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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _________ to _________
Commission File Number: 0-24277
Clarus Corporation
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(Exact name of registrant as specified in its charter)
Delaware 58-1972600
------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3970 Johns Creek Court
Suwanee, Georgia 30024
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(Address of principal executive offices)
(Zip code)
(770) 291-3900
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(Registrant's telephone number, including area code)
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(Former name, former address and former
fiscal year, if changed since last report.)
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 periods 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, ($.0001 Par Value)
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15,623,347 shares outstanding as of August 9, 2002
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INDEX
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CLARUS CORPORATION
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) - June 30, 2002 and
December 31, 2001; 3
Condensed Consolidated Statements of Operations (unaudited) - Three and
six months ended June 30, 2002 and 2001; 4
Condensed Consolidated Statements of Cash Flows (unaudited) - Six
months ended June 30, 2002 and 2001; 5
Notes to Condensed Consolidated Financial Statements (unaudited) -
June 30, 2002 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
PART II OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 32
SIGNATURES 33
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CLARUS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share and per share amounts)
June 30, December 31,
2002 2001
--------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 38,676 $ 55,628
Marketable securities 68,629 65,264
Accounts receivable, less allowance for doubtful accounts
of $787 and $675 in 2002 and 2001, respectively 999 2,566
Deferred marketing expense, current - 391
Prepaids and other current assets 1,596 2,472
--------- --------
Total current assets 109,900 126,321
PROPERTY AND EQUIPMENT, NET 4,183 7,352
OTHER ASSETS:
Deferred marketing expense, net of current portion - 98
Investments - 200
Goodwill - 6,736
Intangible assets, net of accumulated amortization of 1,493 in 2001 - 4,079
Deposits and other long-term assets 592 488
--------- --------
TOTAL ASSETS $ 114,675 $145,274
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 8,155 $ 6,506
Deferred revenue 1,844 5,206
--------- --------
Total current liabilities 9,999 11,712
LONG-TERM LIABILITIES:
Deferred revenue 104 1,969
Long-term debt 5,000 5,000
Other long-term liabilities 258 265
--------- --------
Total liabilities 15,361 18,946
STOCKHOLDERS' EQUITY:
Preferred stock, $0.0001 par value; 5,000,000 shares authorized;
none issued - -
Common stock, $0.0001 par value; 100,000,000 shares authorized;
15,676,501 and 15,638,712 shares issued and 15,601,501 and
15,563,712 outstanding in 2002 and 2001, respectively 2 2
Additional paid-in capital 360,845 360,670
Accumulated deficit (261,651) (234,623)
Treasury stock, at cost (2) (2)
Accumulated other comprehensive income 120 281
--------- --------
Total stockholders' equity 99,314 126,328
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 114,675 $145,274
========= ========
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
3
CLARUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2002 2001 2002 2001
REVENUES:
License fees $ 1,013 $ 3,600 $ 2,486 $ 5,910
Services fees 1,531 2,595 3,999 5,125
--------- --------- --------- ---------
Total revenues 2,544 6,195 6,485 11,035
COST OF REVENUES:
License fees 3 80 17 124
Services fees 1,881 3,341 3,819 7,119
--------- --------- --------- ---------
Total cost of revenues 1,884 3,421 3,836 7,243
OPERATING EXPENSES:
Research and development 2,553 4,570 5,182 10,125
Sales and marketing, exclusive of non-cash expense 2,680 9,329 6,228 17,398
Non-cash sales and marketing 352 1,688 450 3,376
General and administrative, exclusive of non-cash
expense 3,594 2,330 5,099 5,024
Non-cash general and administrative - 112 - 224
Provision for doubtful accounts 1 555 3 2,610
Intangible impairment loss 10,360 - 10,360 -
Depreciation and amortization on property and equipment 1,304 838 2,433 1,683
Amortization of intangible assets 227 2,463 455 4,483
Loss on disposal of assets 795 7 785 7
--------- --------- --------- ---------
Total operating expenses 21,866 21,892 30,995 44,930
OPERATING LOSS (21,206) (19,118) (28,346) (41,138)
OTHER INCOME 6 11 12 10
LOSS ON IMPAIRMENT OF INVESTMENTS - (3,386) - (6,484)
INTEREST INCOME 685 1,762 1,418 4,184
INTEREST EXPENSE (56) (56) (112) (120)
