software services revenues represented 62% and 48%
of the total revenues for 2002 and 2001, respectively, and increased by $15.6
million, or 66%, from $23.7 million in 2001 to $39.3 million in 2002. This
increase was primarily attributable to the growth in our installed customer base
with maintenance contracts and an increase in the number of implementations
partially attributable to our acquisition of Altra.
Strategic consulting: Strategic consulting revenues represented 3% and
13% of the total revenues for 2002 and 2001, respectively, and decreased $4.3
million, or 69%, from $6.2 million in 2001 to $1.9 million in 2002. This
decrease was primarily attributable to our ceasing to operate a separate
strategic consulting business in North America and Europe in the third quarter
of 2002, and the absence in the first half of 2002 of a comparable revenue
stream to replace the successful New Electricity Trading Arrangements ("NETA")
16
consulting engagement in Europe, which was completed on March 29, 2001. The
Company will continue to perform consulting services under a few strategic
consulting contracts for regulatory agencies. Such consulting services, which
were $0.3 million in the third quarter of 2002 are reported as software services
revenue beginning in the third quarter of 2002.
Cost of Revenues
Cost of licenses: Cost of licenses as a percentage of license revenue
remained flat at 3% in both 2001 and 2002.
Cost of software services: Cost of software services increased $5.1
million, or 42%, from $12.0 million in 2001 to $17.1 million in 2002. As a
percentage of software services revenue, costs decreased from 51% in 2001 to 43%
in 2002. The decrease as a percentage of revenue is the result of an increase in
our installed customer base with maintenance contracts and higher implementation
consultant utilization percentages. The increase in absolute dollars was
primarily attributable to an increase in the number of implementations, training
and technical support personnel, including former Altra personnel, to support
the growth of the implementations and the installed customer base. We plan to
maintain our implementation and support services group at levels that allow us
to maximize our utilization percentages. Accordingly, we expect the dollar
amount of our cost of software implementation and support services to fluctuate
with the level of our software services revenue.
Cost of strategic consulting: Cost of strategic consulting decreased
$1.5 million or 44% from $3.4 million in 2001 to $1.9 million in 2002. As a
percentage of strategic consulting revenue, costs increased from 55% in 2001 to
99% in 2002. The increase as a percentage of strategic consulting revenue
resulted primarily from lower consultant utilization percentages due to softness
in the market for these services and increased competition. As noted above, the
Company has ceased to operate a separate strategic consulting business in North
America and Europe for energy market participants in the third quarter of 2002.
The Company will continue to perform consulting services under a few strategic
consulting contracts for regulatory agencies. Such consulting services costs are
reported as cost of software services beginning in the third quarter of 2002.
Amortization of acquired technology: Amortization of acquired
technology increased $5.3 million from $1.5 million in 2001 to $6.8 million in
2002. As a percentage of license revenue, these costs increased from 8% in 2001
to 30% in 2002. Both the increase in cost and percentage of license revenue was
due primarily to our acquisition of Altra.
Operating Expenses
Sales and marketing: Sales and marketing expenses decreased $0.5
million from $8.0 million in 2001 to $7.5 million in 2002. As a percentage of
revenue, sales and marketing expenses decreased from 16% in 2001 to 12% 2002.
The decrease as a percentage of revenue is the result of our increase in revenue
in 2002 compared to 2001 and lower headcount in 2002 partially resulting from
our restructuring in Europe. We do expect, however, to increase our sales
headcount and marketing expenditures over the next few quarters.
Research and development: Research and development expenses increased
$10.7 million, or 120%, from $8.9 million in 2001 to $19.6 million in 2002. As a
percentage of revenue, research and development expenses increased from 18% in
2001 to 31% in 2002. The increased cost as a percentage of revenue was due
primarily to an increase in personnel and to other expenses associated with the
development of new products and enhancements of existing products, due in part
to the acquisition of Altra.
