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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
[_] 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 0-24277
Clarus Corporation
(Exact name of Registrant as specified in its Charter)
Delaware 58-1972600
(State of Incorporation) (R.S. Employer Identification No.)
3970 Johns Creek Court
Suite 100
Suwanee, Georgia 30024
(Address of principal office, including zip code)
(770) 291-3900
(Registrant's telephone number, including area code)
Securities Registered pursuant to Section 12(b) of the Act: None
Securities Registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock and non-voting common equity
held by nonaffiliates of the Registrant at March 13, 2001 was approximately
$101.8 million based on $6.75 per share, the closing price of the common stock
as quoted on the Nasdaq National Market.
The number of shares of the Registrant's common stock outstanding at March
13, 2001, was 15,508,333 shares.
DOCUMENT INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2001 Annual Meeting of Stockholders
to be filed with the Securities and Exchange Commission within 120 days of the
Registrant's 2000 fiscal year end are incorporated by reference into Part III of
this report.
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS.................................................................................................. 1
ITEM 2. PROPERTIES................................................................................................ 15
ITEM 3. LEGAL PROCEEDINGS......................................................................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................................... 15
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................................................. 16
ITEM 6. SELECTED FINANCIAL DATA................................................................................... 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................... 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................................ 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA................................................................ 31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...................... 57
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................................................ 58
ITEM 11. EXECUTIVE COMPENSATION.................................................................................... 58
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................ 58
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................................ 58
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K........................................... 58
SIGNATURES.......................................................................................................... 61
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PART I
ITEM 1. BUSINESS
Overview
We develop, market, and support Internet-based business-to-business (B2B) e-
commerce solutions targeted for large to mid-size enterprises (LME) that
automate the procurement, sourcing, and settlement of goods and services. Our
software helps organizations reduce the costs associated with the purchasing and
payment settlement of goods and services, and helps to maximize procurement
economies of scale. Our digital marketplace solution provides a framework that
allows companies to create trading communities and additional revenue
opportunities. Our solutions also benefit suppliers by reducing sales costs and
providing the opportunity to increase revenues. Our products have been licensed
by customers such as Comcast Corporation, Burlington Northern Santa Fe Railroad,
Gjensidige NOR, Mastercard International, MetLife, Parsons Brinckerhoff,
Sumurfit and Stone, and Wachovia Operational Services Corporation.
Our Internet-based business-to-business e-commerce solutions are
significantly different than the client/server financial software applications
that were the basis of our initial operations. There have been several
milestones in the evolution of our business since our incorporation in Delaware
in 1991. Those milestones include:
. Initial public offering. On May 26, 1998, we completed an initial
public offering of our common stock in which we sold 2.5 million
shares of common stock at $10.00 per share resulting in net proceeds
to us of approximately $22.0 million.
. ELEKOM acquisition. On November 6, 1998, we acquired ELEKOM
Corporation ("ELEKOM") for approximately $15.7 million, consisting of
$8.0 million in cash and approximately 1.4 million shares of our
common stock. ELEKOM developed a software program that provided
electronic corporate procurement capabilities to its clients.
. Sale of our Financial and Human Resources Software Business. On
October 18, 1999, we sold substantially all of the assets of our
financial and human resources software ("ERP") business to Geac
Computer Systems, Inc. and Geac Canada Limited. In this sale we
received approximately $13.9 million. Approximately $2.9 million of
the purchase price was placed in escrow and was subsequently settled
during 2000.
. Follow-on public offering. On March 10, 2000, we sold 2,243,000 shares
of common stock in a secondary public offering at $115.00 per share
resulting in net proceeds to us of approximately $244.4 million.
. iSold.com acquisition. On April 28, 2000, we acquired all the capital
stock of iSold.com, Inc. ("iSold") for approximately $2.5 million in
cash of which $1.6 million was paid at the date of acquisition and
$900,000 is due in April 2001. iSold developed a software program that
provided auctioning capabilities to its clients.
. SAI/Redeo Companies acquisition. On May 31, 2000, we acquired all the
outstanding stock of SAI (Ireland) Limited, SAI Recruitment Limited
and its subsidiaries and related companies, i2Mobile.com Limited and
SAI America Limited (the "SAI/Redeo Companies"). The SAI/Redeo
Companies specialize in electronic payment settlement software.
In December 2000, we announced our business strategy of targeting large to
mid-size enterprises. In support of this strategy, we also announced an expanded
business model that would support a wider range of software licensing
arrangements. As part of this business model expansion, we intend to move from a
traditional up-front license fee revenue model to a ratable revenue recognition
model, as is required in subscription-based licensing agreements. As a result,
we believe that our future financial results may not be comparable to our
historic financial results.
Our Solution
We are a leading provider of Internet-based business-to-business e-commerce
applications targeted for the large to mid-size enterprise (LME) market that
automate the procurement, sourcing and settlement of goods and services. Our
solution includes frameworks to manage corporate procurement and enable digital
marketplaces. Key elements of our solution include the following:
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. Our Procurement Solution. We offer a procurement solution for our
customers from sourcing to procurement to payment settlement. Our
solutions are designed to address the distinct business needs of
corporate procurement and digital marketplaces. Our solutions also
include critical capabilities such as online analytics, content and
catalog management, supplier enablement, and training and
implementation services. We have also established strategic
partnerships to offer complimentary solutions such as business process
consulting, system integration, content management and hosting
services.
. Rapid Deployment/Speed to Return on Investment (ROI). We have
demonstrated the rapid deployment capabilities of our e-commerce
solutions. We offer added value by quickly getting our solutions in
production and ready to process transactions so that our customers can
quickly begin to realize a payback on their investment in our
solution. Delivering solutions that can be deployed rapidly is a
fundamental tenet of our solution strategy. We also work with our
strategic partners to offer differentiated bundled software and
services solutions to extend the rapid deployment advantage even
further for our customers.
. Flexible Business Model. Our business model provides flexible business
terms for our customers including traditional software license
agreements and subscription-based programs. Our business model is not
based on transaction fees or revenue sharing. Our flexible business
model allows companies to realize a more rapid return on their
investment by decreasing their up-front software expenditures. In
addition, we have developed partnerships with application service
providers who offer our customers a hosted software alternative to an
on-site implementation. By leveraging these partnerships, customers
can more rapidly and cost effectively deploy our solution while
outsourcing the ongoing management and operation of our software.
. Open Architecture. We offer a solution that is based on an open
architecture and leverages leading electronic commerce technologies
and industry standards such as Microsoft's .NET e-commerce platform
and XML. Our open architecture allows for flexibility, open catalog
content management, scalability, ease of administration, lower
infrastructure costs and rapid deployment.
Our Strategy and Products
Our objective is to be a leading global provider of business-to-business e-
commerce applications that automate the sourcing, procurement and payment
settlement of goods and services targeted for the LME market.
The key elements of our strategy are to:
. Focus on the large to mid-size enterprise (LME) market;
. Market and sell three e-commerce platforms: sourcing, procurement and
settlement;
. Execute a multi-channel sales strategy;
. Leverage our business model for market penetration; and
. Expand our international operations.
. Intensive focus on the large to mid-size enterprise market. We define the
LME market to be companies with revenues of $250 million to $5 billion.
While our solution has been successfully implemented in companies outside
this revenue range, we believe that our rapid deployment capabilities,
bundled solution offering, and flexible business model are best suited for
the LME market.
We believe that the LME market will be attracted to packaged "turnkey"
solutions with known, reasonable deployment costs and infrastructure
impact. We believe the LME market also desires a total procurement
solution, which includes sourcing, procurement, and payment settlement.
We believe that the combination of our application suite, optimization of
the Microsoft platform, and rapid deployment architecture is well suited to
meet the needs of the LME market.
. Market and sell three e-commerce platforms.
Procurement: We provide two options for electronic procurement: corporate
------------
e-procurement and a digital marketplace framework. Our corporate e-
procurement product, Clarus eProcurement, is designed to provide Internet-
based
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procurement of goods and services, and includes capabilities such as
requisitioning, workflow, order management, and analytics. Our digital
marketplace framework, Clarus eMarket, allows multiple buyer and supplier
organizations to interact in a personalized trading environment. Clarus
eMarket is designed for both private and public exchanges. Our procurement
platforms accounted for 70.2% and 66.0% of our total license fee revenue in
2000 and 1999, respectively.
Settlement: Clarus Settlement is designed to deliver a number of Internet-
-----------
based settlement capabilities including net "market-maker" fee processing,
buyer settlement, seller settlement, and reconciliation. Our settlement
solution may be deployed either independently or as a component of our
procurement solution.
Sourcing: We provide a sourcing solution that provides commerce
---------
capabilities such as auctions, weight-based request for quotations, and
collaboration.
. Execute a multi-channel sales strategy. We believe that a key to market
penetration in the LME space is a multi-channel sales strategy and
organization. Therefore, we continue to expand both our direct and indirect
sales forces with geographic and industry focus.
. Leverage our business model for market penetration. Our business supports a
multi-channel sales strategy that is designed with the needs of the LME
market. These solutions bundle software, services, support, implementation,
training and integration, and are made available through a range of
flexible purchase options spanning from perpetual licenses to
subscriptions.
Expand our international operations. We believe a market for our solution
exists outside the United States. We expanded our operations internationally in
2000 with the opening of a branch office in the United Kingdom, and through the
acquisition of SAI/Redeo Companies, an organization with operations in Ireland.
In 2000, 79.4% of our business was derived from U.S.-based companies. The
remainder of the Company's 2000 revenue was derived from international markets,
none of which exceeded 10% in any one country. In 1999 and 1998, substantially
all of our revenue was from U.S.-based companies.
Client Services
Our client services organization provides our customers and strategic
partners with implementation services, training and technical support. This
organization educates our customers and strategic partners on the strategy,
methodology and functionality of our products and implements our solution, on
average, within three to six months. We typically offer our implementation
services to customers on a time and materials basis. We also offer several
packaged service offerings designed to provide lower-risk, cost-efficient
implementations for customers. Additionally, we have developed relationships
with systems integrators to augment the implementation efforts provided by our
client services organization.
We have dedicated personnel within our client services organization to
support our solution once implemented. We generally enter into a maintenance
contract with our customers, which are renewable on an annual basis.
Strategic Alliances and Relationships
To ensure that we deliver a comprehensive solution to our customers, we
continue to establish and develop strategic relationships with systems
integrators, resellers, OEMs and other complementary technology partners. These
relationships further our strategy of rapidly deploying our business-to-business
e-commerce solutions to the LME market.
We have developed relationships with regional, national and international
systems integrators such as Deloitte & Touche and Compaq Solutions. These
systems integrators implement our products and often assist us with sales lead
generation. We continue to certify and train consultants and business
development professionals in these organizations. We expect that these partners
will represent an increased percentage of our implementation services in the
future.
We also have developed relationships with selected resellers such as
Compaq, VerticalNet and Epicor. By acting as a global sales and delivery
channel, we believe these resellers will accelerate the use and deployment of
our solution by distributing our applications to a broad range of organizations.
Microsoft continues to be a key strategic partner for us. We engage with
Microsoft in joint marketing, selling, and product strategy at both a corporate
and a field level. During 2000, Clarus eMarket was named the Microsoft(R) Global
e-Commerce Solution of the Year for its advanced designed and technology
optimization on Microsoft's .Net platform. We continue to design, develop,
deliver, and optimize all of our solutions exclusively for the Microsoft
platform.
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Sales and Marketing
We sell our software and services through our direct sales force and a
growing number of indirect channels. Our direct sales force, consisting of 47
sales professionals as of December 31, 2000, is organized geographically into
two regions: the Americas and Europe, Middle East and Africa (EMEA) regions,
each of which operates under the direction of a general manager. Our sales
professionals receive a base salary and earn commissions based on achieving
quarterly and annual sales goals. We have also developed indirect channels to
accelerate market adoption of our solution. These indirect channels include
partnerships with application service providers, systems integrators, resellers
and other partners. International channel resellers have also been established
to extend our global sales operations in EMEA, Asia Pacific, and Latin America.
The sales cycle for our business-to-business e-commerce products typically
averages four to nine months.
We have designed our marketing strategy to position us as a leading global
provider of Internet-based business-to-business e-commerce applications for
large to mid-size enterprises. In support of our strategy, we engage in a full
range of marketing programs focused on creating awareness and generating
qualified leads. These programs include developing and maintaining alliances
with business partners such as Microsoft, Compaq, Deloitte & Touche, marchFIRST
and VerticalNet. We participate in industry trade shows and seminars, use
telemarketing campaigns, advertise in major periodicals and business
publications, and conduct direct mail campaigns. We hosted an executive
business-to-business e-commerce conference, eC Leadership, in June 2000, and
have a similar event planned for May 2001. In addition, we maintain a web site,
www.claruscorp.com, which is integrated with our sales, marketing, recruiting
and fulfillment operations.
Competition
The market for our products is highly competitive and subject to rapid
technological change. In targeting the large to mid-size enterprise market, we
believe we are able to differentiate our solutions from corporate electronic
procurement and digital marketplace providers such as Ariba and Commerce One. We
also anticipate competition from some of the large enterprise resource planning
software vendors, such as Oracle and SAP.
The principal competitive factors affecting our market include having a
significant base of referenceable, production customers, breadth and depth of
solution, a critical mass of buyers and suppliers, product quality and
performance, customer service, architecture, product features, the ability to
implement, and value of the overall solution. We believe our solution competes
favorably with respect to these factors.
Research and Development
Our success depends in part on our ability to continue to meet customer and
market requirements with respect to the functionality, performance, technology
and reliability of our products. We invest, and intend to continue to invest, in
our research and development efforts.
Our research effort focuses on identifying new and emerging technologies and
engineering processes, especially with respect to Internet and intranet
transaction processing. Our development effort focuses primarily on the product
delivery cycle and our associated technologies and software life-cycle
processes. Our development teams consist of software engineering, documentation
and quality assurance personnel who have extensive industry experience. Specific
responsibilities of our development teams include:
. enhancing functionality and performance within our product line;
. developing new products and integrating with strategic third-party
products to strengthen our product line;
. updating our product line to remain current and compatible with new
operating systems, databases and tools; and
. managing and continuously improving the overall software development
process.
We proactively seek formal customer feedback through conferences, focus
groups and surveys in order to enhance our products to meet changing business
requirements. We are committed to developing new releases of our products to
provide a highly functional, integrated solution.
Our research and development expenditures were approximately $21.9 million,
$9.0 million and $6.3 million for the years ended December 31, 2000, 1999 and
1998, respectively. In addition, during 2000, we incurred $424,000 of noncash
research and development expenses related to warrants issued to a third party to
develop certain software. Substantially all of our research and development
expenditures in 1998 were related to our enterprise resource planning business
that we sold to Geac Computer
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Systems, Inc. and Geac Canada Limited in October 1999. The majority of our
research and development expenditures in 2000 and 1999 were related to our e-
commerce products.
As of December 31, 2000, we employed 106 research and development personnel.
We have from time to time supplemented, and plan to continue to supplement, our
research and development organization through outside contractors and
consultants when necessary.
Proprietary Rights and Licensing
Our success depends significantly on our internally developed intellectual
property and intellectual property licensed from others. We rely primarily on a
combination of copyright, trademark and trade secret laws, as well as
confidentiality procedures and license arrangements to establish and protect our
proprietary rights in our software products.
Existing patent, trade secret and copyright laws afford only limited
protection of our proprietary rights. We have applied for registration for
certain trademarks and will continue to evaluate the registration of copyrights
and additional trademarks as appropriate. Because of the rapid pace of
technological change in the software industry, we believe that the intellectual
property protection of our products is a less significant factor in our success
than the knowledge, abilities and experience of our employees, the frequency of
our product enhancements, the effectiveness of our marketing activities and the
timeliness and quality of our support services.
We enter into license agreements with each of our customers. Each of our
license agreements provides for the customer's non-exclusive right to use the
object code version of our products. Our license agreements prohibit the
customer from disclosing to third parties or reverse engineering our products
and disclosing our other confidential information.
Employees
Our employees are based in the United States, Canada, the United Kingdom,
and Ireland. As of December 31, 2000, we had a total of 425 employees,
including 121 in client services, 47 in sales, 44 in business development, 41 in
marketing, 106 in research and development and 66 in finance and administration.
None of our employees are represented by a labor union or are subject to a
collective bargaining agreement. We have not experienced any work stoppages and
consider our relationship with our employees to be excellent.
Risk Factors
In addition to other information in this annual report on Form 10-K, the
following risk factors should be carefully considered in evaluating our business
because such factors may have a significant impact on our business, operating
results and financial condition. As a result of the risk factors set forth
below, actual results could differ materially from those projected in any
forward-looking statements.
We may not effectively implement our business strategy.
Our future performance will depend in part on successfully developing,
introducing and gaining market acceptance of our products. On October 18, 1999,
we sold substantially all of the assets of our financial and human resources
software business to Geac Computer Systems, Inc. and Geac Canada Limited. Our
financial and human resources software business had historically been our
primary business. We began marketing our Clarus eProcurement solution in the
second quarter of 1998. We added Clarus eMarket and Clarus Auctions to our
product line in the second quarter of 2000, and introduced Clarus Settlement in
the third quarter of 2000. If we do not successfully implement our business-to-
business e-commerce growth strategy, our business will suffer materially and
adversely. Our focus as an organization is on the large to mid-size enterprise
(LME) market. While we anticipate that this market is increasingly more
receptive to purchasing our solutions, we cannot be sure of the adoption rate.
The actual rate may be slower or less than our expectations, which would
materially and adversely affect our business, results of operations and
financial condition.
We may not be able to maintain referenceable accounts.
The implementation of our product suite by buying organizations can be
complex, time consuming and expensive. In many cases, these organizations must
change established business practices and conduct business in new ways. Our
ability to
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attract additional customers for our product suite will depend on using our
existing customers as referenceable accounts. As a result, our operating
resource solutions may not achieve significant market acceptance.
We expect our product line to appeal to early-stage companies, which expose us
to higher than normal credit risk.
Our product line supports Internet-based business-to-business electronic
commerce solutions that automate the procurement and management of operating
resources. As a result of this functionality many early-stage businesses, in
addition to many companies with traditional business models, are interested in
acquiring our products. Many early-stage companies acquire their funding
periodically based upon investor's perception of their progress and likelihood
of success. Typically, they do not have internal operations sufficient to
generate cash, which would guarantee their ongoing viability. While we evaluate
all potential customers' ability to pay, if an increasing number of our
customers fail in their operations and are unable to continue to pay amounts due
under our license agreement, we will experience material and adverse financial
losses related to these sales.
If our subscription-based model is unsuccessful, the market may adopt our
products at a slower rate than anticipated, and our business may suffer
materially.
We offer a subscription-based payment method to our customers. This model
is unproven and represents a significant departure from the fee-based software
licensing strategies that our competitors and we have traditionally employed. If
we do not successfully develop and support our subscription-based model, the
market may adopt our products at a slower rate than anticipated, and our
business may suffer materially. As of December 31, 2000, we have signed several
customers to subscription-based payment arrangements. Revenue associated with
these customers in 2000 was immaterial.
We may not generate the substantial additional revenues necessary to become
profitable and anticipate that we will continue to incur losses.
We have incurred significant net losses in each year since our formation.
In addition, we have incurred significant costs to develop our e-commerce
technology and products, and to recruit and train personnel. We believe our
success is contingent upon increasing our customer base and investing in further
development of our products and services. This will require significant
expenditures in research and development, sales and marketing, services, and
support infrastructure. As a result, we will need to generate significant
revenues to achieve and maintain profitability in the future. We cannot be
certain that we will ever achieve such growth in the future.
As we expand our international sales and marketing activities and international
operations, our business will be more susceptible to numerous risks associated
with international operations.
To be successful, we believe we must expand our international operations
and hire additional international personnel. As a result, we expect to commit
significant resources to expand our international sales and marketing
activities. We are subject to a number of risks associated with international
business activities. These risks generally include:
. currency exchange rate fluctuations;
. seasonal fluctuations in purchasing patterns;
. unexpected changes in regulatory requirements;
. tariffs, export controls and other trade barriers;
. longer accounts receivable payment cycles and difficulties in
collecting accounts receivable;
. difficulties in managing and staffing international operations;
. potentially adverse tax consequences, including restrictions on the
repatriation of earnings;
. increased transactions costs related to sales transactions conducted
outside the U.S.;
. reduced protection of intellectual property rights and increased risk
of piracy;
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. challenges of retaining and maintaining strategic relationships with
customers and business alliances in international markets;
. foreign laws and courts may govern many of the agreements with
customers and resellers;
. difficulties in maintaining knowledgeable sales representatives in
countries outside the U.S.;
. adequacy of local infrastructures outside the U.S.;
. differing technology standards, translations, and localization
standards;
. uncertain demand for electronic commerce;
. linguistic and cultural differences;
. the burdens of complying with a wide variety of foreign laws; and
. political, social, and economic instability.
We have limited experience in marketing, selling and supporting our products and
services in foreign countries. We do not have experience developing foreign
language versions of our products.
We intend to expand the geographic scope of our customer base and
operations. We opened our first international sales office in the United Kingdom
during the first quarter of 2000 and acquired the SAI/Redeo companies, which
have significant operations in Ireland, in the second quarter of 2000. We have
limited experience in managing geographically dispersed operations and in
operating in Ireland and the United Kingdom.
Our quarterly operations are volatile and difficult to predict. If we fail to
meet the expectations of public market analysts or investors, the market price
of our common stock may decrease significantly.
We believe that our quarterly and annual operating results will fluctuate
significantly in the future, and our results of operations may fall below the
expectations of securities analysts and investors. If this occurs or if market
analysts perceive that it will occur, the market price of our common stock could
decrease substantially. Recently, when the market price of a security has been
volatile, holders of that security have often instituted securities class action
lawsuits against the company that issued the security. We have been the subject
of such lawsuits. These lawsuits divert the time and attention of our management
and an adverse judgment could cause our financial condition or operating results
to suffer.