--------- --------- --------- ---------
NET LOSS $(20,571) $(20,787) $(27,028) $(43,548)
========= ========= ========= =========
Loss per common share (Note 2):
Basic $ (1.32) $ (1.34) $ (1.73) $ (2.81)
Diluted $ (1.32) $ (1.34) $ (1.73) $ (2.81)
Weighted average shares outstanding (Note 2):
Basic 15,588 15,507 15,580 15,507
Diluted 15,588 15,507 15,580 15,507
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4
CLARUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands, except share amounts)
Six months ended
June 30,
--------------------
2002 2001
--------- --------
OPERATING ACTIVITIES:
Net loss $ (27,028) $(43,548)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization on property and equipment 2,433 1,683
Amortization of intangible assets 455 4,483
Loss on impairment of investments - 5,506
Impairment of intangible assets 10,360
Loss on impairment of marketable securities - 979
Gain on sale of investments (15) (10)
Noncash sales and marketing expense 450 3,376
Noncash general and administrative expense - 224
Provision for doubtful accounts 3 2,610
Loss on disposal of property and equipment 785 7
Changes in operating assets and liabilities:
Accounts receivable 1,564 (1,082)
Prepaid and other current assets 876 (815)
Deposits and other long-term assets (104) (17)
Accounts payable and accrued liabilities 1,649 (2,189)
Deferred revenue (5,227) 777
Other long-term liabilities (7) 9
--------- --------
NET CASH USED IN OPERATING ACTIVITIES (13,806) (28,007)
INVESTING ACTIVITIES:
Purchase of marketable securities (20,282) (40,794)
Proceeds from sale of marketable securities 2,628 4,664
Proceeds from maturity of marketable securities 14,140 32,189
Proceeds from sale of investments 200 -
Purchase of investments - (2,000)
Proceeds from sale of property and equipment 27 -
Purchases of property and equipment (76) (2,694)
--------- --------
NET CASH USED IN INVESTING ACTIVITIES (3,363) (8,635)
FINANCING ACTIVITIES:
Proceeds from the exercises of stock options 136 70
Proceeds from issuance of common stock related to employee stock
purchase plan 78 96
--------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 214 166
--------- --------
Effect of exchange rate change on cash 3 83
CHANGE IN CASH AND CASH EQUIVALENTS (16,952) (36,393)
CASH AND CASH EQUIVALENTS, beginning of period 55,628 118,303
--------- --------
CASH AND CASH EQUIVALENTS, end of period $ 38,676 $ 81,910
========= ========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 56 $ 64
========= ========
NONCASH TRANSACTIONS:
Retirement of 82,500 shares of common stock pursuant to a terminated
employment agreement with former owners of the SAI/Redeo Companies $ - $ 2,181
========= ========
Retirement of 7,500 shares related to the termination of a sales and
marketing agreement. $ 39 $ -
========= ========
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5
CLARUS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Clarus
Corporation and subsidiaries (the "Company") for the three and six months ended
June 30, 2002, have been prepared in accordance with accounting principles
generally accepted in the United States of America and instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation of the unaudited condensed consolidated financial
statements have been included. The results of the three and six months ended
June 30, 2002 are not necessarily indicative of the results to be obtained for
the year ending December 31, 2002. These interim financial statements should be
read in conjunction with the Company's audited consolidated financial statements
and footnotes thereto included in the Company's Form 10-K for the fiscal year
ended December 31, 2001, filed with the Securities and Exchange Commission.
NOTE 2. EARNINGS PER SHARE
Basic and diluted net loss per share were computed in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share", using
the weighted average number of common shares outstanding. The diluted net loss
per share for the three and six months ended June 30, 2002 and 2001 does not
include the effect of common stock equivalents, calculated using the treasury
stock method, as their impact would be antidilutive. The potentially dilutive
effect of excluded common stock equivalents are as follows (in thousands):
Three months ended Six months ended
June 30, June 30,
------------------ -----------------
2002 2001 2002 2001
------ ------ ------ ------
Effect of shares issuable under stock options 180 196 141 289
Effect of shares issuable pursuant to warrants to purchase
common stock - - - 1
------ ------ ------ ------
Total effect of dilutive common stock equivalents 180 196 141 290
------ ------ ------ ------
NOTE 3. 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 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.