General and administrative: General and administrative expenses
increased $7.7 million, or 63%, from $12.3 million in 2001 to $20.0 million in
2002. As a percentage of revenue, general and administrative expenses increased
from 25% in 2001 to 32% in 2002. The increase in cost is due primarily to
increased staffing required to support our expanded operations in North America,
along with an increase in rent and other expenses in 2002 compared to 2001 as a
result of our acquisition of Altra.
Restructuring charges: Restructuring charges were $3.5 million in
2002. These restructuring charges in 2002 relate to the ceasing of the majority
of our strategic consulting business and our overall cost reduction program,
which is now complete.
Amortization of intangible assets: The amortization of intangible
assets represents the amortization of other intangible assets and for 2001,
goodwill. Amortization of intangibles decreased $6.9 million, or 82%, from $8.5
million in 2001 to $1.6 million in 2002. As a percentage of revenue,
amortization expense decreased from 17% in 2001 to 2% in 2002. Both the decrease
in expense and as a percentage of revenue are the result of the adoption of FAS
No. 142, which eliminated the amortization of goodwill effective January 1,
2002. Had FAS No. 142 been in affect for the nine months of 2001, amortization
expense for the period would have been $1.3 million.
Loss From Operations
As a result of the variances described above, operating loss increased
by $8.9 million, from $5.9 million in 2001 to $14.8 million in
17
2002. Operating expenses as a percentage of revenues were 82% and 76% for 2002
and 2001, respectively.
Interest and Other Income (Expense), net
Interest and other income (expense) changed by $1.4 million, from $1.7
million of income in 2001 to $0.3 million in 2002, due primarily to interest
expense in 2002 associated with the $15 million credit facility, which was
repaid in March 2002, and lower interest rates.
Provision for (Benefit from) Income Taxes
Provision for (benefit from) income taxes was $(1.8) million in 2002
compared to $2.3 million in 2001. In 2002, the Company formalized transfer
pricing agreements for intercompany royalties and other charges for 2002 and
certain prior periods. The application of these intercompany agreements had no
impact on pre-tax consolidated amounts but shifted taxable income for prior
years from the U.K. to the U.S. resulting in a net tax benefit of $1.6 million.
The reduced taxable income in the U.K. resulted in a reduction of prior taxes of
$1.8 million. The increased taxable income in the U.S. resulted in no taxes
payable and a tax provision of $0.2 million as a portion of the benefit
associated with the utilization of the net operating loss carryforwards that
arose from equity related transactions was allocated to additional paid-in
capital. In addition, the Company recorded a benefit for U.K. losses incurred in
2002 compared with income tax expense recorded in 2001. The Company's U.S. net
operating loss carryforwards as of September 30, 2002 were approximately $22.7
million of which the benefit associated with the utilization of $14.0 million of
these net operating loss carryforwards will be allocated to additional
paid-in-capital.
Adjusted EBITDA
Earnings before interest and other income (expense), income taxes,
amortization, depreciation and non-cash compensation expense, or Adjusted
EBITDA, as a percentage of revenues were (6)% and 12% for 2002 and 2001,
respectively. Adjusted EBITDA decreased $9.7 million, or 163%, from $5.9 million
in 2001 to $(3.8) million in 2002.
Liquidity and Capital Resources
In February 2000 and March 2002, we closed the initial public offering
and secondary offering of our common stock, issuing 4.1 million and 1.6 million
shares of common stock, respectively, realizing net proceeds of $59.0 million
and $29.0 million, respectively.
Our highly liquid assets consist of cash and cash equivalents plus our
investments in marketable securities. For the nine months ended September 30,
2002, our highly liquid assets decreased by $3.0 million, or 7%, from $42.0
million at December 31, 2001 to $39.0 million at September 30, 2002.
Cash and cash equivalents as of September 30, 2002 were $19.2 million,
a decrease of $16.2 million from December 31, 2001 resulting from shifting cash
and cash equivalents to short and long-term marketable securities to take
advantage of higher yields.