Because the percentage of our revenues represented by maintenance services
is smaller than that of many software companies with a longer history of
operations, we do not have a significant recurring revenue stream that could
lessen the effect of quarterly fluctuations in operating results. Many factors
may cause significant fluctuations in our quarterly and annual operating
results, including:
. changes in the demand for our products;
. the timing, composition and size of orders from our customers;
. customer spending patterns and budgetary resources;
. our success in generating new customers;
. the timing of introductions of or enhancements to our products;
. changes in our pricing policies or those of our competitors;
. our ability to anticipate and adapt effectively to developing markets
and rapidly changing technologies;
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. our ability to attract, retain and motivate qualified personnel,
particularly within our sales and marketing and research and
development organizations;
. the publication of opinions or reports about us, our products, our
competitors or their products;
. unforeseen events affecting business-to-business e-commerce;
. changes in general economic conditions;
. bad debt write-offs;
. impairment of strategic investments;
. actions taken by our competitors, including new product introductions
and enhancements;
. our ability to scale our network and operations to support large
numbers of customers, suppliers and transactions;
. our success in maintaining and enhancing existing relationships and
developing new relationships with strategic partners, including
application service providers, systems integrators, resellers, value-
added trading communities and other partners; and
. our ability to control costs.
Our quarterly revenues are especially subject to fluctuation because they
can depend on the sale of relatively large orders for our products and related
services. As a result, our quarterly operating results may fluctuate
significantly if we are unable to complete one or more substantial sales in a
given quarter.
Recently, we announced our strategy to serve the large and mid-sized
enterprise market that emphasizes license agreements that require the
recognition of revenue over a fixed period of time. In these cases, we recognize
revenues on a ratable basis over the life of the contract, which is typically 12
to 36 months. Therefore, if we do not book a sufficient number of large orders
in a particular quarter, our revenues in future periods could be lower than
expected. As we emphasize license agreements requiring ratable revenue
recognition, the potential for fluctuations in our quarterly results could
decrease but our revenues could be lower than expected. Furthermore, our
quarterly revenues may be affected significantly by other revenue recognition
policies and procedures. These policies and procedures may evolve or change over
time based on applicable accounting standards and how these standards are
interpreted.
We are increasing our investment in many areas, including research and
development, sales and marketing, services, and support infrastructure, based
upon our expectations of future revenue growth. These expenditures are
relatively fixed in the short term. If our revenues fall below expectations and
we are not able to quickly reduce spending in response, our operating results
for that quarter and future periods may be harmed.
We may incur costs and liabilities related to potential or pending litigation.
In a number of lawsuits filed against us in the fourth quarter of 2000, our
company and several of our officers have been named as defendants in a number of
securities class action lawsuits filed in the United States District Court for
the Northern District of Georgia. The plaintiffs purport to represent a class of
all persons who purchased or otherwise acquired our common stock in certain
periods beginning on October 20, 1999 and through October 25, 2000. The
complaints allege, among other things, that violations of Section 10(b) and
(20)a of the Securities Exchange Act of 1934, as amended and Rule 10b-5
promulgated thereunder, with respect to alleged material misrepresentations and
omissions made in public filings made with the Securities and Exchange
Commission and certain press releases and other public statements. The
plaintiffs seek unspecified damages and costs. These lawsuits divert the time
and attention of management and an adverse judgment could cause our financial
condition or operating results to suffer.
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Competition from other electronic procurement providers may reduce demand for
our products and cause us to reduce the price of our products.
The market for Internet-based procurement applications, and e-commerce
technology generally, is rapidly evolving and intensely competitive. The
intensity of competition has increased and is expected to further increase in
the future. We may not compete effectively in our markets. Competitive pressure
may result in our reducing the price of our products, which would negatively
affect our revenues and operating margins. If we are unable to compete
effectively in our markets, our business, results of operations and financial
condition would be materially and adversely affected.
In targeting the e-commerce market, we must compete with electronic
procurement providers such as Ariba and Commerce One. We also encounter
competition with respect to different aspects of our solution from companies
such as Concur Technologies, Extensity, Intelisys, VerticalNet, PurchasePro,
FreeMarkets, and i2. We also anticipate competition from some of the large
enterprise software developers, such as Oracle, PeopleSoft and SAP.
In addition, because there are relatively low barriers to entry in the
business-to-business exchange market, we expect additional competition from
other established and emerging companies, particularly if they acquire one of
our competitors.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition, and a larger installed base
of customers than we do. In addition, many of our competitors have well-
established relationships with our current and potential customers and have
extensive knowledge of our industry. In the past, we have lost potential
customers to competitors for various reasons, including lower prices and
incentives not matched by us. In addition, current and potential competitors
have established or may establish cooperative relationships among themselves or
with third parties to increase the ability of their products to address customer
needs. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. We also
expect that competition will increase as a result of industry consolidations.
We may not be able to compete successfully against our current and future
competitors.
Market adoption of our solutions will be impeded if we do not continue to
establish and maintain strategic relationships.
Our success depends in part on the ability of our strategic partners to
expand market adoption of our solutions. If we are unable to maintain our
existing strategic partnerships or enter into new partnerships, we may need to
devote substantially more resources to direct sales of our products and
services. We would also lose anticipated customer introductions and co-marketing
benefits.
We rely, and expect to continue to rely, on a number of third-party
application service providers to host our solutions. If we are unable to
establish and maintain effective, long-term relationships with our application
service providers, or if these providers do not meet our customers' needs or
expectations, our business would be seriously harmed. In addition, we lose a
significant amount of control over our solution when we engage application
service providers, and we cannot adequately control the level and quality of
their service. By relying on third-party application service providers, we are
wholly reliant on their information technology infrastructure, including the
maintenance of their computers and communication equipment. An unexpected
natural disaster or failure or disruption of an application service provider's
infrastructure would have a material adverse effect on our business.
We rely exclusively on one third-party content services provider to provide
catalog aggregation and management services to our customers, as part of our
procurement solution. If we are unable to maintain an effective, long-term
relationship with our content services provider, or if their services do not
meet our customers' needs or expectations, our business could be seriously
harmed.
If the demand for our solutions continues to increase, we will need to
develop relationships with additional third-party service providers to provide
these types of services. Our competitors have or may develop relationships with
these third parties and, as a result, these third parties may be more likely to
recommend competitors' products and services rather than ours.
Many of our strategic partners have multiple strategic relationships, and
they may not regard us as important to their businesses. In addition, our
strategic partners may terminate their relationships with us, pursue other
partnerships or relationships or attempt to develop or acquire products or
services that compete with our solutions. Further, our existing strategic
relationships may interfere with our ability to enter into other desirable
strategic relationships. A significant number of our Clarus eProcurement and
Clarus eMarket customers have been retained through referrals from Microsoft,
but Microsoft is not obligated to refer any
9
potential customers to us, and it has entered into strategic relationships with
other providers of electronic procurement applications.
Our stock price is highly volatile.
Our stock price has fluctuated dramatically. The market price of the common
stock may decrease significantly in the future in response to the following
factors, some of which are beyond our control:
. Variations in our quarterly operating results;
. Announcements that our revenue or income are below analysts'
expectations;
. Changes in analysts' estimates of our performance or industry
performance;
. Changes in market valuations of similar companies;
. Sales of large blocks of our common stock;
. Announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
. Loss of a major customer or failure to complete significant license
transactions;
. Additions or departures of key personnel; and
. Fluctuations in stock market price and volume, which are particularly
common among highly volatile securities of software and Internet-based
companies.
We rely on strategic selling relationships with our partners.
We have established strategic selling relationships with a number of
outside companies. Some of these companies have made significant revenue
commitments to us as part of these relationships. While we do not reflect these
commitments in our financial statements, this information is included in
"backlog" information we share with market analysts and investors. Some of
these strategic selling partners may not have the ability to meet their
financial commitments to us, if they are not able to generate a sufficient level
of sales to meet these commitments.
We expect to depend on our Clarus eProcurement and Clarus eMarket products for a
significant portion of our revenues for the foreseeable future.
We anticipate that revenues from our Clarus eProcurement and Clarus eMarket
products and related services will continue to represent a significant portion
of our revenues for the foreseeable future. As a result, a decline in the price
of, profitability of or demand for our Clarus eProcurement and Clarus eMarket
products would seriously harm our business. Our Clarus eMarket solution was
introduced in the second quarter of 2000.
Our products may perform inadequately in a high volume environment.
Any failure by our principal products to perform adequately in a high
volume environment could materially and adversely affect the market for these
products and our business, results of operations and financial condition. Our
products and the third party software and hardware on which it may depend may
not operate as designed when deployed in high volume environments.
Defects in our products could delay market adoption of our solutions or cause us
to commit significant resources to remedial efforts.
We could lose revenues as a result of software errors or other product
defects. As a result of their complexity, software products may contain
undetected errors or failures when first introduced or as new versions are
released. Despite our testing of our software products and their use by current
customers, errors may appear in new applications after commercial shipping
begins. If we discover errors, we may not be able to correct them.
10
Errors and failures in our products could result in the loss of customers
and market share or delay in market adoption of our applications, and
alleviating these errors and failures could require us to expend significant
capital and other resources. The consequences of these errors and failures could
materially and adversely affect our business, results of operations and
financial condition. Because we do not maintain product liability insurance, a
product liability claim could materially and adversely affect our business,
results of operations and financial condition. Provisions in our license
agreements may not effectively protect us from product liability claims.
Any acquisitions that we attempt or make could prove difficult to integrate or
require a substantial commitment of management time and other resources.
As part of our business strategy, we may seek to acquire or invest in
additional businesses, products or technologies that may complement or expand
our business. If we identify an appropriate acquisition opportunity, we may not
be able to negotiate the terms of that acquisition successfully, finance it, or
integrate it into our existing business and operations. We have completed only
three acquisitions to date. We may not be able to select, manage or absorb any
future acquisitions successfully, particularly acquisitions of large companies.
Further, the negotiation of potential acquisitions, as well as the integration
of an acquired business, would divert management time and other resources. We
may use a substantial portion of our available cash to make an acquisition. On
the other hand, if we make acquisitions through an exchange of our securities,
our stockholders could suffer dilution. In addition, any particular acquisition,
even if successfully completed, may not ultimately benefit our business.
We may not be able to retain the existing employees of acquired companies.
We made two technology acquisitions in 2000: the SAI/Redeo Companies and
iSold.com. In connections with these acquisitions, we acquired products
complementary to our procurement solution. We have no experience in providing
these types of software products or services. We may not have the industry
experience or technical experience to successfully continue development,
marketing and support of these technologies without the continued involvement of
these existing employees. The accounting treatment of our acquisition of the
SAI/Redeo Companies negatively impacted our results of operations.
The accounting treatment for our acquisition of the SAI/Redeo Companies
negatively impacted our results of operations in the second quarter of 2000. We
recognized a write-off of acquired in-process research and development and
amortization expense related to this acquisition. Amortization of this
acquisition will adversely affect our results of operations through 2008. The
amounts allocated under purchase accounting to develop technology and in-process
research and development in the acquisition involved valuation estimations of
future revenues, expenses, operating profit, and cash flows. The actual
revenues, expenses, operating profits, and cash flows from the acquired
technology recognized in the future may vary materially from such estimates. If
the in-process research and development product is not successfully developed,
our sales and profitability may be adversely affected in future periods.
Additionally, the value of other intangible assets acquired may become impaired.
An increase in the length of our sales cycle may contribute to fluctuations in
our operating results.
As our products and competing products become increasingly sophisticated
and complex, the length of our sales cycle is likely to increase. The loss or
delay of orders due to increased sales and evaluation cycles could materially
and adversely affect our business, results of operations and financial condition
and, in particular, could contribute to significant fluctuations in our
quarterly operating results. A customer's decision to license and implement our
solutions may present significant enterprise-wide implications for the customer
and involve a substantial commitment of its management and resources. The period
of time between initial customer contact and the purchase commitment typically
ranges from four to nine months for our applications. Our sales cycle could
extend beyond current levels as a result of lengthy evaluation and approval
processes that typically accompany major initiatives or capital expenditures or
other delays over which we have little or no control.
Our success depends on the continued use of Microsoft technologies or other
technologies that operate with our products.
Our products operate with, or are based on, Microsoft's proprietary
products. If businesses do not continue to adopt these technologies as
anticipated, or if they adopt alternative technologies that we do not support,
we may incur significant costs in redesigning our products or lose market share.
Our customers may be unable to use our products if they experience significant
problems with Microsoft technologies that are not corrected.
The failure to maintain, support or update software licensed from third parties
could materially and adversely affect our products' performance or cause product
shipment delays.
We have entered into license agreements with third-party licensors for
products that enhance our products, are used as tools with our products, are
licensed as products complementary to ours or are integrated with our products.
If these licenses
11
terminate or if any of these licensors fail to adequately maintain, support or
update their products, we could be required to delay the shipment of our
products until we could identify and license software offered by alternative
sources. Product shipment delays could materially and adversely affect our
business, operating results and financial condition, and replacement licenses
could prove costly. We may be unable to obtain additional product licenses on
commercially reasonable terms. Additionally, our inability to maintain
compatibility with new technologies could impact our customers' use of our
products.
If we are unable to manage our internal resources, we may incur increased
administrative costs and be unable to capitalize on revenue opportunities.
The growth of our e-commerce business coupled with the rapid evolution of
our market has strained, and may continue to strain, our administrative,
operational and financial resources and internal systems, procedures and
controls. Our inability to manage our internal resources effectively could
increase administrative costs and distract management. If our management is
distracted, we may not be able to capitalize on opportunities to increase
revenues.
Our success depends on our continuing ability to attract, hire, train and retain
a substantial number of highly skilled managerial, technical, sales, marketing
and customer support personnel.
Competition for qualified personnel is intense, and we may fail to retain
our key employees or to attract or retain other highly qualified personnel. In
particular, there is a shortage of, and significant competition for, research
and development and sales personnel. Even if we are able to attract qualified
personnel, new hires frequently require extensive training before they achieve
desired levels of productivity. If we are unable to hire or fail to retain
competent personnel, our business, results of operations and financial condition
could be materially and adversely affected. We do not maintain key-man life
insurance policies on any of our employees.
Illegal use of our proprietary technology could result in substantial litigation
costs and divert management resources.
Our success will depend significantly on internally developed proprietary
intellectual property and intellectual property licensed from others. We rely on
a combination of patent, copyright, trademark and trade secret laws, as well as
on confidentiality procedures and licensing arrangements, to establish and
protect our proprietary rights in our products. Existing patent, trade secret
and copyright laws provide only limited protection of our proprietary rights. We
have applied for registration of our trademarks. We enter into license
agreements with our customers that give the customer the non-exclusive right to
use the object code version of our products. These license agreements prohibit
the customer from disclosing object code to third parties or reverse-engineering
our products and disclosing our confidential information. Despite our efforts to
protect our products' proprietary rights, unauthorized parties may attempt to
copy aspects of our products or to obtain and use information that we regard as
proprietary. Third parties may also independently develop products similar to
ours.
Litigation may be necessary to enforce our intellectual property rights, to
protect our trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
resources and could harm our business, operating results and financial
condition.
Claims against us regarding our proprietary technology could require us to pay
licensing or royalty fees or to modify or discontinue our products.
Any claim that our products infringe on the intellectual property rights of
others could materially and adversely affect our business, results of operations
and financial condition. Because knowledge of a third party's patent rights is
not required for a determination of patent infringement and because the United
States Patent and Trademark Office is issuing new patents on an ongoing basis,
infringement claims against us are a continuing risk. Infringement claims
against us could cause product release delays, require us to redesign our
products or require us to enter into royalty or license agreements. These
agreements may be unavailable on acceptable terms. Litigation, regardless of the
outcome, could result in substantial cost, divert management attention and delay
or reduce customer purchases. Claims of infringement are becoming increasingly
common as the software industry matures and as courts apply expanded legal
protections to software products. Third parties may assert infringement claims
against us regarding our proprietary technology and intellectual property
licensed from others. Generally, third-party software licensors indemnify us
from claims of infringement. However, licensors may be unable to indemnify us
fully for such claims, if at all.
If a court determines that one of our products violates a third party's
patent or other intellectual property rights, there is a material risk that the
revenue from the sale of the infringing product will be significantly reduced or
eliminated, as we may have to:
12
. pay licensing fees or royalties to continue selling the product;
. incur substantial expense to modify the product so that the third
party's patent or other intellectual property rights no longer apply
to the product; or
. stop selling the product.
In addition, if a court finds that one of our products infringes a third
party's patent or other intellectual property rights, then we may be liable to
that third party for actual damages and attorneys' fees. If a court finds that
we willfully infringed on a third party's patent, the third party may be able to
recover treble damages, plus attorneys' fees and costs.
A compromise of the encryption technology employed in our solutions could reduce
customer and market confidence in our products or result in claims against us.
A significant barrier to Internet-based commerce is the secure exchange of
valued and confidential information over public networks. Any compromise of our
security technology could result in reduced customer and market confidence in
our products and in customer or third party claims against us. This could
materially and adversely affect our business, financial condition and operating
results. Clarus eProcurement and Clarus eMarket rely on encryption technology to
provide the security and authentication necessary to protect the exchange of
valuable and confidential information. Advances in computer capabilities,
discoveries in the field of cryptography or other events or developments may
result in a compromise of the encryption methods we employ in Clarus
eProcurement and Clarus eMarket to protect transaction data.
Our success depends upon market acceptance of e-commerce as a reliable method
for corporate procurement and other commercial transactions.
Market acceptance of e-commerce, generally, and the Internet specifically,
as a forum for corporate procurement is uncertain and subject to a number of
risks. The success of our suite of business-to-business e-commerce applications,
including Clarus eProcurement and Clarus eMarket, depends upon the development
and expansion of the market for Internet-based software applications, in
particular e-commerce applications. This market is new and rapidly evolving.
Many significant issues relating to commercial use of the Internet, including
security, reliability, cost, ease of use, quality of service and government
regulation, remain unresolved and could delay or prevent Internet growth. If
widespread use of the Internet for commercial transactions does not develop or
if the Internet otherwise does not develop as an effective forum for corporate
procurement, the demand for our product suite and our overall business,
operating results and financial condition will be materially and adversely
affected.
If the market for Internet-based procurement applications fails to develop
or develops more slowly than we anticipate or if our Internet-based products or
new Internet-based products we may develop do not achieve market acceptance, our
business, operating results and financial condition could be materially and
adversely affected. The adoption of the Internet for corporate procurement and
other commercial transactions requires accepting new ways of transacting
business. In particular, enterprises with established patterns of purchasing
goods and services that have already invested substantial resources in other
means of conducting business and exchanging information may be particularly
reluctant to adopt a new strategy that may make some of their existing personnel
and infrastructure obsolete. Also, the security and privacy concerns of existing
and potential users of Internet-based products and services may impede the
growth of online business generally and the market's acceptance of our products
and services in particular. A functioning market for these products may not
emerge or be sustained.
The market for business-to-business e-commerce solutions is characterized by
rapid technological change, and our failure to introduce enhancements to our
products in a timely manner could render our products obsolete and unmarketable.
The market for e-commerce applications is characterized by rapid
technological change, frequent introductions of new and enhanced products and
changes in customer demands. In attempting to satisfy this market's demands, we
may incur substantial costs that may not result in increased revenues due to the
short life cycles for business-to-business e-commerce solutions. Because of the
potentially rapid changes in the e-commerce applications market, the life cycle
of our products is difficult to estimate.
Products, capabilities or technologies others develop may render our
products or technologies obsolete or noncompetitive and shorten the life cycles
of our products. Satisfying the increasingly sophisticated needs of our
customers requires developing and introducing enhancements to our products and
technologies in a timely manner that keeps pace with technological developments,
emerging industry standards and customer requirements while keeping our products
priced competitively. Our
13
failure to develop and introduce new or enhanced e-commerce products that
compete with other available products could materially and adversely affect our
business, results of operations and financial condition.
Losses from our investments in strategic partners could negatively impact our
operating results.
We have made several financial investments in strategic partners. These
companies are primarily early-stage enterprises with limited operated histories.
If these partners are unsuccessful in executing their business plans, we may
experience losses on these investments, which would negatively impact our
operating results.
Failure to expand Internet infrastructure could limit our growth.
Our ability to increase the speed and scope of our services to customers is
limited by and depends on the speed and reliability of both the Internet and our
customers' internal networks. As a result, the emergence and growth of the
market for our services depends on improvements being made to the entire
Internet infrastructure as well as to our individual customers' networking
infrastructures. The recent growth in Internet traffic has caused frequent
periods of decreased performance. If the Internet's infrastructure is unable to
support the rapid growth of Internet usage, its performance and reliability may
decline, and overall Internet usage could grow more slowly or decline. If
Internet reliability and performance declines, or if necessary improvements do
not increase the Internet's capacity for increased traffic, our customers will
be hindered in their use of our solutions, and our business, operating results
and financial condition could suffer.
Future governmental regulations could materially and adversely affect our
business and e-commerce generally.
We are not subject to direct regulation by any government agency, other than
under regulations applicable to businesses generally, and few laws or
regulations specifically address commerce on the Internet. In view of the
increasing use and growth of the Internet, however, the federal government or
state governments may adopt laws and regulations covering issues such as user
privacy, property ownership, libel, pricing and characteristics and quality of
products and services. We could incur substantial costs in complying with these
laws and regulations, and the potential exposure to statutory liability for
information carried on or disseminated through our application systems could
force us to discontinue some, or all of our services. These eventualities could
adversely affect our business operating results and financial condition. The
adoption of any laws or regulations covering these issues also could slow the
growth of e-commerce generally, which would also adversely affect our business,
operating results or financial condition. Additionally, one or more states may
impose sales tax collection obligations on out-of-state companies that engage in
or facilitate e-commerce. The collection of sales tax in connection with e-
commerce could impact the growth of e-commerce and could adversely affect sales
of our e-commerce products.
Legislation limiting further levels of encryption technology may adversely
affect our sales.
As a result of customer demand, it is possible that Clarus eProcurement and
Clarus eMarket will be required to incorporate additional encryption technology.
The United States government regulates the exportation of this technology.
Export regulations, either in their current form or as they may be subsequently
enacted, may further limit the levels of encryption or authentication technology
that we are able to use in our software and our ability to distribute our
products outside the United States. Any revocation or modification of our export
authority, unlawful exportation or use of our software or adoption of new
legislation or regulations relating to exportation or use of software and
encryption technology could materially and adversely affect our sales prospects
and, potentially, our business, financial condition and operating results as a
whole.
