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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
[_] 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
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Clarus Corporation
(Exact name of Registrant as specified in its Charter)
Delaware 58-1972600
(State of Incorporation) (I.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 14, 2002 was approximately
$61.1 million based on $4.04 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
14, 2002, was 15,578,142 shares.
DOCUMENT INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2002 Annual Meeting of Stockholders
to be filed with the Securities and Exchange Commission within 120 days of the
Registrant's 2001 fiscal year end are incorporated by reference into Part III
of this report.
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TABLE OF CONTENTS
Page
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PART I
ITEM 1. BUSINESS....................................................... 1
ITEM 2. PROPERTIES..................................................... 7
ITEM 3. LEGAL PROCEEDINGS.............................................. 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 7
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....... 8
ITEM 6. SELECTED FINANCIAL DATA........................................ 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................... 10
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA..................... 47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE....................................... 79
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 80
ITEM 11. EXECUTIVE COMPENSATION......................................... 80
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..................................................... 80
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 80
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K....................................................... 80
SIGNATURES.............................................................. 83
PART I
ITEM 1. BUSINESS
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 "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Risk Factors".
Overview
We develop, market, and support Internet-based business-to-business ("B2B")
e-commerce solutions 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 BarclaysB2B, the
Burlington Northern and Santa Fe Railway Company, Cox Enterprises, Mastercard
International, Union Pacific Corporation, Parsons Brinckerhoff, Sumurfit-Stone
Container Corporation, and Wachovia 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.
1
. 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
was accrued at the date of acquisition and paid 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") for 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 SAI/Redeo Companies specialized in electronic payment settlement
software.
Our Solution
We are a leading provider of Internet-based business-to-business e-commerce
applications 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:
. 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, supplier
enablement, and training and implementation services.
. Rapid Deployment/Speed to Return on Investment (ROI). We have
demonstrated the rapid deployment capabilities of our e-commerce
solutions. We believe that 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 offer bundled
software and services solutions designed 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 includes
options that allow companies to realize a more rapid return on their
investment by decreasing their up-front software expenditures.
. 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.
2
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.
The key elements of our strategy are to:
. Market and sell three e-commerce platforms: sourcing, procurement and
settlement.
Sourcing: We provide a sourcing solution that provides commerce
capabilities such as auctions, weight-based request for quotations, and
collaboration. Our sourcing platforms accounted for 15.4% and 7.4% of our
total license fee revenue in 2001 and 2000, respectively.
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 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 61.6% and 79.8%
of our total license fee revenue in 2001 and 2000, 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. Our settlement platforms accounted
for 23.0% and 12.8% of our total license fee revenue in 2001 and 2000,
respectively.
. Execute a multi-channel sales strategy. We believe that a key to market
penetration is a multi-channel sales strategy and organization.
Therefore, our organization includes both a direct and indirect sales
force.
. Leverage our business model for market penetration. Our solutions include
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 the SAI/Redeo Companies, an
organization with operations in Ireland. In 2001, 73.1% of our business
was derived from U.S.-based companies. The remainder of the Company's
2001 revenue was derived from international markets, of which 12.6% of
total revenue was derived from one customer in Italy. 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 substantially all of our
revenue was from U.S.-based companies. There are certain risks attendant
to our international operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Risk Factors".
. Offer flexible payment options. We believe a key to market adoption of
our products is to offer multiple payment options that are a departure
from the fee-based software licensing strategies that our competitors and
we have traditionally employed.
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.
3
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 application
service providers, systems integrators, resellers, OEMs and other complementary
technology partners. These relationships are focused on the expansion of our
sales reach to markets not covered by our direct sales organization.
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 also have developed relationships with selected resellers such as Compaq,
Microsoft Great Plains' resellers, Manugistics, BCE Emergis, 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. Most recently, in
2002, Microsoft elevated its partnership with Clarus to the select Independent
Software Vendor ("ISV") program level in the managed partner group. This
selection recognizes our commitment to .NET and its importance in a strategic
area of the enterprise software marketplace. It also recognizes us as one of
Microsoft's top 20 ISV partners and will continue to provide us access to
engineering, sales and marketing resources at Microsoft. 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 design 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. Additionally, during 2001 we entered into a reseller agreement with
Microsoft Great Plains that was subsequently restructured to allow us to deal
directly with the Microsoft Great Plains' resellers.
Sales and Marketing
We sell our software and services through our direct sales force and a
number of indirect channels. Our direct sales force, consisting of 41 sales
professionals as of December 31, 2001, is organized geographically into two
regions: the Americas and Europe, Middle East and Africa ("EMEA") regions. 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. 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 and Deloitte & Touche. We participate in industry trade shows
and seminars, use telemarketing campaigns, and conduct direct mail campaigns.
We hosted an executive customer conference, eCLeadership, in May 2001. In
addition, we maintain a web site, www.claruscorp.com, which is integrated with
our sales, marketing, recruiting and fulfillment operations.
4
Competition
The market for our products is highly competitive and subject to rapid
technological change. We believe we are able to differentiate our solutions
from corporate electronic procurement and digital marketplace providers such as
Ariba and Commerce One through the breadth and depth of our solution, our
product quality and performance, our customer service, our product features and
the value of our overall solution . We also encounter competition with respect
to different aspects of our solution from companies such as VerticalNet,
PurchasePro, FreeMarkets, and i2. We also anticipate competition from some of
the large enterprise resource planning software vendors, such as Oracle, SAP
and Peoplesoft.
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 and focus
groups 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 $16.2 million,
$22.4 million and $9.0 million for the years ended December 31, 2001, 2000 and
1999, 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 1999 were related to our enterprise resource planning business
that we sold to Geac Computer Systems, Inc. and Geac Canada Limited in October
1999. The majority of our research and development expenditures in 2001 and
2000 were related to our e-commerce products.
As of December 31, 2001, we employed 70 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.
5
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, 2001, we had a total of 209 employees,
including 53 in client services, 41 in sales, 2 in business development, 11 in
marketing, 70 in research and development and 32 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.
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
Contact: Kevin Acocella
Our fiscal year ends on December 31. We file annual, quarterly, and other
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.
6
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 Maidenhead, England, where we lease approximately
7,700 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 5,200 square
feet near Toronto, Canada, which was used for the delivery of services as well
as research and development through October, 2001. We also lease executive
suites, primarily for sales offices. We believe our facilities are adequate for
future growth.
We are currently attempting to sub-let our facility near Toronto, Canada and
a portion of the corporate headquarters in Suwanee, Georgia.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to lawsuits in the normal course of its 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 the following lawsuit could adversely affect the Company's
business, results of operations, liquidity or financial condition.
Following its public announcement on October 25, 2000, of its financial
results for the third quarter, the Company and certain of its 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. On March 22, 2001, the Court entered an order appointing as
the lead Plaintiffs John Nittolo, Dean Monroe, Ronald Williams, V&S Industries,
Ltd., VIP World Asset Management, Ltd., Atlantic Coast Capital Management,
Ltd., and T.F.M. Investment Group. Pursuant to the previous Consolidation Order
of the Court, a Consolidated Amended Complaint was filed on May 14, 2001. On
June 29, 2001, the Company filed a motion to dismiss the consolidated case. The
plaintiffs responded to the Company's motion to dismiss on August 6, 2001. The
Company replied with a rebuttal to the plaintiffs' response on August 27, 2001.
The class action complaint alleges claims against the Company 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 the Company and certain of its officers
relating to its business, results of operations, financial condition and future
prospects, as a result of which, it is alleged, the market price of the
Company's common stock was artificially inflated during the class periods. The
class action complaint focuses on statements made concerning an account
receivable from one of the Company's customers. 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 all of its obligations under the Federal securities
laws and the Company intends to defend this lawsuit vigorously. As a result of
consultation with legal representation and current insurance coverage, the
Company does not believe the lawsuit will have a material impact on the
Company's results of operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
7
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 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.......................... $ 9.25 $ 5.09
Second Quarter......................... $ 7.29 $ 5.08
Third Quarter.......................... $ 8.45 $ 3.55
Fourth Quarter......................... $ 6.27 $ 3.30
Calendar Year 2002........................
First Quarter (through March 14, 2002). $ 6.25 $ 3.44
Stockholders
As of March 14, 2002, there were 167 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.
8
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.
Years Ended December 31,
------------------------------------------------
2001 2000 1999 1998 1997
--------- -------- -------- -------- -------
(in thousands, except per share data)
Statement of Operations Data:
Revenues:
License fees............................................. $ 7,807 $ 24,686 $ 15,101 $ 17,372 $13,506
Services fees............................................ 9,198 9,361 23,041 24,268 12,482
--------- -------- -------- -------- -------
Total revenues....................................... 17,005 34,047 38,142 41,640 25,988
Cost of revenues:
License fees............................................. 211 154 1,351 1,969 1,205
Service fees............................................. 12,253 11,935 14,517 13,952 7,311
--------- -------- -------- -------- -------
Total cost of revenues............................... 12,464 12,089 15,868 15,921 8,516
Operating expenses:
Research and development, exclusive of noncash expense... 16,220 22,390 9,003 6,335 6,690
Noncash research and development......................... -- 424 -- -- --
In-process research and development...................... -- 8,300 -- 10,500 --
Sales and marketing, exclusive of noncash expense........ 27,294 36,230 15,982 11,802 9,515
Noncash sales and marketing.............................. 6,740 7,001 1,930 -- --
General and administrative, exclusive of noncash expense. 9,381 9,897 4,996 4,387 3,036
Provision for doubtful accounts.......................... 5,537 5,824 1,245 739 125
Noncash general and administrative....................... 252 1,098 874 880 58
Loss on impairment of intangible assets.................. 36,756 -- -- -- --
Depreciation and amortization............................ 12,212 8,132 3,399 2,154 1,406
--------- -------- -------- -------- -------
Total operating expenses............................. 114,392 99,296 37,429 36,797 20,830
--------- -------- -------- -------- -------
Operating loss............................................. (109,851) (77,338) (15,155) (11,078) (3,358)
Gain on sale of assets..................................... 20 1,347 9,417 -- --
Gain on foreign currency transactions...................... 107 -- -- -- --
Loss on sale of marketable securities...................... (11) (100) -- -- --
Loss on impairment of investments.......................... (16,461) (4,128) -- -- --
Amortization of debt discount.............................. -- (982) -- -- --
Interest income............................................ 6,570 10,902 442 636 34
Interest expense........................................... (228) (348) (105) (224) (308)
Minority interest.......................................... -- -- -- (36) (478)
--------- -------- -------- -------- -------
Net loss................................................... $(119,854) $(70,647) $ (5,401) $(10,702) $(4,110)
========= ======== ======== ======== =======
Net loss per common share:
Basic.................................................... $ (7.72) $ (4.90) $ (0.49) $ (1.70) $ (2.97)
========= ======== ======== ======== =======
Diluted.................................................. $ (7.72) $ (4.90) $ (0.49) $ (1.70) $ (2.97)
========= ======== ======== ======== =======
Weighted average common shares outstanding:
Basic.................................................... 15,530 14,420 11,097 6,311 1,386
========= ======== ======== ======== =======
Diluted.................................................. 15,530 14,420 11,097 6,311 1,386
========= ======== ======== ======== =======
As of December 31,
------------------------------------------
2001 2000 1999 1998 1997
-------- -------- ------- ------- --------
Balance Sheet Data:
Cash and cash equivalents............. $ 55,628 $118,303 $14,127 $14,799 $ 7,213
Marketable securities................. 65,264 50,209 -- -- --
Working capital (deficit)............. 114,609 171,336 16,751 9,001 (453)
Total assets.......................... 145,274 266,904 48,563 40,082 14,681
Long-term debt, net of current portion 5,000 5,000 -- 245 497
Total stockholders' equity (deficit).. 126,328 246,822 32,615 22,111 (27,910)
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 "Risk Factors".
Overview
The Company develops, markets, and supports Internet-based
business-to-business ("B2B") e-commerce solutions that automate the
procurement, sourcing, and settlement of goods and services. The Company's
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. The Company's digital marketplace solution provides a
framework that allows companies to create trading communities and additional
revenue opportunities. The Company's solutions also benefit suppliers by
reducing sales costs and providing the opportunity to increase revenues. The
Company's products have been licensed by customers such as BarclaysB2B, the
Burlington Northern and Santa Fe Railway Company, Cox Enterprises, Mastercard
International, Union Pacific Corporation, Parsons Brinckerhoff, Sumurfit-Stone
Container Corporation, and Wachovia Corporation.
The Company's 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.
10
. 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 appproximately $2.5 million in
cash of which $1.6 million was paid at the date of acquisition and
$900,000 was accrued at the date of acquisition and paid 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") for 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 SAI/Redeo Companies specialized in electronic payment
settlement software.
Critical Accounting Policies and Use of Estimates
If demand for business-to-business software and related services remain soft
our business, operating results, liquidity and financial condition will be
adversely affected. Our success depends on market acceptance of e-commerce as a
viable method for corporate procurement and other commercial transactions and
market adoption of our current products and future products. We continue to
reposition our products and our company in the markets we serve. This strategy
may not be successful. The competitive landscape we face is continuously
changing. It is difficult to estimate how competition will affect our revenues.
It is also very difficult to predict our quarterly results. We have incurred
significant net losses in each year since our inception. We believe that we
will continue to incur losses in 2002. We may not increase our customer base
sufficient to generate the substantial additional revenues necessary to become
profitable. We have established strategic selling relationships with a number
of outside companies. There is no guarantee that these relationships will
generate the level of revenues currently anticipated.
As we expand our international sales and marketing activities and
international operations our business is more susceptible to the numerous risks
associated with international sales and operations. We may not be successful in
addressing these and other risks and difficulties that we may encounter. Please
refer to the "Risk Factors" sections for additional information regarding the
risks associated with our operations and financial condition.
The Company's discussion of financial condition and results of operations
are based on the consolidated financial statements which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements. Estimates also affect the reported amounts of revenues
and expenses during the reporting periods. The Company continually evaluates
its estimates and assumptions including those related to revenue recognition,
allowance for doubtful accounts, impairment of long-lived assets, impairment of
investments, and contingencies and litigation. The Company bases its estimates
on historical experience and other assumptions that are believed to be
reasonable under the circumstances. Actual results could differ from these
estimates.
The Company believes the following critical accounting policies include the
more significant estimates and assumptions used by management in the
preparation of its consolidated financial statements.
. 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
11
("SOP") 97-2, "Software Revenue Recognition", and SOP 98-9, "Software
Revenue Recognition with Respect to Certain Transactions" and related
interpretations. 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.
. The Company maintains allowances for doubtful accounts based on expected
losses resulting from the inability of the Company's customers to make
required payments. As a result, the Company has recorded a provision for
doubtful accounts of $5.5 million, $5.8 million and $1.2 million,
respectively, in the years ended December 31, 2001, 2000 and 1999. If the
financial condition of these customers were to deteriorate additional
allowances may be required.