NOTE 4. RESTRUCTURING AND RELATED COSTS
During 2001 and 2002, 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 closures and consolidation costs. During the first quarter of 2002, the
Company determined that amounts previously charged during 2001 of approximately
$202,000 that related to employee separation and related charges were no longer
required and this amount was credited to sales and marketing expense in the
accompanying condensed consolidated statement of operations during the three
months ended March 31, 2002. The Company's management approved further
reductions and reorganizations during the three months ended June 30, 2002,
which resulted in restructuring and related charges of $3.8 million. These
charges were comprised of
6
$2.2 million for employee separation and related costs for 102 employees and
$1.6 million for facility closures and consolidation costs.
The Company expects to complete the facility closures and consolidation during
2002. The facility closures and consolidation costs relate to the abandonment of
the Company's leased facilities in Limerick, Ireland; Maidenhead, England; and
near Toronto, Canada, as well as the restructuring of the Company's leased
facility in Suwanee, Georgia. Total facility closures and consolidation costs
include the write-down of property and equipment and leasehold improvements to
their net realizable value, 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.
In connection with the Company's continuing restructuring program, the Company
implemented a further reduction of its worldwide workforce and incurred a
related restructuring charge of approximately $1.3 million during July 2002. The
July 2002 charge is comprised of employee separation and related costs for 47
employees.
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 2002 and the balance of the accrual as of June 30, 2002:
Six Months Ended June 30, 2002
Accruals Expenditures Balance ------------------------------------- Balance
During 2001 During 2001 12/31/01 Accruals Expenditures Credits 06/30/02
----------- ------------ -------- -------- ------------ ------- --------
(in thousands)
Employee separation costs $2,939 $2,259 $ 680 $2,239 $2,388 $202 $ 329
Facility closure costs 1,218 9 1,209 1,568 401 - 2,376
------ ------ ------ ------ ------ ---- ------
Total restructuring and
related costs $4,157 $2,268 $1,889 $3,807 $2,789 $202 $2,705
====== ====== ====== ====== ====== ==== ======
The accrual for restructuring and related costs is included in accounts payable
and accrued liabilities in the accompanying condensed consolidated balance
sheets.
NOTE 5. COMPREHENSIVE INCOME (LOSS)
SFAS No. 130 "Reporting Comprehensive Income (Loss)", establishes standards of
reporting and display of comprehensive income (loss) and its components of net
income (loss) and "Other Comprehensive Income (Loss)". "Other Comprehensive
Income (Loss)" refers to revenues, expenses and gains and losses that are not
included in net income (loss) but rather are recorded directly in stockholders'
equity. The components of comprehensive loss for the three and six months ended
June 30, 2002 and 2001 were as follows (in thousands):
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2002 2001 2002 2001
-------- --------- -------- --------
Net loss $(20,571) $(20,787) $(27,028) $(43,548)
Unrealized gain (loss) on marketable securities 18 812 (164) 709
Foreign currency translation adjustments 87 (7) 3 83
-------- -------- -------- --------
Comprehensive loss $(20,466) $(19,982) $(27,189) $(42,756)
======== ======== ======== ========
NOTE 6. CREDIT AND CUSTOMER CONCENTRATIONS
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. As of June 30, 2002, four
customers accounted for more than 10% each, totaling $1.1 million or 64.2% of
the gross accounts receivable balance on that date. The percentage by customer
was 23.8%, 18.2%, 11.8%, and 10.4% , respectively, at June 30, 2002. 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.