Where You Can Find More Information
At your request, we will provide you, without charge, a copy of any exhibits
to this annual report on Form 10-K. If you want an exhibit or more information,
call, write or e-mail us at:
Clarus Corporation
3970 Johns Creek Court
Suite 100
Suwanee, Georgia 30024
Telephone: (770) 291-3900
Fax: (770) 291-4997
www.claruscorp.com
14
Our fiscal year ends on December 31. We file annual, quarterly, and special
reports, proxy statements and other information with the Securities and Exchange
Commission. You may read and copy any reports, statements, or other information
we file at the SEC's public reference rooms in Washington, D.C., New York, New
York, and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also available to
the public from commercial document retrieval services and at the Web site
maintained by the SEC at http://www.sec.gov.
ITEM 2. PROPERTIES
Our corporate headquarters is located in Suwanee, Georgia, where we lease
approximately 89,000 square feet. This location houses: client services,
strategy and business development, sales and marketing, research and
development, and finance and administration. Our Europe, Middle East and Africa
("EMEA") headquarters is in Reading, England, where we lease approximately
13,700 square feet. This location houses: client services, business development,
sales and marketing, and finance and administration. We also lease approximately
6,000 square feet in Limerick, Ireland, which is primarily used for development
of our Clarus Settlement product and approximately 5,000 square feet in
Mississauga, Ontario, which is primarily used for development and customization
of our products. We also lease executive suites, primarily for sales offices. We
believe our facilities are adequate for future growth.
ITEM 3. LEGAL PROCEEDINGS
We are a party to lawsuits in the normal course of our business. Litigation
in general, and securities litigation in particular, can be expensive and
disruptive to normal business operations. Moreover, the results of complex legal
proceedings are difficult to predict. An unfavorable resolution of one or more
of the following lawsuits could adversely affect our business, results of
operations, or financial condition.
Following our public announcement on October 25, 2000, of our financial
results for the third quarter, we and certain of our directors and officers were
named as defendants in fourteen putative class action lawsuits filed in the
United States District Court for the Northern District of Georgia on behalf of
all purchasers of common stock of the Company during various periods beginning
as early as October 20, 1999 and ending on October 25, 2000. The fourteen class
action lawsuits filed against the company were consolidated into one case, Case
No. 1:00-CV-2841, pursuant to an order of the court dated November 17, 2000.
The class action complaints allege claims against us and other defendants
for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, as amended, and Rule 10b-5 promulgated thereunder with respect to alleged
material misrepresentations and omissions in public filings made with the
Securities and Exchange Commission and certain press releases and other public
statements made by us and certain of our officers relating to our business,
results of operations, financial condition and future prospects, as a result of
which, it is alleged, the market price of our common stock was artificially
inflated during the class periods. The class action complaints focus on
statements made concerning an account receivable from one of our customers. The
plaintiffs seek unspecified compensatory damages and costs (including attorneys'
and expert fees), expenses and other unspecified relief on behalf of the
classes. We believe that we have complied with our obligations under the Federal
securities laws and we intend to defend these lawsuits vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been listed on the Nasdaq National Market since May 26,
1998, the effective date of our initial public offering. On August 28, 1998, we
changed our name from SQL Financials International, Inc. to Clarus Corporation.
Effective September 2, 1998, we changed our Nasdaq National Market symbol from
"SQLF" to "CLRS." Prior to May 26, 1998, there was no established trading
market for our common stock. The following table sets forth, for the indicated
periods, the high and low closing sales prices for our common stock as reported
by the Nasdaq National Market.
Closing Sales Price
------------------------
High Low
------------ ----------
Calendar Year 1999
First Quarter..................................................................................... $ 6.13 $ 3.31
Second Quarter.................................................................................... $ 5.91 $ 4.50
Third Quarter..................................................................................... $ 15.44 $ 5.06
Fourth Quarter.................................................................................... $ 71.00 $ 9.38
Calendar Year 2000
First Quarter..................................................................................... $136.00 $54.50
Second Quarter.................................................................................... $ 68.38 $21.31
Third Quarter..................................................................................... $ 63.25 $22.81
Fourth Quarter.................................................................................... $ 23.75 $ 6.06
Calendar Year 2001
First Quarter (through March 13, 2001)............................................................ $ 9.25 $ 5.09
Stockholders
As of March 13, 2001, there were 155 holders of record of our common stock.
Dividends
We currently anticipate that we will retain all future earnings for use in our
business and do not anticipate that we will pay any cash dividends in the
foreseeable future. The payment of any future dividends will be at the
discretion of our Board of Directors and will depend upon, among other things,
our results of operations, capital requirements, general business conditions,
contractual restrictions on payment of dividends, if any, legal and regulatory
restrictions on the payment of dividends, and other factors our Board of
Directors deems relevant.
16
ITEM 6. SELECTED FINANCIAL DATA
Our selected financial information set forth below should be read in
conjunction with our consolidated financial statements, including the notes
thereto. The following statement of operations and balance sheet data have been
derived from our audited consolidated financial statements and should be read in
conjunction with those statements, which are included in this report.
Year Ended December 31,
-----------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(in thousands, except per share data)
Statement of Operations Data:
- -----------------------------
Revenues:
License fees..................................................... $ 24,686 $ 15,101 $ 17,372 $13,506 $ 6,425
Services fees.................................................... 9,361 23,041 24,268 12,482 6,631
-------- -------- -------- ------- -------
Total revenues.................................................. 34,047 38,142 41,640 25,988 13,056
Cost of revenues:...................................................
License fees..................................................... 154 1,351 1,969 1,205 416
Service fees..................................................... 12,776 14,517 13,952 7,311 4,254
-------- -------- -------- ------- -------
Total cost of revenues.......................................... 12,930 15,868 15,921 8,516 4,670
Operating expenses:
Research and development, exclusive of noncash expense........... 21,891 9,003 6,335 6,690 5,360
Noncash research and development................................. 424 - - - -
In-process research and development.............................. 8,300 - 10,500 - -
Sales and marketing, exclusive of noncash expense................ 35,888 15,982 11,802 9,515 7,191
Noncash sales and marketing ..................................... 7,001 1,930 - - -
General and administrative, exclusive of noncash expense... 15,721 6,241 5,126 3,161 2,368
Noncash general and administrative.............................. 1,098 874 880 58 -
Depreciation and amortization.................................... 8,132 3,399 2,154 1,406 1,125
-------- -------- -------- ------- -------
Total operating expenses........................................... 98,455 37,429 36,797 20,830 16,044
-------- -------- -------- ------- -------
Operating loss...................................................... (77,338) (15,155) (11,078) (3,358) (7,658)
Gain on sale of assets.............................................. 1,347 9,417 - - -
Realized loss on sale of
investments........................................................ (100) - - - -
Loss on impairment of
investments........................................................ (4,128) - - - -
Amortization of debt
discount........................................................... (982) - - - -
Interest income, net................................................ 10,554 337 412 (274) (6)
Minority interest................................................... - - (36) (478) (215)
-------- -------- -------- ------- -------
Net loss............................................................ $(70,647) $ (5,401) $(10,702) $(4,110) $(7,879)
======== ======== ======== ======= =======
Net loss per common share:
Basic............................................................ $(4.90) $(0.49) $(1.70) $(2.97) $(5.74)
======== ======== ======== ======= =======
Diluted.......................................................... $(4.90) $(0.49) $(1.70) $(2.97) $(5.74)
======== ======== ======== ======= =======
Weighted average common shares outstanding:
Basic............................................................ 14,420 11,097 6,311 1,386 1,373
======== ======== ======== ======= =======
Diluted.......................................................... 14,420 11,097 6,311 1,386 1,373
======== ======== ======== ======= =======
Year Ended December 31,
-----------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Balance Sheet Data:
- -------------------
Cash and cash equivalents........................................... $118,303 $14,127 $14,799 $ 7,213 $ 3,279
Working capital (deficit)........................................... 171,336 16,751 9,001 (453) (3,422)
Total assets........................................................ 266,904 48,563 40,082 14,681 8,525
Long-term debt, net of current portion.............................. 5,000 - 245 497 1,093
Total stockholders' equity (deficit)................................ 246,822 32,615 22,111 (27,910) (23,837)
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company develops, markets and supports Internet-based business-to-
business electronic commerce solutions that automate the procurement and
management of operating resources. The Company's multiple solutions provide a
framework to enable Internet-based digital marketplaces, allowing companies to
create trading communities and additional revenue opportunities. The Company's
multiple solutions, based on a free trade model, provide a direct Internet-based
connection between buyer and supplier without requiring transactions to be
executed through a centralized portal. The Company's product line includes
solutions that serve "market makers" (businesses utilizing the Internet for the
purpose of facilitating and increasing the efficiency of the distribution
channels of chosen vertical markets) as well as other solutions that best serve
the purchasing processes of business enterprises. The Company also provides
implementation and ongoing customer support services as part of its complete
procurement solutions. To achieve broad market adoption of the Company's
solutions and services, the Company has developed a multi-channel distribution
strategy that includes both a direct sales force and a growing number of
indirect channels, including application service providers, system integrators
and resellers.
Forward-Looking Statements
This report contains certain forward-looking statements, including or
related to our future results, including certain projections and business
trends. Assumptions relating to forward-looking statements involve judgments
with respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control. When
used in this report, the words "estimate," "project," "intend," "believe" and
"expect" and similar expressions are intended to identify forward-looking
statements. Although we believe that assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate, and we
may not realize the results contemplated by the forward-looking statement.
Management decisions are subjective in many respects and susceptible to
interpretations and periodic revisions based upon actual experience and business
developments, the impact of which may cause us to alter our business strategy or
capital expenditure plans that may, in turn, affect our results of operations.
In light of the significant uncertainties inherent in the forward-looking
information included in this report, you should not regard the inclusion of such
information as our representation that we will achieve any strategy, objectives
or other plans. The forward-looking statements contained in this report speak
only as of the date of this report, and we have no obligation to update publicly
or revise any of these forward-looking statements.
These and other statements, which are not historical facts, are based
largely upon our current expectations and assumptions and are subject to a
number of risks and uncertainties that could cause actual results to differ
materially from those contemplated by such forward-looking statements. These
risks and uncertainties include, among others, the risks and uncertainties
described in "Business - Risk Factors."
Sources of Revenue
The Company's revenue consists of license fees and services fees. License
fees are generated from the licensing of the Company's suite of products.
Services fees are generated from consulting, implementation, training, content
aggregation and maintenance support services.
Revenue Recognition
The Company recognizes revenue from two primary sources, software licenses
and services. Revenue from software licensing and services fees is recognized in
accordance with Statement of Position ("SOP") 97-2, "Software Revenue
Recognition", and SOP 98-9, "Software Revenue Recognition with Respect to
Certain Transactions". Accordingly, the Company recognizes software license
revenue when: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred; (3) the fee is fixed or determinable; and (4) collectibility is
probable.
SOP No. 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair values of the elements. The fair value of an element must be based
on evidence that is specific to the vendor. License fee revenue allocated to
software products generally is recognized upon delivery of the products or
deferred and recognized in future periods to the extent that an arrangement
includes one or more elements to be delivered at a future date and for which
fair values have not been established. Revenue allocated to maintenance is
recognized ratably over the maintenance term, which is typically 12 months and
revenue allocated to training and other service elements is recognized as the
services are performed.
18
Under SOP No. 98-9, if evidence of fair value does not exist for all
elements of a license agreement and post-contract customer support is the only
undelivered element, then all revenue for the license arrangement is recognized
ratably over the term of the agreement as license revenue. If evidence of fair
value of all undelivered elements exists but evidence does not exist for one or
more delivered elements, then revenue is recognized using the residual method.
Under the residual method, the fair value of the undelivered elements is
deferred and the remaining portion of the arrangement fee is recognized as
revenue. Revenue from hosted software agreements are recognized ratably over the
term of the hosting arrangements.
Cost of Revenues and Operating Expenses
Cost of license fees includes royalties and software duplication and
distribution costs. The Company recognizes these costs as the applications are
shipped.
Cost of services fees includes personnel related expenses and consulting
fees incurred to provide implementation, training, maintenance, content
aggregation, and upgrade services to customers and partners. These costs are
recognized as they are incurred.
Research and development expenses consist primarily of personnel related
expenses and consulting fees. The Company accounts for software development
costs under Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." The
Company charges research and development costs related to new products or
enhancements to expense as incurred until technological feasibility is
established, after which the remaining costs are capitalized until the product
or enhancement is available for general release to customers. The Company
defines technological feasibility as the point in time at which a working model
of the related product or enhancement exists. Historically, the costs incurred
during the period between the achievement of technological feasibility and the
point at which the product is available for general release to customers have
not been material.
Sales and marketing expenses consist primarily of personnel related
expenses, including sales commissions and bonuses, expenses related to travel,
trade show participation, public relations, promotional activities, regional
sales offices, and advertising.
General and administrative expenses consist primarily of personnel related
expenses for financial, administrative and management personnel, fees for
professional services, and bad debt expense. The Company allocates the total
cost of its information technology function and costs related to the occupancy
of its corporate headquarters, to each of the functional areas. Information
technology expenses include personnel related expenses, communication charges,
and software support. Occupancy charges include rent, utilities, and maintenance
services.
The Company has incurred significant costs to develop its business-to-
business e-commerce technology and products and to recruit and train personnel.
The Company believes its success is contingent upon increasing its customer base
and investing in further development of its products and services. This will
require significant expenditures for sales, marketing, research and development,
and to a lesser extent support infrastructure. The Company therefore expects to
continue to incur substantial operating losses for the foreseeable future.
Limited Operating History
The Company has a limited operating history as an e-commerce business that
makes it difficult to forecast its future operating results. Prior period
results should not be relied on to predict the Company's future performance.
19
Results of Operations
The following table sets forth certain statement of operations data dividing
revenues between our previous human resources and financial software business
and our current e-commerce business for the years indicated.
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
(in thousands)
Revenues: e-commerce
License fees................................................................ $ 24,686 $ 9,969 $ 211
Services fees............................................................... 9,361 1,515 59
--------- --------- ---------
Total revenues............................................................ 34,047 11,484 270
Revenues: ERP
License fees................................................................ - 5,132 17,161
Services fees............................................................... - 21,526 24,209
--------- --------- ---------
Total revenues............................................................ - 26,658 41,370
Cost of revenues: e-commerce
License fees................................................................ 154 400 125
Services fees............................................................... 12,776 3,130 60
--------- --------- ---------
Total cost of revenues.................................................... 12,930 3,530 185
Cost of revenues: ERP
License fees................................................................ - 951 1,844
Services fees............................................................... - 11,387 13,892
--------- --------- ---------
Total cost of revenues.................................................... - 12,338 15,736
Gross margin on e-commerce license fees.......................................... 24,532 9,569 86
Gross margin on e-commerce services fees......................................... (3,415) (1,615) (1)
Gross margin on ERP license fees................................................. - 4,181 15,317
Gross margin on ERP services fees................................................ - 10,139 10,317
Operating expenses:
Research and development, exclusive of noncash expense...................... 21,891 9,003 6,335
Noncash research and development............................................ 424 - -
In-process research and development......................................... 8,300 - 10,500
Sales and marketing, exclusive of noncash expense........................... 35,888 15,982 11,802
Noncash sales and marketing................................................. 7,001 1,930 -
General and administrative, exclusive of noncash expense.................... 15,721 6,241 5,126
Noncash general and administrative.......................................... 1,098 874 880
Depreciation and amortization............................................... 8,132 3,399 2,154
--------- --------- ---------
Total operating expenses.................................................. 98,455 37,429 36,797
Operating loss................................................................... (77,338) (15,155) (11,078)
Gain on sale of assets........................................................... 1,347 9,417 -
Realized loss on sale of investments............................................. (100) - -
Loss on impairment of investments................................................ (4,128) - -
Amortization of debt discount.................................................... (982) - -
Interest income, net............................................................. 10,554 337 412
Minority interest................................................................ - - (36)
--------- --------- ---------
Net loss......................................................................... $ (70,647) $ (5,401) $ (10,702)
========= ========= =========
20
Years Ended December 31, 2000 and 1999
Revenues
In the second half of 2000, the Company expanded its business model to
include ratable revenue recognition. Total revenues and e-commerce license fees
in 2000 were impacted by the use of subscription programs and traditional,
perpetual license contracts with extended payment terms that result in revenues
taken ratably. The impact in 2000 from subscription programs was $643,000 and
$75,000 in the third and fourth quarters, respectively. The impact in 2000 from
the traditional, perpetual license contracts with extended payment terms was
$3.3 million, in the fourth quarter. Although lowering reported total revenue
and e-commerce license fees in 2000, the benefits achieved over time of the
ratable model are a more linear revenue pattern as well as increased visibility
and predictability of financial results.
Total Revenues. Total revenues decreased 10.7% to $34.0 million in 2000
from $38.1 million in 1999. This decrease is primarily attributable to the
expansion of the Company's business model, discussed above, and decreased
services fees, as a result of the sale of the Company's ERP business in October
1999, partially offset by increased e-commerce license fees. For the year ended
December 31, 2000, one customer accounted for more than 10%, totaling $3.8
million, of total revenue.
E-commerce License Fees. License fees increased 147.6% to $24.7 million, or
72.5% of total e-commerce revenues, in 2000 from $10.0 million, or 86.8% of
total e-commerce revenues, in 1999. The increase in e-commerce license fees was
the result of an increase in the amount of software licensed partially offset by
the expansion of the Company's business model, discussed above. The majority of
the Company's e-commerce license revenue for the year ended December 31, 2000
was derived from the licensing of products that became generally available since
June 1, 2000.
E-commerce Services Fees. Services fees increased 517.9% to $9.4 million
from $1.5 million in 1999, and increased as a percentage of total e-commerce
revenues to 27.5% in 2000 from 13.2% in 1999. This increase is primarily
attributable to increased demand for the Company's services as a result of the
growth in e-commerce license fees.
ERP License Fees. The Company sold its ERP business in October 1999, and as
a result, had no ERP license fees during the year ended December 31, 2000. ERP
license fees represented $5.1 million, or 34.0% of total license revenues,
during the year ended December 31, 1999.
ERP Services Fees. The Company sold its ERP business in October 1999, and as
a result, had no ERP services fees during the year ended December 31, 2000. ERP
services fees represented $21.5 million, or 93.4% of total services revenues,
during the year ended December 31, 1999.
Cost of Revenues
Total Cost of Revenues. Cost of revenues decreased 18.5% to $12.9 million,
or 38.0% of total revenues, during the year ended December 31, 2000 from $15.9
million, or 41.6% of total revenues, during the same period in 1999. The
decrease both in total and as a percentage of total revenues is primarily a
result of the change in mix in revenue from services fees, which historically
had a higher cost of revenues, to license fees.
E-commerce Cost of License Fees. Cost of e-commerce license fees decreased
to $154,000 in 2000 from $400,000 in 1999. The cost of license fees may vary
from period to period depending on the product mix licensed, but are expected to
remain a small percentage of license fees.
E-commerce Cost of Services Fees. Cost of e-commerce services fees increased
308.2% to $12.8 million, or 136.5% of total e-commerce services fees, in 2000
compared to $3.1 million, or 206.6% of total e-commerce services fees, in 1999.
The increase in the cost of e-commerce services fees was primarily attributable
to personnel related costs and consulting fees. The consulting fees related to
sub-contracted services was approximately $2.4 million during the year ended
December 31, 2000 compared to approximately $127,000 during the year ended
December 31, 1999. Although the Company intends to increase the number of
services employees, it will continue sub-contracting some consulting and
implementation engagements to its system integrator partners. The Company has
incurred cost of e-commerce service fees in excess of e-commerce service fees
due primarily to the hiring and training of personnel in anticipation of future
growth. While the Company believes these costs will continue to be greater than
e-commerce service fees in the near term, the Company plans for e-commerce
service fees to exceed costs by late 2001 or early 2002.
ERP Cost of License Fees. The Company sold its ERP business in October 1999,
and as a result, had no ERP license fees or cost of ERP license fees during the
year ended December 31, 2000. ERP cost of license fees represented $951,000, or
18.5%
21
of ERP license revenues, during the year ended December 31, 1999.
ERP Cost of Services Fees. The Company sold its ERP business in October
1999, and as a result, had no ERP services fees or cost of ERP services fees
during the year ended December 31, 2000. ERP cost of services fees represented
$11.4 million, or 52.9% of ERP services revenues, during the year ended December
31, 1999.
Research and Development, Exclusive of Noncash Expense
Research and development expenses increased 143.2% to $21.9 million, or
64.3% of total revenues, in 2000 from $9.0 million, or 23.6% of total revenues,
in 1999. Research and development expenses increased primarily due to increased
personnel related expenses and increased consulting fees incurred to develop the
Company's products. Consulting fees increased to approximately $12.3 million
during the year ended December 31, 2000 from approximately $605,000 during the
year ended December 31, 1999. The Company intends to hire in-house research and
development personnel moving forward, but expects increases in personnel related
costs to be offset by a decrease in consulting fees.
Noncash Research and Development Expense
Noncash research and development expenses of approximately $424,000 were
recognized during 2000. The expense resulted from the Company's agreement with
a third party to develop certain software that the Company intends to sell in
the future. The agreement required the third party to reach certain milestones
related to the software development in order to receive warrants to purchase
50,000 shares of the Company's common stock with an exercise price of $56.78.
The third party completed two of the three scheduled milestones in the first
quarter of 2000 and they were granted warrants to purchase 33,334 shares of
common stock. The value of the warrants earned approximated $424,000 and was
computed using the Black-Scholes option pricing model. The third milestone was
not reached by the scheduled due date, and a result, the warrants to purchase
the remaining 16,666 shares of common stock were forfeited. Warrants to
purchase 33,334 shares remain outstanding at December 31, 2000 and expire in the
first quarter of 2003.
In-Process Research and Development Expense
In-Process Research and Development ("IPR&D") expense was approximately
$8.3 million for the year ended December 31, 2000. The Company recorded this
expense in the second quarter of 2000 related to its acquisition of the
SAI/Redeo Companies on May 31, 2000 (the "Valuation Date").
At the Valuation Date, the SAI/Redeo Companies had technology under
development that had not demonstrated technological or commercial feasibility.