. The Company has significant long-lived assets, primarily intangibles, as
a result of acquisitions completed during 2000. The Company has
periodically evaluated the carrying value of its long-lived assets,
including intangibles, according to Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of ". During the fourth
quarter of 2001, the Company's evaluation of the performance of the
SAI/Redeo companies compared to initial projections, negative economic
trends and a decline in industry growth rate projections indicated that
the carrying value of these intangible assets exceeded management's
revised estimates of future undiscounted cash flows. This assessment
resulted in a $36.8 million impairment charge of the intangible assets
based on the amount by which the carrying amount of these assets exceeded
fair value. Subsequent changes in projections may require additional
impairment charges.
. The Company has made equity investments in several privately held
companies. The Company records an impairment charge when it believes an
investment has experienced a decline in value that is other than
temporary. During the years ended December 31, 2001 and 2000, the Company
recorded impairment charges on investments of $15.4 million and $4.1
million, respectively.
. The Company is a party to lawsuits in the normal course of its 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 the following lawsuit could adversely affect
the Company's business, results of operations, liquidity or financial
condition.
Following its public announcement on October 25, 2000, of its financial
results for the third quarter, the Company and certain of its 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.
On March 22, 2001, the Court entered an order appointing as the lead
Plaintiffs John Nittolo, Dean Monroe, Ronald Williams, V&S Industries,
Ltd., VIP World Asset Management, Ltd., Atlantic Coast Capital
Management, Ltd., and T.F.M. Investment Group. Pursuant to the previous
Consolidation Order of the Court, a Consolidated Amended Complaint was
filed on May 14, 2001. On June 29, 2001, the Company filed a motion to
dismiss the consolidated case. The plaintiffs responded to the Company's
motion to dismiss on August 6, 2001. The Company replied with a rebuttal
to the plaintiffs' response on August 27, 2001.
The class action complaint alleges claims against the Company 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 the Company
and certain of its officers relating to its business, results of
operations, financial condition and future prospects, as a result of
which, it is alleged, the market price of the Company's common stock was
artificially inflated during the class periods. The class action
complaint focuses on statements made concerning an account receivable
from one of the Company's customers.
12
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 all
of its obligations under the Federal securities laws and the Company
intends to defend this lawsuit vigorously. As a result of consultation
with legal representation and current insurance coverage, the Company
does not believe the lawsuit will have a material impact on the Company's
results of operations or financial position.
Stock Option Exchange Program
On April 9, 2001, the Company announced a voluntary stock option exchange
program for its employees. Under the program, employees were given the
opportunity to cancel outstanding stock options previously granted to them on
or after November 1, 1999 in exchange for an equal number of new options to be
granted at a future date. The exercise price of these new options was equal to
the fair market value of the Company's common stock on the date of grant.
During the first phase of the program 366,174 options with a weighted average
exercise price of $30.55 per share were canceled and new options to purchase
263,920 shares with an exercise price of $3.49 per share were issued on
November 9, 2001. During the second phase of the program 273,188 options with a
weighted average exercise price of $43.87 per share were canceled and new
options to purchase 198,052 shares with an exercise price of $4.10 per share
were issued on February 11, 2002. Employees who participated in the first
exchange were not eligible for the second exchange. The exchange program was
designed to comply with Financial Accounting Standards Board ("FASB")
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation" and did not result in any additional compensation charges or
variable accounting. Members of the Company's Board of Directors and its
executive officers were not eligible to participate in the exchange program.
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" and related interpretations. 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.
13
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 the provision for doubtful accounts. 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
during 2002.
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.
Pro-forma Results
The Company prepares and releases quarterly unaudited financial statements
prepared in accordance with generally accepted accounting principles ("GAAP").
The Company also discloses and discusses certain pro forma financial
information in the related earnings releases and investor conference calls.
This pro forma financial information excludes restructuring costs and expenses
related to reductions in employee workforce and office closure and
consolidation, depreciation and amortization charges, stock-based compensation
expenses, gain realized on the sale of assets, loss on the sale of marketable
securities and loss on impairment of investments, all of which are included in
our financial results for GAAP reporting purposes. Additionally, pro forma
results exclude $36.8 million for a goodwill impairment charge, recognized in
2001, related to the
14
write-down of certain intangible assets associated with the acquisition of the
SAI/Redeo companies. The Company believes the disclosure of the pro forma
financial information helps investors more meaningfully evaluate the results of
the Company's ongoing operations. The pro forma measures are not in accordance
with GAAP and may be different from pro forma measures used by other companies
including our competitors. Therefore, we urge you to carefully review the GAAP
financial information included as part of this Annual Report on Form 10-K,
compare GAAP financial information with the pro forma financial results
disclosed below and read the associated reconciliation.
Pro Forma Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
Years ended
December 31
------------------
2001 2000
-------- --------
Revenues:
License fees......................................... $ 7,807 $ 24,686
Services fees........................................ 9,198 9,361
-------- --------
Total Revenues................................. 17,005 34,047
Cost of Revenues:
License fees......................................... 211 154
Services fees........................................ 11,076 11,935
-------- --------
Total Cost of Revenues......................... 11,287 12,089
Operating Expenses:
Research and development............................. 16,003 22,390
Sales and marketing.................................. 26,076 36,230
General and administrative........................... 7,836 9,897
Bad debt expense..................................... 5,537 5,824
-------- --------
Total Operating Expenses....................... 55,452 74,341
-------- --------
Operating loss........................................ $(49,734) $(52,383)
Gain on foreign currency transactions................. 107 --
Interest income, (net)................................ 6,342 10,554
-------- --------
Pro forma net loss.................................... $(43,285) $(41,829)
======== ========
Weighted average shares outstanding--basic and diluted 15,530 14,420
======== ========
Pro forma net loss per share--basic and diluted....... $ (2.79) $ (2.90)
======== ========
15
Reconciliation of GAAP Net Loss to Pro Forma Net Loss
(in thousands, except per share data)
(unaudited)
Twelve months ended
December 31
-------------------
2001 2000
--------- --------
Net loss.............................................. $(119,854) $(70,647)
Restructuring costs/1/................................ 4,157 --
In-process research and development................... -- 8,300
Goodwill impairment loss.............................. 36,756 --
Depreciation and amortization......................... 12,212 8,132
Stock-based compensation.............................. 6,992 8,523
Gain on sale of assets................................ (20) (1,347)
Realized loss on sale of investments.................. 11 100
Loss on impairment of investments..................... 16,461 4,128
Amortization of debt discount......................... -- 982
--------- --------
Pro forma net loss.................................... $ (43,285) $(41,829)
========= ========
Weighted average shares outstanding--basic and diluted 15,530 14,420
--------- --------
Pro forma net loss per share--basic and diluted....... $ (2.79) $ (2.90)
--------- --------
- --------
(1) Restructuring costs are comprised of employee severance and termination
costs and office closure and consolidation costs. For the year ended
December 31, 2001, these costs were classified in the consolidated
statement of operations as follows:
Year Ended
December 31, 2001
-----------------
(in thousands)
Cost of revenues--services fees $1,177
Research and development....... 217
Sales and marketing............ 1,218
General and administrative..... 1,545
------
Total.......................... $4,157
======
Restructuring and Related Costs
During 2001, the Company's management approved restructuring plans to
reorganize and reduce operating costs. Restructuring and related charges of
$513,000, $498,000 and $3.1 million were expensed in the first, third and
fourth quarters of 2001, respectively, to better align the Company's cost
structure with projected revenue. The first and third quarter charges were
comprised entirely of employee separation and related costs for 23 and 43
employees, respectively. The fourth quarter charge was comprised of $1.9
million for employee separation and related costs for 115 employees and $1.2
million for facility closure and consolidation costs. For the year ended
December 31, 2001, the restructuring and related costs were classified in the
Company's consolidated statement of operations as follows:
Year Ended
December 31, 2001
-----------------
Cost of revenues--services fees.................. $1,177
Research and development......................... 217
Sales and marketing.............................. 1,218
General and administrative....................... 1,545
------
Total accrued for restructuring and related costs $4,157
======
16
The Company completed all employee separation initiatives by December 31, 2001
and expects to complete the facility closure and consolidation during the first
half of 2002. The facility closure and consolidation costs relate to the
abandonment of the Company's leased facility near Toronto, Canada and the
restructuring of the Company's leased facility in Suwanee, Georgia. Total
facility closure and consolidation costs include remaining lease liabilities,
construction costs and brokerage fees to sublet the abandoned space offset by
estimated sublease income. The estimated costs of abandoning these leased
facilities, including estimated costs to sublease, were based on market
information trend analysis provided by a commercial real estate brokerage firm
retained by the Company. The Company anticipates annualized savings of
approximately $18.3 million as a result of these actions.
The following is a reconciliation of the components of the accrual for
restructuring and related costs, the amounts charged against the accrual during
2001 and the balance of the accrual as of December 31, 2001:
Restructuring
and Related
Charges Expenditures December 31, 2001
------------- ------------ -----------------
(in thousands)
Employee separation costs............ $2,939 $2,259 $ 680
Facility closure costs............... 1,218 9 1,209
------ ------ ------
Total restructuring and related costs $4,157 $2,268 $1,889
====== ====== ======
The accrual for restructuring and related costs is included in accounts payable
and accrued liabilities in the accompanying consolidated balance sheet at
December 31, 2001.
Results of GAAP Operations e-commerce and ERP
The following table sets forth certain statement of operations data
reflecting revenues and cost of revenues between our previous human resources
and financial software business and our current e-commerce business for the
years indicated.
Years Ended December 31,
-------------------------
2001 2000 1999
------- ------- -------
(in thousands)
Revenues: e-commerce
License fees........................... $ 7,807 $24,686 $ 9,969
Services fees.......................... 9,198 9,361 1,515
------- ------- -------
Total revenues................... 17,005 34,047 11,484
Revenues: ERP
License fees........................... -- -- 5,132
Services fees.......................... -- -- 21,526
------- ------- -------
Total revenues................... -- -- 26,658
Cost of revenues: e-commerce
License fees........................... 211 154 400
Services fees.......................... 12,253 11,935 3,130
------- ------- -------
Total cost of revenues........... 12,464 12,089 3,530
Cost of revenues: ERP
License fees........................... -- -- 951
Services fees.......................... -- -- 11,387
------- ------- -------
Total cost of revenues........... -- -- 12,338
Gross margin on e-commerce license fees. 7,596 24,532 9,569
Gross margin on e-commerce services fees (3,055) (2,574) (1,615)
Gross margin on ERP license fees........ -- -- 4,181
Gross margin on ERP services fees....... -- -- 10,139
17
Years Ended December 31,
-----------------------------
2001 2000 1999
--------- -------- --------
(in thousands)
Operating expenses:
Research and development, exclusive of noncash expense.. 16,220 22,390 9,003
Noncash research and development........................ -- 424 --
In-process research and development..................... -- 8,300 --
Sales and marketing, exclusive of noncash expense....... 27,294 36,230 15,982
Noncash sales and marketing............................. 6,740 7,001 1,930
General and administrative, exclusive of noncash expense 9,381 9,897 4,996
Bad debt expense........................................ 5,537 5,824 1,245
Noncash general and administrative...................... 252 1,098 874
Intangible impairment................................... 36,756 -- --
Depreciation and amortization........................... 12,212 8,132 3,399
--------- -------- --------
Total operating expenses.......................... 114,392 99,296 37,429
Operating loss........................................... (109,851) (77,338) (15,155)
Gain on sale of assets................................... 20 1,347 9,417
Gain on foreign currency transactions.................... 107 -- --
Realized loss on sale of investments..................... (11) (100) --
Loss on impairment of investments........................ (16,461) (4,128) --
Amortization of debt discount............................ -- (982) --
Interest income, net..................................... 6,342 10,554 337
--------- -------- --------
Net loss................................................. $(119,854) $(70,647) $ (5,401)
========= ======== ========
Results of Operations
Years Ended December 31, 2001 and 2000
Revenues
Total Revenues. Total revenues decreased 50.1% to $17.0 million in 2001
from $34.0 million in 2000. The decrease in total revenues resulted primarily
from a decrease in license revenue due to the softening demand for
business-to-business software and a decline in the information technology
market generally. For the year ended December 31, 2001, three customers
accounted for more than 10% each, totaling $6.1 million or 35.7% of total
revenue. The percentage of total revenue recognized from these three customers
was 12.6%, 11.6%, and 11.5%. For the year ended December 31, 2000, one customer
accounted for more than 10%, totaling $3.8 million or 11.3% of total revenue.
License Fees. License fees decreased 68.4% to $7.8 million, or 45.9% of
total revenues, in 2001 from $24.7 million, or 72.5% of total revenues, in
2000. The decrease in license fees was the result of a decrease in the amount
of software licensed. This decrease is due to the factors discussed above.
Services Fees. Services fees decreased 1.7% to $9.2 million from $9.4
million in 2001, but increased as a percentage of total revenues to 54.1% in
2001 from 27.5% in 2000. This decrease is primarily attributable to a decrease
in implementation and training services, a direct result of the decrease in the
amount of software licensed, partially offset by an increase in maintenance
fees.
Cost of Revenues
Total Cost of Revenues. Cost of revenues increased 3.1% to $12.5 million,
or 73.3% of total revenues, during the year ended December 31, 2001 from $12.1
million, or 35.5% of total revenues, during the same period in 2000. The
increase in the total cost of revenues and increase in percentage of total
revenues is primarily a result of a change in the mix of revenue to services
fees from license fees, which historically have a higher cost of revenues.
18
Cost of License Fees. Cost of license fees increased to $211,000 in 2001
from $154,000 in 2000. Cost of license fees includes royalties and software
duplication and distribution costs. 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.
Cost of Services Fees. Cost of services fees increased 2.7% to $12.3
million, or 133.2% of total services fees, in 2001 compared to $11.9 million,
or 127.5% of total services fees, in 2000. The increase in the cost of services
fees was primarily attributable to restructuring costs and an increase in
personnel related costs partially offset by a decrease in consulting fees. The
Company incurred $1.0 million of expense related to employee separation and
related benefit costs and $0.2 million of facility closure costs incurred as
part of the Company's restructuring initiative. The Company had an average of
21.7% more employees during the year ended December 31, 2001 compared to the
same period during 2000. The consulting fees related to subcontracted services
were approximately $422,000 during the year ended December 31, 2001 compared to
approximately $2.4 million during the year ended December 31, 2000. The Company
has incurred cost of e-commerce service fees in excess of revenues from
e-commerce service fees due primarily to the hiring and training of personnel
in anticipation of future growth. As discussed above, the Company's management
approved plans to reorganize and reduce operating costs during 2001. These
actions have allowed the Company to better align its cost structure with
projected revenue and allowed the Company's services fees revenue to exceed
cost of services fees on a pro forma basis during the fourth quarter of 2001.
Although the Company anticipates continued services fees revenue in excess of
cost of services fees, there can be no assurance that due to fluctuations in
services fees revenue and the relatively fixed nature of the cost of services
fees that costs will not exceed revenue in the future.
Research and Development, Exclusive of Noncash Expense
Research and development expenses decreased 27.6% to $16.2 million, or 95.4%
of total revenues, in 2001 from $22.4 million, or 65.8% of total revenues, in
2000. Research and development expenses decreased primarily due to decreased
consulting fees incurred to develop the Company's products partially offset by
an increase in personnel related costs, restructuring costs of $217,000
incurred during 2001 and a $600,000 fee incurred during 2001 as a result of
terminating a services agreement with a development partner. Consulting fees
decreased to approximately $3.6 million during the year ended December 31, 2001
from approximately $12.3 million during the year ended December 31, 2000. The
Company had an average of 6.5% more employees in the research and development
area during 2001 compared to the same period of 2000. The Company intends to
perform most research and development in-house moving forward, but expects to
incur consulting fees for certain specialized development projects.