During the quarter ended June 30, 2002, two customers accounted for more than
10% of total revenue, totaling $1.0 million or 40.7% of total revenue. The
percentage by customer was 30.6% and 10.1% respectively, for the quarter ended
June 30, 2002. During the quarter ended June 30, 2001, three customers accounted
for more than 10% each, totaling $4.0 million or 63.8% of total revenue. The
percentage by customer was 25.0%, 23.9% and 14.9%, respectively, for the quarter
ended June 30, 2001. During the
7
six months ended June 30, 2002, one customer accounted for more than 10% of
total revenue, totaling $2.6 million or 39.5% of total revenue. During the six
months ended June 30, 2001, three customers accounted for more than 10% each,
totaling $6.3 million or 57.0% of total revenue. The percentage by customer was
28.2%, 15.3%, and 13.5%, respectively, for the six months ended June 30, 2001.
As a result of BarclaysB2B's recent decision to discontinue its external
operations to focus on internal cost reduction, the Company was notified that
BarclaysB2B will terminate its current software license and service agreements
with the Company effective August 31, 2002. Upon termination the Company will be
required to refund to BarclaysB2B prepaid software license and support fees of
approximately $2.7 million less costs incurred by the Company associated with
terminating the contract. During the six months ended June 30, 2002, revenues
from the Company's agreements with BarclaysB2B represented 39.5% of the
Company's total revenues for this period.
NOTE 7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities include the following (in thousands):
June 30, December 31,
2002 2001
------- ------------
Accounts payable $ 461 $ 588
Accrued compensation, benefits, and commissions 1,237 1,386
Restructuring reserves 2,705 1,889
Payable to BarclaysB2B 2,657 -
Other 1,095 2,643
------ ------
Total $8,155 $6,506
====== ======
NOTE 8. CONTINGENCIES
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.
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.
NOTE 9. NEW ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities". SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee termination Benefits and Other Costs to Exit an
8
Activity (including Certain Costs Incurred in a Restructuring)". The provisions
of SFAS 146 are effective for the Company's 2003 fiscal year. The Company does
not believe that SFAS 146 will have a material impact on its financial
statements
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". SFAS
145 rescinds SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt",
SFAS 44, "Accounting for Intangible Assets of Motor Carriers" and SFAS 64,
"Extinguishments of Debt Made to Satisfy Sinking Fund Requirements". SFAS 145
amends SFAS 13, "Accounting for Leases", eliminating an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications with similar economic effects as
sale-leaseback transactions. This statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under certain conditions. The
provisions related to SFAS 13 are effective for transactions occurring after May
15, 2002. All other provisions of the statement are effective for financial
statements issued on or after May 15, 2002. The adoption of SFAS 145 did not
have a material impact on the Company's financial statements.
At the November 2001 EITF meeting, the FASB released Staff Announcement Topic
D-103, "Income Statement Characterization of Reimbursements Received for
`Out-of-Pocket' Expenses Incurred" stating that the Staff believes that
reimbursements received for out-of-pocket expenses should be characterized as
revenue. The Company adopted this Staff Announcement effective January 1, 2002.
Historically the Company has not reflected such reimbursements as revenue in its
consolidated statements of operations. Upon adoption of this FASB Staff
Announcement, comparative financial statements for prior periods were
reclassified to provide consistent presentation. The adoption of this FASB Staff
Announcement did not have any impact on the Company's financial position or
results of operations, however, the Company's services fees revenue and cost of
services fees revenue increased by an equal amount as a result of the gross-up
of revenues and expenses for reimbursable expenses. For the three and six months
ended June 30, 2002, the Company recorded revenue from reimbursement of
out-of-pocket expenses of approximately $62,000 and $150,000, respectively. For
the three and six months ended June 30, 2001, the Company's services fees
revenue and cost of services fees revenue increased by approximately $202,000
and $470,000, respectively, as a result of the reclassification of these
reimbursements.
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 adopted SFAS 144 effective January 1, 2002, which did not have
a material impact on the Company's financial statements.