This technology is described below. As of the Valuation Date, the projects
associated with the IPR&D efforts have not yet reached technological feasibility
and the IPR&D has no alternative future use in the event that the proposed
products do not prove to be feasible. These development efforts fall within the
definition of IPR&D contained in the Statement of Financial Accounting Standards
("SFAS") No. 2.
SAI/Redeo IPR&D SAI/Redeo management believes that the SAI/Redeo product
under development as the first settlement portal that completes the B2B commerce
chain cycle for the buy side, sell side, and net marketmakers ("NMMs"). The
Company's goal is to complete the e-procurement cycle from order fulfillment to
settlement automatically and at the lowest possible cost. Planned functional
capabilities of the SAI/Redeo product include:
. Payment Type Independence - Multiple payment types are fully
supported, including credit card, purchasing card, EFT, direct debit,
direct deposit, and traditional check. The process is flexible,
allowing trading partners and NMMs to negotiate solutions.
. Deferred/Scheduled Settlement - Transactions may be scheduled for
settlement to assure traditional payment terms are retained. Control
over settlement may be pre-negotiated or retained by either the
customer or the vendor.
. Least Cost Pricing - The portal determines the lowest cost alternative
for settlement based on business rules configured between trading
partners and the NMMs.
. Multi-currency - Trading partners may settle in any currency with
exchange gains, losses and settlement charges recorded in the trading
partners respective ERP system.
. Global Coverage - Any bank or service provider around the world may be
used for settlement and is not tied to the country where the
transaction originated. Settlement integration is performed using EDI
or XML standards.
. Financial Institution Integration and Independence - Redeo currently
offers integration with over 60 banks around the world, and trading
partners and NMMs can change banking and service provider
relationships. Also, trading partners can select the settlement
institution or service provider at the time of the settlement.
22
. ERP Integration - Settlement may be integrated with the leading ERP
providers, allowing trading partners to have disparate ERP systems
within their enterprise and between enterprises.
. Aggregation & Consolidation - Trading partners in the net market may
aggregate and net transactions in order to reduce the number of
settlement transactions.
. Reconciliation - Transactions and balances may be automatically
reconciled between trading partners and NMM's disparate systems.
Charge backs and disputes may be automatically recorded and processed.
At the Valuation Date, the technologies were approximately 70.5% complete.
The acquired in-process technologies were originally anticipated to become
commercially viable in years 2000, 2001, and 2002. Expenditures to complete the
acquired in-process technologies were expected to total approximately $3.5
million.
Valuation of IPR&D: Amounts allocated to IPR&D were calculated using
------------------
established valuation techniques in the high technology industry and expensed
such amounts in the quarter that the acquisition was consummated because
technological feasibility had not been achieved and no alternative future uses
had been established. Consistent with the Company's policy for internally
developed technology, the Company concluded that the IPR&D had no alternative
future use after taking into consideration the potential for usage of the
technology in different products, resale of the software, and internal usage.
Upon consummation of the SAI/Redeo acquisition, the Company immediately
recognized expense of $8.3 million representing the acquired IPR&D that had not
yet reached technological feasibility and had no alternative future use. The
value assigned to acquired IPR&D was determined by identifying products under
research in areas for which technological feasibility had not been established.
The IPR&D technology was then segmented into two classifications: (i) IPR&D -
completed and (ii) IPR&D - to-be-completed, giving explicit consideration to the
value created by research and development efforts of SAI/Redeo prior to the
acquisition and to be created by the Company after the acquisition. These value
creation efforts were estimated by considering the following major factors: (i)
time-based data, (ii) cost-based data, and (iii) complexity-based data.
The value of the IPR&D was determined using a discounted cash flow model
similar to the income approach, focusing on the income-producing capabilities of
the in-process technologies and taking into consideration (i) the analysis of
the stage of completion of each project and (ii) the exclusion of value related
to research and development yet-to-be completed as part of the on-going IPR&D
projects. Under this approach, the value is determined by estimating the
revenue contribution generated by each of the identified products classified
within the classification segments. Revenue estimates were based on (i)
individual product revenues, (ii) anticipated growth rates, (iii) anticipated
product development and introduction schedules, (iv) product sales cycles, and
(v) the estimated life of a product's underlying technology.
From the revenue estimates, operating expense estimates, including cost of
sales, general and administrative, selling and marketing, income taxes and a use
charge for contributory assets, were deducted to arrive at operating income.
Revenue growth rates were estimated by management for each product and gave
consideration to relevant market sizes and growth factors, expected industry
trends, the anticipated nature and timing of new product introductions by us and
our competitors, individual product sales cycles, and the estimated life of each
product's underlying technology. Operating expense estimates reflect the
Company's historical expense ratios. Additionally, these projects will require
continued research and development after they have reached a state of
technological and commercial feasibility. The resulting operating income stream
was discounted to reflect its present value at the date of the acquisition.
These estimates are subject to change, given the uncertainties of the
development process, and no assurance can be given that deviations from these
estimates will not occur or that the Company will realize any anticipated
benefits of the acquisition.
The rate used to discount the net cash flows from the purchased IPR&D was
28%, which is equal to the weighted average cost of capital of the Company,
taking into account required rates of return from investments in various areas
of the enterprise, and reflecting the inherent uncertainties in future revenue
estimates from technology investments including the uncertainty surrounding the
successful development of the acquired IPR&D, the useful life of such
technology, the profitability levels of such technology, if any, and the
uncertainty of technological advances, all of which are unknown at this time.
Certain risks and uncertainties are associated with the completion of the
development within a reasonable projected period of time. Each of the acquired
IPR&D projects have not demonstrated its technological or commercial feasibility
as of the acquisition date. Significant risks exist because of uncertainties
the Company may face in the form of time and costs necessary to produce
technologically feasible products. If the proposed products fail to become
viable, there is uncertainty that the Company would be able to realize any value
from the sale of the technology to another party.
23
Sales and Marketing, Exclusive of Noncash Expense
Sales and marketing expenses increased 124.6% to $35.9 million, or 105.4%
of total revenues, in 2000 from $16.0 million, or 41.9% of total revenues, in
1999. The increase was primarily attributable to the additional sales and
marketing personnel and promotional activities associated with building market
awareness of the Company's e-commerce products. The Company experienced a
significant increase in sales and marketing expenses in the fourth quarter of
2000 due in large part to advertising commitments associated with the Company's
branding campaign.
Noncash Sales and Marketing Expense
During the years ended December 31, 2000 and 1999, noncash sales and
marketing expenses of approximately $7.0 million and $1.9 million, respectively,
were recognized in connection with sales and marketing agreements signed by the
Company during the fourth quarter of 1999 and the first quarter of 2000. In
connection with these agreements, the Company issued warrants and shares of
common stock to certain strategic partners, all of whom are also customers, in
exchange for their participation in the Company's sales and marketing efforts.
The Company recorded the value of these warrants and common stock as deferred
sales and marketing expenses, which are being amortized over the life of the
agreements which range from nine months to five years.
General and Administrative, Exclusive of Noncash Expense
General and administrative expenses increased 151.9% to $15.7 million in
2000 from $6.2 million in 1999. As a percentage of total revenues, general and
administrative expenses increased to 46.2% in 2000 from 16.4% in 1999. The
increase in general and administrative expenses was primarily attributable to
increases in personnel related costs and bad debt expense of $5.8 million in the
year ended December 31, 2000. The increase in bad debt expense in 2000 relates
primarily to a reserve for a single customer of $2.3 million as well as a
reserve related to management's concerns for receivables from early-stage
companies due to the volatile industry-based economic conditions, especially
during the fourth quarter of 2000. The deferred revenue balance at December 31,
2000 related to these early-stage companies was approximately $373,000.
Noncash General and Administrative Expense
Noncash general and administrative expenses increased to approximately $1.1
million, or 3.2% of total revenues, in 2000 from $874,000, or 2.3% of total
revenues, in 1999. The increase was primarily attributable to the Company
granting 160,000 options to a senior executive during the first quarter of 2000
at an exercise price below the fair market value at the date of grant. Fifteen
percent of these options vested immediately and the remainder vested over four
years. The Company immediately expensed $814,500 associated with the intrinsic
value of the vested options and recorded the intrinsic value of the unvested
options, $4.6 million, as deferred compensation. This arrangement was
terminated in the fourth quarter of 2000 and all options except those vesting
immediately were forfeited. The Company recognized net compensation expense
related to this arrangement of $814,500 during the year ended 2000. In the
third quarter of 2000, the Company granted 18,750 options to a new board member
at a price below the fair market value at the date of grant. Deferred
compensation of approximately $266,000 was recorded related to this grant and
compensation expense of approximately $116,000 was recognized. Forty percent of
these options will be fully vested on June 13, 2001 and the remainder will vest
quarterly through July 30, 2001.
Depreciation and Amortization Expense
Depreciation and amortization increased 139.2% to $8.1 million, or 23.9% of
total revenues, in 2000, from $3.4 million, or 8.9% of total revenues, in 1999.
This increase in this expense is primarily the result of the Company's
amortization of its intangible assets associated with acquisitions completed in
the second quarter of 2000.
Gain on Sale of Assets
On October 18, 1999, the Company sold its human resources and financial
software business to Geac Computer Systems, Inc. and Geac Canada Limited. The
Company received approximately $13.9 million in proceeds. A gain of $9.4
million was recorded in 1999, with an additional gain of approximately $1.3
million recorded during 2000, following an escrow settlement.
Loss on Impairment of Investments
During the fourth quarter of 2000, the Company recorded a loss on impairment
of investments of approximately $4.1 million. The loss was necessitated by
other than temporary losses to the value of investments the Company has made in
privately held companies. These companies are primarily early-stage companies
and are subject to significant risk due to their limited operating history and
volatile industry-based economic conditions.
24
Interest Income
Interest income increased 2,366.5% to $10.9 million in 2000, or 32.0% of
total revenues, from $442,000, or 1.2% of total revenues, in 1999. The increase
in interest income was due to increased levels of cash available for investment,
a direct result of the Company's follow-on offering in March 2000. The Company
expects to continue to use cash to fund operating losses and, as a result,
interest income on available cash is expected to decline in future periods.
Interest Expense And Amortization of Debt Discount
Interest expense increased 231.4% to $348,000 in 2000 from $105,000 in
1999. This increase is primarily due to higher levels of debt in the first
quarter of 2000 as compared to 1999. The increased interest expense was the
result of both an interim funding of $7.0 million received in December 1999 and
a securities purchase agreement with Wachovia Capital Investments, Inc. signed
in March 2000. Interest paid related to the interim funding and the purchase
agreement was $165,000 and $182,500, respectively, for the year ended December
31, 2000.
As part of the interim funding agreement, the Company also issued warrants
valued at approximately $982,000 using the Black-Scholes option pricing model as
debt discount to be amortized over the life of the financing agreement. The
entire $7.0 million plus interest was paid prior to the end of the first quarter
of 2000. As result, the entire value of the warrants was amortized in the
quarter ending March 31, 2000.
Income Taxes
As a result of the operating losses incurred since the Company's inception,
no provision or benefit for income taxes was recorded in 2000 or in 1999.
Years Ended December 31, 1999 and 1998
Revenues
Total Revenues. Total revenues decreased 8.4% to $38.1 million in 1999
from $41.6 million in 1998. This decrease was attributable to decreases in both
license fees and services fees.
E-commerce License Fees. License fees increased 4,624.6% to $10.0 million,
or 86.8% of total e-commerce revenues, in 1999 from $211,000, or 78.1% of total
e-commerce revenues, in 1998. The increase in e-commerce license fees resulted
from an increase in both the amount of software licensed and an increase in the
average customer transaction size.
E-commerce Services Fees. Services fees increased 2,467.8% to $1.5 million
from $59,000 in 1998, but decreased as a percentage of total e-commerce revenues
to 13.2% in 1999 from 21.9% in 1998. This increase in service fees is primarily
attributable to stronger growth in e-commerce license fees in 1999.
ERP License Fees. ERP License fees decreased 70.1% to $5.1 million, or
19.3% of total ERP revenues, in 1999 from $17.2 million, or 41.5% of total ERP
revenues, in 1998. The decrease in ERP license fees was the result of reduced
demand for our ERP products in 1999 and the sale of the ERP business in October
1999.
ERP Services Fees. ERP Services fees decreased 11.1% to $21.5 million in
1999 from $24.2 million in 1998. ERP services fees increased to 80.7% of total
ERP revenues in 1999 from 58.5% of total ERP revenues in 1998. The decrease in
services fees was primarily due to reduced demand for our ERP services, as well
as the sale of our ERP business. The increase as a percentage of total ERP
revenues is attributable to a shift in revenue mix in 1999 due to the reduced
demand for our ERP products.
Cost of Revenues
Total Cost of Revenues. Cost of revenues was constant between 1999 and
1998 at $15.9 million, but increased as a percentage of total revenue to 41.6%
in 1999 from 38.2% in 1998. The increase as a percentage of total revenues is
primarily a result of the increase in the portion of the revenue mix represented
by services fees, which historically have had a higher cost of revenue than
license fees.
E-commerce Cost of License Fees. Cost of e-commerce license fees increased
to $400,000 in 1999 from $125,000 in 1998. Cost of e-commerce license fees as a
percentage of sales decreased to 4.0% of e-commerce license fees in 1999 from
59.2% in 1998. The increase in e-commerce cost of license fees is attributable
to the sale of products introduced in 1999, components of
25
which were licensed from third parties. The decrease as a percentage of revenue
is directly attributable to the completion of the ELEKOM acquisition in November
1998, which eliminated the payment of royalties to ELEKOM for our e-procurement
product.
E-commerce Cost of Services Fees. Cost of services fees increased 5,116.7%
to $3.1 million, or 206.6% of total e-commerce services fees, in 1999 compared
to $60,000, or 101.7% of total e-commerce services fees, in 1998. The increase
in the cost of e-commerce services fees and the increase in e-commerce cost of
services fees as a percentage of e-commerce services fee revenue was primarily
attributable to an increase in personnel and related costs to provide
implementation, training and upgrade services to both customers and partners.
ERP Cost of License Fees. Cost of ERP license fees decreased to $951,000
in 1999 from $1.8 million in 1998. This decrease in ERP cost of license fees was
primarily due to lower ERP sales in 1999. The increase in ERP cost of license
fees as a percentage of ERP license fee revenue is attributable to a revenue mix
that included a greater portion of sales of products with third-party
components.
ERP Cost of Services Fees. Cost of ERP services fees decreased to $11.4
million in 1999 from $13.9 million in 1998, and also decreased as a percentage
of ERP services fees to 52.9% in 1999, as compared to 57.4% in 1998. The
decrease is primarily attributable to higher utilization of services personnel
in 1999 as compared to 1998.
Research and Development, Exclusive of Noncash Expense
Research and development expenses increased 42.1% to $9.0 million, or 23.6%
of total revenues, in 1999 from $6.3 million, or 15.2% of total revenues, in
1998. Research and development expenses increased primarily due to increased
personnel and contractor fees related to the development of our e-commerce
products.
In-Process Research and Development Expense
During the fourth quarter of 1998, the Company acquired ELEKOM Corporation
and as part of the acquisition, $10.5 million was written off to in-process
research and development expense. The existence of purchased research and
development was determined by identifying computer software code under
development by ELEKOM since 1995. The value was determined by estimating the
remaining costs to develop the purchased in-process technology into a
commercially viable product, estimating the resulting net cash flows from the
project and discounting the net cash flows back to its present value.
The nature of the efforts to develop the purchased research and development
into a commercially viable product principally related to the completion of all
planning, programming and testing activities that were necessary to establish
that the product could be produced to meet its design specifications including
functions, features, and technical performance requirements. The efforts to
develop the purchased in-process technology also included determining the
compatibility and interoperability with other applications. The estimated
remaining costs to be incurred to develop the purchased in-process research and
development into a commercially viable product was approximately $2.0 million.
The Company did not recognize any in-process research and development
expense in the year ended December 31, 1999.
Sales and Marketing, Exclusive of Noncash Expense
Sales and marketing expenses increased 35.4% to $16.0 million, or 41.9% of
total revenues, in 1999 from $11.8 million, or 28.3% of total revenues, in 1998.
The increase was primarily attributable to the additional sales and marketing
personnel and promotional activities associated with building market awareness
of our e-commerce products.
Noncash Sales and Marketing Expense
During 1999, the Company issued warrants to certain strategic partners, all
of whom are also customers, in exchange for their participation in our sales and
marketing efforts. The Company recorded the value of these warrants as a
deferred sales and marketing expense of approximately $12.1 million. Sales and
marketing expenses in the fourth quarter of 1999 included amortization of
approximately $1.9 million related to these agreements. The remainder of the
value of the warrants will be amortized over periods ranging from nine months to
two years.
General and Administrative, Exclusive of Noncash Expense
General and administrative expenses increased 21.8% to $6.2 million in 1999
from $5.1 million in 1998. As a percentage of total revenues, general and
administrative expenses increased to 16.4% in 1999 from 12.3% in 1998. The
increase in general and
26
administrative expenses was primarily attributable to increases in personnel,
facilities and related costs.
Noncash General and Administrative Expense
Noncash general and administrative expense remained relatively constant at
$874,000, or 2.3% of total revenues, in 1999 as compared to $880,000, or 2.1% of
total revenues, in 1998. In the fourth quarter of 1999, the Company recorded
compensation expense of $706,000 for the accelerated vesting of certain employee
stock options related to the sale of its human resources and financial software
business. In the second quarter of 1998, the Company recorded compensation
expense of $705,000 related to the accelerated vesting of certain employee stock
options issued in the first quarter of 1998.
Depreciation and Amortization Expense
Depreciation and amortization increased 57.8% to $3.4 million, or 8.9% of
total revenues, in 1999, from $2.2 million, or 5.2% of total revenues, in 1998.
This increase in depreciation and amortization expense is due to the
amortization of intangible assets acquired in the ELEKOM transaction and
increases in capital expenditures.
Gain on Sale of Assets
In October of 1999, the Company sold its financial and human resources
software business to Geac Computer Systems, Inc. and Geac Canada Limited and
recognized a gain of approximately $9.4 million.
Interest Income
Interest income decreased 30.5% to $442,000 in 1999, or 1.2% of total
revenues, from $636,000, or 1.5% of total revenues, in 1998. The decrease in
interest income was primarily due to lower average levels of cash available for
investment.
Interest Expense
Interest expense decreased 53.1% to $105,000 in 1999 from $224,000 in 1998.
This decrease is primarily due to lower average levels of debt in 1999 as
compared to 1998.
Minority Interest
Minority interest was eliminated with the purchase of the 20% minority
interest in our services subsidiary on February 5, 1998.
Income Taxes
As a result of the operating losses incurred since our inception, we have
not recorded any provision or benefit for income taxes in 1999 and in 1998.
Liquidity and Capital Resources
On March 10, 2000, the Company completed a follow-on offering of 2,243,000
shares of common stock at an offering price of $115.00 per share. The proceeds,
net of expenses, from this public offering of approximately $244.4 million were
placed in investment grade cash equivalents and marketable securities. Although
operating activities may provide cash in certain periods, to the extent the
Company experiences growth in the future, the Company's operating and investing
activities will use significant amounts of cash. The Company believes its
liquid current assets and to the extent necessary, additional external
financing, should adequately meet the Company's needs for the foreseeable
future.
On March 14, 2000, the Company entered into a securities purchase agreement
with Wachovia Capital Investments, Inc. Wachovia purchased a 4.5% convertible
subordinated promissory note (the "Note") in the original principal amount of
$5.0 million. The Note provides for the ability of the holder to convert, at
its option, all or any portion of the principal of the Note into common stock of
the Company at the price of $147.20 per share. If at any time after the date of
the Note, the quoted price per share of the Company's common stock exceeds 200%
of the conversion price then in effect for at least 20 trading days in any
period of 30 consecutive trading days, the Company has the right to require that
the holder of the Note convert all of the principal of the Note into common
stock of the Company at the price of $147.20 per share. The Note is due March
15, 2005 and the $5.0 million principal amount was placed in investment grade
cash equivalents.
27
Cash used in operating activities was approximately $50.9 million during
2000. The cash used was primarily attributable to the Company's net loss and to
increases in accounts receivable partially offset by noncash items and increases
in accounts payable and accrued liabilities. Cash used in operating activities
was approximately $17.3 million during 1999. This was primarily attributable to
the Company's net loss and increases in accounts receivable and prepaid and
other current assets.
Cash used for investing activities was approximately $90.4 million during
2000. The cash was used for acquisitions, purchases of investments, marketable
securities, and property and equipment. The cash used for investing activities
was partially offset by proceeds related to the sale of ERP assets of
approximately $1.9 million. Cash provided by investing activities was
approximately $8.4 million during 1999. The cash increase resulted from proceeds
related to the sale of ERP assets of approximately $12.0 million partially
offset by purchases of property and equipment.
Cash provided by financing activities was approximately $245.5 million
during 2000, and cash provided by financing activities was approximately $8.3
million during 1999. The cash provided by financing activities during 2000 was
primarily attributable to proceeds from the sale of 2,243,000 shares of common
stock for approximately $244.4 million and the issuance of long-term debt of
$5.0 million, which was partially offset by the repayment of $7.0 million in
interim funding provided by Transamerica Business Credit Corp., Silicon Valley
Bank and Sand Hill Capital II, L.P. The cash provided by financing activities
during 1999 was primarily attributable to proceeds from the interim funding
discussed above as well as proceeds from the exercise of stock options.
On October 18, 1999, the Company sold its human resources and financial
software business to Geac Computer Systems, Inc. and Geac Canada Limited. The
Company received approximately $13.9 million in proceeds. A gain of $9.4
million was recorded in 1999, with an additional gain of approximately $1.3
million recorded during 2000, following the escrow settlement. In connection
with the sale of this business, the Company accelerated the vesting on certain
options and recorded a one-time, noncash compensation charge of approximately
$706,000 during 1999 related to these options. Revenue from the human resources
and financial software business for the years ended December 31, 1999 and 1998
were approximately $26.7 million and $41.4 million, respectively. The Company
used approximately $2.1 million of its proceeds to repay all of its indebtedness
under its credit facility with Silicon Valley Bank and approximately $300,000 to
repay all of its indebtedness under its equipment facility with Leasing
Technologies International, Inc.