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 as 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, 2001 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").
19
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 had not yet reached technological feasibility
and the IPR&D had no alternative future use in the event that the proposed
products did not prove to be feasible. These development efforts fall within
the definition of IPR&D contained in Statement of Financial Accounting
Standards ("SFAS") No. 2.
SAI/Redeo IPR&D. Management believes that the SAI/Redeo product under
development is the first settlement product that completes the B2B commerce
procurement 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.
. 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. The initial development and commercial release of the Company's
Settlement product was completed during the third quarter of 2000. The Company
is continuing to invest in further development and enhancements of the
Settlement product. During the year ended December 31, 2001, 23.0% of the
Company's license revenue was derived from licensing the Settlement product.
During the year ended December 31, 2000, 12.8% of the Company's license revenue
was derived from licensing the Company's Settlement product.
20
Valuation of IPR&D: Amounts allocated to IPR&D were calculated using
established valuation techniques in the high technology industry and the
Company 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.
To date, actual revenues attributable to the IPR&D have been lower than the
original projections. No assurance can be given that future revenues and
operating profit attributable to the purchased IPR&D will not deviate from the
projections used to value such technology. Ongoing operations and financial
results for acquired businesses, and the Company as a whole, are subject to a
variety of factors which may not have been known or estimable at the Valuation
Date. To date, actual costs of completing the project and the timing thereof
have been consistent with the estimates used in developing the valuation of the
purchased IPR&D.
21
Sales and Marketing, Exclusive of Noncash Expense
Sales and marketing expenses decreased 24.7% to $27.3 million, or 160.5% of
total revenues, in 2001 from $36.2 million, or 106.4% of total revenues, in
2000. The decrease was primarily attributable to the reduction of sales and
marketing personnel, a decrease in variable compensation as a result of lower
license revenue during 2001, and a reduction of 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. The Company had an average of
12.6% fewer sales and marketing employees during 2001 compared to the same
period in 2000.
Noncash Sales and Marketing Expense
During the years ended December 31, 2001 and 2000, non-cash sales and
marketing expenses of approximately $6.7 million and $7.0 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 costs, which are being amortized over the
life of the agreements which range from nine months to five years. Included in
the results for 2001 is $1.4 million of expense recorded in the fourth quarter
as a result of terminating the sales and marketing agreement with one customer.
The Company anticipates expenses related to sales and marketing agreements to
be approximately $98,000 per quarter during 2002.
General and Administrative, Exclusive of Noncash Expense
General and administrative expenses, including the provision for doubtful
accounts, decreased 5.1% to $14.9 million in 2001 from $15.7 million in 2000.
As a percentage of total revenues, general and administrative expenses
increased to 87.7% in 2001 from 46.2% in 2000. Included in general and
administrative expenses is a provision for doubtful accounts of $5.5 million
and $5.8 million for the years ended December 31, 2001 and 2000, respectively.
The decrease in general and administrative expenses was primarily attributable
to decreases in personnel related costs and a decrease in the provision for
doubtful accounts. The Company had an average of 8.5% fewer general and
administrative employees during 2001 compared to the same period in 2000.
Noncash General and Administrative Expense
Noncash general and administrative expenses decreased to approximately
$252,000, or 1.5% of total revenues, in 2001 from approximately $1.1 million,
or 3.2% of total revenues, in 2000. The decrease 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 during
2000. The remaining balance of $150,000 was recognized as compensation expense
during 2001. The amount expensed during 2001 relates primarily to these options.
22
Loss on Impairment of Intangible Assets
In the fourth quarter of 2001, the Company recognized an intangible asset
impairment loss of $36.8 million related to the write-down of certain
intangible assets associated with the acquisition of the SAI/Redeo companies.
The Company periodically evaluates the carrying value of its long-lived assets,
including intangibles, according to Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". During the fourth quarter of 2001, the
Company's evaluation of the performance of the SAI/Redeo companies compared to
initial projections, negative economic trends and a decline in industry growth
rate projections indicated that the carrying value of the intangible exceeded
expected cash flows. The $36.8 million write-down was based on the amount by
which the carrying amount of these assets exceeded fair value.
Depreciation and Amortization Expense
Depreciation and amortization increased 50.2% to $12.2 million, or 71.8% of
total revenues, in 2001, from $8.1 million, or 23.9% of total revenues, in
2000. This increase 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 years ended December 31, 2001 and 2000, the Company recorded a
loss on impairment of investments of approximately $16.5 million and $4.1
million, respectively. These losses were necessitated by other than temporary
losses to the value of investments the Company had made in privately held
companies and marketable securities of one publicly traded company. The
privately held companies are primarily early-stage companies and are subject to
significant risk due to their limited operating history and volatile
industry-based economic conditions. As of December 31, 2001, all investments
but one have been written off. The remaining investment, valued at $200,000 in
the accompanying December 31, 2001 balance sheet, was sold and cash of $200,000
was received during the first quarter of 2002.
Interest Income
Interest income decreased 39.7% to $6.6 million in 2001, or 38.6% of total
revenues, from $10.9 million, or 32.0% of total revenues, in 2000. The decrease
in interest income was due to lower levels of cash available for investment and
lower interest rates. 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 decreased 34.5% to $228,000 in 2001 from $348,000 in 2000.
This decrease in interest expense is primarily due to higher levels of debt in
the first quarter of 2000 as compared to 2001. In March of 2000, the Company
entered into a $5.0 million borrowing arrangement with an interest rate of 4.5%
with Wachovia Capital Investments, Inc. The interest expense in 2001 is
primarily related to this agreement.
In 1999, the Company entered into financing agreements for $7.0 million. In
connection with the financing, the Company 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 a result, the entire value of the warrants was amortized as a debt
discount in the quarter ended March 31, 2000.
23
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 2001 or in 2000.
Years Ended December 31, 2000 and 1999
Revenues
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
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. 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 23.8% to $12.1 million,
or 35.5% 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. Cost of license fees includes
royalties and software duplication and distribution costs. 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 281.3% to $11.9 million, or 127.5% 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.
24
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% 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 148.7% to $22.4 million, or
65.8% 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 as 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, 2001 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 Statement of Financial Accounting
Standards ("SFAS") No. 2.
SAI/Redeo IPR&D. Management believes that the SAI/Redeo product under
development is the first settlement product that completes the B2B commerce
procurement 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.
25
. 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.
. 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. The initial development and commercial release of the Company's
Settlement product was completed during the third quarter of 2000. The Company
is continuing to invest in further development and enhancements of the
Settlement product. During the year ended December 31, 2000, 12.8% of the
Company's license revenue was derived from licensing the Company's Settlement
product.
Valuation of IPR&D: Amounts allocated to IPR&D were calculated using
established valuation techniques in the high technology industry and the
Company 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
26
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.
To date, actual revenues attributable to the IPR&D have been lower than the
original projections. No assurance can be given that future revenues and
operating profit attributable to the purchased IPR&D will not deviate from the
projections used to value such technology. Ongoing operations and financial
results for acquired businesses, and the Company as a whole, are subject to a
variety of factors which may not have been known or estimable at the Valuation
Date. To date, actual costs of completing the project and the timing thereof
have been consistent with the estimates used in developing the valuation of the
purchased IPR&D.
Sales and Marketing, Exclusive of Noncash Expense
Sales and marketing expenses increased 126.7% to $36.2 million, or 106.4% 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.
27
General and Administrative, Exclusive of Noncash Expense
General and administrative expenses, including the provision for doubtful
accounts, 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% in2000 from 16.4% in 1999. The increase in general and
administrative expenses was primarily attributable to increases in personnel
related costs and an increase in the provision for doubtful accounts to $5.8
million in the year ended December 31, 2000 from $1.2 million in the year ended
December 31, 1999. The increase in the provision for doubtful accounts 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 during 2000. The
remaining balance of $150,000 was recognized as compensation expense during
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.
The 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.
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.
28
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.
Liquidity and Capital Resources
The Company's cash and cash equivalents decreased to $55.6 million at
December 31, 2001 from $118.3 million at December 31, 2000. Marketable
securities increased to $65.3 million at December 31, 2001 from $50.2 million
at December 31, 2000. The overall decrease in cash and cash equivalents and
marketable securities is due primarily to cash used in operating activities and
investing activities partially offset by cash provided from financing
activities.
Cash used in operating activities was approximately $42.4 million during
2001. The cash used was primarily attributable to the Company's net loss and to
decreases in accounts payable and accrued liabilities partially offset by
noncash items and an increase in deferred revenue. Cash used in operating
activities was approximately $50.8 million during 2000. This was primarily
attributable to the Company's net loss and an increase in accounts receivable
partially offset by noncash items and increases in accounts payable and accrued
liabilities.
Cash used for investing activities was approximately $20.8 million during
2001. The cash was used for purchases of investments, marketable securities,
and property and equipment partially offset by the sale and maturity of
marketable securities. Cash used by investing activities was approximately
$90.5 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 the sale and maturity of
marketable securities and proceeds related to the sale of ERP assets of
approximately $1.9 million.
Cash provided by financing activities was approximately $458,000 during
2001, and approximately $245.5 million during 2000. The cash provided by
financing activities during 2001 was primarily attributable to proceeds from
shares issued under the employee stock purchase plan and stock option
exercises. 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 Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. As of December 31, 2001, four
customers accounted for more than 10% each, totaling $1.7 million or 53.2% of
the gross accounts receivable balance on that date. The percentage of total
accounts receivable due from these four customers was 15.8%, 13.9%, 12.6% and
10.9%, respectively, at December 31, 2001. As of December 31, 2000, four
customers accounted for more than 10% each, totaling $6.7 million or 56.0% of
the gross accounts receivable balance on that date. The percentage of total
accounts receivable due from these four customers was 19.9%, 14.5%, 11.2% and
10.4%, respectively, at December 31, 2000.
29
During the year ended December 31, 2001, three customers accounted for more
than 10% each, totaling $6.1 million, or 35.7% of total revenue. The percentage
of total revenue recognized from these three customers was 12.6%, 11.6% and
11.5%, respectively. During the year ended December 31, 2000, one customer
accounted for more than 10%, totaling $3.8 million, or 11.3% of total revenue.
During 1999 no customer accounted for more than 10% of total revenue.
During the second quarter of 2001, the Company made an equity investment of
$2.0 million in a privately held strategic partner. Prior to 2001, the Company
made equity investments of $17.7 million in eleven privately held companies.
The Company's equity interest in these entities ranges from 2.5% to 12.5% and
the Company is accounting for these investments using the cost method of
accounting. During 2001 and 2000 the Company recorded charges of $15.4 million
and $4.1 million, respectively, for other than temporary losses on these
investments. These companies are primarily early-stage companies and are
subject to significant risk due to their limited operating history and current
economic and capital market conditions. The Company has not recognized any
material revenue from these companies during 2001. During the years ended
December 31, 2000 and 1999, the Company recognized $16.0 million and $3.1
million, respectively, in total revenue from these companies.
On August 15, 2001, the Company granted options to purchase 150,000 shares
of common stock to a senior executive with an exercise price equal to the fair
market value at the date of grant. These options are designated as nonqualified
options and will expire if not exercised in full before August 14, 2011.
Twenty-five percent of the shares subject to the option shall vest on the first
anniversary of the date of grant and the remaining portion of the option shall
vest in equal monthly installments for 36 months beginning on August 15, 2002.
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.
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 twenty trading days in
any period of thirty 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.
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 was accrued at the
date of acquisition and paid 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 3
years and the goodwill is being amortized over 4 years.
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.
30
At December 31, 2001, 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 $98.7 million, $1.1 million
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.$16.0 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 an obligation to make 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 costs of approximately $454,000, $3.8
million, and $600,000, respectively. Deferred sales and marketing costs will be
amortized over the term of the sales and marketing agreements, which range from
nine months to five years.
During the fourth quarter of 2001, the sales and marketing agreement with
one customer was terminated requiring a charge of $1.4 million to write-off the
remaining balance in deferred sales and marketing costs. Also, as a result of
the termination, the Company is no longer obligated to make cash payments of
$300,000 for each of the last two years of the related agreement.
Although operating activities may provide cash in certain periods, to the
extent the Company incurs continuing operating losses or experiences growth in
the future, the Company's operating and investing activities will use
significant amounts of cash. The Company currently estimates uses of cash in
2002 to fund operating losses and to a lesser extent for purchases of property
and equipment. The actual use of cash in operations during 2002 will be
impacted dramatically by any fluctuations in projected revenue as the Company's
operating expenses are relatively fixed in the short term. The Company
currently believes that existing cash and cash equivalents and marketable
securities will be sufficient to meet operating and investing needs during 2002
and thereafter until the Company achieves break-even cash flow.
The following summarizes the Company's contractual obligations and
commercial commitments at December 31, 2001, and the effect such obligations
are expected to have on our liquidity and cash flow in future periods:
Total 2002 2003 2004 2005 2006 Thereafter
------- ------ ------ ------ ------ ---- ----------
(in thousands)
Long-term debt.. $ 5,000 $ -- $ -- $ -- $5,000 $ -- $ --
Operating leases 8,098 2,022 1,774 1,803 1,802 644 53
------- ------ ------ ------ ------ ---- ----
Total........... $13,098 $2,022 $1,774 $1,803 $6,802 $644 $ 53
======= ====== ====== ====== ====== ==== ====
The Company does not have commercial commitments under capital leases, lines
of credit, standby lines of credit, guaranties, standby repurchase obligations
or other such arrangements.
The Company does not engage in any transactions or have relationships or
other arrangements with an unconsolidated entity. These include special purpose
and similar entities or other off-balance sheet arrangements. The Company also
does not trade in energy, weather or other commodity based contracts.
31
Related Party Transactions
On November 1, 2001, the Company engaged E.Com Consulting to perform market
research and provide recommendations concerning the needs and opportunities
associated with the Company's settlement product. E.Com Consulting
subcontracted with e-RM International, Inc. ("e-RMI") to assist with a portion
of this project. e-RMI is a Delaware corporation whose sole shareholder is
Chrismark Enterprises LLC. Chrismark Enterprises LLC is owned by Mark Johnson,
a director of the Company, and his wife. The contract period of the engagement
was November 1, 2001 through January 31, 2002 for which the Company agreed to
pay total professional fees of $50,000 plus out-of-pocket expenses. Of this
amount $7,805 was paid to e-RMI. The Company expensed a total of $42,164 in
connection with this engagement during 2001 that is included in general and
administrative expense in the accompanying consolidated statement of operations
and had a balance due E.Com of $34,359 at December 31, 2001 that is included in
accounts payable and accrued liabilities in the accompanying consolidated
balance sheet. The remaining amounts due under the agreement will be expensed
and paid in 2002.
On February 7, 2002 Todd Hewlin joined the Company's board of directors. Mr.