In August 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations". SFAS 143 addresses financial accounting and reporting obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The provisions of SFAS 143 are effective for the
Company's 2003 fiscal year. The Company does not believe that SFAS 143 will have
a material impact on its 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 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually. SFAS 142 also requires that intangible assets with
estimable useful lives be amortized over their respective estimated useful lives
to their estimated residual values. The Company adopted SFAS 141 upon issuance
and adopted SFAS 142 effective January 1, 2002. Upon adoption, the Company
tested goodwill for impairment at January 1, 2002 according to the provisions of
SFAS 142, which resulted in no impairment required as a cumulative effect of
accounting change. In the second quarter of 2002, the Company tested goodwill
for impairment according to the provisions of SFAS 142 and intangible assets
with definite lives according to SFAS 144 due to certain changes in business
strategy that effected the Company's business plans, which resulted in an
impairment of $6.7 million of goodwill and $3.6 million of intangible assets
with definite lives. The Company recorded $2.2 million and $4.0 million,
respectively, of amortization expense related to goodwill during the three and
six months ended June 30, 2001. As a result of adopting SFAS 142, the Company
did not recognize any goodwill amortization during the three and six months
ended June 30, 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.
9
NOTE 10. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current
period presentation.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains certain forward-looking statements 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" herein.
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, Smurfit-Stone Container Corporation, and
Wachovia Corporation.
In May 2002 the Company announced that it had retained an investment banking
firm to assist the Company in exploring all strategic alternatives to enhance
stockholder value. Such alternatives may include a sale of the Company, its
assets or its product lines or the adoption of a plan of liquidation. In
addition, the Company may redeploy its cash to acquire a company or companies
that may or may not be related to the Company's current business.
Critical Accounting Policies and Use of Estimates
As a result of the Company's announcement on exploring strategic alternatives
and the continuing poor market conditions, the Company has experienced a decline
in the demand for its software. While the Company has significantly reduced its
head count, the Company's announced strategy makes the retention of certain
employees critical to the success of this strategy. There is no guarantee that
the Company will be able to successfully execute on its announced strategy to
explore all strategic alternatives to enhance stockholder value.
If demand for business-to-business software and related services remain soft,
the Company's business, operating results, liquidity and financial condition
will be adversely affected. The Company's success depends on market acceptance
of e-commerce as a viable method for corporate procurement and other commercial
transactions and market adoption of the Company's current and future products.
The competitive landscape the Company faces is continuously changing. It is
difficult to estimate how competition will affect the Company's revenues.
It is also very difficult to predict the Company's quarterly results. The
Company has incurred significant net losses in each year since its inception.
The Company may not increase its customer base sufficient to generate the
substantial additional revenues necessary to become profitable. The Company has
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.
10
The Company's international sales and marketing activities cause the Company's
business to be more susceptible to the numerous risks associated with
international sales. The Company may not be successful in addressing these and
other risks and difficulties that it may encounter. Please refer to the "Risk
Factors" sections for additional information regarding the risks associated with
the Company's 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
recorded a provision for doubtful accounts of $1,000 and $3,000
for the three and six months ended June 30, 2002, respectively.
The Company recorded a provision for doubtful accounts of
$555,000 and $2.6 million for the three and six months ended June
30, 2001, respectively.
- The Company has significant long-lived assets, primarily
intangibles and goodwill, as a result of acquisitions completed
during 2000. The Company currently evaluates the carrying value
of its long-lived assets, including intangibles, according to
Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets".
Prior to 2002, the Company periodically evaluated the carrying
value of its long-lived assets, including intangibles, according
to 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 during the three months ended
December 31, 2001 to goodwill and intangible assets based on the
amount by which the carrying amount of these assets exceeded fair
value. As a result of a change in the Company's strategic
direction during the second quarter of 2002, the Company
determined that remaining goodwill and intangible assets should
be tested for further impairment. The Company's evaluation of the
present value of future cash flows based on the change in
strategic direction indicated the carrying value of the Company's
assets exceeded fair value. As a result, the Company recorded an
additional impairment charge to goodwill of $6.7 million and an
impairment charge to intangible assets of $3.6 million during the
three months ended June 30, 2002. The Company recorded $227,000
of amortization expense related to intangible assets with
definite lives during the three months ended June 30, 2002 and
2001. The Company recorded $455,000 of amortization expense
related to intangible assets with definite lives during the six
months ended June 30, 2002 and 2001. The Company recorded $2.2
million and $4.0 million of amortization expense related to
goodwill during the three and six months ended June 30, 2001. As
a result of adopting SFAS 142, the Company did not record
amortization expense related to goodwill during 2002.