On April 28, 2000, the Company acquired all of the capital stock of
iSold.com, Inc., a Delaware corporation ("iSold"). iSold has developed a
software program that provides auctioning capabilities to its clients. The
purchase consideration was approximately $2.5 million in cash of which $1.6
million was paid at the date of acquisition and $900,000 is due in April 2001.
The acquisition was treated as a purchase for accounting purposes with
approximately $500,000 of the purchase consideration allocated to developed
technologies and approximately $2.0 million to goodwill. The developed
technologies are being amortized over 36 months and the goodwill is being
amortized over 48 months.
On May 31, 2000, the Company acquired all of the outstanding capital stock
of SAI (Ireland) Limited, SAI Recruitment Limited and its subsidiaries and
related companies, i2Mobile.com Limited and SAI America Limited (the "SAI/Redeo
Companies"). The SAI/Redeo Companies specialize in electronic payment
settlement. The purchase consideration was approximately $63.2 million,
consisting of approximately $30.0 million in cash (exclusive of $350,000 of cash
acquired), 1,148,000 shares of the Company's common stock with a fair value of
$30.4 million, assumed options to acquire 163,200 shares of common stock with an
exercise price of $23.50 (estimated fair value of $1.8 million using the Black-
Scholes option pricing model) and approximately $995,000 in acquisition costs.
At December 31, 2000, the Company has net operating loss, research and
experimentation credit and alternative minimum tax credit carryforwards for U.S.
federal income tax purposes of approximately $55.0 million, $657,000 and
$53,000, respectively, which expire in varying amounts beginning in the year
2009. The Company also has incurred foreign losses in the amount of
approximately U.S.$7.0 million that are available to offset future taxable
income in foreign jurisdictions. The Company's ability to benefit from certain
net operating loss carryforwards is limited under section 382 of the Internal
Revenue Code as the Company is deemed to have had an ownership change of greater
than 50%. Accordingly, certain net operating losses may not be realizable in
future years due to this limitation.
During the first six months of 2000, the Company issued 25,000 warrants and
approximately 39,000 shares of the Company's common stock to certain strategic
partners, all of whom are also customers, in exchange for their participation in
the Company's sales and marketing efforts. The sales and marketing agreement
signed with one strategic partner also included cash payments of $300,000 in
each of the last two years of the related agreement. The Company recorded the
fair value of these warrants, common stock, and cash payments as deferred sales
and marketing expense of approximately $454,000, $3.8 million, and $600,000,
respectively. Deferred sales and marketing expenses will be amortized over the
term of the sales and marketing agreements, which
28
range from nine months to five years.
During 1999, the Company entered into an agreement with a third party to
develop certain software that it intends to sell in the future. The third party
was to be compensated for these services with warrants to purchase 50,000 shares
of the Company's common stock at an exercise price of $56.78 per share. The
agreement requires the third party to reach certain milestones related to the
software development in order to earn the warrants. The third party completed
two of the three scheduled milestones in the first quarter of 2000 and they were
granted warrants to purchase 33,334 shares of the Company's common stock. The
Company recorded the issuance of the warrants at the time they were earned by
the third party and the warrants were valued at approximately $424,000 based on
the fair value of the warrants on the date of the grant using the Black-Scholes
option pricing model. The third milestone was not reached by the scheduled due
date, and as a result the warrants to purchase the remaining 16,666 shares of
the Company's common stock were forfeited.
During 1999, the Company entered into a reseller agreement that allows the
reseller to license its products in a certain territory. The Company will
receive royalty amounts from the reseller if certain minimum revenue
requirements are met by the reseller. The Company will recognize these license
fees as the products are licensed to end users. Additionally, the reseller has
the ability to earn warrants to purchase up to 150,000 shares of the Company's
common stock if certain revenue targets are met. No warrants were earned under
the agreement and the agreement was terminated in the fourth quarter of 2000.
New Accounting Pronouncements
In September 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This Statement was amended in June 2000 by Statement No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
Statement No. 138 is effective for the Company beginning January 2001. The new
Statement requires all derivatives to be recorded on the balance sheet at fair
value and establishes accounting treatment for three types of hedges: hedges of
changes in the fair value of assets, liabilities or firm commitments; hedges of
the variable cash flows of forecasted transactions; and hedges of foreign
currency exposures of net investments in foreign operations. To date, the
Company has not invested in derivative instruments nor participated in hedging
activities and, therefore, does not anticipate there will be a material impact
on the result of operations or financial position from Statements No. 133 or No.
138.
Quarterly Data
The following represents quarterly data for the years ended December 31,
2000 and 1999,(in thousands, except per share data):
2000
----
First Second Third Fourth
Quarter Quarter Quarter Quarter
-----------------------------------------
Revenues......................... $ 7,006 $ 10,085 $ 13,543 $ 3,413
Gross profit..................... 5,395 7,499 9,393 (1,170)
Operating loss................... (11,261) (20,968) (16,860) (28,249)
Net loss......................... (11,431) (16,903) (13,616) (28,697)
Net loss per share:
Basic......................... (0.93) (1.16) (0.89) (1.85)
Diluted....................... (0.93) (1.16) (0.89) (1.85)
1999
----
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------
Revenues......................... $ 11,401 $ 11,279 $ 8,756 $ 6,706
Gross profit..................... 6,705 6,654 4,510 4,405
Operating loss................... (1,394) (1,756) (4,372) (7,633)
Net loss......................... (1,303) (1,669) (4,309) 1,880
Net loss per share:
Basic......................... (0.12) (0.15) (0.39) 0.17
Diluted....................... (0.12) (0.15) (0.39) 0.17
During the fourth quarter of 2000, the Company reversed $1.25 million of
license revenue recorded previously in 2000 as a result of a change in payment
terms with a single customer. The Company anticipates recognizing this revenue
during the first
29
half of 2001 as cash is collected. In addition, the Company recorded an
additional provision for doubtful accounts during the fourth quarter of 2000 as
a result of management's concern for receivables from early-stage companies due
to the volatile industry-based economic conditions in which they operate. Also,
during the fourth quarter of 2000, the Company recorded a loss on impairment of
investments of approximately $4.1 million as a result of other than temporary
losses to the value of investments the Company has made in privately held
companies.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion concerning the Company's market risk involves
forward-looking statements that are subject to risks and uncertainties. Actual
results could differ materially from those discussed in the forward-looking
statements. The Company is exposed to market risk related to foreign currency
exchange rates, interest rates and investment values. The Company currently
does not use derivative financial instruments to hedge these risks or for
trading purposes.
Foreign Currency Risk
Substantially all of the revenue recognized to date by the Company has been
denominated in U.S. dollars, including sales made internationally. As a result,
a strengthening of the U.S. dollar could make the Company's products less
competitive in foreign markets. In addition, the Company has foreign
subsidiaries which subject the Company to risks associated with foreign currency
exchange rates and weak economic conditions in these foreign markets. An
increase or decrease in foreign currency exchange rates of 10% would not have a
material effect on the Company's financial position or results of operations.
Interest Rate Risk
The Company is exposed to market risk from changes in interest rates
primarily through its investing activities. The primary objective of the
Company's investment activities is to manage interest rate exposure by investing
in short-term, highly liquid investments. As a result of this strategy, the
Company believes that there is no exposure. The Company's investments are
carried at market value, which approximates cost. An increase or decrease in
interest rates of 10% would not have a material effect on the Company's
financial position or results of operations.
Investments
As of December 31, 2000 the Company has made equity investments of $17.7
million, recorded at original cost, in eleven privately held companies and the
Company has accounted for these investments using the cost basis of accounting.
During the fourth quarter of 2000, the Company recorded a loss provision of $4.1
million for other than temporary losses in these investments. These companies
are primarily early-stage companies and are subject to significant risk due to
their limited operating history.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
CLARUS CORPORATION AND SUBSIDIARIES
Index to Financial Statements
Page
Independent Auditors' Report of KPMG LLP................................................................. 32
Report of Arthur Andersen LLP, Independent Public Accountants............................................ 33
Consolidated Balance Sheets--December 31, 2000 and 1999.................................................. 34
Consolidated Statements of Operations--December 31, 2000, 1999 and 1998.................................. 35
Consolidated Statements of Stockholders' Equity and Comprehensive Loss--December 31, 2000, 1999 and 1998. 36
Consolidated Statements of Cash Flows--December 31, 2000, 1999 and 1998.................................. 37
Notes to Consolidated Financial Statements............................................................... 39
31
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Clarus Corporation and subsidiaries:
We have audited the consolidated balance sheet of Clarus Corporation and
subsidiaries (the "Company") as of December 31, 2000, and the related
consolidated statements of operations, stockholders' equity and comprehensive
loss, and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Clarus
Corporation and subsidiaries as of December 31, 2000, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
Atlanta, Georgia
February 6, 2001
32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Clarus Corporation:
We have audited the consolidated balance sheet of Clarus Corporation (a
Delaware corporation) and Subsidiaries as of December 31, 1999 and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the two years ended December 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Clarus
Corporation and subsidiaries as of December 31, 1999 and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
/s/ Arthur Andersen LLP
Atlanta, Georgia
January 28, 2000
33
CLARUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
(In Thousands, Except Share and Per Share Amounts)
ASSETS
2000 1999
----------------------
CURRENT ASSETS:
Cash and cash equivalents.............................................................................. $ 118,303 $ 14,127
Marketable securities.................................................................................. 50,209 -
Accounts receivable, less allowance for doubtful accounts of $3,917 and $271 in
2000 and 1999, respectively.......................................................................... 8,126 10,389
Deferred marketing expense, current.................................................................... 5,321 5,723
Prepaids and other current assets...................................................................... 2,731 1,965
--------- --------
Total current assets................................................................................. 184,690 32,204
--------- --------
PROPERTY AND EQUIPMENT, NET.............................................................................. 7,619 4,122
--------- --------
OTHER ASSETS:
Deferred marketing expense, net of current portion..................................................... 2,508 4,293
Investments............................................................................................ 13,619 1,168
Intangible assets, net of accumulated amortization of $6,146 and $784 in 2000
and 1999, respectively............................................................................... 58,214 6,649
Deposits and other long-term assets.................................................................... 254 127
--------- --------
Total other assets................................................................................... 74,595 12,237
--------- --------
Total assets......................................................................................... $ 266,904 $ 48,563
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities............................................................... $ 11,059 $ 6,326
Deferred revenue....................................................................................... 2,295 3,081
Current maturities of notes payable to bank and capital lease obligations, net of debt
discount of approximately $980,000 as of December 31, 1999............................................ - 6,046
--------- --------
Total current liabilities............................................................................ 13,354 15,453
LONG-TERM LIABILITIES:
Deferred revenue....................................................................................... 881 293
Long-term debt......................................................................................... 5,000 -
Other long-term liabilities............................................................................ 847 202
--------- --------
Total liabilities.................................................................................... 20,082 15,948
--------- --------
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value; 5,000,000 shares authorized in 2000 and 1999........................ - -
Common stock, $.0001 par value; 100,000,000 and 25,000,000 shares authorized;
15,609,029 and 11,600,681 shares issued in 2000 and 1999, respectively............................... 2 1
Additional paid-in capital............................................................................. 362,415 77,008
Accumulated deficit.................................................................................... (114,769) (44,122)
Less treasury stock, 75,000 shares at cost............................................................. (2) (2)
Accumulated other comprehensive income (loss).......................................................... (572) -
Deferred compensation.................................................................................. (252) (270)
--------- --------
Total stockholders' equity........................................................................... 246,822 32,615
--------- --------
Total liabilities and stockholders' equity........................................................... $ 266,904 $ 48,563
========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
34
CLARUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2000, 1999, and 1998
(In Thousands, Except Per Share Amounts)
2000 1999 1998
------------------------------
REVENUES:
License fees................................................................................... $ 24,686 $ 15,101 $ 17,372
Services fees.................................................................................. 9,361 23,041 24,268
-------- -------- --------
Total revenues............................................................................... 34,047 38,142 41,640
COST OF REVENUES:
License fees................................................................................... 154 1,351 1,969
Services fees.................................................................................. 12,776 14,517 13,952
-------- -------- --------
Total cost of revenues....................................................................... 12,930 15,868 15,921
OPERATING EXPENSES:
Research and development, exclusive of noncash expense......................................... 21,891 9,003 6,335
Noncash research and development............................................................... 424 - -
In-process research and development............................................................ 8,300 - 10,500
Sales and marketing, exclusive of noncash expense.............................................. 35,888 15,982 11,802
Noncash sales and marketing.................................................................... 7,001 1,930 -
General and administrative, exclusive of noncash expense....................................... 15,721 6,241 5,126
Noncash general and administrative............................................................. 1,098 874 880
Depreciation and amortization.................................................................. 8,132 3,399 2,154
-------- -------- --------
Total operating expenses..................................................................... 98,455 37,429 36,797
-------- -------- --------
OPERATING LOSS................................................................................... (77,338) (15,155) (11,078)
GAIN ON SALE OF ASSETS........................................................................... 1,347 9,417 -
REALIZED LOSS ON SALE OF INVESTMENTS............................................................. (100) - -
LOSS ON IMPAIRMENT OF INVESTMENTS................................................................ (4,128) - -
AMORTIZATION OF DEBT DISCOUNT.................................................................... (982) - -
INTEREST INCOME.................................................................................. 10,902 442 636
INTEREST EXPENSE................................................................................. (348) (105) (224)
MINORITY INTEREST................................................................................ - - (36)
-------- -------- --------
NET LOSS......................................................................................... $(70,647) $ (5,401) $(10,702)
======== ======== ========
NET LOSS PER SHARE--BASIC AND DILUTED............................................................ $ (4.90) $ (0.49) $ (1.70)
======== ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--BASIC AND
DILUTED....................................................................................... 14,420 11,097 6,311
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
35
CLARUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
For the Years Ended December 31, 2000, 1999, and 1998
(In Thousands)
Additional Treasury
Common Stock Paid-In Accumulated Stock
-------------- -----
Shares Amount Capital Deficit Shares Amount
------ ------ ------- ------- ------ ------
BALANCES, December 31, 1997................. 1,467 $ - $ 1,141 $ (28,019) (75) $ (2)
Issuance of common stock in
initial public offering................. 2,500 - 21,962 - - -
Issuance of stock in acquisition of
ELEKOM Corporation...................... 1,391 - 7,615 - - -
Issuance of warrant and shares in
acquisition of minority interest
in Services Subsidiary.................. 225 - 3,200 - - -
Conversion of preferred stock............. 4,788 1 25,262 - - -
Conversion of note payable
for exercise of warrant................. 300 - 1,012 - - -
Exercise of warrants...................... 132 - - - - -
Issuance of stock options................. - - 1,062 - - -
Amortization of deferred
compensation............................ - - - - - -
Exercise of stock options................. 200 - 179 - - -
Net loss.................................. - - - (10,702) - -
-----------------------------------------------------------------------
BALANCES, December 31, 1998................. 11,003 1 61,433 (38,721) (75) (2)
Exercise of warrants...................... 26 - - - - -
Issuance of warrants...................... - - 13,028 - - -
Accelerated vesting of
stock options........................... - - 687 - - -
Cancellation of stock options............. - - (143) - - -
Amortization of deferred
compensation............................. - - - - - -
Exercise of stock options................. 572 - 2,003 - - -
Net loss.................................. - - - (5,401) - -
-----------------------------------------------------------------------
BALANCES, December 31, 1999................. 11,601 1 77,008 (44,122) (75) (2)
Exercise of warrants...................... 32 - - - - -
Issuance of warrants in connection
with marketing and research and
development agreements................... - - 878 - - -
Exercise of stock options.................. 542 1 3,074 - - -
Issuance of shares under
employee stock purchase plan.......... 4 - 34 - - -
Issuance of stock options at less
than fair market value................ - - 5,696 - - -
Amortization of deferred
compensation.......................... - - - - - -
Cancellation of stock options............ - - (4,616) - - -
Issuance of stock and stock
options in acquisition of SAI......... 1,148 - 32,153 - - -
Issuance of stock in secondary
offering............................. 2,243 - 244,427 - - -
Issuance of stock in connection
with marketing agreements............ 39 - 3,761 - - -
Net loss................................. - - - (70,647) - -
Foreign currency translation
adjustment........................... - - - - - -
Unrealized loss on marketable
securities............................. - - - - - -
Total comprehensive loss..................
-----------------------------------------------------------------------
BALANCES, December 31, 2000................. 15,609 $ 2 $ 362,415 $(114,769) (75) $ (2)
=======================================================================
Accumulated
Other Total
Comprehensive Note From Deferred Stockholders' Comprehensive
Income Stockholder Compensation Equity (Deficit) Loss
------ ----------- ------------ --------------- --------------
BALANCES, December 31, 1997................ $ - $(612) $ (418) $(27,910)
Issuance of common stock in
initial public offering................ - - - 21,962
Issuance of stock in acquisition of
ELEKOM Corporation..................... - - - 7,615
Issuance of warrant and shares in
acquisition of minority interest
in Services Subsidiary................. - - - 3,200
Conversion of preferred stock............ - - - 25,263
Conversion of note payable
for exercise of warrant................ - - - 1,012
Exercise of warrants..................... - 612 - 612
Issuance of stock options................ - - (1,062) -
Amortization of deferred
compensation........................... - - 880 880
Exercise of stock options................ - - - 179
Net loss................................. - - - (10,702) $(10,702)
-------------------------------------------------------------------------------
BALANCES, December 31, 1998................ - - (600) 22,111
Exercise of warrants..................... - - - -
Issuance of warrants..................... - - - 13,028
Accelerated vesting of
stock options.......................... - - 19 706
Cancellation of stock options............ - - 143 -
Amortization of deferred
compensation............................ - - 168 168
Exercise of stock options................ - - - 2,003
Net loss................................. - - - (5,401) $ (5,401)
-------------------------------------------------------------------------------
BALANCES, December 31, 1999................ - - (270) 32,615
Exercise of warrants..................... - - - -
Issuance of warrants in connection
with marketing and research and
development agreements.................. - - - 878
Exercise of stock options................. - - - 3,075
Issuance of shares under
employee stock purchase plan......... - - - 34
Issuance of stock options at less
than fair market value............... - - (5,696) -
Amortization of deferred
compensation......................... - - 1,098 1,098
Cancellation of stock options........... - - 4,616 -
Issuance of stock and stock
options in acquisition of SAI........ - 32,153
Issuance of stock in secondary
offering............................ - - - 244,427
Issuance of stock in connection
with marketing agreements........... - - - 3,761
Net loss................................ - - - (70,647) $(70,647)
Foreign currency translation
adjustment.......................... (19) - - (19) (19)
Unrealized loss on marketable
securities............................ (553) - - (553) (553)
---------------
Total comprehensive loss................. $(71,219)
----------------------------------------------------------------===============
BALANCES, December 31, 2000................ $ (572) $ - $ (252) $246,822
===============================================================
The accompanying notes are an integral part of these consolidated financial
statements.
36
CLARUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2000, 1999, and 1998
(In Thousands)
2000 1999 1998
-------- -------- --------
OPERATING ACTIVITIES:
Net loss........................................................................ $(70,647) $ (5,401) $(10,702)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.................................................. 2,770 2,000 1,271
Amortization of intangible assets.............................................. 5,362 1,399 883
Minority interest.............................................................. - 36
Loss on impairment of investments.............................................. 4,128 - -
Noncash interest expense associated with original issue discount on debt....... 982 - 77
In-process research and development............................................ 8,300 - 10,500
Provision for doubtful accounts................................................ 5,824 1,245 739
Noncash research and development expense....................................... 424 - -
Noncash sales and marketing expense............................................ 7,001 1,930 -
Noncash general and administrative expense..................................... 1,098 874 880
Exchange of software for cost-method investments............................... (12,868) (1,168) -
Gain on sale of assets......................................................... (1,347) (9,419) -
Loss on sale of property and equipment......................................... - 138 -
Changes in operating assets and liabilities:
Accounts receivable.......................................................... (4,567) (8,185) (5,828)
Prepaids and other current assets............................................ (855) (2,396) (66)
Deposits and other long-term assets.......................................... (127) 248 (205)
Accounts payable and accrued liabilities..................................... 4,934 203 1,228
Deferred revenue............................................................. (1,407) 1,121 (617)
Other long-term liabilities.................................................. 46 127 26
-------- -------- --------
Net cash used in operating activities....................................... (50,949) (17,284) (1,778)
-------- -------- --------
INVESTING ACTIVITIES:
Purchase of marketable securities............................................... (55,548) - -
Proceeds from the sale and maturity of marketable securities.................... 6,000 - -
Purchase of SAI/Redeo companies, net of cash acquired........................... (30,645) - -
Purchase of iSold............................................................... (2,453) - -
Purchase of ELEKOM Corporation, net of cash acquired............................ - - (8,450)
Purchase of property and equipment.............................................. (5,871) (3,213) (2,418)
Purchase of investments......................................................... (3,711) - -
Purchase of minority interest in consolidated subsidiary........................ - - (392)
Proceeds from sale of assets.................................................... 1,864 12,006 -
Proceeds from sale of property and equipment.................................... - 48 -
Purchase of intangible software rights.......................................... - (489) (178)
-------- -------- --------
Net cash (used in) provided by investing activities......................... (90,364) 8,352 (11,438)
======== ======== ========
37
CLARUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
For the Years Ended December 31, 2000, 1999, and 1998
(In Thousands, except shares and warrants)
2000 1999 1998
-------- ------- -------
FINANCING ACTIVITIES:
Proceeds from issuance of redeemable convertible preferred stock......... - - 150
Proceeds from issuance of common stock in initial public offering........ - - 21,962
Proceeds from issuance of common stock related to secondary
offering............................................................... 244,427 - -
Proceeds from the exercise of stock options.............................. 3,075 2,003 179
Proceeds from issuance of common stock related to employee stock
purchase plan.......................................................... 34 - -
Proceeds from long-term debt............................................. 5,000 7,000 1,645
Repayments of long term debt and capital lease obligations............... (7,028) (743) (3,505)
Proceeds from exercise of warrants....................................... - - 612
Payments to holder of minority interest.................................. - - (241)
-------- ------- -------
Net cash provided by financing activities............................... 245,508 8,260 20,802
-------- ------- -------
Effect of exchange rate change on cash.................................... (19) - -
CHANGE IN CASH AND CASH EQUIVALENTS....................................... 104,176 (672) 7,586
CASH AND CASH EQUIVALENTS, beginning of year.............................. 14,127 14,799 7,213
-------- ------- -------
CASH AND CASH EQUIVALENTS, end of year.................................... $118,303 $14,127 $14,799
======== ======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest................................................... $ 348 $ 103 $ 161
======== ======= =======
NONCASH TRANSACTIONS:
Issuance of warrants to purchase 25,000 and 230,000 shares,
respectively, of common stock in connection with marketing agreements... $ 454 $12,046 $ -
======== ======= =======
Issuance of warrants to purchase 33,334 shares of common stock in
connection with research & development arrangement...................... $ 424 $ - $ -
======== ======= =======
Issuance of 39,118 shares of common stock in connection with marketing $ 3,761 $ - $ -
agreements.............................................................. ======== ======= =======
Issuance of 1,148,000 shares of common stock and 163,200 of common $ 32,153 $ - $ -
stock options in connection with SAI acquisition........................ ======== ======= =======
Receipt of marketable securities in satisfaction of trade accounts $ 1,214 $ 1,168 $ -
receivable.............................................................. ======== ======= =======
Issuance of warrants to purchase 29,999 shares of common stock in $ - $ 982 $ -
connection with short-term borrowing.................................... ======== ======= =======
Issuance of 1,391,000 shares of common stock in connection with the $ - $ - $ 7,615
acquisition of ELEKOM Corporation....................................... ======== ======= =======
Issuance of 225,000 shares of common stock, warrants to purchase
300,000 shares of common stock, and note payable for purchase of the
minority interest in consolidated subsidiary............................ $ - $ - $ 4,300
======== ======= =======
Conversion of preferred stock............................................ $ - $ - $25,262
======== ======= =======
Conversion of note payable for exercise of warrant....................... $ - $ - $ 1,100
======== ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
38
CLARUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Clarus Corporation, a Delaware corporation, and its subsidiaries, (the
"Company") develop, market, and support Internet-based business-to-business
electronic commerce solutions that automate the procurement and management of
operating resources. The Company also provides implementation and ongoing
customer support services as part of its complete procurement solutions.