Hewlin is a managing director of The Chasm Group, LLC, a consultancy
organization focusing on helping technology companies develop and implement
strategies that create and sustain market leadership positions for their core
products while building shareholder value and a sustainable competitive
advantage. During 2001, the Company engaged The Chasm Group to assist the
Company on various strategic and organizational issues. The contract period of
the engagement was November 15, 2001 through February 15, 2002 for which the
Company agreed to professional fees of $225,000 plus out-of-pocket expenses.
The Company expensed a total of $131,000 during 2001 that is included in
general and administrative in the accompanying consolidated statement of
operations and had a balance due The Chasm Group of $94,000 at December 31,
2001 that is included in accounts payable and accrued liabilities in the
accompanying consolidated balance sheet. The remaining amounts due under the
agreement will be expensed and paid in 2002.
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 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 a services subsidiary of the Company. Mr. McCall remained an employee of the
Company until the completion of the Company's initial public 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
initial public 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 to Mr. McCall under this consulting agreement during the
year ended December 31, 1999. No payments were made to Mr. McCall in 2000 or
2001.
In the opinion of management, the rates, terms, and considerations of the
transactions with the related parties described above approximate those that
the Company would have received in transactions with unaffiliated parties.
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, liquidity 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.
32
The softening demand for business-to-business software and related services
could negatively affect our business, operating results, liquidity, financial
condition, and stock price.
Our revenue growth and operating results depend significantly on the overall
demand for technological goods and services, and in particular, demand for
business-to-business software and services. Softening demand for these products
and services caused by ongoing economic uncertainty may contribute to lower
revenues. Continued delays or reductions in technology spending could have a
material adverse effect on demand for our products and services, and
consequently our business, operating results, liquidity, financial condition,
and stock price.
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 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 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,
liquidity and financial condition will be materially and adversely affected.
If the market for Internet-based procurement applications 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, liquidity 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 be sustained.
Our settlement platform is a new technology product in an evolving market.
Our settlement product is a technology that is currently being marketed to
early-adopting customers. We have limited experience in marketing this product.
If the market for the settlement product fails to completely develop or
develops more slowly than we anticipate, our business, operating results,
liquidity and financial condition could be materially and adversely affected.
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.
33
Because the percentage of our revenues represented by maintenance services
and other recurring forms of revenue 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 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;
. 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 intangibles;
. impairment of strategic investments;
. actions taken by our competitors, including new product introductions and
enhancements;
. restructuring of our operations and related charges;
. 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 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.
We continue to invest 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.
Our stock price is highly volatile.
Our stock price has fluctuated dramatically. The market price of our 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;
34
. 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 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.
We may be required to defer recognition of license fee revenue for a
significant period of time after entering into a license agreement, which could
negatively impact our financial results.
We may be required to defer recognition of license fee revenue for a
significant period of time after entering into a license agreement for a
variety of transactions, including:
. transactions that include both currently available software products and
products that are under development or other undeliverable elements;
. transactions where the customers demand services that include signficant
modifications or customizations that could delay product delivery or
acceptance;
. transactions that involve acceptance criteria that may preclude revenue
recognition or if there are identified product-related issues, such as
performance issues; and
. transactions that involve payment terms or fees that depend on
contingencies.
Generally accepted accounting principles ("GAAP") for software revenue
recognition requires that our license agreements meet specific criteria in
order to recognize revenue when we initially deliver software. Although we have
standard form license agreements that meet the GAAP criteria for immediate
revenue recognition on delivered elements, we do on some occasions negotiate
the terms of our license agreements. Some of these negotiated agreements may
not meet the GAAP criteria for immediate software revenue recogntion on
delivered elements.
Although our business model allows for time-based license agreements, we
continue to record some of our license fee revenue upon software delivery. The
deferral of license fee revenue recognition on these agreements could have an
adverse effect on our financial results.
35
We may not generate the substantial additional revenues necessary to become
profitable and we 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 the
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.
If our flexible payment options are not well received, the market may adopt our
products at a slower rate than anticipated, and our business may suffer
materially.
We offer flexible payment methods to our customers. These programs are
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 execute these programs the market may adopt our
products at a slower rate than anticipated, and our business may suffer
materially.
We expect to evolve to our business model over time. The adoption rate of
our flexible payment options may, from quarter to quarter, fluctuate or be
rejected by the market altogether. As we continue this program, we may find
that the majority of our revenues continue to come from traditional revenue
recognition license arrangements that result in revenues being recognized upon
delivery. If the results of our flexible payment options program fluctuate due
to uneven adoption rates or if our program is rejected entirely, our business,
results of operations, liquidity and financial condition would be materially
and adversely affected.
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, liquidity 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.
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 attract additional customers for our product suite will depend on
using our existing customers as referenceable accounts. As a result, our
solutions may not achieve significant market acceptance. In addition, current
customers are subject to the effects of being acquired, which may jeopardize
their use of our products and referencability in the future.
We may not realize the entire value of our sales and marketing agreements with
certain customers.
During the fourth quarter of 1999 and the first quarter of 2000, we issued
warrants and shares of common stock to certain strategic partners, all of whom
are also customers, in exchange for their participation in our sales and
marketing efforts. We recorded the value of these warrants and common stock as
deferred sales and marketing costs, to be amortized over the life of the
agreements which range from nine months to five years. If these strategic
partners discontinue being referenceable customers or in our judgment these
assets become impaired, we will be required to write-off these assets. As a
result of terminating the sales and marketing agreement with one customer we
recorded a write-off of $1.4 million related to these assets in the fourth
quarter of 2001.
36
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 exclusively on third-party content services providers to provide
catalog aggregation and management services to our customers, as part of our
procurement solution. If we are unable to maintain effective, long-term
relationships with our content services providers, or if their services do not
meet our customers' needs or expectations, our business could be seriously
harmed. If the demand for our solutions 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 obtained through referrals from Microsoft,
but Microsoft is not obligated to refer any potential customers to us, and it
has entered into strategic relationships with other providers of electronic
procurement applications.
We rely on strategic selling relationships with our partners.
We have established strategic selling relationships with a number of outside
companies. Some of these strategic selling partners may not be able to generate
a sufficient level of sales to justify continuing their relationship with us.
Much of our sales growth and future success is expected to come from our
channel partners. While we expect to invest in these relationships including
sales training, product integration and joint selling, we cannot predict the
channel partner's commitment or level of success. Additionally the timetable
for productivity of any channel partner may vary based on many factors out of
our control. We expect that the development of most relationships will take
three to six months, although we cannot be assured of this timetable or if
these relationships will ever deliver any results. Should our channel
relationships prove unproductive or take longer to deliver results, our
financial results and path to profitability could suffer serious adverse
consequences.
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.
We have reduced our headcount in 2001 based on our current expectations of
future revenue growth, and as part of our cost reduction initiatives. These
reductions may make it more difficult for us to attract, hire and retain the
personnel we need. If we are unable to hire or fail to retain competent
personnel, our business, results of operations, liquidity and financial
condition could be materially and adversely affected. We do not maintain
key-man life insurance policies on any of our employees.
If we are unable to manage our internal resources, we may incur increased
administrative costs and be unable to capitalize on revenue opportunities.
The volatility of the e-commerce 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.
37
As we expand our international sales and marketing activities and international
operations, our business is 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 transaction costs related to sales transactions conducted
outside the U.S.;
. reduced protection of intellectual property rights and increased risk of
piracy;
. 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 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.
We may not be able to recover the carrying value of our intangibles.
Through December 31, 2001, we periodically assessed the impairment of
long-lived assets, including identifiable intangibles and related goodwill, in
accordance with the provisions of Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and Assets to be
Disposed Of ". An impairment review is performed whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. As a
result of this assessment we incurred impairment charges in the fourth quarter
of 2001.We can give no assurance that additional future impairment charges will
not be required due to factors we consider important including, but not limited
to, significant underperformance relative to historical or projected operating
results, significant changes in the manner of use of the acquired assets and
significant negative industry or economic trends.
38
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 achieve anticipated benefits of prior acquisitions.
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 developed 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
we do not continue to develop and enhance the acquired technology, if the
market for this technology changes, or if actual revenues are lower than
estimated, the net realizable value of our intangibles may be less than the
carrying value requiring us to incur an impairment charge to appropriately
reflect the value of the intangibles. In the fourth quarter of 2001, we
recognized an intangible asset impairment loss of $36.8 million related to the
write-down of certain intangible assets associated with the acquisition of the
SAI/Redeo companies based on the amount by which the carrying amount of these
assets exceeded fair value.
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 that
are now consolidated into one lawsuit, 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 consolidated complaint alleges, among
other things, that 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 made in public
filings with the Securities and Exchange Commission and certain press releases
and other public statements. The plaintiffs seek unspecified damages and costs.
This lawsuit diverts the time and attention of management and an adverse
judgment could cause our financial condition or operating results to suffer.
Our estimate of costs associated with our restructuring and related activities
may not be adequate.
During 2001, our management approved restructuring plans to reorganize and
reduce operating costs. Restructuring and related charges of $4.2 million were
expensed during 2001 to better align our cost structure with projected revenue.
These charges were comprised of employee separation related costs and facility
closure and consolidation costs. If the estimates and assumptions used in the
restructuring plan prove to be incorrect we may incur additional costs related
to these activities.
39
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, liquidity 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.
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,
liquidity 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, liquidity and financial condition. Provisions
in our license agreements may not effectively protect us from product liability
claims.
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.
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 current market or new markets
we develop or enter. Competitive pressure may result in our reducing the price
of our products, which would negatively affect our revenues and operating
margins. Our competitors vary in size and in the scope and breath of the
products and services they offer. If we are unable to compete effectively in
our markets, our business, results of operations, liquidity and financial
condition would be materially and adversely affected.
In 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
VerticalNet, PurchasePro, FreeMarkets, and i2. We also face 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. We are entering into new and developing markets and we expect
to face competition as these markets develop.
40
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 their 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.
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 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, liquidity 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.
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, liquidity 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, liquidity 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
41
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:
. 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, operating
results and liquidity. 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.
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 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,
liquidity and financial condition.
42
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. For example, a number of comprehensive legislative and
regulatory privacy proposals are now under consideration by federal, state, and
local governments. 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, liquidity 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, liquidity or financial condition.
Foreign governmental regulations could also materially and adversely affect
our business. For example, the European Union has enacted the European Data
Privacy Directive, which relates to the protection and processing of certain
types of personal data. Under the directive, personal data about citizens of
European Union member states may not be transferred outside the European Union
unless certain specified conditions are met. In addition, persons whose
personal data is collected within the European Union are guaranteed certain
rights, including the right to access and obtain information about their data
and to object to certain forms of processing of their data. The directive
therefore affects all companies that collect, process, or transfer personal
data in the European Union or receive personal data from the European Union.
Other countries outside the European Union have also recently enacted similar
laws regulating the transmission of private data, including, without
limitation, Argentina, Australia, Hong Kong, Poland and Switzerland. The
potential effect of the European Union directive and other foreign data privacy
regulations on our business is uncertain. These laws could create uncertainty
in the marketplace that could reduce demand for our software or increase the
cost of doing business as a result of litigation costs or increased service
delivery costs, or could in some other manner have a material and adverse
effect on our business, results of operations, liquidity and financial
condition.
In addition, because our services are accessible worldwide, and we
facilitate sales of goods to users worldwide, other jurisdictions may claim
that we are required to qualify to do business as a foreign corporation in a
particular state or foreign country. Our failure to qualify as a foreign
corporation in a jurisdiction could subject us to taxes and penalties and could
result in our inability to enforce contracts in such jurisdictions. Any such
new legislation or regulation or the application of laws or regulations from
jurisdictions whose laws do not currently apply to our business, could have a
material and adverse effect on our business, results of operations, liquidity
and financial condition.
Security risks may affect the use of the Internet in electronic commerce.
The secure transmission of confidential information over public networks is
necessary to the conduct of electronic commerce. Advances in cryptography and
other computer capabilities, however, could result in compromises or breaches
of our security systems or the security systems of other Web sites. If a
particularly well-published compromise of security were to occur, the use of
the Web for communications and commerce could be substantially affected.
Anyone circumventing our security measures could potentially misappropriate
proprietary information or cause interruptions in our operations. Because the
Internet is a public network, computer viruses could be introduced to our
system or those of our customers or suppliers, thereby disrupting our
operational network and making our services inaccessible. In the event our
security measures ever failed, our business and financial condition would be
substantially harmed. Furthermore, we may be required to expend substantial
capital and other resources in order to protect against security breaches and
interruptions and in order to keep our security system up-to-date.
43
Legislation limiting further levels of encryption technology may adversely
affect our sales.
As a result of customer demand, it is possible that our products 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 operating results and liquidity
as a whole.
Future taxation could harm our business and Internet commerce generally.
We file tax returns in such states as required by law based on principles
applicable to traditional businesses. We do not collect sales or similar taxes
in respect of transactions conducted through our software products or trading
communications created with our products. However, one or more states could
seek to impose additional income tax obligations or sales tax collection
obligations on out-of-state companies engaging in or facilitating online
commerce. A number of proposals have been made at state and local levels that
could impose such taxes on the sale of products and services through the
Internet or the income derived from such sales. Such proposals, if adopted,
could substantially impair the growth of electronic commerce and reduce the
demand for our electronic commerce products and digital marketplaces in general.
Legislation limiting the ability of the states to impose taxes on
Internet-based transactions was enacted by the United States Congress. This
legislation was recently extended through November 1, 2003 as a result of the
Internet Tax Non-discrimination Act, signed on November 28, 2001. If the
moratorium is not renewed after November 1, 2003, any such taxes could
adversely affect our ability to license our electronic commerce products.
New Accounting Pronouncements
At the November 2001 Emerging Issues Task Force ("EITF") meeting, the FASB
released Staff Announcement Topic D-103, "Income Statement Characterization of
Reimbursements Received for 'Out-of-Pocket' Expenses Incurred". The FASB Staff
Announcement clarified interpretations of EITF 99-19, "Reporting Revenue Gross
as a Principal versus Net as an Agent", stating that the Staff believes that
reimbursements received for out-of-pocket expenses should be characterized as
revenue. Historically the Company has not reflected such reimbursements as
revenue in its consolidated statements of operations. The largest expenses, for
which the Company is reimbursed by clients, are travel related charges. The
FASB Staff Announcement requires adoption in financial reporting periods
beginning after December 15, 2001. Upon adoption of this FASB Staff
Announcement, comparative financial statements for prior periods will be
reclassified to provide consistent presentation. The Company does not expect
the new FASB Staff Announcement to have any impact on its financial position or
results of operations. However, the Company's services fees revenue and cost of
services fees revenue will increase by an equal amount as a result of the
gross-up of revenues and expenses for reimbursable expenses. The following
table shows the expected impact of adopting the Staff Announcement on services
fees revenue and cost of services fees revenue for the years ended 2001 and
2000:
2001 2000
------- -------
(in thousands)
As reported
Services fees revenue........ $ 9,198 $ 9,361
Cost of services fees revenue 12,253 11,935
After reclassification
Services fees revenue........ 9,866 10,327
Cost of services fees revenue 12,921 12,901
44
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Assets to Be Disposed
Of". The Company is required to adopt SFAS 144 effective January 1, 2002. The
adoption of SFAS 144 is not expected to have a material impact on the Company's
financial statements.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. SFAS 142 will require that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually. SFAS 142 will also require
that intangible assets with estimable useful lives be amortized over their
respective estimated useful lives to their estimated residual values.