- 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 three and six months ended June
30, 2001, the Company recorded impairment charges on investments
of $3.4 million and $6.5 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
Company's pending securities
11
lawsuit could adversely affect the Company's business, results of
operations, liquidity or financial condition. See "Risk Factors"
and "Part II Other Information - Item 1. Legal Proceedings"
herein.
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 and 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.
Operating Expenses
Cost of license fees includes royalties and software duplication and
distribution costs. The Company recognizes these costs as software applications
are shipped.
Cost of services fees includes personnel related expenses and third-party
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 for time and material arrangements and are
recognized using the percentage of completion method for fixed price
arrangements.
Research and development expenses consist primarily of personnel related
expenses and third-party 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, customer
meetings, 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, board of director fees, 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.
12
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 closures and consolidation,
depreciation and amortization on property and equipment, amortization of
intangibles, intangible impairment losses, stock-based compensation expenses,
losses realized on the disposal of assets, gains on sales of marketable
securities, and losses on impairment of investments, all of which are included
in our financial results for GAAP reporting purposes. 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 the Company's competitors.
Therefore, we urge you to carefully review the GAAP financial information
included as part of this Form 10-Q, 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)
Three months ended Six months ended
June 30 June 30
------------------------ -------------------------
2002 2001 2002 2001
REVENUES:
License fees $ 1,013 $ 3,600 $ 2,486 $ 5,910
Services fees 1,531 2,595 3,999 5,125
------- -------- -------- --------
TOTAL REVENUES 2,544 6,195 6,485 11,035
COST OF REVENUES:
License fees 3 80 17 124
Services fees 1,336 3,341 3,274 6,958
------- -------- -------- --------
TOTAL COST OF REVENUES 1,339 3,421 3,291 7,082
OPERATING EXPENSES:
Research and development 1,806 4,570 4,435 10,125
Sales and marketing 2,046 9,329 5,796 17,264
General and administrative 1,714 2,885 3,221 7,416
-------- -------- -------- --------
TOTAL OPERATING EXPENSES 5,566 16,784 13,452 34,805
-------- -------- -------- --------
Operating loss $(4,361) $(14,010) $(10,258) $(30,852)
Loss on foreign currency transactions (9) - (3) -
Interest income, (net) 629 1,706 1,306 4,064
-------- -------- -------- --------
Pro forma net loss $(3,741) $(12,304) $ (8,955) $(26,788)
======== ======== ======== ========
Weighted average shares outstanding - basic and diluted 15,588 15,507 15,580 15,507
======== ======== ======== ========
Pro forma net loss per share - basic and diluted $ (0.24) $ (0.79) $ (0.57) $ (1.73)
======== ======== ======== ========
13
Reconciliation of GAAP Net Loss to Pro Forma Net Loss
(in thousands, except per share data)
(unaudited)
Three months ended Six months ended
June 30 June 30
2002 2001 2002 2001
------------------------- ------------------------
Net loss $(20,571) $(20,787) $(27,028) $(43,548)
Restructuring costs/1/ 3,807 - 3,605 513
Depreciation and amortization on property and equipment 1,304 838 2,433 1,683
Amortization of intangibles 227 2,463 455 4,483
Intangible impairment loss 10,360 - 10,360 -
Stock-based compensation 352 1,800 450 3,600
Loss on disposal of assets 795 7 785 7
Gain on sale of marketable securities (15) (11) (15) (10)
Loss on impairment of investments - 3,386 - 6,484
-------- -------- -------- --------
Pro forma net loss $ (3,741) $(12,304) $ (8,955) $(26,788)
======== ======== ======== ========
Weighted average shares outstanding - basic and diluted 15,588 15,507 15,580 15,507
-------- -------- -------- --------
Pro forma net loss per share - basic and diluted $ (0.24) $ (0.79) $ (0.57) $ (1.73)
-------- -------- -------- --------
- ----------
/1/ Restructuring costs are comprised of employee severance and termination
costs and office closures and consolidation costs. For the three and six months
ended June 30, 2002 and 2001, these costs consist of the following:
(in thousands) Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
Cost of services fees revenue $ 545 $ - $ 545 $ 161
Research and development 747 - 747 -
Sales and marketing 634 - 432 134
General and administrative 1,881 - 1,881 218
------- ----- ------- ------
Total $ 3,807 $ - $ 3,605 $ 513
======= ===== ======= ======
Restructuring and Related Costs
During 2001 and 2002, 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 closures and consolidation costs. During the first quarter of 2002, the
Company determined that amounts previously charged during 2001 of approximately
$202,000 that related to employee separation and related charges were no longer
required and this amount was credited to sales and marketing expense in the
accompanying condensed consolidated statement of operations during the three
months ended March 31, 2002. The Company's management approved further
reductions and reorganizations during the three months ended June 30, 2002,
which resulted in restructuring and related charges of $3.8 million. These
charges were comprised of $2.2 million for employee separation and related costs
for 102 employees and $1.6 million for facility closures and consolidation
costs.