Net cash used in operating activities for the nine months ended
September 30, 2002 was $6.6 million. Net cash used in operating activities
primarily resulted from the reduction of deferred revenue by $4.8 million and
our payment of accrued annual employee incentive bonuses and commissions for
2001 and other accrued liabilities aggregating $2.9 million.
Net cash used in investing activities during the nine months ended
September 30, 2002 was $17.6 million and resulted from the net purchase of $13.2
million in marketable securities, $2.5 million of capital expenditures for
computer and communications equipment, purchased software, office equipment,
furniture, fixtures and leasehold improvements, and $1.9 million of contingent
acquisition consideration resulting from an acquisition by Altra prior to
Caminus' acquisition of Altra.
Net cash provided by financing activities during the nine months ended
September 30, 2002 was $7.1 million. During the nine months ended September 30,
2002, we completed our secondary offering of 1.6 million shares raising $29.0
million of which $15.0 million was used to repay our borrowings under a credit
facility. In addition, financing activities provided cash of $0.6 million from
the sale of common stock in connection with our employee stock purchase plan and
$0.7 million from the exercise of stock options. These increases in cash were
offset in part by the repurchase of $8.2 million of our common stock.
We believe the cash and investment balances at September 30, 2002 and
cash to be generated from operations will be sufficient to meet our expenditure
requirements for the foreseeable future.
18
Certain Factors That May Affect Our Business
Our quarterly operating results may fluctuate substantially, which may adversely
affect our business and the market price of our common stock, particularly if
our 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. These fluctuations may adversely
affect our business, financial condition, and the market price of our common
stock particularly if our quarterly results fall below the expectations of
securities analysts. A number of factors, many of which are outside our control,
may cause variations in our quarterly revenues and operating results, including:
o changes in demand for our software solutions and consulting
services;
o the length of our sales cycle, and the timing and recognition of
sales of our products and services, including the timing and
recognition of significant product orders;
o unexpected delays in the development and introduction of new
products and services;
o increased expenses, whether related to sales and marketing, software
development or other corporate activities;
o changes in the rapidly evolving market for products and services in
the energy industry;
o the mix of our revenue during any period, particularly with respect
to the breakdown between software license and services revenues;
o the hiring, retention and utilization of personnel;
o costs related to the integration of people, operations and products
from previously acquired businesses and technologies and from future
acquisitions, if any; and
o general economic conditions.
Accordingly, we believe that quarter-to-quarter comparisons of our
results of operations are not necessarily meaningful. You should not rely on our
historical quarterly results as an indication of our future performance.
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 consulting services to participants in the energy
industry. The success of our business is dependant on the success of our
energy-based customers, which is linked to the energy industry itself. Moreover,
because of the capital expenditures required in connection with investing in our
software and services, we believe that demand for our software and services
could be affected by fluctuations, disruptions, instability or downturns in the
energy market, which may cause current and potential customers to leave the
energy industry or delay, cancel or reduce any planned expenditures for our
software solutions and consulting services. In addition, tighter IT spending
budgets and the requirement for higher or multiple level contract approvals by
our customers may affect our revenues.
Recent events and disclosures have created uncertainty in the energy markets.
Adverse events and disclosures affecting numerous energy market
participants have created uncertainty in the energy markets. Beginning with
disclosures of alleged financial and accounting improprieties by, and the
subsequent bankruptcy of, Enron Corporation, and followed by disclosures of
abusive trading practices and possible financial and accounting improprieties by
certain energy traders and other energy market participants, the energy markets
have been subjected to an unprecedented series of bad news, resulting in
uncertainty. It is impossible to predict the outcome of current market
uncertainty. Among other things, the results could include certain energy market
participants exiting energy trading, either temporarily or permanently, thereby
shrinking the customer base that we sell into, or new or enhanced government
regulation of participants and/or transactions in the energy markets. Any such
results may materially adversely affect our business, results of operations and
financial condition.