The Company is required to adopt the provisions of SFAS 141 immediately and
SFAS 142 effective January 1, 2002. Goodwill and intangible assets determined
to have an indefinite useful life acquired in a purchase business combination
completed after June 30, 2001, but before SFAS 142 is adopted in full will not
be amortized, but will continue to be evaluated for impairment in accordance
with the accounting literature in effect prior to the issuance of SFAS 142.
Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001 will continue to be amortized prior to the adoption of SFAS
142.
At December 31, 2001, the Company's unamortized goodwill and intangibles
totaled $10.8 million. Amortization expense related to goodwill was $7.6
million and $5.8 million for the years ended December 31, 2001 and 2000,
respectively. Upon adoption, the Company tested goodwill for impairment
according to the provisions of SFAS 142, which resulted in no impairment
required as a cumulative effect of accounting change. The Company anticipates
amortization related to intangibles with definitive lives to be approximately
$863,000 during 2002.
In September 1998, the FASB issued SFAS 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". The Company adopted these new pronouncements in January of
2001. The new Statements require all derivatives to be recorded on the balance
sheet at fair value and establish 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.
The Company has no derivatives and the adoption of these pronouncements did not
have any impact on the Company's results of operations or financial position.
Quarterly Data
The following represents quarterly data for the years ended December 31,
2001 and 2000 (in thousands, except per share data):
2001
--------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Revenues........... $ 4,572 $ 5,993 $ 3,024 $ 3,416
Operating loss..... (22,021) (19,111) (15,637) (53,080)
Net loss........... (22,761) (20,787) (16,897) (59,408)
Net loss per share:
Basic............. (1.47) (1.34) (1.09) (3.82)
Diluted........... (1.47) (1.34) (1.09) (3.82)
45
2000
--------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Revenues........... $ 7,006 $ 10,085 $ 13,543 $ 3,413
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)
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 very little 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
During the second quarter of 2001, the Company made an equity investment of
$2.0 million in a privately held strategic partner. Prior to 2001, the Company
made equity investments of $17.7 million in eleven privately held companies.
The Company's equity interest in these entities ranges from 2.5% to 12.5% and
the Company is accounting for these investments using the cost method of
accounting. During 2001 and 2000 the Company recorded charges of $15.4 million
and $4.1 million, respectively, for other than temporary losses on these
investments. These companies are primarily early-stage companies and are
subject to significant risk due to their limited operating history and current
economic and capital market conditions. The Company has not recognized any
material revenue from these companies during 2001. During the years ended
December 31, 2000 and 1999, the Company recognized $16.0 million and $3.1
million, respectively, in total revenue from these companies.
46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
CLARUS CORPORATION AND SUBSIDIARIES
Index to Financial Statements
Page
----
Independent Auditors' Report of KPMG LLP........................................................ 48
Report of Arthur Andersen LLP, Independent Public Accountants................................... 49
Consolidated Balance Sheets--December 31, 2001 and 2000......................................... 50
Consolidated Statements of Operations--Years Ended December 31, 2001, 2000 and 1999............. 51
Consolidated Statements of Stockholders' Equity and Comprehensive Loss--Years Ended December 31,
2001, 2000 and 1999........................................................................... 52
Consolidated Statements of Cash Flows--Years Ended December 31, 2001, 2000 and 1999............. 53
Notes to Consolidated Financial Statements...................................................... 55
47
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Clarus Corporation and
Subsidiaries:
We have audited the consolidated balance sheets of Clarus Corporation and
subsidiaries (the "Company") as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity and comprehensive
loss, and cash flows for the years 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 audits.
We conducted our audits 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
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, 2001 and 2000, and the results
of their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
Atlanta, Georgia
February 8, 2002
48
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Clarus Corporation:
We have audited the consolidated statements of operations, stockholders'
equity and comprehensive loss, and cash flows of Clarus Corporation (a Delaware
corporation) and subsidiaries for the year 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 results of operations and cash
flows of Clarus Corporation and subsidiaries for the year ended December 31,
1999 in conformity with accounting principles generally accepted in the United
States.
/s/ Arthur Andersen LLP
Atlanta, Georgia
January 28, 2000
49
CLARUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
(In Thousands, Except Share and Per Share Amounts)
2001 2000
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................... $ 55,628 $ 118,303
Marketable securities............................................................... 65,264 50,209
Accounts receivable, less allowance for doubtful accounts of $675 and $3,917 in
2001 and 2000, respectively....................................................... 2,566 8,126
Deferred marketing costs, current................................................... 391 5,321
Prepaids and other current assets................................................... 2,472 2,731
--------- ---------
Total current assets.......................................................... 126,321 184,690
--------- ---------
PROPERTY AND EQUIPMENT, NET.......................................................... 7,352 7,619
--------- ---------
OTHER ASSETS:
Deferred marketing costs, net of current portion.................................... 98 2,508
Investments......................................................................... 200 13,619
Intangible assets, net of accumulated amortization of $14,608 and $6,146 in 2001 and
2000, respectively................................................................ 10,815 58,214
Deposits and other long-term assets................................................. 488 254
--------- ---------
Total assets.................................................................. $ 145,274 $ 266,904
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities............................................ $ 6,506 $ 11,059
Deferred revenue.................................................................... 5,206 2,295
--------- ---------
Total current liabilities..................................................... 11,712 13,354
LONG-TERM LIABILITIES:
Deferred revenue.................................................................... 1,969 881
Long-term debt...................................................................... 5,000 5,000
Other long-term liabilities......................................................... 265 847
--------- ---------
Total liabilities............................................................. 18,946 20,082
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value; 5,000,000 shares authorized; none issued......... -- --
Common stock, $.0001 par value; 100,000,000 shares authorized; 15,638,712 and
15,609,029 shares issued and 15,563,712 and 15,534,029 shares outstanding in
2001 and 2000, respectively....................................................... 2 2
Additional paid-in capital.......................................................... 360,670 362,415
Accumulated deficit................................................................. (234,623) (114,769)
Less treasury stock, 75,000 shares at cost.......................................... (2) (2)
Accumulated other comprehensive income (loss)....................................... 281 (572)
Deferred compensation............................................................... -- (252)
--------- ---------
Total stockholders' equity.................................................... 126,328 246,822
--------- ---------
Total liabilities and stockholders' equity.................................... $ 145,274 266,904
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
50
CLARUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2001, 2000, and 1999
(In Thousands, Except Per Share Amounts)
2001 2000 1999
--------- -------- --------
REVENUES:
License fees............................................ $ 7,807 $ 24,686 $ 15,101
Services fees........................................... 9,198 9,361 23,041
--------- -------- --------
Total revenues.................................... 17,005 34,047 38,142
COST OF REVENUES:
License fees............................................ 211 154 1,351
Services fees........................................... 12,253 11,935 14,517
--------- -------- --------
Total cost of revenues............................ 12,464 12,089 15,868
OPERATING EXPENSES:
Research and development, exclusive of noncash expense.. 16,220 22,390 9,003
Noncash research and development........................ -- 424 --
In-process research and development..................... -- 8,300 --
Sales and marketing, exclusive of noncash expense....... 27,294 36,230 15,982
Noncash sales and marketing............................. 6,740 7,001 1,930
General and administrative, exclusive of noncash expense 9,381 9,897 4,996
Provision for doubtful accounts......................... 5,537 5,824 1,245
Noncash general and administrative...................... 252 1,098 874
Loss on impairment of intangible assets................. 36,756 -- --
Depreciation and amortization........................... 12,212 8,132 3,399
--------- -------- --------
Total operating expenses.......................... 114,392 99,296 37,429
--------- -------- --------
OPERATING LOSS........................................... (109,851) (77,338) (15,155)
GAIN ON SALE OF ASSETS................................... 20 1,347 9,417
GAIN ON FOREIGN CURRENCY TRANSACTIONS.................... 107 -- --
LOSS ON SALE OF MARKETABLE SECURITIES.................... (11) (100) --
LOSS ON IMPAIRMENT OF INVESTMENTS........................ (16,461) (4,128) --
AMORTIZATION OF DEBT DISCOUNT............................ -- (982) --
INTEREST INCOME.......................................... 6,570 10,902 442
INTEREST EXPENSE......................................... (228) (348) (105)
--------- -------- --------
NET LOSS................................................. $(119,854) $(70,647) $ (5,401)
========= ======== ========
NET LOSS PER SHARE--BASIC AND DILUTED.................... $ (7.72) $ (4.90) $ (0.49)
========= ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--BASIC
AND DILUTED............................................ 15,530 14,420 11,097
========= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
51
CLARUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
Years Ended December 31, 2001, 2000, and 1999
(In Thousands)
Accumulated
Common Stock Additional Treasury Stock Other
-------------- Paid-In Accumulated ------------- Comprehensive Deferred
Shares Amount Capital Deficit Shares Amount Income Compensation
------ ------ ---------- ----------- ------ ------ ------------- ------------
BALANCES, December 31, 1998..................... 11,003 $ 1 $ 61,433 $ (38,721) (75) $(2) $ -- $ (600)
Exercise of warrants......................... 26 -- -- -- -- -- -- --
Issuance of warrants......................... -- -- 13,028 -- -- -- -- --
Accelerated vesting of stock options......... -- -- 687 -- -- -- -- 19
Cancellation of stock options................ -- -- (143) -- -- -- -- 143
Amortization of deferred compensation........ -- -- -- -- -- -- -- 168
Exercise of stock options.................... 572 -- 2,003 -- -- -- -- --
Net loss..................................... -- -- -- (5,401) -- -- -- --
------ --- -------- --------- --- --- ----- -------
BALANCES, December 31, 1999..................... 11,601 1 77,008 (44,122) (75) (2) -- (270)
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 -- -- -- -- (5,696)
Amortization of deferred compensation........ -- -- -- -- -- -- -- 1,098
Cancellation of stock options................ -- -- (4,616) -- -- -- -- 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...... -- -- -- -- -- -- (19) --
Unrealized loss on marketable securities..... -- -- -- -- -- -- (553) --
Total comprehensive loss.....................
------ --- -------- --------- --- --- ----- -------
BALANCES, December 31, 2000..................... 15,609 2 362,415 (114,769) (75) (2) (572) (252)
Amortization of deferred compensation........ -- -- -- -- -- -- -- 252
Exercise of stock options.................... 63 -- 198 -- -- -- -- --
Issuance of shares under employee stock
purchase plan............................... 55 -- 260 -- -- -- -- --
Retirement of shares related to the SAI
acquisition................................. (88) -- (2,203) -- -- -- -- --
Net loss..................................... -- -- -- (119,854) -- -- -- --
Foreign currency translation adjustment...... -- -- -- -- -- -- 87 --
Unrealized gain on marketable securities..... -- -- -- -- -- -- 766 --
------ --- -------- --------- --- --- ----- -------
Total comprehensive loss.....................
BALANCES, December 31, 2001..................... 15,639 $ 2 $360,670 $(234,623) (75) $(2) $ 281 $ --
====== === ======== ========= === === ===== =======
Total
Stockholders' Comprehensive
Equity Loss
------------- -------------
BALANCES, December 31, 1998..................... $ 22,111
Exercise of warrants......................... --
Issuance of warrants......................... 13,028
Accelerated vesting of stock options......... 706
Cancellation of stock options................ --
Amortization of deferred compensation........ 168
Exercise of stock options.................... 2,003
Net loss..................................... (5,401) $ (5,401)
---------
BALANCES, December 31, 1999..................... 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................................ --
Amortization of deferred compensation........ 1,098
Cancellation of stock options................ --
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)
Unrealized loss on marketable securities..... (553) (553)
---------
Total comprehensive loss..................... $ (71,219)
--------- =========
BALANCES, December 31, 2000..................... 246,822
Amortization of deferred compensation........ 252
Exercise of stock options.................... 198 --
Issuance of shares under employee stock
purchase plan............................... 260 --
Retirement of shares related to the SAI
acquisition................................. (2,203) --
Net loss..................................... (119,854) $(119,854)
Foreign currency translation adjustment...... 87 87
Unrealized gain on marketable securities..... 766 766
--------- ---------
Total comprehensive loss..................... $(119,001)
=========
BALANCES, December 31, 2001..................... $ 126,328
=========
The accompanying notes are an integral part of these consolidated financial
statements.
52
CLARUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001, 2000, and 1999
(In Thousands)
2001 2000 1999
--------- -------- --------
OPERATING ACTIVITIES:
Net loss................................................................... $(119,854) $(70,647) $ (5,401)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of property and equipment................... 3,750 2,770 2,000
Amortization of intangible assets......................................... 8,462 5,362 1,399
Loss on impairment of investments......................................... 15,419 4,128 --
Loss on impairment of intangible assets................................... 36,756 -- --
Loss on impairment of marketable securities............................... 1,042 -- --
Loss on sale of investments and other..................................... (11) 100 --
Noncash interest expense associated with original issue discount on debt.. -- 982 --
In-process research and development....................................... -- 8,300 --
Provision for doubtful accounts........................................... 5,537 5,824 1,245
Noncash research and development expense.................................. -- 424 --
Noncash sales and marketing expense....................................... 6,740 7,001 1,930
Noncash general and administrative expense................................ 252 1,098 874
Exchange of software for cost-method investments.......................... -- (12,868) (1,168)
Gain on sale of assets.................................................... (20) (1,347) (9,419)
Loss on sale of property and equipment.................................... -- -- 138
Changes in operating assets and liabilities:
Accounts receivable..................................................... 23 (4,567) (8,185)
Prepaids and other current assets....................................... 259 (855) (2,396)
Deposits and other long-term assets..................................... (234) (127) 248
Accounts payable and accrued liabilities................................ (4,553) 4,934 203
Deferred revenue........................................................ 3,999 (1,407) 1,121
Other long-term liabilities............................................. 18 46 127
--------- -------- --------
Net cash used in operating activities................................. (42,415) (50,849) (17,284)
--------- -------- --------
INVESTING ACTIVITIES:
Purchase of marketable securities.......................................... (95,527) (55,648) --
Proceeds from the sale and maturity of marketable securities............... 80,185 6,000 --
Purchase of SAI/Redeo companies, net of cash acquired...................... -- (30,645) --
Purchase of iSold.......................................................... -- (2,453) --
Purchase of property and equipment......................................... (3,463) (5,871) (3,213)
Purchase of investments.................................................... (2,000) (3,711) --
Proceeds from sale of assets............................................... -- 1,864 12,006
Proceeds from sale of property and equipment............................... -- -- 48
Purchase of intangible software rights..................................... -- -- (489)
--------- -------- --------
Net cash (used in) provided by investing activities..................... (20,805) (90,464) 8,352
--------- -------- --------
53
CLARUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
Years Ended December 31, 2001, 2000, and 1999
(In Thousands, except shares and warrants)
2001 2000 1999
-------- -------- -------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock related to secondary offering......... -- 244,427 --
Proceeds from the exercise of stock options.................................. 198 3,075 2,003
Proceeds from issuance of common stock related to employee stock purchase
plan....................................................................... 260 34 --
Proceeds from long-term debt................................................. -- 5,000 7,000
Repayments of long term debt and capital lease obligations................... -- (7,028) (743)
-------- -------- -------
Net cash provided by financing activities.................................... 458 245,508 8,260
-------- -------- -------
Effect of exchange rate change on cash....................................... 87 (19) --
CHANGE IN CASH AND CASH EQUIVALENTS.......................................... (62,675) 104,176 (672)
CASH AND CASH EQUIVALENTS, beginning of year................................. 118,303 14,127 14,799
-------- -------- -------
CASH AND CASH EQUIVALENTS, end of year....................................... $ 55,628 $118,303 $14,127
======== ======== =======
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest....................................................... $ 228 $ 348 $ 103
======== ======== =======
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
agreements................................................................. $ -- $ 3,761 $ --
Issuance of 1,148,000 shares of common stock and 163,200 common stock
options in connection with SAI acquisition................................. $ -- $ 32,153 $ --
Retirement of 82,500 shares related to SAI acquisition....................... $ (2,181) $ -- $ --
Receipt of marketable securities in satisfaction of trade accounts receivable $ -- $ 1,214 $ 1,168
Issuance of warrants to purchase 29,999 shares of common stock in connection
with short-term borrowing.................................................. $ -- $ -- $ 982
The accompanying notes are an integral part of these consolidated financial
statements.