The Company expects to complete the facility closures and consolidation during
2002. The facility closures and consolidation costs relate to the abandonment of
the Company's leased facilities in Limerick, Ireland; Maidenhead, England; and
near Toronto, Canada, as well as the restructuring of the Company's leased
facility in Suwanee, Georgia. Total facility closures and consolidation costs
include the write-down of property and equipment and leasehold improvements to
their net realizable value, 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.
In connection with the Company's continuing restructuring program, the Company
implemented a further reduction of its worldwide workforce and incurred a
related restructuring charge of approximately $1.3 million during July, 2002.
The July 2002 charge is comprised of employee separation and related costs for
47 employees.
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 2002 and the balance of the accrual as of June 30, 2002:
14
Six Months Ended June 30, 2002
Accruals Expenditures Balance ----------------------------------- Balance
During 2001 During 2001 12/31/01 Accruals Expenditures Credits 06/30/02
----------- ------------ -------- -------- ------------ ------- --------
(in thousands)
Employee separation costs $2,939 $2,259 $ 680 $ 2,239 $ 2,388 $ 202 $ 329
Facility closure costs 1,218 9 1,209 1,568 401 - 2,376
------ ------ ------- ------- --------- ----- ------
Total restructuring and
related costs $4,157 $2,268 $ 1,889 $ 3,807 $ 2,789 $ 202 $2,705
====== ====== ======= ======= ========= ===== ======
The accrual for restructuring and related costs is included in accounts payable
and accrued liabilities in the accompanying condensed consolidated balance
sheets.
Results of Operations
Revenues
Total Revenues. Total revenues for the quarter ended June 30, 2002 decreased
58.9% to $2.5 million from $6.2 million during the same period in 2001. Total
revenues for the six months ended June 30, 2002 decreased 41.2% to $6.5 million
from $11.0 million during the same period in 2001. The decrease in total
revenues in both periods resulted primarily from a decrease in license revenue
due to reduced demand for the Company's software products as a result of reduced
information technology spending and the announcement by the Company to explore
all strategic alternatives during the quarter ended June 30, 2002. During the
quarter ended June 30, 2002, two customers accounted for more than 10% of total
revenue, totaling $1.0 million or 40.7% of total revenue. The percentage by
customer was 30.6% and 10.1% respectively, for the quarter ended June 30, 2002.
During the quarter ended June 30, 2001, three customers accounted for more than
10% each, totaling $4.0 million or 63.8% of total revenue. The percentage by
customer was 25.0%, 23.9%, and 14.9%, respectively, for the quarter ended June
30, 2001. During the six months ended June 30, 2002, one customer accounted for
more than 10% of total revenue, totaling $2.6 million or 39.5% of total revenue.
During the six months ended June 30, 2001, three customers accounted for more
than 10% each, totaling $6.3 million or 57.0% of total revenue. The percentage
by customer was 28.2%, 15.3% and 13.5%, respectively, for the six months ended
June 30, 2001.
As a result of BarclaysB2B's recent decision to discontinue its external
operations to focus on internal cost reduction, the Company was notified that
BarclaysB2B will terminate its current software license and service agreements
with the Company effective August 31, 2002. Upon termination the Company will be
required to refund to BarclaysB2B prepaid software license and support fees of
approximately $2.7 million less costs incurred by the Company associated with
terminating the contract. During the six months ended June 30, 2002, revenues
from the Company's agreements with BarclaysB2B represented 39.5% of the
Company's total revenues for this period.