Our sales cycle may be subject to seasonality, which could result in
fluctuations in the market price of our common stock.
We may experience seasonality in the sales of our software. For
instance, many of our current and potential customers in the energy industry
face budgetary incentives to invest in energy software before the end of each
fiscal year. As a result, we may tend to report higher revenues during the
fourth quarter of our fiscal year and lower revenues during the first quarter of
our fiscal year. These
19
seasonal variations in our sales may lead to fluctuations in our quarterly
operating results, which in turn may lead to volatility in the market price of
our common stock.
Substantial competition could reduce our market share and materially adversely
affect our financial performance.
The market for products and services in the energy industry is very
competitive, and we expect competition to intensify in the future. We currently
face competition from a variety of sources, including energy software providers,
in-house development, large consultancies and enterprise software companies.
Some of our current and potential competitors have longer operating
histories, greater name recognition, greater resources, and a higher number of
established customer relationships than we have. Many of these competitors also
have extensive knowledge of our industry. As a result of these factors, some of
our competitors may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements or may be able to devote
greater resources to the marketing and sale of their products. If we are not
able to compete effectively, our business, results of operations, and financial
condition could be materially adversely affected.
We may not be able to successfully manage the expansion of our operations.
We have experienced significant growth throughout most of our history.
We cannot assure you that we will not experience difficulties managing our
growth in the future. Future growth may place increased demands on our
management, financial and operational resources. In addition, as part of our
growth, we will need to expand, train and manage our employee base and maintain
close coordination within our organization. If we are unable to manage our
growth effectively, our business, results of operations, and financial condition
could be materially adversely affected.
Our future results may be harmed by economic, political, regulatory and other
risks associated with international sales and operations.
Because we sell and market our products worldwide, our business is
subject to risks associated with doing business internationally. We anticipate
that revenues from international operations will represent an increasing portion
of our total revenues going forward. Accordingly, our future results could be
harmed by a variety of factors, including:
o the need to comply with the laws and regulations of different
countries;
o difficulties in enforcing contractual obligations and intellectual
property rights in some countries;
o difficulties and costs of staffing and managing foreign operations;
o fluctuations in currency exchange rates and the imposition of
exchange or price controls or other restrictions on the conversion
of foreign currencies;
o difficulties in collecting international accounts receivable and the
existence of potentially longer payment cycles;
o the impact of possible recessions in economies outside the United
States; and
o political and economic instability, including instability related to
terrorist attacks in the United States and abroad.
If we are unable to minimize the risks associated with international
sales and operations, our business, results of operations, and financial
condition could be materially adversely affected, which could cause our stock
price to decline.
We may pursue strategic acquisitions, which could have an adverse impact on our
business if unsuccessful.
We may from time to time acquire or invest in complementary companies,
products or technologies. For instance, in November 2001, we acquired Altra
Software Services, Inc. From time to time, we may evaluate other acquisition
opportunities that could provide us with additional product or services
offerings or additional industry expertise. These acquisitions, if any, may
result in difficulties for us in assimilating acquired operations and products,
and could result in the diversion of our capital and our management's attention
from other business issues and opportunities. For instance, the integration of
acquired companies may result in problems related to the integration of
technology and management teams. We may not be able to successfully integrate
operations, personnel or products that we have acquired or may acquire in the
future. If we fail to successfully integrate our recent acquisitions and any
future acquisitions, our business, results of operations, and financial
condition could be materially adversely affected. In addition, our acquisitions
may not be successful in achieving our desired strategic objectives, which would
also cause our business to suffer. Acquisitions also may present other risks,
such as exposing our company to potential unknown liabilities associated with
acquired businesses.
20
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 technological changes,
frequent new product introductions, uncertain product life cycles, changes in
customer demands, and evolving industry standards and regulations. 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
regulations or technology standards 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 requirements of our customers. Software addressing
the trading, transaction processing, and risk 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 new or enhanced products could cause us to lose revenue
opportunities and customers.