Sale of Financial and Human Resources Software Business
On October 18, 1999, the Company sold its financial and human resources
software business (the "Assets") to Geac Computer Systems, Inc. and Geac Canada
Limited for a total of approximately $13.9 million. Approximately $2.9 million
of the purchase price was placed in escrow and subsequently settled during 2000.
The Company recorded a gain in 1999 on the sale of the business of approximately
$9.4 million and an additional gain of $1.3 million in 2000 upon settlement of
the escrow and release of indemnifications. In connection with the sale of the
Assets, the Company accelerated the vesting on certain options. The company
recorded a non-cash compensation charge of approximately $706,000 during 1999
related to these options. License revenue from the financial and human
resources software business for the years ended December 31, 1999 and 1998 were
approximately $5.1 million, and $17.2 million, respectively. Services revenue
from the financial and human resources software business for the years ended
December 31, 1999 and 1998 were approximately $21.5 million, and $24.2 million,
respectively.
Completion of Initial Public and Secondary Offerings
On May 26, 1998, the Company completed an initial public offering (the
"Offering") of 2.5 million shares at $10 per share, resulting in net proceeds of
approximately $22.0 million.
On February 19, 1998, the Company's board of directors approved a three-for-
two stock split on the Company's common stock to be effected in the form of a
stock dividend. All share and per share data in the accompanying consolidated
financial statements have been adjusted to reflect the split.
On March 10, 2000, the Company sold 2,243,000 shares of common stock in a
secondary public offering at $115.00 per share resulting in net proceeds to the
Company of approximately $244.4 million.
Summary of Significant Accounting Policies
Basis of Consolidated Financial Statement Presentation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All intercompany transactions and balances have
been eliminated. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. Estimates also affect the
reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
39
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. The Company had
approximately $101.6 million in cash equivalents included in the accompanying
consolidated balance sheet for the year ended December 31, 2000. The Company
had no cash equivalents in 1999.
Marketable Securities
Marketable securities at December 31, 2000 consist of government notes and
bonds, commercial paper, corporate debt and equity securities. The Company
accounts for its marketable securities under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Pursuant to the provisions of SFAS
No. 115, the Company has classified its marketable securities as available-for-
sale. Available-for-sale securities have been recorded at fair value and
related unrealized gains and losses have been excluded from earnings and
reported as a separate component of accumulated other comprehensive income
(loss) until realized.
Credit and Customer Concentrations
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. As of December 31, 2000, four
customers accounted for more than 10% each, totaling $6.7 million, of the gross
accounts receivable balance on that date. During the year ended December 31,
2000, one customer accounted for more than 10%, totaling $3.8 million, of total
revenue. During 1999 and 1998, no customer accounted for more than 10% of total
revenue.
During 2000 and 1999, the Company has sold $15.6 million and $3.1 million,
respectively, of products and services to ten and one, respectively, early-stage
technology companies in which the Company has also made investments. These
companies are subject to significant risk due to the limited operating history
and volatile industry-based economic conditions.
During 2000, 20.6% of the Company's revenue was derived from international
markets, none of which exceeded 10% in any one country. In 1999 and 1998,
substantially all of our revenue was from U.S.-based companies.
Property and Equipment
Property and equipment consist of furniture, computers, other office
equipment, purchased software, and leasehold improvements. These assets are
depreciated on a straight-line basis over periods ranging from two to seven
years. Leasehold improvements are amortized over the shorter of the useful life
or the term of the lease.
40
Property and equipment are summarized as follows (in thousands):
December 31,
---------------------
2000 1999
------ ------
Computers and equipment $8,190 $4,632
Purchased software 4,212 1,693
Furniture and fixtures 1,241 1,201
Leasehold improvements 1,024 875
------ ------
14,667 8,401
Less accumulated depreciation and amortization 7,048 4,279
------ ------
Net property and equipment $7,619 $4,122
====== ======
The Company has included purchased software in property and equipment which
represents the cost of purchased integration software tools and the cost of
software acquired in connection with business combinations. It also includes
the cost of licenses to use, embed and sell software tools developed by others.
These costs are being amortized ratably based on the projected revenue
associated with these purchased or licensed tools and products or the straight-
line method over two years, whichever method results in a higher level of annual
amortization. Amortization expense related to purchased software amounted to
approximately $766,000, $614,000 and $311,000 in 2000, 1999, and 1998,
respectively. Accumulated amortization related to purchased software totaled
approximately $1.6 million and $850,000 at December 31, 2000 and 1999,
respectively.
Investments
During 2000 and 1999, the Company made equity investments of $16.6 million and
$1.1 million, respectively, in 11 privately held companies. The Company's
interest in these entities range from 3.5% to 12.5% and the Company has
accounted for these investments using the cost method of accounting. During the
fourth quarter of 2000, the Company recorded a charge of $4.1 million for other
than temporary losses in these investments. During the years ended December 31,
2000 and 1999, the Company recognized $15.6 and $3.1 million, respectively in
license revenue from software sales to these companies. These companies are
primarily early-stage companies and are subject to significant risk due to their
limited operating history and volatile industry-based economic conditions.
Intangible Assets
At December 31, 2000 and 1999, intangible assets were $58.2 million and $6.6
million, respectively, and include goodwill, developed technologies, assembled
workforce and trade names and are being amortized on a straight-line basis over
periods ranging from three to ten years. Amortization expense related to these
intangibles amounted to $5.4 million, $1.4 million and $883,000 in 2000, 1999
and 1998, respectively. At each balance sheet date, the Company assesses the
recoverability of the intangible assets by determining whether the amortization
of the asset balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired asset. The amount of
impairment, if any, is measured based on discounted future operating cash flows
using a discount rate reflecting the Company's average cost of funds.
Accumulated amortization related to intangibles totaled $6.1 million and
$784,000 at December 31, 2000 and 1999, respectively.
41
Intangible assets are summarized as follows (in thousands):
Useful
Life
2000 1999 (in years)
---- ---- -----------
Goodwill-ELEKOM................................................. $ 6,987 $6,987 10
Goodwill-SAI/Rodeo.............................................. 49,735 - 8
Goodwill-iSold.com.............................................. 1,948 - 4
Developed technologies - SAI/Rodeo.............................. 4,100 - 8
Developed technologies - iSold.com.............................. 506 - 3
Assembled workforce............................................. 450 - 7
Customer base................................................... 100 - 4
Other........................................................... 534 446 3
----------------------
64,360 7,433
Less accumulated amortization................................... 6,146 784
----------------------
Net intangible assets........................................ $ 58,214 $6,649
======================
Long-Lived Assets and Long-Lived Assets to be Disposed of
The Company accounts for long-lived assets in accordance with the provisions
of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of". This statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell.
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities include the following as of December
31, 2000 and 1999 (in thousands):
2000 1999
------- ------
Accounts payable......................................................... $ 2,429 $2,094
Accrued compensation, benefits, and commissions.......................... 3,497 2,295
Payable associated with iSold acquisition................................ 900 -
Other.................................................................... 4,233 1,937
------- ------
$11,059 $6,326
======= ======
Product Returns and Warranties
The Company provides warranties for its products after the software is
purchased for the period in which the customer maintains the Company's support
of the product. The Company generally supports only current releases and the
immediately prior releases of its products. The Company's license agreements do
not permit product returns by its customers. The Company has not experienced
significant warranty claims to date. Accordingly, the Company has not provided a
reserve for warranty costs at December 31, 2000, 1999, and 1998.
Fair Value of Financial Instruments
The Company uses financial instruments in the normal course of its business.
The carrying values of cash equivalents, accounts receivable and accounts
payable approximate fair value due to the short-term
42
maturities of these assets and liabilities. The fair value of the Company's
investments in privately held companies is not readily available. The Company
believes the fair values of these investments exceed their respective carrying
values at December 31, 2000 and 1999.
Revenue
The Company recognizes revenue from two primary sources, software licenses and
services. Revenue from software licensing and services fees is recognized in
accordance with Statement of Position ("SOP") 97-2, "Software Revenue
Recognition", and SOP 98-9, "Software Revenue Recognition with Respect to
Certain Transactions". Accordingly, the Company recognizes software license
revenue when: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred; (3) the fee is fixed or determinable; and (4) collectibility is
probable.
SOP No. 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair values of the elements. The fair value of an element must be based
on evidence that is specific to the vendor. License fee revenue allocated to
software products generally is recognized upon delivery of the products or
deferred and recognized in future periods to the extent that an arrangement
includes one or more elements to be delivered at a future date and for which
fair values have not been established. Revenue allocated to maintenance is
recognized ratably over the maintenance term, which is typically 12 months and
revenue allocated to training and other service elements is recognized as the
services are performed.
Under SOP No. 98-9, if evidence of fair value does not exist for all elements
of a license agreement and post-contract customer support is the only
undelivered element, then all revenue for the license arrangement is recognized
ratably over the term of the agreement as license revenue. If evidence of fair
value of all undelivered elements exists but evidence does not exist for one or
more delivered elements, then revenue is recognized using the residual method.
Under the residual method, the fair value of the undelivered elements is
deferred and the remaining portion of the arrangement fee is recognized as
revenue. Revenue from hosted software agreements are recognized ratably over the
term of the hosting arrangements.
Amounts that have been received in cash or billed but that do not yet qualify
for revenue recognition are reflected as deferred revenues. Deferred revenues at
December 31, 2000 and 1999, were as follows (in thousands):
2000 1999
------ ------
Deferred revenues:
Deferred license fees................................................. $ 328 $1,511
Deferred services and training fees................................... 111 313
Deferred maintenance fees............................................. 2,737 1,550
------ ------
Total deferred revenues............................................... 3,176 3,374
Less current portion.................................................. 2,295 3,081
------ ------
Noncurrent deferred revenues.......................................... $ 881 $ 293
====== ======
The Company has introduced in the past, and is expected to introduce in the
future, product enhancements. As a result, deferred revenues resulting from
contracts executed in a prior period are recognized in the quarter in which
delivery of the new product occurs. This practice has, and will in the future,
continue to cause fluctuations in revenue and operating results from period to
period.
Non-monetary Transactions
The Company accounts for non-monetary transactions based on the fair value of
the elements to the arrangement. During 2000 and 1999, the Company recognized
$15.6 million and $3.1 million, respectively, in license revenue from software
sales to privately held companies in exchange for investments in the respective
customers for which a fair value of the equity is not readily available.
43
Accordingly, the Company recorded the fair value of the license revenue based on
evidence of past sales that are specific to the Company and recorded the fair
value of the investment in customers based on similar prices paid in cash by
outside financial investors or valuations performed by third parties. As of
December 31, 2000 the Company has made equity investments of $17.7 million,
originally recorded at cost.
As discussed at note 10, during 2000 and 1999, the Company issued shares of
common stock and warrants to purchase the Company's common stock in exchange for
sales and marketing and software development services. The Company recorded the
noncash sales and marketing and research and development expenses, as well as
the deferred components depending on the terms of the agreements, at the earlier
of the performance commitment date or the date of completion based on the fair
value of the Company's common stock or the fair value of the warrants using the
Black-Scholes option-pricing model.
Research and Development
Research and development expenses are charged to expense as incurred. Computer
software development costs are charged to research and development expense until
technological feasibility is established, after which remaining software
production costs are capitalized in accordance with SFAS No. 86, "Accounting for
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." The
Company has defined technological feasibility as the point in time at which the
Company has a working model of the related product. Historically, the
development costs incurred during the period between the achievement of
technological feasibility and the point at which the product is available for
general release to customers have not been material. Therefore, the Company has
charged all software development costs to expense as incurred for the three
years ended December 31, 2000.
Stock-Based Compensation Plan
The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. As such,
compensation expense to be recognized over the related vesting period is
generally determined on the date of grant only if the current market price of
the underlying stock exceeds the exercise price. SFAS 123, "Accounting for
Stock-Based Compensation", permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS 123 allows entities to continue to apply the provisions of
APB Opinion No. 25 and provide pro forma net income (loss) and pro forma net
income (loss) per share disclosures for employee stock option grants as if the
fair-value-based method defined in SFAS 123 had been applied. The Company has
elected to continue to apply the provisions of APB Opinion No. 25 and provide
the pro forma disclosures required by SFAS 123.
Income Taxes
Income taxes are computed using an asset and liability approach, which
requires the recognition of taxes payable or refundable for the current year and
deferred tax assets and liabilities for the future tax consequences of events
that have been recognized in the Company's consolidated financial statements or
tax returns. The measurement of current and deferred tax assets and liabilities
are based on provisions of the enacted tax law; the effects of future changes in
tax laws or rates are not anticipated. The measurement of deferred tax assets is
reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
Net Loss Per Share
Basic and diluted net loss per share was computed in accordance with SFAS No.
128, "Earnings Per Share," using the weighted average number of common shares
outstanding. The diluted net loss per share for the years ended December 31,
2000, 1999 and 1998 does not include the effect of common stock equivalents,
calculated by the treasury stock method, at December 31, 2000, 1999 and 1998, as
their impact
44
would be antidilutive. The potentially dilutive effect of excluded common stock
equivalents are as follows (in thousands):
2000 1999 1998
----- ---- ----
Effect of shares issuable under stock options 1,116 857 739
Effect of shares issuable pursuant to warrants to
purchase common stock 167 25 4
-----------------------------
Total 1,283 882 743
Comprehensive Income (Loss)
The Company utilizes SFAS No. 130, "Reporting Comprehensive Income". SFAS No.
130 establishes standards for reporting and presentation of comprehensive income
and its components in a full set of financial statements. Comprehensive income
(loss) primarily consists of net income (loss), foreign currency translation
adjustments, and unrealized gains and losses from available-for-sale investments
and is presented in the consolidated statements of shareholders' equity as
comprehensive income (loss).
Segment and Geographic Information
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
This Statement establishes standards for the way companies report information
about operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers.
In accordance with the provisions of SFAS No. 131, the Company has determined
that during 2000 the Company operated in one principal business segment, e-
commerce software solutions, across domestic and international markets. During
1999 and 1998 the Company operated in two business segments, e-commerce software
solutions and ERP software solutions. The Company evaluated the performance of
the segments based on revenues and gross margin of the segments. The Company
did not allocate assets to reportable segments. The accounting policies of the
segments are the same as those described above. Segment information for the
years ended December 31, 1999 and 1998 are as follows (in thousands):
1999 1998
E-commerce revenue $11,484 $ 270
ERP revenue 26,658 41,370
------- -------
Total Revenue $38,142 $41,640
E-commerce gross margin $ 7,954 $ 85
ERP gross margin 14,320 25,634
------- -------
Total gross margin $22,274 $25,719
Substantially all of the Company's operating results and identifiable assets
are in the United States.
New Accounting Pronouncements
In September 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This Statement was amended in
June 2000 by Statement No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities." Statement No. 138 is effective for the Company
beginning January 2001. The new Statement requires all derivatives to be
recorded on the balance sheet at fair value and establishes accounting treatment
for three types of hedges: hedges of changes in the fair value of assets,
liabilities or firm commitments; hedges of the variable cash flows of forecasted
transactions; and hedges of foreign currency exposures of net investments in
foreign operations. To date, the Company has not invested in derivative
instruments nor participated in hedging
45
activities and, therefore, does not anticipate there will be a material impact
on the result of operations or financial position from Statements No. 133 or No.
138.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
2. MARKETABLE SECURITIES
Prior to 2000, the Company did not own any marketable securities. After the
completion of the Company's follow-on offering, the proceeds were placed in
investment grade cash equivalents and marketable securities. As of December 31,
2000, those investments with an original maturity of three months or less are
classified as cash equivalents and those investments with maturities between
four and twelve months are classified as marketable securities. Pursuant to the
provisions of SFAS No. 115, the Company has classified all of its marketable
securities as available-for-sale. The amortized cost, gross unrealized holding
gains, gross unrealized holding losses and fair value of these available-for-
sale securities by major security type and class of security at December 31,
2000 were as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Holding Gains Holding Losses Value
Commercial paper............... $20,897 $ 46 $ (29) $20,914
Corporate notes and bonds...... 19,594 47 - 19,641
Government notes and bonds..... 4,709 13 - 4,722
Certificate of deposit......... 4,501 17 - 4,518
Equity securities.............. 1,213 - (799) 414
-----------------------------------------------------------
Total...................... $50,914 $123 $(828) $50,209
===========================================================
The maturities of debt securities classified as available-for-sale are less
than one year from December 31, 2000.
Proceeds from the sale and maturities of marketable securities available for
sale were $6.0 million in 2000. The Company had no realized gains and had
approximately $100,000 in realized losses included in the accompanying
consolidated statements of operations for the year ended December 31, 2000.
The gross unrealized holding gains and the gross unrealized holding losses
for the cash equivalents at December 31, 2000 were approximately $159,000 and
$7,000, respectively.
3. ACQUISITIONS
Acquisition of the Services Subsidiary
On February 5, 1998, the Company purchased from Technology Ventures, a former
related party controlled by Joseph S. McCall, the remaining 20% ownership in a
subsidiary, the Services Subsidiary, in which the Company was a majority owner,
for a purchase price of approximately $4.5 million. Mr. McCall was a former
shareholder and director of the Company. In exchange for the 20% interest in the
Services Subsidiary, the Company (i) issued 225,000 shares of common stock to
Technology Ventures, (ii) granted Technology Ventures a warrant to purchase an
additional 300,000 shares of common stock at a purchase price of $3.67 per
share, and (iii) agreed to pay Technology Ventures a monthly sum equal to 20% of
the net profits of the Services Subsidiary until the earlier of the completion
of the Offering or a sale of the Company. In addition, the Company agreed to pay
Technology Ventures the sum of $1.1 million upon exercise of the warrant, but
not later than February 5, 2000, pursuant to a nonnegotiable, noninterest-
46
bearing subordinated promissory note. The Company imputed interest on the note
payable based on its original terms and recognized interest during the period
the note was outstanding. In November 1998, the warrant was exercised and the
note payable was surrendered as payment for the warrant exercise price. The
remaining unamortized discount of $89,000 on the note payable was reclassified
to additional paid-in capital.
The purchase price of the Services Subsidiary was determined by including the
following: (i) 225,000 shares of common stock at $8 per share or $1.8 million,
(ii) a note payable of $1.1 million discounted for interest at 9% for two years,
resulting in a net note payable of $934,000, (iii) cash paid of $62,000, (iv)
20% of net profits, totaling $330,000, for the period February 5, 1998, through
the Offering, and (v) a warrant valued at $1.4 million determined using the
Black-Scholes model and using expected volatility of 65%, an expected term of
two years, and a risk-free rate of 5.5% to determine a value per share of $4.67
or a total value of $1.4 million. The Company has accounted for the transaction
using the purchase method of accounting. The purchase price has been allocated
to assets acquired and liabilities assumed based on the fair market value at the
date of acquisition. Goodwill resulting from the transaction was being amortized
over 15 years until the sale of the ERP business in October of 1999 at which
time the unamortized balance was included as a reduction to the gain on the
sale of the ERP assets. The Services Subsidiary was merged into the Company in
1999.
Acquisition of ELEKOM Corporation
On November 6, 1998, the Company completed its acquisition of ELEKOM
Corporation ("ELEKOM") for approximately $15.7 million, consisting of $8.0
million in cash and approximately 1.4 million shares, valued at $5.52 per share,
of the Company's common stock. ELEKOM was merged with and into Clarus CSA, Inc.,
a wholly owned subsidiary of the Company, and the separate existence of ELEKOM
ceased. The Company, as additional purchase price, recorded (i) payments of
$500,000 made to fund the operations of ELEKOM from October 1, 1998 through the
closing date and (ii) expenses of approximately $1.0 million to complete the
merger. The Company allocated $10.5 million of the purchase price to in-process
research and development. The remainder of the excess of the purchase price over
the tangible assets acquired of approximately $6.9 million was assigned to
goodwill and the remaining balance is being amortized over ten years.