54
CLARUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
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. The
Company's subsidiaries include Clarus International, Inc., Clarus eMEA Ltd.,
Clarus CSA, Inc., SAI (Ireland) Limited, SAI Recruitment Limited, i2Mobile.com
Limited and SAI America Limited.
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 year ended December 31, 1999 was
approximately $5.1 million. Services revenue from the financial and human
resources software business for the year ended December 31, 1999 was
approximately $21.5 million.
Completion of Secondary Offering
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. The proceeds, net of expenses, from
this public offering were placed in investment grade cash equivalents and
marketable securities.
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.
Critical Accounting Policies and Use of Estimates
If demand for business-to-business software and related services remain soft
our business, operating results, liquidity and financial condition will be
adversely affected. Our success depends on market acceptance of e-commerce as a
viable method for corporate procurement and other commercial transactions and
market adoption of our current products and future products. We continue to
reposition our products and our company in the markets we serve. This strategy
may not be successful. The competitive landscape we face is continuously
changing. It is difficult to estimate how competition will affect our revenues.
It is also very difficult to predict our quarterly results. We have incurred
significant net losses in each year since our inception. We believe that we
will continue to incur losses in 2002. We may not increase our customer base
sufficient to generate the substantial additional revenues necessary to become
profitable. We have
55
CLARUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
established strategic selling relationships with a number of outside companies.
There is no guarantee that these relationships will generate the level of
revenues currently anticipated.
As we expand our international sales and marketing activities and
international operations our business is more susceptible to the numerous risks
associated with international sales and operations. We may not be successful in
addressing these and other risks and difficulties that we may encounter. Please
refer to the "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Risk Factors" section for additional information
regarding the risks associated with our operations and financial condition.
The Company's discussion of financial condition and results of operations
are based on the consolidated financial statements which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements. Estimates also affect the reported amounts of revenues
and expenses during the reporting periods. The Company continually evaluates
its estimates and assumptions including those related to revenue recognition,
allowance for doubtful accounts, impairment of long-lived assets, impairment of
investments, and contingencies and litigation. The Company bases its estimates
on historical experience and other assumptions that are believed to be
reasonable under the circumstances. Actual results could differ from these
estimates.
The Company believes the following critical accounting policies include the
more significant estimates and assumptions used by management in the
preparation of its consolidated financial statements.
. 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" and related
interpretations. 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.
. The Company maintains allowances for doubtful accounts based on expected
losses resulting from the inability of the Company's customers to make
required payments. As a result, the Company has recorded a provision for
doubtful accounts of $5.5 million, $5.8 million and $1.2 million,
respectively, in the years ended December 31, 2001, 2000 and 1999. If the
financial condition of these customers were to deteriorate additional
allowances may be required.
. The Company has significant long-lived assets, primarily intangibles, as
a result of acquisitions completed during 2000. The Company has
periodically evaluated the carrying value of its long-lived assets,
including intangibles, according to Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of". During the fourth
quarter of 2001, the Company's evaluation of the performance of the
SAI/Redeo companies compared to initial projections, negative economic
trends and a decline in industry growth rate projections indicated that
the carrying value of these intangible assets exceeded management's
revised estimates of future undiscounted cash flows. This assessment
resulted in a $36.8 million impairment charge of the intangible assets
based on the amount by which the carrying amount of these assets exceeded
fair value. Subsequent changes in projections may require additional
impairment charges.
. The Company has made equity investments in several privately held
companies. The Company records an investment impairment charge when it
believes an investment has experienced a decline in value that
56
CLARUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
is other than temporary. During the years ended December 31, 2001 and
2000, the Company recorded impairment charges on investments of $15.4
million and $4.1 million, respectively.
. The Company is a party to lawsuits in the normal course of its 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 the following lawsuit could adversely affect
the Company's business, results of operations, liquidity or financial
condition.
Following its public announcement on October 25, 2000, of its financial
results for the third quarter, the Company and certain of its 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.
On March 22, 2001, the Court entered an order appointing as the lead
Plaintiffs John Nittolo, Dean Monroe, Ronald Williams, V&S Industries,
Ltd., VIP World Asset Management, Ltd., Atlantic Coast Capital
Management, Ltd., and T.F.M. Investment Group. Pursuant to the previous
Consolidation Order of the Court, a Consolidated Amended Complaint was
filed on May 14, 2001. On June 29, 2001, the Company filed a motion to
dismiss the consolidated case. The plaintiffs responded to the Company's
motion to dismiss on August 6, 2001. The Company replied with a rebuttal
to the plaintiffs' response on August 27, 2001.
The class action complaint alleges claims against the Company 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 the Company
and certain of its officers relating to its business, results of
operations, financial condition and future prospects, as a result of
which, it is alleged, the market price of the Company's common stock was
artificially inflated during the class periods. The class action
complaint focuses on statements made concerning an account receivable
from one of the Company's customers. 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 all of its obligations under
the Federal securities laws and the Company intends to defend this
lawsuit vigorously. As a result of consultation with legal representation
and current insurance coverage, the Company does not believe the lawsuit
will have a material impact on the Company's results of operations or
financial position.
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 $40.6 million and $101.6 million in cash equivalents included
in the accompanying consolidated balance sheets for the years ended December
31, 2001 and 2000, respectively.
Marketable Securities
Marketable securities at December 31, 2001 and 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
57
CLARUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 will be 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, 2001, four
customers accounted for more than 10% each, totaling $1.7 million or 53.2% of
the gross accounts receivable balance on that date. The percentage of total
accounts receivable due from each of these four customers was 15.8%, 13.9%,
12.6% and 10.9%, respectively, at December 31, 2001. As of December 31, 2000,
four customers accounted for more than 10% each, totaling $6.7 million or 56.0%
of the gross accounts receivable balance on that date. The percentage of total
accounts receivable due from each of these four customers was 19.9%, 14.5%,
11.2% and 10.4%, respectively, at December 31, 2000.
During the year ended December 31, 2001, three customers accounted for more
than 10% each, totaling $6.1 million, or 35.7% of total revenue. The percentage
of total revenue recognized from these three customers was 12.6%, 11.6% and
11.5%, respectively. During the year ended December 31, 2000, one customer
accounted for more than 10%, totaling $3.8 million, or 11.3% of total revenue.
During 1999 no customer accounted for more than 10% of total revenue.
During 2000 and 1999, the Company recognized revenue of $16.0 million,
representing ten customers, and $3.1 million, from one customer, respectively,
relating to early-stage technology companies in which the Company has also made
investments. These companies are subject to significant risk due to their
limited operating histories and volatile industry-based economic conditions.
During 2001, 26.9% of the Company's revenue was derived from international
markets, and 12.6% was derived from one customer in Italy. 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 substantially all of our revenue was
from U.S.-based companies.
Property and Equipment
Property and equipment consists of furniture and fixtures, computers and
other 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.
Property and equipment are summarized as follows (in thousands):
December 31,
---------------- Useful Life
2001 2000 (in years)
------- ------- -----------
Computers and equipment....................... $ 6,936 $ 8,190 2-5
Purchased software............................ 4,730 4,212 2-5
Furniture and fixtures........................ 1,297 1,241 5-7
Leasehold improvements........................ 1,330 1,024 2-7
------- -------
14,293 14,667
Less accumulated depreciation and amortization (6,941) (7,048)
------- -------
Property and equipment, net.................. $ 7,352 $ 7,619
======= =======
Depreciation and amortization expense related to property and equipment
totaled $3.8 million, $2.8 million and $2.0 million for the years ended
December 31, 2001, 2000 and 1999, respectively.
58
CLARUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has included purchased software in property and equipment which
represents the cost of purchased integration software tools. 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 $1.3 million, $766,000 and $614,000 and in 2001,
2000, and 1999, respectively. Accumulated amortization related to purchased
software totaled approximately $2.1 million and $1.6 million at December 31,
2001 and 2000, respectively.
Investments
During the second quarter of 2001, the Company made an equity investment of
$2.0 million in a privately held strategic partner. The Company did not
recognize any revenue related to this investment. Prior to 2001, the Company
made equity investments of $17.7 million in eleven privately held companies.
The Company's equity interest in these entities ranges from 2.5% to 12.5% and
the Company is accounting for these investments using the cost method of
accounting. The Company did not recognize any material revenue from these
companies during 2001. During the years ended December 31, 2000 and 1999, the
Company recognized $16.0 million and $3.1 million, respectively, in total
revenue from these companies. During 2001 and 2000 the Company recorded
impairment charges of $15.4 million and $4.1 million, respectively, for other
than temporary losses on these investments. These companies are primarily
early-stage companies and are subject to significant risk due to their limited
operating history and current economic and capital market conditions. The
remaining investment, valued at $200,000 in the accompanying December 31, 2001
balance sheet, was sold and cash of $200,000 was received during the first
quarter of 2002.
Intangible Assets
At December 31, 2001 and 2000, intangible assets were $10.8 million and
$58.2 million, respectively, and include goodwill, developed technologies, and
other intangibles. These intangible assets are being amortized on a
straight-line basis over periods ranging from three to ten years. Amortization
expense related to these intangibles amounted to $8.5 million, $5.4 million and
$1.4 million in 2001, 2000 and 1999, respectively.
At each balance sheet date, the Company assesses the recoverability of the
intangible assets by determining whether the carrying value can be recovered
through expected 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. Based on this assessment and a revision to the Company's future
cash flow estimate made during the fourth quarter of 2001, the Company
recognized an impairment charge on intangible assets of $36.8 million related
to the write-down of certain intangible assets associated with the acquisition
of the SAI/Redeo companies on May 31, 2000.
As part of the acquisition of the SAI/Redeo companies, two former executives
of the SAI/Redeo companies signed employment agreements. As a result of the
voluntary termination of one agreement prior to the first anniversary of the
acquisition date, the executive was required to return to the Company for
cancellation 55,000 shares of common stock issued in connection with the
agreement. During the first quarter of 2001, the Company recorded the fair
value of these shares as of the acquisition date, approximately $1.5 million,
as a reduction to the intangible balance associated with the SAI/Redeo
acquisition. As a result of the voluntary termination of the second agreement
prior to the second anniversary of the acquisition date, the executive was
required to return to the Company for cancellation 27,500 shares of common
stock issued in connection with the agreement. During the second quarter of
2001, the Company recorded the fair value of these shares as of the acquisition
date, approximately $727,000, as a reduction to the intangible balance
associated with the SAI/Redeo acquisition.
59
CLARUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accumulated amortization related to intangibles totaled $14.6 million and
$6.1 million at December 31, 2001 and 2000, respectively.
Intangible assets are summarized as follows (in thousands):
Useful Life
2001 2000 (in years)
-------- ------- -----------
Goodwill-ELEKOM.................. $ 6,987 $ 6,987 10
Goodwill-SAI/Rodeo............... 10,798 49,735 8
Goodwill-iSold.com............... 1,948 1,948 4
Developed technologies--SAI/Rodeo 4,100 4,100 8
Developed technologies--iSold.com 506 506 3
Assembled workforce.............. 450 450 7
Customer base.................... 100 100 4
Other............................ 534 534 3
-------- -------
25,423 64,360
Less accumulated amortization.... (14,608) (6,146)
-------- -------
Intangible assets, net.......... $ 10,815 $58,214
======== =======
Long-Lived Assets and Long-Lived Assets to be Disposed Of
Through December 31, 2001, the Company accounted 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, 2001 and 2000 (in thousands):
2001 2000
------ -------
Accounts payable............................... $ 588 $ 2,429
Accrued compensation, benefits, and commissions 1,386 3,497
Restructuring reserves......................... 1,889 --
Payable associated with iSold acquisition...... -- 900
Other.......................................... 2,643 4,233
------ -------
$6,506 $11,059
====== =======
Product Returns and Warranties
The Company provides warranties for its products after the software is
purchased for an agreed upon period. 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
60
CLARUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
experienced significant warranty claims to date. Accordingly, the Company has
not provided a reserve for warranty costs at December 31, 2001, 2000, and 1999.
Fair Value of Financial Instruments
The Company uses financial instruments in the normal course of its business.
The carrying values of cash equivalents, marketable securities, accounts
receivable, accounts payable and long-term debt approximate fair value. 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, 2001 and 2000.
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" and related interpretations. 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, 2001 and 2000, were as follows (in thousands):
2001 2000
------ ------
Deferred revenues:
Deferred license fees.............. $4,903 $ 328
Deferred services and training fees 281 111
Deferred maintenance fees.......... 1,991 2,737
------ ------
Total deferred revenues............ 7,175 3,176
Less current portion............... 5,206 2,295
------ ------
Noncurrent deferred revenues....... $1,969 $ 881
====== ======
61
CLARUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred license fees include amounts collected under subscription, milestone
based and other ratable contracts for which revenue has not been recognized.
Deferred services, training fees and maintenance fees consist of prepaid fees
for the performance of these services in the future.
Nonmonetary Transactions
The Company accounts for nonmonetary transactions based on the fair value of
the elements to the arrangement. During the second quarter of 2001, the Company
made an equity investment of $2.0 million in a privately held strategic
partner. The Company did not recognize any revenue related to this investment.
Prior to 2001, the Company made equity investments of $17.7 million in eleven
privately held companies. The Company's equity interest in these entities
ranges from 2.5% to 12.5% and the Company is accounting for these investments
using the cost method of accounting. During 2000 and 1999, the Company
recognized $16.0 million and $3.1 million, respectively, in total revenue from
software sales to these privately held companies.
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 discussed in note 11, 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 costs based upon
the terms of the agreements using the fair value of the common stock or
warrants issued.
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 research and
development expense for the three years ended December 31, 2001.
Advertising Expense
Advertising costs are expensed as incurred and totaled $319,000, $4.4
million and $27,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.