Our software products may contain errors, which could damage our reputation,
decrease market acceptance of our products, cause us to lose customers and
revenue, and result in liability to us.
Despite internal testing and testing by third parties, complex software
products such as ours often contain errors or defects, particularly when first
introduced or when new versions or enhancements are released. 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. Although our license agreements typically contain
provisions designed to limit our exposure to potential liability claims, these
provisions could be invalidated by unfavorable judicial decisions or by federal,
state, local or foreign laws or regulations. If a claim against us was
successful, we might be required to incur significant expense and to pay
substantial damages. Even if we were to prevail, the accompanying publicity
could adversely affect the demand for our products.
We may be unable to adequately protect our intellectual property rights, which
could result in the use of our technology by competitors or other third parties.
Our success depends in large part upon our proprietary technologies. We
rely upon a combination of copyright and trade secret protection,
confidentiality and nondisclosure agreements, and licensing arrangements to
establish and protect our intellectual property rights. We seek to prevent
disclosure of our trade secrets through a number of means, including requiring
those individuals with access to our proprietary information to enter into
nondisclosure agreements with us and restricting access to our source code.
Trade secret and copyright laws, under which we seek to protect our software,
documentation, and other proprietary materials, provide only limited protection.
Despite these efforts to protect our proprietary rights, unauthorized parties
may be successful in copying or otherwise obtaining and using our software. In
addition, other parties may breach confidentiality agreements or other
protective contracts that we have entered into with them, and we may not be able
to enforce our rights in these circumstances. Any actions taken by us to enforce
our intellectual property rights could result in significant expense to us as
well as the diversion of management time and other resources.
In addition, detecting infringement and misappropriation of
intellectual property can be difficult, and there can be no assurance that we
would detect any infringement or misappropriation of our proprietary rights.
Even if we are able to detect infringement or misappropriation of our
proprietary rights, litigation to enforce our rights could cause us to divert
significant financial and other resources from our business operations, and may
not ultimately be successful. Moreover, we license our software internationally,
and the laws of some foreign countries may not protect our proprietary rights to
the same extent as do the laws of the United States.
If we are unable to rely on licenses of intellectual property from third
parties, our ability to conduct our business could be harmed.
We rely on third-party licensors for technology that is incorporated
into, and is necessary for the operation of, some elements of our software. 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. We cannot assure you, however, that such licenses will be available in
the future on favorable terms or at all.
We could become subject to claims of infringement of third-party intellectual
property rights, which could limit our ability to conduct our business.
There has been a substantial amount of litigation in the software
industry regarding intellectual property rights. It is possible that, in the
future, third parties may claim that our products infringe upon their
intellectual property. Energy software product developers may
21
increasingly become subject to infringement claims as the number of products and
competitors in the energy software industry grows and the functionality of
products from different software developers overlaps. Parties making
infringement claims may be able to obtain an injunction against us, which could
prevent us from selling our products in the United States or in foreign
countries. Any such injunction could significantly harm our business. Moreover,
any infringement claims, with or without merit, could be time consuming, result
in costly litigation, divert management's attention, cause product shipment
delays, force us to redesign or cease selling products or services that
incorporate the challenged intellectual property, or require us to enter into
royalty or licensing agreements, which may not be available on reasonable terms
or at all. Such royalty or license agreements, if required, may not be available
on terms acceptable to us or at all, which could materially adversely affect our
business. Even if we ultimately are able to enter into royalty or license
agreements, these agreements may require us to make payments that may adversely
affect our results of operations. In addition, we may be obligated to indemnify
customers against claims that we infringe upon intellectual property rights of
third parties.
We will need to recruit, train and retain sufficient qualified personnel in
order to successfully expand our business.
Our future success will depend to a significant extent on our ability
to recruit and retain highly qualified technical, sales and marketing, and other
personnel. If we do not attract and retain such personnel, we may not be able to
expand our business. Competition for qualified personnel is intense in the
energy industry. There are a limited number of people with the appropriate
combination of skills needed to provide the services that our customers demand.