Acquisition of iSold.com
On April 28, 2000, the Company acquired all of the capital stock of
iSold.com, Inc., a Delaware corporation ("iSold"). iSold has developed a
software program that provides auctioning capabilities to its clients. The
purchase consideration was approximately $2.5 million in cash of which $1.6
million was paid at the date of acquisition and $900,000 is due in April 2001.
The acquisition was treated as a purchase for accounting purposes with
approximately $500,000 of the purchase consideration allocated to developed
technologies and approximately $2.0 million to goodwill. The developed
technologies are being amortized over 36 months and the goodwill is being
amortized over 48 months.
Acquisition of the SAI/Redeo Companies
On May 31, 2000, the Company acquired all of the outstanding capital stock of
SAI (Ireland) Limited, SAI Recruitment Limited, i2Mobile.com Limited and SAI
America Limited (the "SAI/Redeo Companies"). The SAI/Redeo Companies specialize
in electronic payment settlement. The purchase consideration was approximately
$63.2 million, consisting of approximately $30.0 million in cash (exclusive of
$350,000 of cash acquired), 1,148,000 shares of the Company's common stock with
a fair value of $30.4 million, assumed options to acquire 163,200 shares of the
Company's common stock with an exercise price of $23.50 (estimated fair value of
$1.8 million using the Black-Scholes option pricing model with the following
variables: no expected dividend yield, volatility of 70%, risk-free interest
rate of 6.5%, and an expected life of 2 years) and acquisition costs of
approximately $995,000. The acquisition was treated as a purchase for
accounting purposes, and accordingly, the assets and liabilities were recorded
based on their preliminary fair value at the date of acquisition. The Company
evaluated the developed technologies and
47
in-process research and development to determine their stage of development,
their expected income generating ability, as well as risk factors associated
with achieving technological feasibility. The Company expensed approximately
$8.3 million to in-process research and development in the second quarter of
2000.
The following unaudited pro forma information presents the results of
operations of the Company as if the SAI/Redeo acquisition had taken place on
January 1, 1999, and excludes the write-off of in-process research and
development of $8.3 million and the results of operations of iSold.com due to
the related amounts being immaterial (in thousands, except per share amounts):
Years ended
December 31,
2000 1999
---------------------
Revenues $ 34,929 $ 41,775
Net loss (66,521) (14,856)
Basic earnings per share:
Net loss per common share $ (4.47) $ (1.21)
Equivalent number of shares 14,894 12,245
Diluted earnings per share:
Net loss per common share $ (4.47) $ (1.21)
Equivalent number of shares 14,894 12,245
4. RELATED-PARTY TRANSACTIONS
During 1998, the Company engaged in a number of transactions with McCall
Consulting Group, Inc. ("McCall Consulting Group") and Technology Ventures,
L.L.C. ("Technology Ventures"), entities controlled by Joseph S. McCall, a
former shareholder and director of the Company. In the opinion of management,
the rates, terms, and considerations of the transactions with related parties
approximate those with non-related entities.
Expenses relating to services provided by McCall Consulting Group were
approximately $220,000 for the year ended December 31, 1998. No services were
provided in 1999 or 2000.
In February 1998, the Company entered into an agreement with Mr. McCall
whereby he resigned as the Company's chief executive officer and as chairman,
chief executive officer, and manager of the Services Subsidiary. Mr. McCall
remained an employee of the Company until the completion of the Offering in May
1998, at which time he became a consultant to the Company for a period of one
year pursuant to the terms of an independent contractor agreement. In
recognition of past services to the Company, and resignations of certain
positions noted above, the Company paid to Mr. McCall a lump sum of $225,000 on
June 30, 1998, and also agreed to pay Mr. McCall severance of $75,000 payable
over a one-year period. For his consulting services, the Company paid Mr. McCall
the sum of $125,000 over the one-year period from the date of the Offering, with
the ability to earn an additional $100,000 in incentive compensation if certain
revenue targets were met by the Company. The Company paid $124,000 and $107,000
to Mr. McCall under this consulting agreement during the years ended December
31, 1999 and 1998, respectively. No payments were made to Mr. McCall in 2000.
5. INCOME TAXES
For financial reporting purposes, losses from continuing operations before
income taxes includes the following components (in thousands):
Year ended
December 31,
-----------------------------------------
2000 1999 1998
----------- ---------- ----------
Pretax income (loss):
United States $ (51,805) $ (5,401) $ (10,702)
48
Foreign (18,842) -- --
---------- --------- ----------
$ (70,647) $ (5,401) $ (10,702)
=========== ========== ==========
The Company files a consolidated income tax return with its wholly-owned
subsidiaries. The components of the income tax expense (benefit) for each of the
years in the three-year period ended December 31, 2000 are as follows (in
thousands):
Year ended
December 31,
-----------------------------------
2000 1999 1998
---------- -------- --------
Current:
Federal $ -- $ -- $ 98
State -- -- 12
Foreign -- -- --
--------- -------- --------
-- -- 110
--------- -------- --------
Deferred:
Federal (16,216) (1,473) (98)
State (2,700) (173) (12)
Foreign (1,863) -- --
--------- -------- --------
(20,779) (1,646) (110)
Change in valuation allowance for
deferred income taxes 20,779 1,646 110
---------- -------- --------
$ -- $ -- $ --
========== ======== ========
The following is a summary of the items that caused recorded income taxes to
differ from income taxes computed using the statutory federal income tax rate of
34% for the three years ended December 31, 2000:
Year ended
December 31,
---------------------------------
2000 1999 1998
------- -------- -------
"Expected" tax (benefit) (34.0)% (34.0)% (34.0)%
(Increase) decrease in income taxes resulting from:
State income taxes, net of federal income taxes (3.7) (4.0) (4.0)
Other, net 0.7 0.8 1.7
Nondeductible goodwill 2.5 6.7 --
Nondeductible acquired research and development 4.0 -- 37.3
Income tax effect attributable to foreign operations 1.1 -- --
Increase (decrease) in valuation allowance 29.4 30.5 (1.0)
------- -------- -------
Provision (benefit) for income taxes --% --% --%
======= ======== =======
Deferred income tax assets and liabilities are determined based on the
difference between the financial accounting and tax bases of assets and
liabilities. Significant components of the Company's deferred income tax assets
and liabilities as of December 31, 2000 and 1999 are as follows (in thousands):
December 31,
-----------------------
2000 1999
--------- ---------
Deferred income tax assets:
Net operating loss and research and experimentation credit
carryforwards $ 23,980 $ 10,900
Allowance for doubtful accounts 1,509 103
Depreciation and amortization 540 219
Noncash compensation 4,719 733
Accrued liabilities 385 9
Reserves for investments 1,610 -
--------- ---------
49
--------- ---------
Net deferred income tax assets before valuation allowance 32,743 11,964
Valuation allowance for deferred income tax assets (32,743) (11,964)
--------- ---------
Net deferred income tax assets $ - $ -
========= =========
During 1998, the Company used $110,000 of the net operating loss
carryforwards to eliminate current income taxes payable. The Company reversed
the valuation allowance on the net operating loss carryforwards that were used
and set up a valuation allowance for the deferred income tax assets created
during that year.
The net increase (decrease) in the valuation allowance for deferred income
tax assets for 2000, 1999, and 1998 was $20.8 million, $1.6 million, and
($110,000), respectively. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred income tax assets will not be realized. The ultimate realization
of deferred income tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred income tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment.
At December 31, 2000, the Company has net operating loss, research and
experimentation credit and alternative minimum tax credit carryforwards for U.S.
federal income tax purposes of approximately $55.0 million, $657,000 and
$53,000, respectively, which expire in varying amounts beginning in the year
2009. The Company also has incurred foreign losses in the amount of
approximately U.S. $7.0 million that are available to offset future taxable
income in foreign jurisdictions.
The Company's ability to benefit from certain net operating loss
carryforwards is limited under section 382 of the Internal Revenue Code as the
Company is deemed to have had an ownership change of greater than 50%.
Accordingly, certain net operating losses may not be realizable in future years
due to this limitation.
6. DEBT
The Company's short- and long-term debt consists of the following as of
December 31, 2000 and 1999 (in thousands):
2000 1999
------ ------
Convertible subordinated promissory note with a commercial bank,
which is also a customer, due March 15, 2005, interest at 4.5% $5,000 $ -
Note payable, payable the earlier of April 30, 2000 or the completion
of a secondary offering of the Company's common stock, secured by
substantially all the assets of the Company, interest at prime plus
3% (11.5% at December 31, 1999), net of discount of approximately
$980 as of December 31, 1999............................................. - 6,018
Note payable to a financing company, payable in monthly installments
of approximately $2 through November 2000, secured by certain
company assets, bearing interest at 8%................................... - 16
Capital lease obligations............................................. - 12
------ ------
5,000 6,046
Less current portion of long-term debt................................ - 6,046
------ ------
$5,000 $ -
====== ======
The Company entered into a $5.0 million convertible subordinated promissory
note (the "Note") with a commercial bank who is also a major customer on March
14, 2000 which is due March 15, 2005. The note provides for the ability of the
holder to convert, at its option, all or any portion of the principal of the
50
Note into common stock of the Company at the price of $147.20 per share. If at
any time after the date of the Note the quoted price per share of the Company's
common stock exceeds 200% of the conversion price then in effect for at least 20
trading days in any period of 30 consecutive trading days, the Company has the
right to require that the holder of the Note convert all of the principal of the
Note into common stock of the Company at the price of $147.20 per share.
In 1999, the Company entered into financing agreements for $7.0 million. In
connection with the financing, the Company issued warrants to purchase 29,999
shares of common stock at an exercise price of $53.69 per share. The Company
recorded the value of the warrants of approximately $980,000 as original issue
discount to be amortized to interest expense over the life of the bridge
financing. The entire $7.0 million plus interest was paid during the first
quarter of 2000. As a result, the entire value of the warrants was amortized in
the period ending March 31, 2000. Additionally, the Company paid approximately
$700,000 in debt issuance costs that were amortized in the period ended March
31, 2000. These costs were included in prepaids and other current assets in the
accompanying December 31, 1999 consolidated balance sheet.
7. ROYALTY AGREEMENTS
The Company is a party to royalty and other equipment manufacturer
agreements for certain of its applications. The Company incurred a total of
approximately $139,000, $1.3 million, and $1.8 million in royalty fees for the
years ended December 31, 2000, 1999, and 1998, respectively, pursuant to these
agreements. The royalty fees paid are included in cost of revenues-license fees
in the accompanying consolidated statements of operations.
8. EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) Plan (the "Plan"), a defined contribution
plan covering substantially all employees of the Company. Under the Plan's
deferred compensation arrangement, eligible employees who elect to participate
in the Plan may contribute between 2% and 20% of eligible compensation, as
defined, to the Plan. The Company, at its discretion, may elect to provide for
either a matching contribution or discretionary profit-sharing contribution or
both. The Company made matching contributions of approximately $93,000 in 2000.
The Company did not make matching or discretionary profit-sharing contributions
in 1999 or 1998.
On June 13, 2000, the Company adopted the Clarus Corporation Employee Stock
Purchase Plan (the "U.S. Plan") and the Global Employee Stock Purchase Plan (the
"Global Plan") (collectively, the "Plans") which offers employees the right to
purchase shares of the Company's common stock at 85% of the market price, as
defined. Under the Plans, full-time employees, except persons owning 5% or more
of the Company's common stock, are eligible to participate after 90 days of
employment. Employees may contribute up to 15% of their annual salary toward
the Purchase Plan up to a maximum of $12,500 per year. A maximum of 750,000
shares of common stock may be purchased under the Plans. Common stock is
purchased in the open market on behalf of the participants. During the year
ended December 31, 2000, 3,883 shares were issued under the Plans. As of
December 31, 2000, there were 69 and 20 participants in the U.S. Plan and the
Global Plan, respectively.
9. STOCK OPTION PLANS
The Company has a stock option plan for employees, consultants, and other
individual contributors to the Company, which enables the Company to grant up to
approximately 1.6 million qualified and nonqualified incentive stock options
(the "1992 Plan"). The qualified options are to be granted at an exercise price
not less than the fair market value at the date of grant. The nonqualified
options are to be granted at an exercise price of not less than 85% of the fair
market value at the date of grant. The compensation committee determines the
period within which options may be exercised, but no option may be exercised
more than ten years from the date of grant. The compensation committee also
determines the period over which the options vest. Options are generally
exercisable for seven years from the grant date and generally vest over a four-
year period from the date of grant.
51
The 1992 Plan also provides for stock purchase authorizations and stock
bonus awards. As of December 31, 2000, no such awards have been granted under
the 1992 Plan.
The Company adopted the 1998 Stock Incentive Plan (the "1998 Plan") in the
first quarter of 1998. Under the 1998 Plan, the Board of Directors has the
flexibility to determine the type and amount of awards to be granted to eligible
participants, who must be employees of the Company or its subsidiaries or
consultants. The 1998 Plan provides for grants of incentive stock options,
nonqualified stock options, restricted stock awards, stock appreciation rights,
and restricted units. During 2000, the Board of Directors and shareholders
adopted an amendment, which increased the number of shares authorized and
reserved for issuance from 1.5 million shares to 3.0 million shares of common
stock for issuance under the 1998 Plan. The aggregate number of shares of common
stock that may be granted through awards under the 1998 Plan to any employee in
any calendar year may not exceed 200,000 shares. The 1998 Plan will continue in
effect until February 2008 unless terminated sooner.
In the third quarter of 2000, the Company granted 18,750 options from the
1998 Plan to a new board member at a price below the fair market value at the
date of grant. Deferred compensation of approximately $266,000 was recorded
related to this grant and compensation expense of approximately $116,000 was
recognized. Forty percent of these options will be fully vested on June 13, 2001
and the remainder will vest quarterly through July 30, 2001.
Upon the acquisition of the SAI/Redeo Companies on May 31, 2000, the
Company assumed the Stock Incentive Plan of Software Architects International,
Limited (the "SAI Plan"), and the options outstanding. The SAI Plan enables the
Company to grant up to 750,000 nonqualified stock options. The Company may grant
options to eligible participants who must be employees of the Company or its
subsidiaries or consultants, but not directors or officers of the Company.
During 2000, the Board of Directors approved and the Company issued 176,687
nonqualified stock options that were independent of the 1992 Plan and the 1998
Plan to certain employees of the Company. These options were issued at fair
market value and vest over a four-year period in accordance with the Company's
standard vesting schedule. Additionally, the Board of Directors approved and
the Company issued 160,000 nonqualified stock options to a senior executive
during the first quarter of 2000 at an exercise price below the fair market
value at the date of grant. These options were independent of the 1992 Plan and
the 1998 Plan. Fifteen percent of these options vested immediately and the
remainder vested over a four-year period in accordance with the Company's
standard vesting schedule. The Company immediately expensed $814,500 associated
with the intrinsic value of the vested options and recorded the intrinsic value
of the unvested options, $4.6 million, as deferred compensation. This
arrangement was terminated in the fourth quarter of 2000 and all options except
those already vested were forfeited. As a result of the options forfeited, the
Company reversed approximately $1.1 million of compensation expense in the
fourth quarter of 2000 that had previously been recognized during 2000.
Total options available for grant under all plans as of December 31, 2000
were 976,484.
The Company applies the principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees," in accounting for its plans. Accordingly, the
Company recognizes deferred compensation when the exercise price of the options
granted is less than the fair market value of the stock at the date of grant, as
determined by the Board of Directors. The deferred compensation is presented as
a component of equity in the accompanying consolidated balance sheets and is
amortized over the periods expected to be benefited, generally the vesting
period of the options.
During 2000 and 1998, the Company granted options with exercise prices
below the fair market value at the date of grant. Accordingly, the Company
recorded deferred compensation of approximately $5.7 million and $1.1 million
for options granted during the years ended December 31, 2000 and 1998,
respectively. The 2000 expense includes $814,500 of expense related to options
issued below market value that vested immediately, discussed above, and
approximately $116,000 of expense related to options issued below fair market
value granted to a board member, discussed above. The Company amortizes deferred
52
compensation over the vesting period of the options. The Company amortized to
noncash compensation expense approximately $1,098,000, $874,000, and $880,000 of
the deferred compensation related to these option grants for the years ended
December 31, 2000, 1999, and 1998, respectively. The noncash compensation
expense for 1999 and 1998 includes the effect of the Company's acceleration of
vesting on certain options that were granted in the first quarter of 1998 and
third quarter of 1999. The Company recorded noncash compensation expense of
approximately $705,000 in 1998 related to this acceleration. Additionally, in
1999, upon the sale of its financial and human resources software business, the
Company accelerated the vesting on options to certain employees. As a result of
the acceleration of vesting, the Company recorded a noncash charge of
approximately $706,000 for the year ended December 31, 1999, representing the
value of the options on the date of the acceleration and the removal of the
remaining unamortized deferred compensation of approximately $19,000.
A summary of changes in outstanding options during the three years ended
December 31, 2000 is as follows:
Weighted
Average
Exercise
Shares Price Price
------- ----- -----
December 31, 1997.................................... 1,359,640 $0.67-$ 3.67 $ 2.07
Granted............................................ 1,071,322 $3.67-$ 10.00 $ 7.29
Canceled........................................... (147,413) $0.67-$ 10.00 $ 3.16
Exercised.......................................... (199,546) $0.67-$ 3.67 $ 0.90
--------------------------
December 31, 1998.................................... 2,084,003 $0.67-$ 10.00 $ 4.79
Granted............................................ 1,436,320 $3.50-$ 62.00 $15.50
Canceled........................................... (802,991) $0.67-$ 18.88 $ 5.48
Exercised.......................................... (572,318) $0.67-$ 12.06 $ 3.50
--------------------------
December 31, 1999.................................... 2,145,014 $0.67-$ 62.00 $12.05
Granted............................................ 2,104,732 $6.13-$136.00 $31.06
Canceled........................................... (440,631) $0.67-$128.13 $25.53
Exercised.......................................... (541,993) $0.67-$ 59.00 $ 5.67
--------------------------
December 31, 2000.................................... 3,267,122 $0.67-$136.00 $23.51
Vested and exercisable at December 31, 2000.......... 564,081 $16.86
==========================
Vested and exercisable at December 31, 1999.......... 525,845 $ 5.55
==========================
Vested and exercisable at December 31, 1998.......... 564,790 $ 3.92
==========================
For SFAS No. 123 purposes, the fair value of each option grant has been
estimated as of the date of grant using the Black-Scholes option pricing model
with the following assumptions:
2000 1999 1998
---------- ---------- ----------
Dividend yield.................................. 0% 0% 0%
Expected volatility............................. 90% 60% 65%
Risk-free interest rate at the date of grant.... 3.44%-6.60% 4.64%-6.38% 4.10%-5.68%
Expected life................................... Four years Four years Four years
Using these assumptions, the fair values of the stock options granted during
these years ended December 31, 2000, 1999, and 1998, are approximately $49.0
million, $6.0 million, and $2.2 million respectively, which would be amortized
over the vesting period of the options. Had compensation cost been determined
consistent with the provisions of SFAS No. 123, the Company's pro forma net loss
and net loss per share in accordance with SFAS No. 123 for each of the years in
the three-year period ended December 31, 2000, would have been as follows (in
thousands, except per share amounts):
2000 1999 1998
-------- -------- --------
Net loss:
As reported............................................... $(70,647) $ (5,401) $(10,702)
53
Pro forma in accordance with SFAS No. 123................. $(79,320) $(6,275) $(11,009)
Basic and diluted net loss per share:
As reported............................................... $ (4.90) $ (0.49) $ (1.70)
Pro forma in accordance with SFAS No. 123................. $ (5.50) $ (0.57) $ (1.74)
The following table summarizes the exercise price range, weighted average
exercise price, and remaining contractual lives by year of grant for the number
of options outstanding as of December 31, 2000:
Weighted
Number Average Number
Exercise of Shares Weighted Remaining of Shares Weighted
Price Outstanding Average Contractual Exercisable Average
Range at 12/31/00 Price Life (Years) at 12/31/00 Price
=======================================================================================================
$ 0.67 - $7.84 1,067,917 $ 4.95 5.41 274,116 $ 4.48
$ 8.00 - $35.13 923,174 $17.46 5.78 147,941 $14.36
$35.38 - $49.19 1,092,607 $39.97 6.36 115,052 $40.52
$50.06 - $136.00 183,424 $63.89 6.19 26,972 $55.62
------------- ------------
3,267,122 $23.51 564,081 $16.86
============= ============
The weighted average grant date fair value of options granted during the
years ended December 31, 2000, 1999, and 1998, was $23.27, $17.63, and $7.33
respectively.
Subsequent to December 31, 2000, the Company granted options to purchase
525,450 shares of common stock at exercise prices ranging from $5.56 to $9.13
per share.
10. STOCKHOLDERS' EQUITY
Common Stock
During 2000, the Company entered into agreements with three strategic
partners to provide various sales and marketing efforts on behalf of the Company
in exchange for approximately 22,500, 6,000 and 10,618 shares of the Company's
common stock, respectively. The value of which, represented the closing price
of the Company's common stock on the date prior to issuance. The fair values
for these shares were $115, $70.63, and $70.63, respectively. The total value
of these common stock grants was approximately $3.8 million. The sales and
marketing agreement signed with one strategic partner also included cash
payments of $300,000 in each of the last two years of the related agreement.
The Company recorded the fair value of the common stock and the cash payments as
a deferred sales and marketing expense in the accompanying consolidated balance
sheet. The Company amortized as noncash sales and marketing expense
approximately $825,000 during 2000 related to these agreements. The remainder of
the balance will be amortized over service periods ranging from three to five
years.
Preferred Stock
The Company is authorized to issue 5.0 million shares of preferred stock.
No shares have been issued. In connection with the Company's initial public
offering, the original preferred stock outstanding on the date of the Offering
was converted to approximately 4.8 million shares of common stock.
Warrants
In connection with the Company's financing during 1997, the Company issued
warrants to purchase 70,232 shares of common stock at a price of $6.40 per
share. As of December 31, 2000, 12,285 of these warrants remain outstanding of
which 4,095 shares and 8,190 shares expire June 4, 2001 and August 4, 2001,
respectively.
54
In connection with the 1999 financing discussed in Note 6, the Company
issued warrants to purchase 29,999 shares of common stock at an exercise price
of $53.69 per share. The expiration date of these warrants is December 28, 2002.