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
62
CLARUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
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, 2001, 2000 and 1999 does not include the effect of common stock
equivalents, calculated by the treasury stock method, as their impact would be
antidilutive. The potentially dilutive effect of excluded common stock
equivalents are as follows (in thousands):
2001 2000 1999
---- ----- ----
Effect of shares issuable under stock options.......................... 194 1,116 857
Effect of shares issuable pursuant to warrants to purchase common stock -- 167 25
--- ----- ---
Total effect of dilutive common stock equivalents...................... 194 1,283 882
=== ===== ===
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 2001 and 2000 the Company operated in one principal
business segment, e-commerce software solutions, across domestic and
international markets. During 1999 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
63
CLARUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
accounting policies of the segments are the same as those described above.
Segment information for the year ended December 31, 1999 is as follows (in
thousands):
1999
-------
Revenues:
E-commerce revenue.................................... $11,484
ERP revenue........................................... 26,658
-------
Total revenues........................................ $38,142
Cost of revenues:
E-commerce cost of revenues........................... $ 3,530
ERP cost of revenues.................................. 12,338
-------
Total cost of revenues................................ $15,868
Gross margins:
E-commerce gross margin............................... $ 7,954
ERP gross margin...................................... 14,320
-------
Total gross margins................................... $22,274
=======
Geographic revenue and property and equipment as of and for the years ended
December 31, 2001 and 2000 were as follows:
2001 2000
------- -------
(in thousands)
Revenue:
United States....................................... $12,431 $27,033
Italy............................................... 2,149 --
Other international................................. 2,425 7,014
------- -------
Total................................................. $17,005 $34,047
======= =======
Property and equipment:
United States....................................... $ 6,661 $ 7,098
International....................................... 691 521
------- -------
Total................................................. $ 7,352 $ 7,619
======= =======
Prior to 2000, substantially all of the Company's revenue and property and
equipment were in the United States.
New Accounting Pronouncements
At the November 2001 Emerging Issues Task Force ("EITF") meeting, the FASB
released Staff Announcement Topic D-103, "Income Statement Characterization of
Reimbursements Received for 'Out-of-Pocket' Expenses Incurred". The FASB Staff
Announcement clarified interpretations of EITF 99-19, "Reporting Revenue Gross
as a Principal versus Net as an Agent", stating that the Staff believes that
reimbursements received for out-of-pocket expenses should be characterized as
revenue. Historically the Company has not reflected such reimbursements as
revenue in its consolidated statements of operations. The largest expenses, for
which the Company is reimbursed by clients, are travel related charges. The
FASB Staff Announcement requires adoption in financial reporting periods
beginning after December 15, 2001. Upon application of this FASB Staff
Announcement, comparative financial statements for prior periods will be
reclassified to provide consistent presentation. The Company does not expect
the new FASB Staff Announcement to have any impact on its
64
CLARUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
financial position or results of operations. However, the Company's services
fees revenue and cost of services fees revenue will increase by an equal amount
as a result of the gross-up of revenues and expenses for reimbursable expenses.
The following table shows the expected impact of adopting the Staff
Announcement on services fees revenue and cost of services fees revenue for the
years ended 2001 and 2000:
2001 2000
------- -------
(in thousands)
As reported
Services fees revenue............................... $ 9,198 $ 9,361
Cost of services fees revenue....................... 12,253 11,935
After reclassification
Services fees revenue............................... 9,866 10,327
Cost of services fees revenue....................... 12,921 12,901
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Assets to Be Disposed
Of". The Company is required to adopt SFAS 144 effective January 1, 2002. The
adoption of SFAS 144 is not expected to have a material impact on the Company's
financial statements.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. SFAS 142 will require that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually. SFAS 142 will also require
that intangible assets with estimable useful lives be amortized over their
respective estimated useful lives to their estimated residual values.
The Company is required to adopt the provisions of SFAS 141 immediately and
SFAS 142 effective January 1, 2002. Goodwill and intangible assets determined
to have an indefinite useful life acquired in a purchase business combination
completed after June 30, 2001, but before SFAS 142 is adopted in full will not
be amortized, but will continue to be evaluated for impairment in accordance
with the accounting literature in effect prior to the issuance of SFAS 142.
Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001 will continue to be amortized prior to the adoption of SFAS
142.
At December 31, 2001, the Company's unamortized goodwill and intangibles
totaled $10.8 million. Amortization expense related to goodwill was $7.6
million and $5.8 million for the years ended December 31, 2001 and 2000,
respectively. Upon adoption, the Company tested goodwill for impairment
according to the provisions of SFAS 142, which resulted in no impairment
required as a cumulative effect of accounting change. The Company anticipates
amortization related to intangibles with definitive lives to be approximately
$863,000 during 2002.
In September 1998, the FASB issued SFAS 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". The Company adopted these new pronouncements in January of
2001. The new Statements require all derivatives to be recorded on the balance
sheet at fair value and establish 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.
The Company has no derivatives and the adoption of these pronouncements did not
have any impact on the Company's results of operations or financial position.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
65
CLARUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. MARKETABLE SECURITIES
Prior to 2000, the Company did not own any marketable securities. After the
completion of the Company's secondary offering, the proceeds were placed in
investment grade cash equivalents and marketable securities. As of December 31,
2001 and 2000, those investments with an original maturity of three months or
less are classified as cash equivalents and those investments with original
maturities beyond three 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 marketable securities by major security type and class
of security at December 31, 2001 were as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Holding Gains Holding Losses Value
--------- ------------- -------------- -------
Commercial paper...................................... $ 9,915 $ 21 $ -- 9,936
Corporate notes and bonds............................. 26,401 105 (13) 26,493
Government notes and bonds............................ 24,758 72 (6) 24,824
Certificates of deposit............................... 3,999 12 -- 4,011
------- ---- ---- -------
Total.............................................. $65,073 $210 $(19) $65,264
======= ==== ==== =======
The maturities of all securities are less than one year from December 31,
2001.
The Company had no realized gains and had approximately $11,000 in realized
losses from sales of marketable securities included in the accompanying
consolidated statements of operations for the year ended December 31, 2001. The
Company received approximately $15.0 million in proceeds from these sales.
The gross unrealized holding gains for the cash equivalents at December 31,
2001 were approximately $22,000. There were no gross unrealized holding losses
for the cash equivalents at December 31, 2001.
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and fair value of these available-for-sale marketable 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
Certificates of deposit............................... 4,501 17 -- 4,518
Equity securities..................................... 1,213 -- (799) 414
------- ---- ----- -------
Total.............................................. $50,914 $123 $(828) $50,209
======= ==== ===== =======
The maturities of all securities except for equity securities are less than
one year from December 31, 2000.
The Company had no realized gains and had approximately $100,000 in realized
losses from sales of marketable securities included in the accompanying
consolidated statements of operations for the year ended December 31, 2000. The
Company received approximately $2.9 million in proceeds from these sales.
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.
66
CLARUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. ACQUISITIONS
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 was accrued at the
date of acquisition and paid 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 3
years and the goodwill is being amortized over 4 years.
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
assumptions: 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 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 as in-process research and
development in the second quarter of 2000.
Pro forma information
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 and 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
On November 1, 2001, the Company engaged E.Com Consulting to perform market
research and provide recommendations concerning the needs and opportunities
associated with the Company's settlement product. E.Com Consulting
subcontracted with e-RM International, Inc. ("e-RMI") to assist with a portion
of this project.
67
CLARUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
e-RMI is a Delaware corporation whose sole shareholder is Chrismark Enterprises
LLC. Chrismark Enterprises LLC is owned by Mark Johnson, a director of the
Company, and his wife. The contract period of the engagement was November 1,
2001 through January 31, 2002 for which the Company agreed to pay total
professional fees of $50,000 plus out-of-pocket expenses. Of this amount $7,805
was paid to e-RMI. The Company expensed a total of $42,164 in connection with
this engagement during 2001 that is included in general and administrative
expense in the accompanying consolidated statement of operations and had a
balance due E.Com of $34,359 at December 31, 2001 that is included in accounts
payable and accrued liabilities in the accompanying consolidated balance sheet.
The remaining amounts due under the agreement will be expensed and paid in 2002.
On February 7, 2002 Todd Hewlin joined the Company's board of directors. Mr.
Hewlin is a managing director of The Chasm Group, LLC, a consultancy
organization focusing on helping technology companies develop and implement
strategies that create and sustain market leadership positions for their core
products while building shareholder value and a sustainable competitive
advantage. During 2001, the Company engaged The Chasm Group to assist the
Company on various strategic and organizational issues. The contract period of
the engagement was November 15, 2001 through February 15, 2002 for which the
Company agreed to professional fees of $225,000 plus out-of-pocket expenses.
The Company expensed a total of $131,000 during 2001 that is included in
general and administrative in the accompanying consolidated statement of
operations and had a balance due The Chasm Group of $94,000 at December 31,
2001 that is included in accounts payable and accrued liabilities in the
accompanying consolidated balance sheet. The remaining amounts due under the
agreement will be expensed and paid in 2002.
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 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 a services subsidiary of the Company. Mr. McCall remained an employee of the
Company until the completion of the Company's initial public 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
initial public 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 to Mr. McCall under this consulting agreement during the
year ended December 31, 1999. No payments were made to Mr. McCall in 2000 or
2001.
In the opinion of management, the rates, terms, and considerations of the
transactions with the related parties described above approximate those that
the Company would have received in transactions with unaffiliated parties.
5. RESTRUCTURING AND RELATED COSTS
During 2001, the Company's management approved restructuring plans to
reorganize and reduce operating costs. Restructuring and related charges of
$513,000, $498,000 and $3.1 million were expensed in the first, third and
fourth quarters of 2001, respectively, to better align the Company's cost
structure with projected revenue. The first and third quarter charges were
comprised entirely of employee separation and related costs for 23 and 43
employees, respectively. The fourth quarter charge was comprised of $1.9
million for employee separation and related costs for 115 employees and $1.2
million for facility closure and consolidation costs. For the year
68
CLARUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ended December 31, 2001, the restructuring and related costs were classified in
the Company's consolidated statement of operations as follows:
Year Ended
December 31, 2001
-----------------
(in thousands)
Cost of revenues--services fees....................... $1,177
Research and development.............................. 217
Sales and marketing................................... 1,218
General and administrative............................ 1,545
------
Total................................................. $4,157
======
The Company completed all employee separation initiatives by December 31,
2001 and expects to complete the facility closure and consolidation during the
first half of 2002. The facility closure and consolidation costs relate to the
abandonment of the Company's leased facility near Toronto, Canada and the
restructuring of the Company's leased facility in Suwanee, Georgia. Total
facility closure and consolidation costs include remaining lease liabilities,
construction costs and brokerage fees to sublet the abandoned space offset by
estimated sublease income. The estimated costs of abandoning these leased
facilities, including estimated costs to sublease, were based on market
information trend analysis provided by a commercial real estate brokerage firm
retained by the Company.
The following is a reconciliation of the components of the restructuring and
related accrual, the amounts charged against the accrual during 2001 and the
balance of the accrual as of December 31, 2001:
Remaining
Restructuring accrual at
and Related Expenditures December 31,
charges During 2001 2001
------------- ------------ ------------
(in thousands)
Employee separation costs............................. $2,939 $2,259 $ 680
Facility closure costs................................ 1,218 9 1,209
------ ------ ------
Total................................................. $4,157 $2,268 $1,889
====== ====== ======
The accrual for restructuring and related costs is included in accounts
payable and accrued liabilities in the accompanying consolidated balance sheet
at December 31, 2001.
6. INCOME TAXES
For financial reporting purposes, losses from continuing operations
before income taxes includes the following components (in thousands):
Year ended December 31,
----------------------------
2001 2000 1999
--------- -------- -------
Pre-tax loss:
United States....................................... $ (66,995) $(51,805) $(5,401)
Foreign............................................. (52,859) (18,842) --
--------- -------- -------
$(119,854) $(70,647) $(5,401)
========= ======== =======
69
CLARUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 2001 are as follows
(in thousands):
Year ended December 31,
---------------------------
2001 2000 1999
-------- -------- -------
Current:
Federal................................................. $ -- $ -- $ --
State................................................... --
Foreign................................................. -- -- --
-------- -------- -------
-- -- --
-------- -------- -------
Deferred:
Federal................................................. (19,950) (16,216) (1,473)
State................................................... (4,809) (2,700) (173)
Foreign................................................. (2,513) (1,863) --
-------- -------- -------
(27,272) (20,779) (1,646)
Increase in valuation allowance for deferred income taxes 27,272 20,779 1,646
-------- -------- -------
$ -- $ -- $ --
======== ======== =======
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 each of the years in the three-year period ended December
31, 2001:
Year ended December 31,
-------------------------
2001 2000 1999
------ ------- ------
Computed "expected" income tax expense (benefit)..... (34.0)% (34.0)% (34.0)%
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal income taxes..... (2.6) (3.7) (4.0)
Other, net.......................................... 0.1 0.7 0.8
Nondeductible goodwill.............................. 12.8 2.5 6.7
Nondeductible acquired research & development....... 0.0 4.0 0.0
Income tax effect attributable to foreign operations 0.9 1.1 0.0
Increase in valuation allowance..................... 22.8 29.4 30.5
------ ------- ------
Income tax expense (benefit)......................... $ -- $ -- $ --
====== ======= ======
70
CLARUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 2001 and 2000 are as follows:
Year ended
December 31,
------------------
2001 2000
-------- --------
Deferred income tax assets:
Net operating loss and research & experimentation credit carryforwards $ 43,985 23,980
Allowance for doubtful accounts....................................... 131 1,509
Depreciation and amortization......................................... 856 540
Noncash compensation.................................................. 7,444 4,719
Accrued liabilities................................................... 392 385
Impairment charges on investments..................................... 7,207 1,610
-------- --------
Net deferred income tax assets before valuation allowance.............. 60,015 32,743
Valuation allowance for deferred income tax assets..................... (60,015) (32,743)
-------- --------
Net deferred income tax assets......................................... $ -- $ --
======== ========
The net increase in the valuation allowance for deferred income tax assets
for 2001, 2000 and 1999 was $27.3 million, $20.8 million, and $1.6 million,
respectively. In assessing the realizability of deferred income 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. Management has provided a valuation
allowance against deferred income tax assets at December 31, 2001 because the
ultimate realization of those benefits and assets does not meet the more likely
than not criteria.
At December 31, 2001, 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 $98.7 million, $1.1 million
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.$16.0 million that are available to offset future taxable
income in foreign jurisdictions.
The Company's ability to benefit from certain net operating loss and other
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 U.S. net operating losses may not be realizable in future
years due to this limitation.
7. DEBT
The Company's short- and long-term debt consists of the following as of
December 31, 2001 and 2000 (in thousands):
2001 2000
------ ------
Convertible subordinated promissory note with a commercial bank, which is also a
customer, due March 15, 2005, interest payable quarterly at 4.5%.............. $5,000 $5,000
------ ------
5,000 5,000
Less current portion of long-term debt.......................................... -- --
------ ------
$5,000 $5,000
====== ======
71
CLARUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
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.
8. 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 $169,000, $139,000 and $1.3 million in royalty expense for the
years ended December 31, 2001, 2000, and 1999, respectively, pursuant to these
agreements. The royalty fees paid are included in cost of revenues-license fees
in the accompanying consolidated statements of operations.
9. 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 $147,000 and $93,000 in
2001 and 2000, respectively. The Company did not make matching or discretionary
profit-sharing contributions in 1999.