We expect competition for qualified personnel to remain intense, and we may not
succeed in attracting or retaining sufficient personnel. In addition, newly
hired employees generally require substantial training, which requires
significant resources and management attention. Even if we invest significant
resources to recruit, train and retain qualified personnel, we may not be
successful in our efforts.
We may seek additional financing in the future, which could be difficult to
obtain and which could dilute your ownership interest or the value of your
shares.
We intend to continue to invest in the development of new products and
enhancements to our existing products. We believe that our current cash and
investment balances, together with cash generated from our operations, will be
sufficient to meet our operating and capital requirements for the foreseeable
future. However, from time to time, we may seek to raise additional funds
through public or private financing, or other arrangements. Obtaining additional
financing will be subject to a number of factors, including market conditions,
our operating performance, and investor sentiment. 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 also may issue
securities that have rights, preferences and privileges senior to our common
stock.
Terrorist attacks or acts of war may seriously harm our business.
Terrorist attacks or acts of war may cause damage or disruption to our
company, our employees, our facilities and our customers, which could
significantly impact our revenues, costs and expenses, and financial condition.
The terrorist attacks that took place in the United States on September 11, 2001
were unprecedented events that have created many economic and political
uncertainties, some of which may materially adversely affect our business,
results of operations, and financial condition. The long-term effects on our
company of the September 11, 2001 attacks are unknown. The potential for future
terrorist attacks, the national and international responses to terrorist
attacks, and other acts of war or hostility have created many economic and
political uncertainties, which could materially adversely affect our business,
results of operations, and financial condition in ways that we currently cannot
predict.
Our performance will depend on the continued growth in demand for wholesale
energy trading, transaction processing, and risk management products and
services.
Our future success will depend on the continued growth in demand for
wholesale energy trading, transaction processing, and risk management products
and services, which is difficult to predict. If demand for these products and
services does not continue to grow or grows more slowly than expected, demand
for our software and services will be reduced. Utilities, energy service
providers and other businesses, such as commercial or industrial customers, may
be slow to adapt to changes in the energy marketplace or may be satisfied with
existing services and solutions. This could result in less demand for our
software and services than we currently expect. Because a substantial portion of
our operating expenses is fixed in the short term, any unanticipated reduction
in demand for our software and services would negatively impact our operating
results. Even if there is significant market acceptance of wholesale energy
trading, transaction processing, and risk management products and services, we
may incur substantial expenses adapting our software and services to changing
needs.
22
The global energy industry is subject to extensive and varied governmental
regulations, and, as a result, our business may be adversely affected if we are
unable to successfully develop software and services that address numerous and
changing regulatory regimes.
Although the global energy industry has experienced significant
deregulation in recent years, it is still subject to extensive and varied local,
regional and national regulation. These regulations affect all energy industry
participants, including utilities, producers, energy marketers, processors,
storage operators, distributors, marketers and pipelines. If we are unable to
design and develop software solutions and strategic consulting services that
address the numerous and changing regulatory requirements or we fail to alter
our software and services rapidly enough, our customers or potential customers
may not purchase our software and services.
In addition, it is difficult to predict the extent to which the global
energy industry will continue to become deregulated. The bankruptcy filing of
Enron Corporation, formerly one of the energy industry's largest traders and
market makers, and disclosures of actual or alleged abusive trading practices by
certain energy market participants have resulted in numerous government and
private inquiries and investigations. The impact of such inquiries and
investigations cannot be determined at this time. Any changes to the laws and
regulations to which companies in the energy industry are subject may materially
adversely affect our business, results of operations, and financial condition.
Our stock price has been and may remain volatile.