The warrants remain outstanding at December 31, 2000.
During 1999, the Company issued warrants to purchase 225,000 shares of the
Company's common stock at exercise prices ranging from $10.00 to $53.75 per
share, which will expire in December of 2002. These warrants were issued to
certain strategic partners in exchange for the agreement to be party to a sales
and marketing agreement between the Company and the strategic partner to provide
various sales and marketing efforts on behalf of the Company. The total fair
market value of the warrants was approximately $11.9 million, determined using
the Black-Scholes option-pricing model with the following variables: the
respective fair market value of the Company's stock at the date of grant, no
expected dividend yield, volatility of 60%, risk-free interest rate of 6.24%,
and an expected life of two years. These amounts were recorded as additional
paid-in capital and deferred sales and marketing expense in the accompanying
consolidated balance sheet for the year ended December 31, 1999. The Company has
amortized to sales and marketing expense approximately $7.0 million and $1.9
million related to these agreements during the years ended December 31, 2000 and
1999, respectively. The remainder of the value of the warrants will be amortized
over periods ranging from nine months to two years, reflecting the terms of the
sales and marketing agreements. The warrants remain outstanding at December 31,
2000.
During 1999, the Company issued 5,000 warrants to a customer as a sales
incentive to enter into a software license agreement. The warrants have an
exercise price of $53.21 per share and allow the holder to purchase the
Company's common stock at any time prior to December 31, 2002. The fair market
value of the warrants at the date of issuance was $101,000 determined using the
Black-Scholes options pricing model with the following variables: no expected
dividend yield, volatility of 60%, risk-free interest rate of 6.24%, and a
contractual life of 2 years. This amount was recorded as additional paid-in
capital and deferred license revenue in the accompanying consolidated balance
sheet for the year ended December 31, 1999. In June 2000, the customer earned
the 5,000 warrants as a result of entering into a software license agreement.
This amount was recorded as a charge to software license revenue in the 2000
statement of operations. The warrants remain outstanding at December 31, 2000.
During 1999, the Company entered into a reseller agreement with a third
party. This agreement provides for the ability of the reseller to sell the
Company's products in a certain territory. The Company will receive payments
from the reseller based on the sales to end users but will also receive minimum
royalty amounts from the reseller as indicated in the agreement. The Company
will recognize this fee under this arrangement as the product is sold to the end
user by the reseller. Additionally, the reseller has the ability to earn
warrants to purchase up to 150,000 shares of common stock of the Company if
certain revenue targets are met. No warrants were earned under the agreement and
the agreement was terminated in the fourth quarter of 2000.
During 1999, the Company entered into an agreement with two strategic
partners to provide various sales and marketing efforts on behalf of the Company
in exchange for a maximum of 25,000 warrants each to be earned pro-rata on a
quarterly basis over the first three quarters of 2000. One of the strategic
partners failed to earn any of the 25,000 warrants while the other strategic
partner met the predetermined sales and marketing milestones and earned all of
the 25,000 warrants, 8,333 each during the first three quarters of 2000. The
exercise price of these warrants was $53.75 per share and allows the holder to
purchase the Company's stock any time prior to October 31, 2003. The fair market
value of the warrants at the end of each quarter was $303,000, $111,000 and
$39,000 on the respective grant date, determined using the Black-Scholes option-
pricing model with the following variables: the respective fair market value of
the Company's stock at the date of grant, no expected dividend yield, volatility
of 110%, risk-free interest rate of 6.3%, and an expected life of one year. As
a result, the Company recognized $454,000 as noncash sales and marketing expense
in the accompanying consolidated financial statements. The 25,000 warrants
remain outstanding at December 31, 2000.
During 2000, the Company entered into an agreement with a third party to
develop certain software that the Company intends to sell in the future in
exchange for a maximum of 50,000 warrants, 33,334 and 16,666 to be earned 90 and
120 days from the commencement of the project, respectively. The developer
55
met the first predetermined milestone and earned the 33,334 warrants while the
remaining 16,666 were forfeited. The exercise price of the 33,334 warrants was
$56.78 per share and allows the holder to purchase the Company's stock any time
prior to March 31, 2003. The fair market value of the warrants on date of grant
was $424,000, determined using the Black-Scholes option-pricing model with the
following variables: the fair market value of the Company's stock at the date of
grant, no expected dividend yield, volatility of 110%, risk-free interest rate
of 6.3%, and an expected life of one year. These amounts were recorded as
additional paid-in capital and noncash research and development expense in the
accompanying consolidated financial statements accordingly. The warrants remain
outstanding at December 31, 2000.
11. COMMITMENTS AND CONTINGENCIES
Leases
The Company rents certain office space, telephone, and computer equipment
under noncancelable operating leases. Rents charged to expense were
approximately $1,859,000, $1,679,000, and $918,000 for the years ended December
31, 2000, 1999, and 1998, respectively. Aggregate future minimum lease payments
under noncancelable operating leases as of December 31, 2000, are as follows (in
thousands):
Year ending December 31,
2001.............................................. $1,751
2002.............................................. 1,395
2003.............................................. 1,381
2004.............................................. 1,416
2005.............................................. 1,452
Thereafter........................................ 1,052
----------
Total $8,447
==========
Sales and Marketing Agreements
During 2000, the Company entered into a sales and marketing agreement with
a strategic partner in which the Company issued warrants in exchange for the
partner agreeing to provide various sales and marketing efforts on behalf of the
Company. The total term of the agreement is five years, of which the warrants
were in consideration for the first three years of sales and marketing efforts.
The Company is required to pay the strategic partner $300,000 annually for the
fourth and fifth years of the agreement. The Company is carrying this commitment
in other long-term liabilities in the accompanying consolidated balance sheet.
Product Liability
As a result of their complexity, software products may contain undetected
errors or failures when first introduced or as new versions are released. There
can be no assurance that, despite testing by the Company and testing and use by
current and potential customers, errors will not be found in applications after
commencement of commercial shipments or, if discovered, that the Company will be
able to successfully correct such errors in a timely manner or at all. The
occurrence of errors and failures in the Company's products could result in loss
of or delay in the market acceptance of the Company's applications, and
alleviating such errors and failures could require significant expenditure of
capital and other resources by the Company. The consequences of such errors and
failures could have a material adverse effect on the Company's business, results
of operations, and financial condition.
Litigation
The Company is involved in claims and other legal actions arising out of
the ordinary course of business. Additionally, several shareholder class action
lawsuits were filed against the Company following the public announcement of its
financial results for the third quarter of 2000. The Company and certain
56
directors and officers were named as defendants in fourteen putative class
action lawsuits filed on behalf of all purchasers of common stock of the Company
during various periods beginning as early as October 20, 1999 and ending on
October 25, 2000. The fourteen class action lawsuits were later consolidated
into one case.
The class action complaints allege claims against the Company and other
defendants for violations of certain sections of the Securities Exchange Act of
1934 with respect to alleged material misrepresentations and omissions in public
filings made with the Securities and Exchange Commission and certain press
releases and other public statements made by the Company and certain of its
officers relating to the business, results of operations, financial condition
and future prospects. The complaints alleged that as a result of these
misrepresentations, the market price of the Company's common stock was
artificially inflated during the class periods. The class action complaints
focus on statements made concerning an account receivable of one customer. The
plaintiffs seek unspecified compensatory damages and costs (including attorneys'
and expert fees), expenses and other unspecified relief on behalf of the
classes. The Company believes that it has complied with its obligations under
the Federal securities laws and intends to defend these lawsuits vigorously.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Arthur Andersen LLP was previously our principal accountant. On June 6,
2000, we terminated Arthur Andersen LLP's appointment as our principal
accountant and KPMG LLP was appointed as our principal accountant. The decision
to change accountants was approved by our audit committee and our full board of
directors.
During the two fiscal years ended December 31, 1999, and the subsequent
interim period from January 1, 2000 through June 6, 2000, there were no
disagreements between us and Arthur Andersen LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures, which disagreements if not resolved to their satisfaction would have
caused them to make reference in connection with their opinion to the subject
matter of the disagreement.
None of the "reportable events" described under Item 304(a)(1)(v) of
Regulation S-K occurred within 1998 and 1999 and the subsequent interim period
through June 6, 2000.
The audit reports of Arthur Andersen LLP on our financial statements as of
and for the fiscal years ended December 31, 1999 and 1998, did not contain any
adverse opinion or disclaimer of opinion, nor were they qualified or modified as
to uncertainty, audit scope, or accounting principles.
During our fiscal years ended December 31, 1999 and December 31, 1998, and
the subsequent interim period through June 6, 2000, we did not consult with KPMG
LLP regarding any of the matters or events set forth in Item 304 (a)(2)(i) and
(ii) of Regulation S-K.
57
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption "Election of Directors" in the
Proxy Statement used in connection with our 2001 Annual Stockholders Meeting, is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" in the
Proxy Statement used in connection with our 2001 Annual Stockholders Meeting, is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Principal Stockholders" in the
Proxy Statement used in connection with our 2001 Annual Stockholders' Meeting is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and
Related Transactions" in the Proxy Statement used in connection with our 2001
Annual Stockholders' Meeting is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON F0RM 8-K
Financial Statements, Financial Statement Schedules and Exhibits
(a) Financial Statement Schedule
(1) Schedule II Valuation and Qualifying Accounts
(b) Exhibits
58
Exhibit
Number Exhibit
- ---------- -------
3.1 Amended and Restated Certificate of Incorporation of the Company
(Incorporated by reference from Exhibit 3.1 to Company's
Registration on Form S-4 (File No. 333-63535)).
3.2 Amendment to Amended and Restated Certificate of Incorporation
(Incorporated by reference from Exhibit 4.1 of the Company's Form
10-Q filed on August 14, 2000).
3.3 Amended and Restated Bylaws of the Company (Incorporated by
reference from Exhibit 3.2 to Company's Registration on Form S-4
(File No. 333-63535)).
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Certificate of Incorporation and Amended and Restated
Bylaws of the Company defining rights of the holders of Common
Stock of the Company.
4.2 Specimen Stock Certificate (Incorporated by reference from
Exhibit 9.1 to Company's Registration on Form S-1 (File No. 333-
46685)).
4.3 Form of Vendor Warrant Agreement (Incorporated by reference from
Exhibit 4.3 to the Company's Form 10-K filed on March 30, 2000).
10.1 Asset Purchase Agreement between the Company and Geac Computer
Systems, Inc. (Incorporated by reference from Exhibit 2.1 to the
Company's current report on Form 8-K filed on August 30, 1999).
10.2 Intellectual Property Rights Purchase Agreement between the
Company and Geac Canada Limited (Incorporated by reference from
Exhibit 2.2 to the Company's current report on Form 8-K filed on
August 30, 1999).
10.3 Indemnification Agreement between the Company and Geac Computer
Systems, Inc. (Incorporated by reference from Exhibit 2.3 to the
Company's current report on Form 8-K filed on August 30, 1999).
10.4 First Amendment to Intellectual Property Rights Purchase
Agreement (Incorporated by reference from Exhibit 2.1 to the
Company's Form 8-K/A filed on December 15, 1999).
10.5 Securities Purchase Agreement (Incorporated by reference from
Exhibit 99.1 to the Company's Form 8-K filed on March 20, 2000).
10.6 Convertible Subordinated Promissory Note (Incorporated by
reference from Exhibit 99.2 to the Company's Form 8-K filed on
March 20, 2000).
10.7 Stock Purchase Agreement dated May 31, 2000 by and among Clarus
Corporation, SAI (Ireland) Limited, SAI Recruitment Limited,
i2Mobile.com Limited, SAI America Limited (the "Companies") and
the shareholders of the Companies (Incorporated by reference from
Exhibit 2.1 of the Company's Form 8-K filed on June 13, 2000).
10.8 Patent License Agreement (Incorporated by reference from Exhibit
10.2 of the Company's Form 10-Q filed on August 14, 2000).
10.9 Amended and Restated Stock Incentive Plan (Incorporated by
reference from Exhibit 10.2 of the Company's Form 10-Q filed on
August 14, 2000).
10.10 Employee Stock Purchase Plan (Incorporated by reference from
Exhibit 10.3 of the Company's Form 10-Q filed on August 14,
2000).
10.11 Global Employee Stock Purchase Plan (Incorporated by reference
from Exhibit 10.4 of the Company's Form 10-Q filed on August 14,
2000).
10.12 Form of Nonqualified Stock Option Agreement (Incorporated by
reference from Exhibit 10.5 of the Company's Form 10-Q filed on
August 14, 2000).
10.13 Stock Incentive Plan of Software Architects International,
Limited (Incorporated by reference from Exhibit 2.2 of the
Company's Form 8-K filed on June 13, 2000).
59
Exhibit
Number Exhibit
- ---------- -------
10.14 2000 Declaration of Amendment to Software Architects
International Limited Stock Incentive Plan (Incorporated by
reference from Exhibit 2.3 of the Company's Form 8-K filed on
June 13, 2000).
10.15 Employment Agreement between the Company and Stephen P. Jeffery.
(Incorporated by reference from Exhibit 10.8 of the Company's
Form 10-Q filed on August 14, 2000).
10.16 Employment Agreement between the Company and Mark D. Gagne
(Incorporated by reference from Exhibit 10.9 of the Company's
Form 10-Q filed on August 14, 2000).
10.17 SQL 1992 Stock Option Plan, effective November 22, 1992
(Incorporated by reference from Exhibit 10.2 to Company's
Registration on Form S-1 (File No. 333-46685)).
10.18 Lease Agreement between the Company and Technology Park/Atlanta,
Inc. dated July 24, 1998 (Incorporated by reference from Exhibit
10.18 of the Company's Form S-4 Registration Statement (File No.
333-63535)).
10.19 Assignment and Assumption of Leases between Technology
Park/Atlanta, Inc. and Metropolitan Life Insurance Company dated
July 24, 1998 (Incorporated by reference from Exhibit 10.18 of
the Company's Form S-4 Registration Statement (File No.
333-63535)).
10.20 Amendment to 1992 Stock Option Plan. (Incorporated by reference
from Exhibit 10.2 of the Company's Form 10-K filed on March 30,
2000).
16.1 Letter from Arthur Andersen LLP (Incorporated by reference from
Exhibit 16.1 of the Company's current report on Form 8-K filed on
June 12, 2000).
21.1 List of Subsidiaries.
23.1 Consent of KPMG LLP.
23.2 Consent of Arthur Andersen LLP.
99.1 Independent Auditors' Report of KPMG LLP on Financial Statement
Schedule.
99.2 Report of Independent Public Accountants, Arthur Andersen LLP, on
Financial Statement Schedule.
(c) Reports on Form 8-K filed in the fourth quarter of 2000. -- None.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CLARUS CORPORATION
Date: March 21, 2001
By: /s/ Stephen P. Jeffery
---------------------------------------
Stephen P. Jeffery,
Chairman, Chief Executive Officer and
President
Signature Title Date
- -------------------------------------- --------------------------------------------- -------------------------------
/s/ Stephen P. Jeffery Chairman, Chief Executive Officer, President March 21, 2001
- -------------------------------------- (principal executive officer) and Director
Stephen P. Jeffery
/s/ James J. McDevitt Chief Financial Officer (principal financial and March 21, 2001
- -------------------------------------- accounting officer)
James J. McDevitt
/s/ Tench Coxe Director March 21, 2001
- --------------------------------------
Tench Coxe
/s/ Donald L. House Director March 21, 2001
- --------------------------------------
Donald L. House
/s/ Mark A. Johnson Director March 21, 2001
- --------------------------------------
Mark A. Johnson
/s/ Said Mohammadioun Director March 21, 2001
- --------------------------------------
Said Mohammadioun
/s/ Brady L. Rackley, III Director March 21, 2001
- --------------------------------------
Brady L. Rackley, III
61
Schedule II
Valuation and Qualifying Accounts
Clarus Corporation and Subsidiaries
For the years ended December 31, 2000, 1999, and 1998
Allowance for Doubtful Accounts, Returns and Valuation Allowance for Deferred
Income Tax Assets
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Period Expenses Accounts Deductions Period
- ---------------------------------------------------------------------------------------------------------------------------------
Allowance for Doubtful Accounts
1998 $ 284,000 739,000 54,000 (a) 676,000 401,000
1999 401,000 1,245,000 0 1,375,000 (b) $ 271,000
2000 271,000 5,824,000 0 2,178,000 3,917,000
Allowance for Returns
1998 54,000 0 (54,000) (a) 0 0
1999 0 0 0 0 0
2000 0 0 0 0 0
Valuation Allowance for Deferred Income Tax Assets
1998 10,428,000 0 0 110,000 10,318,000
1999 10,318,000 1,646,000 0 0 11,964,000
2000 11,964,000 20,779,000 0 0 32,743,000
(a) amounts were reclassified from the returns reserve to the bad debt reserve
(b) of this amount, $537,000 was transferred as part of the sale of the
financial and human resources software business.
62
EXHIBIT INDEX
Exhibit
Number Exhibit
- -------- -------
3.1 Amended and Restated Certificate of Incorporation of the Company
(Incorporated by reference from Exhibit 3.1 to Company's Registration
on Form S-4 (File No. 333-63535)).
3.2 Amendment to Amended and Restated Certificate of Incorporation
(Incorporated by reference from Exhibit 4.1 of the Company's Form 10-
Q filed on August 14, 2000).
3.3 Amended and Restated Bylaws of the Company (Incorporated by reference
from Exhibit 3.2 to Company's Registration on Form S-4 (File No. 333-
63535)).
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated
Certificate of Incorporation and Amended and Restated Bylaws of the
Company defining rights of the holders of Common Stock of the
Company.
4.2 Specimen Stock Certificate (Incorporated by reference from Exhibit
9.1 to Company's Registration on Form S-1 (File No. 333-46685)).
4.3 Form of Vendor Warrant Agreement (Incorporated by reference from
Exhibit 4.3 to the Company's Form 10-K filed on March 30, 2000).
10.1 Asset Purchase Agreement between the Company and Geac Computer
Systems, Inc. (Incorporated by reference from Exhibit 2.1 to the
Company's current report on Form 8-K filed on August 30, 1999).
10.2 Intellectual Property Rights Purchase Agreement between the Company
and Geac Canada Limited (Incorporated by reference from Exhibit 2.2
to the Company's current report on Form 8-K filed on August 30,
1999).
10.3 Indemnification Agreement between the Company and Geac Computer
Systems, Inc. (Incorporated by reference from Exhibit 2.3 to the
Company's current report on Form 8-K filed on August 30, 1999).
10.4 First Amendment to Intellectual Property Rights Purchase Agreement
(Incorporated by reference from Exhibit 2.1 to the Company's Form 8-
K/A filed on December 15, 1999).
10.5 Securities Purchase Agreement (Incorporated by reference from Exhibit
99.1 to the Company's Form 8-K filed on March 20, 2000).
10.6 Convertible Subordinated Promissory Note (Incorporated by reference
from Exhibit 99.2 to the Company's Form 8-K filed on March 20, 2000).
10.7 Stock Purchase Agreement dated May 31, 2000 by and among Clarus
Corporation, SAI (Ireland) Limited, SAI Recruitment Limited,
i2Mobile.com Limited, SAI America Limited (the "Companies") and the
shareholders of the Companies (Incorporated by reference from Exhibit
2.1 of the Company's Form 8-K filed on June 13, 2000).
10.8 Patent License Agreement (Incorporated by reference from Exhibit 10.2
of the Company's Form 10-Q filed on August 14, 2000).
10.9 Amended and Restated Stock Incentive Plan (Incorporated by reference
from Exhibit 10.2 of the Company's Form 10-Q filed on August 14,
2000).
10.10 Employee Stock Purchase Plan (Incorporated by reference from Exhibit
10.3 of the Company's Form 10-Q filed on August 14, 2000).
10.11 Global Employee Stock Purchase Plan (Incorporated by reference from
Exhibit 10.4 of the Company's Form 10-Q filed on August 14, 2000).
10.12 Form of Nonqualified Stock Option Agreement (Incorporated by
reference from Exhibit 10.5 of the Company's Form 10-Q filed on
August 14, 2000).
10.13 Stock Incentive Plan of Software Architects International, Limited
(Incorporated by reference from Exhibit 2.2 of the Company's Form 8-K
filed on June 13, 2000).
63
Exhibit
Number Exhibit
- -------- -------
10.14 2000 Declaration of Amendment to Software Architects International
Limited Stock Incentive Plan (Incorporated by reference from Exhibit
2.3 of the Company's Form 8-K filed on June 13, 2000).
10.15 Employment Agreement between the Company and Stephen P. Jeffery.
(Incorporated by reference from Exhibit 10.8 of the Company's Form
10-Q filed on August 14, 2000).
10.16 Employment Agreement between the Company and Mark D. Gagne
(Incorporated by reference from Exhibit 10.9 of the Company's Form
10-Q filed on August 14, 2000).
10.17 SQL 1992 Stock Option Plan, effective November 22, 1992 (Incorporated
by reference from Exhibit 10.2 to Company's Registration on Form S-1
(File No. 333-46685)).
10.18 Lease Agreement between the Company and Technology Park/Atlanta, Inc.
dated July 24, 1998 (Incorporated by reference from Exhibit 10.18 of
the Company's Form S-4 Registration Statement (File No. 333-63535)).
10.19 Assignment and Assumption of Leases between Technology Park/Atlanta,
Inc. and Metropolitan Life Insurance Company dated July 24, 1998
(Incorporated by reference from Exhibit 10.18 of the Company's Form
S-4 Registration Statement (File No. 333-63535)).
10.20 Amendment to 1992 Stock Option Plan. (Incorporated by reference from
Exhibit 10.2 of the Company's Form 10-K filed on March 30, 2000).
16.1 Letter from Arthur Andersen LLP (Incorporated by reference from
Exhibit 16.1 of the Company's current report on Form 8-K filed on
June 12, 2000).
21.1 List of Subsidiaries.
23.1 Consent of KPMG LLP.
23.2 Consent of Arthur Andersen LLP.
99.1 Independent Auditors' Report of KPMG LLP on Financial Statement
Schedule.
99.2 Report of Independent Public Accountants, Arthur Andersen LLP, on
Financial Statement Schedule.
64