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. A maximum of 1,000,000 shares of common stock may be
purchased under the Plans. Common stock is purchased directly from the Company
on behalf of the participants. During the years ended December 31, 2001 and
2000, 55,420 and 3,883 shares were purchased for the benefit of the
participants under the Plans, respectively. As of December 31, 2001, there were
17 and 7 participants in the U.S. Plan and the Global Plan, respectively. As of
December 31, 2000, there were 69 and 20 participants in the U.S. Plan and the
Global Plan, respectively.
72
CLARUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. 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.
The 1992 Plan also provides for stock purchase authorizations and stock
bonus awards. As of December 31, 2001, 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. 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 $150,000 and
$116,000 was recognized during 2001 and 2000, respectively.
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.
On April 9, 2001, the Company announced a voluntary stock option exchange
program for its employees. Under the program, employees were given the
opportunity to cancel outstanding stock options previously granted to them on
or after November 1, 1999 in exchange for an equal number of new options to be
granted at a future date. The exercise price of the new options was equal to
the fair market value of the Company's common stock on the date of grant.
During the first phase of the program 366,174 options with a weighted average
exercise price of $30.55 per share were canceled and new options to purchase
263,920 shares with an exercise price of $3.49 per share were issued on
November 9, 2001. During the second phase of the program 273,188 options with a
weighted average exercise price of $43.87 per share were canceled and new
options to purchase 198,052 shares with an exercise price of $4.10 per share
were issued on February 11, 2002. Employees who participated in the first
exchange were not eligible for the second exchange. The exchange program was
designed to comply with Financial Accounting Standards Board ("FASB")
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation" and did not result in any additional compensation charges or
variable accounting. Members of the Company's Board of Directors and its
executive officers were not eligible to participate in the exchange program.
73
CLARUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On August 15, 2001, the Company granted options to purchase 150,000 shares
of common stock to a senior executive with an exercise price equal to the fair
market value at the date of grant. These options are designated as nonqualified
options and will expire if not exercised in full before August 14, 2011.
Twenty-five percent of the shares subject to the option shall vest on the first
anniversary of the date of grant and the remaining portion of the option shall
vest in equal monthly installments for 36 months beginning on August 15, 2002.
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. During 2001, 160,020 of these options were canceled.
The remaining 16,667 options were canceled during the first quarter of 2002.
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. The vested options were
canceled during the first quarter of 2002.
Total options available for grant under all plans as of December 31, 2001
were 930,015.
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 shareholders' 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 Company amortizes deferred compensation over the vesting
period of the options. The Company amortized to noncash compensation expense
approximately $252,000, $1,098,000 and $874,000 of the deferred compensation
related to these option grants for the years ended December 31, 2001, 2000, and
1999, 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 noncash compensation
expense for 1999 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. 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.
74
CLARUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of changes in outstanding options during the three years ended
December 31, 2001 is as follows:
Weighted
Average
Range of Exercise
Shares Exercise Prices Price
---------- --------------- --------
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
Granted................................. 1,923,240 $3.43-$ 9.25 $ 5.80
Canceled................................ (1,886,791) $1.00-$136.00 $25.80
Exercised............................... (62,445) $0.67-$ 5.75 $ 3.17
----------
December 31, 2001.......................... 3,241,126 $1.00-$128.13 $12.06
==========
Vested and exercisable at December 31, 2001 1,122,296 $ 15.40
==========
Vested and exercisable at December 31, 2000 564,081 $ 16.86
==========
Vested and exercisable at December 31, 1999 525,845 $ 5.55
==========
The weighted average grant date fair value of options granted during the
years ended December 31, 2001, 2000, and 1999, was $5.78, $23.27 and $17.63
respectively.
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:
2001 2000 1999
----------- ----------- -----------
Dividend yield......... 0% 0% 0%
Expected volatility.... 90% 90% 60%
Risk-free interest rate 3.56%-4.98% 3.44%-6.60% 4.64%-6.38%
Expected life.......... Four years Four years Four years
Using these assumptions, the fair values of the stock options granted during
the years ended December 31, 2001, 2000, and 1999, were approximately $7.4
million, $49.0 million and $6.0 million respectively, which would be amortized
over the vesting period of the options. The per share fair values of the stock
options granted during the years ended December 31, 2001, 2000, and 1999, were
$3.84, $23.28 and $4.18, respectively. 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, 2001, would have been as
follows (in thousands, except per share amounts):
2001 2000 1999
--------- -------- -------
Net loss:
As reported......................... $(119,854) $(70,647) $(5,401)
Pro forma........................... $(124,065) $(79,320) $(6,275)
Basic and diluted net loss per share:
As reported......................... $ (7.72) $ (4.90) $ (0.49)
Pro forma........................... $ (7.99) $ (5.50) $ (0.57)
75
CLARUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes the exercise price range, weighted average
exercise price, and remaining contractual lives by significant ranges for
options outstanding and exercisable as of December 31, 2001:
Weighted
Number of Average Number of
Shares Weighted Remaining Shares Weighted
Outstanding Average Contractual Exercisable Average
Exercise Price Range at 12/31/01 Price Life (Years) at 12/31/01 Price
-------------------- ----------- -------- ------------ ----------- --------
$ 1.00-$ 4.83.... 712,864 $ 3.65 5.04 266,967 $ 3.62
$ 5.17-$ 7.63... 1,535,733 $ 6.14 6.00 333,991 $ 5.94
$ 7.88-$ 26.44.... 448,938 $11.30 4.13 231,163 $11.32
$29.50-$128.13.... 543,591 $40.56 5.08 290,175 $40.38
--------- ---------
3,241,126 $12.06 1,122,296 $15.40
========= =========
Subsequent to December 31, 2001, the Company has granted options to purchase
502,932 shares of common stock at exercise prices ranging from $4.10 to $5.99
per share.
11. STOCKHOLDERS' EQUITY
Common Stock
During 2000, the Company entered into agreements with three strategic
partners, who are also customers, 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 total value
of these common stock grants was approximately $3.8 million based upon the
value of the Company's common stock at the date of grant. The Company
recognized $1.5 million and $8.3 million of total revenues from these customers
during the years ended December 31, 2001 and 2000, respectively. The Company
did not recognize any revenue from these customers during 1999.
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 deferred sales and marketing costs in the accompanying consolidated
balance sheet. During the fourth quarter of 2001, the Company terminated the
sales and marketing agreement with this strategic partner resulting in a
write-off of the remaining deferred sales and marketing costs of $1.4 million.
Also, as a result of the termination, the Company is no longer required to make
cash payments of $300,000 for the last two years of the agreement The Company
recorded noncash sales and marketing expense, including the write-off discussed
above, of approximately $2.5 million and $825,000 during 2001 and 2000,
respectively related to these agreements. The remaining balance will be
amortized over the initial service period of three years.
Warrants
In connection with the 1999 financing discussed in Note 7, 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, 2001.
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, who were also customers, 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
76
CLARUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 costs at the date of issuance. The Company has
recorded noncash sales and marketing expense of approximately $4.3 million,
$5.7 million and $1.9 million related to these agreements during the years
ended December 31, 2001, 2000 and 1999, respectively. All of the warrants
remain outstanding at December 31, 2001. The Company recognized $473,000 and
$3.2 million of total revenues from these customers during the years ended
December 31, 2000 and 1999, respectively. The Company did not recognize any
revenue from these customers during 2001.
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 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. These warrants remain outstanding at December 31, 2001.
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 the 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, who were also customers, 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 for the year ended December 31, 1999. The
25,000 warrants remain outstanding at December 31, 2001. The Company recognized
$869,000 and $4.2 million of total revenues from these customers during the
years ended December 31, 2000 and 1999, respectively. The Company did not
recognize any revenue from these customers during 2001.
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
met the first predetermined milestone and earned the 33,334 warrants while the
remaining 16,666 were forfeited. The exercise
77
CLARUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 the 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, 2001.
12. COMMITMENTS AND CONTINGENCIES
Leases
The Company rents certain office space, copiers, telephone and computer
equipment under noncancelable operating leases. Rents charged to expense were
approximately $2.1 million, $1.9 million and $1.7 million for the years ended
December 31, 2001, 2000, and 1999, respectively. Aggregate future minimum lease
payments for the next five years and thereafter under noncancelable operating
leases with remaining terms greater than one year and in the aggregate as of
December 31, 2001, are as follows (in thousands):
Year ending December 31,
2002............. $2,022
2003............. 1,774
2004............. 1,803
2005............. 1,802
2006............. 644
Thereafter.......... 53
------
Total............ $8,098
======
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, liquidity and financial condition.
Litigation
The Company is a party to lawsuits in the normal course of its 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 the following lawsuit could adversely affect the Company's
business, results of operations, liquidity or financial condition.
Following its public announcement on October 25, 2000, of its financial
results for the third quarter, the Company and certain of its 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. On March 22, 2001, the Court entered an order appointing as
the lead Plaintiffs John Nittolo, Dean Monroe, Ronald Williams, V&S
78
CLARUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Industries, Ltd., VIP World Asset Management, Ltd., Atlantic Coast Capital
Management, Ltd., and T.F.M. Investment Group. Pursuant to the previous
Consolidation Order of the Court, a Consolidated Amended Complaint was filed on
May 14, 2001. On June 29, 2001, the Company filed a motion to dismiss the
consolidated case. The plaintiffs responded to the Company's motion to dismiss
on August 6, 2001. The Company replied with a rebuttal to the plaintiffs'
response on August 27, 2001.
The class action complaint alleges claims against the Company 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 the Company and certain of its officers
relating to its business, results of operations, financial condition and future
prospects, as a result of which, it is alleged, the market price of the
Company's common stock was artificially inflated during the class periods. The
class action complaint focuses on statements made concerning an account
receivable from one of the Company's customers. 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 all of its obligations under the Federal securities
laws and the Company intends to defend this lawsuit vigorously. As a result of
consultation with legal representation and current insurance coverage, the
Company does not believe the lawsuit will have a material impact on the
Company's results of operations or financial position.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
79
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 2002 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 2002 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 2002 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 2002
Annual Stockholders' Meeting is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements, Financial Statement Schedules and Exhibits
(a) Financial Statements. See Item 8 of Part II of this Form 10-K.
--------------------
Financial Statement Schedules
-----------------------------
Schedule II Valuation and Qualifying Accounts
Exhibits
--------
80
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 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).
10.2 Patent License Agreement (Incorporated by reference from Exhibit 10.2 of the Company's
Form 10-Q filed on August 14, 2000).
10.3 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). *
10.4 Employee Stock Purchase Plan (Incorporated by reference from Exhibit 10.3 of the Company's
Form 10-Q filed on August 14, 2000). *
10.5 Global Employee Stock Purchase Plan (Incorporated by reference from Exhibit 10.4 of the
Company's Form 10-Q filed on August 14, 2000). *
10.6 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). *
10.7 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). *
10.8 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). *
10.9 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). *
10.10 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). *
10.11 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)). *
10.12 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)).
10.13 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)).
81
Exhibit
Number Exhibit
------ -------
10.14 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). *
10.15 ** Employment Agreement between the Company and Steven M. Hornyak (Incorporated by
reference from Exhibit 10.1 of the Company's Form 10-Q filed on August 10, 2001).*
10.16 Employment Agreement between the Company and Sean Feeney. *
10.17 *** Separation Agreement between the Company and Michael W. Mattox. *
10.18 Employment Agreement between the Company and Craig W. Potts. *
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.
- --------
* Management contract or compensatory plan or arrangement.
** Certain information in this Exhibit has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
granted with respect to the omitted portions.
*** Certain information in this Exhibit has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
(b) Reports on Form 8-K filed in the fourth quarter of 2001.--None.
82
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, 2002
By: /s/ STEPHEN P. JEFFERY
-----------------------------
Stephen P. Jeffery
Chairman, Chief Executive
Officer and President
Name Title Date
---- ----- ----
/s/ STEPHEN P. JEFFERY Chairman, Chief Executive March 21, 2002
- ----------------------------- Officer, President
Stephen P. Jeffery (principal executive
officer) and Director
/s/ JAMES J. MCDEVITT Chief Financial Officer March 21, 2002
- ----------------------------- (principal financial and
James J. McDevitt accounting officer)
/s/ TENCH COXE Director March 21, 2002
- -----------------------------
Tench Coxe
/s/ TODD HEWLIN Director March 21, 2002
- -----------------------------
Todd Hewlin
/s/ DONALD L. HOUSE Director March 21, 2002
- -----------------------------
Donald L. House
/s/ MARK A. JOHNSON Director March 21, 2002
- -----------------------------
Mark A. Johnson
/s/ SAID MOHAMMADIOUN Director March 21, 2002
- -----------------------------
Said Mohammadioun
/s/ BRADY L. RACKLEY, III Director March 21, 2002
- -----------------------------
Brady L. Rackley, III
83
Schedule II
Valuation and Qualifying Accounts
Clarus Corporation and Subsidiaries
For the years ended December 31, 2001, 2000, and 1999
Allowance for Doubtful Accounts, Valuation Allowance for Deferred
Income Tax Assets and Restructuring and Related Charges
Balance at Charged to Charged Balance at
Beginning of Costs and to Other End of
Period Expenses Accounts Deductions (a) Period
------------ ----------- -------- -------------- -----------
Allowance for Doubtful Accounts
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
2001.......................... 3,917,000 5,537,000 0 8,779,000 675,000
Valuation Allowance for Deferred
Income Tax Assets
1999.......................... 10,318,000 1,646,000 0 0 11,964,000
2000.......................... 11,964,000 20,779,000 0 0 32,743,000
2001.......................... 32,743,000 27,272,000 0 0 60,015,000
Restructuring and Related Charges
2001.......................... 0 4,157,000 0 2,268,000 1,889,000
- --------
(a) Deductions related to the allowance for doubtful accounts represent the
write-off of uncollectible accounts receivable balances against the
allowance for doubtful accounts. Deductions related to restructuring and
related charges represent cash payments.
(b) Of this amount $537,000 was transferred as part of the sale of the
financial and human resources software business.
S-1
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 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).
10.2 Patent License Agreement (Incorporated by reference from Exhibit 10.2 of the Company's
Form 10-Q filed on August 14, 2000).
10.3 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). *
10.4 Employee Stock Purchase Plan (Incorporated by reference from Exhibit 10.3 of the Company's
Form 10-Q filed on August 14, 2000). *
10.5 Global Employee Stock Purchase Plan (Incorporated by reference from Exhibit 10.4 of the
Company's Form 10-Q filed on August 14, 2000). *
10.6 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). *
10.7 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). *
10.8 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). *
10.9 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). *
10.10 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). *
10.11 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)). *
10.12 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)).
10.13 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)).
Exhibit
Number Exhibit
------ -------
10.14 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). *
10.15 ** Employment Agreement between the Company and Steven M. Hornyak (Incorporated by
reference from Exhibit 10.1 of the Company's Form 10-Q filed on August 10, 2001).*
10.16 Employment Agreement between the Company and Sean Feeney. *
10.17 *** Separation Agreement between the Company and Michael W. Mattox. *
10.18 Employment Agreement between the Company and Craig W. Potts. *
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.
- --------
* Management contract or compensatory plan or arrangement.
** Certain information in this Exhibit has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
granted with respect to the omitted portions.
*** Certain information in this Exhibit has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.