The market price of our common stock has been in the past, and may in
the future be, subject to wide fluctuations in response to factors such as:
o variations in quarterly operating results, due to delay in or loss
of anticipated software license revenue or other factors;
o announcements, by us or our competitors, of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
o changes in recommendations or financial estimates by securities
analysts;
o loss or addition of major customers;
o conditions and trends in the energy industry; and
o general conditions in the economy or the financial markets.
In addition, in recent years, the stock market has experienced
significant price and volume fluctuations, which are often unrelated to the
performance or condition of particular companies. Such broad market fluctuations
could adversely affect the market price of our common stock. Following periods
of volatility in the market price of a particular company's securities,
securities class action litigation has often been brought against a company. If
we become subject to this kind of litigation in the future, it could result in
substantial litigation costs, damages awards against us, and the diversion of
our management's attention and resources.
Provisions in our charter documents and Delaware law may prevent or delay
acquisition of us.
Our certificate of incorporation and bylaws and Delaware law contain
provisions that could make it harder for a third party to acquire us without the
consent of our board of directors. These provisions include those that:
o provide for a classified board of directors with staggered,
three-year terms;
o limit the persons who may call special meetings of stockholders;
o prohibit stockholder action by written consent; and
o establish advance notice requirements for nominations for election
to the board of directors or for proposing matters that can be
presented at stockholder meetings.
Delaware law also imposes some restrictions on mergers and other
business combinations between us and any holder of 15% or more of our
outstanding common stock. These provisions apply even if the offer may be
considered beneficial by some stockholders.
23
Because a small number of stockholders own a significant percentage of our
common stock, they significantly influence major corporate decisions and our
other stockholders may not be able to influence these corporate decisions.
Our executive officers and directors and their affiliates beneficially
own approximately 31.8% of our outstanding common stock. If these parties act
together, they can significantly influence the election of all directors and the
approval of actions requiring the approval of a majority of our stockholders.
The interests of our executive officers and directors and their affiliates could
conflict with the interests of our other stockholders.
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 September 30, 2002, we
invested the remaining net proceeds from our initial public offering and
secondary 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 are dependent upon the various foreign exchange rates and the
magnitude of the foreign subsidiaries' financial statements. At September 30,
2002, our foreign currency translation adjustment was not material and, for the
nine months ended September 30, 2002, 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.
For the nine months ended September 30, 2002, approximately 17% of our
revenues and 16% of our operating expenses were denominated in British pounds.
Historically, the effect of fluctuations in currency exchange rates has not had
a material impact on our operations. Our exposure to fluctuations in currency
exchange rates will increase as we expand our international operations. We
conduct our European operations in the United Kingdom and the countries of the
European Union, which are part of the European Monetary Union. 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.
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation, as of a date within 90 days of the filing
date of this Form 10-Q, our Chief Executive Officer and Chief Financial Officer
have concluded that our disclosure controls and procedures (as defined in Rule
13a-14(c) and Rule 15d-14(c) under the Securities Exchange Act of 1934, as
amended) are effective. There have been no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
24
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.
Our net offering proceeds, after deducting the total expenses of $6,382
(in thousands) were $59,028 (in thousands).
From the effective date of the Registration Statement through September 30,
2002, we used the net proceeds from the offering as follows (in thousands):
Repayment of Indebtedness........... $ 4,309
Capital Expenditures................ 9,628
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.............. 13,676
Acquisition of Altra................ 12,422
Cash Used in Operations............. 14,707
--------
$ 59,028
========
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.
25
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: November 6, 2002
CAMINUS CORPORATION
-------------------
Registrant
/s/ Joseph P. Dwyer
---------------------------
Chief Financial Officer and
Registrant's Authorized Officer
26
CERTIFICATIONS
I, William P. Lyons, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Caminus Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 6, 2002
/s/ William P. Lyons
- ---------------------
William P. Lyons
Chief Executive Officer
27
I, Joseph P. Dwyer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Caminus Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 6, 2002
/s/ Joseph P. Dwyer
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Joseph P. Dwyer
Chief Financial Officer
28
Exhibit
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).
29