License Fees. License fees decreased 71.9% to $1.0 million or 39.8% of total
revenues, for the quarter ended June 30, 2002 from $3.6 million, or 58.1% of
total revenues, for the same period in 2001. License fees decreased 57.9% to
$2.5 million or 38.3% of total revenues, for the six months ended June 30, 2002
from $5.9 million, or 53.6% of total revenues, for the same period in 2001. The
decrease in license fees was primarily attributable to the decision by the
Company to explore strategic alternatives during the quarter ended June 30,
2002, the softening demand for business-to-business software and the information
technology market generally.
Services Fees. Services fees decreased 41.0% to $1.5 million for the quarter
ended June 30, 2002, from $2.6 million for the same period in 2001. Services
fees decreased 22.0% to $4.0 million, for the six months ended June 30, 2002,
from $5.1 million for the same period in 2001. Services fees, however, increased
as a percentage of total revenues to 60.2%, for the quarter ended June 30, 2002,
from 41.9% during the same period in 2001, and to 61.7% for the six months ended
June 30, 2002, from 46.4% during the same period in 2001. The decrease in
services fees revenue for the three and six months ended June 30, 2002 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. As a result of the decision by the
Company to explore strategic alternatives during the quarter ended June 30,
2002, the Company anticipates certain customers may terminate their
relationships with the Company which would result in a decrease in maintenance
fees in future periods.
Cost of Revenues
Total Cost of Revenues. Cost of revenues decreased 44.9% to $1.9 million, or
74.1% of total revenue, during the quarter ended June 30, 2002 from $3.4
million, or 55.2% of total revenue, during the same period in 2001. Cost of
revenues decreased 47.0% to $3.8 million, or 59.2% of total revenue, during the
six months ended June 30, 2002 from $7.2 million, or 65.6% of total revenue,
during the same period in 2001. The decreases in cost of revenues are primarily
a result of a decrease in the cost of services fees
15
due to lower personnel related costs, partially offset by costs associated with
restructuring costs incurred during the three months ended June 30, 2002. During
the three months ended June 30, 2002, the Company had an average of 64.5% fewer
employees in services compared to the same period in 2001. During the six months
ended June 30, 2002, the Company had an average of 61.5% fewer employees in
services compared to the same period in 2001. The reduced personnel related
costs are a result of Company instituted cost control measures that began during
2001 and the Company's announced strategy in May 2002 to pursue strategic
alternatives such as a sale of the Company, its assets or its product lines.
Cost of License Fees. Cost of license fees decreased 96.3% to $3,000 in the
second quarter of 2002 from $80,000 in the second quarter of 2001. Cost of
license fees decreased 86.3% to $17,000 in the first six months of 2002 from
$124,000 in the first six months of 2001. 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 decreased 43.7% to $1.9 million, or
122.9% of total services fees revenues, during the quarter ended June 30, 2002
compared to $3.3 million, or 128.7% of total services fees revenues, during the
same period in 2001. Cost of services fees decreased 46.4% to $3.8 million, or
95.5% of total services fees revenues, during the six months ended June 30, 2002
compared to $7.1 million, or 138.9% of total services fees revenues, during the
same period in 2001. As discussed above, the decrease in the cost of services
fees was primarily attributable to lower personnel related costs in both the
services implementation and customer support areas, partially offset by costs
associated with restructuring costs incurred during the three months ended June
30, 2002. The Company incurred costs related to employee severance and related
costs of $545,000 during the three months ended June 30, 2002 and costs of
$161,000 during the three months ended March 31, 2001.
Research and Development Expense
Research and development expenses decreased 44.1% to approximately $2.6 million,
or 100.4% of total revenues, during the quarter ended June 30, 2002 from $4.6
million, or 73.8% of total revenues, during the same period in 2001. During the
six months ended June 30, 2002, research and development expenses decreased
48.8% to approximately $5.2 million, or 79.9% of total revenues from $10.1
million, or 91.8% of total revenues, during the same period in 2001. Research
and development expenses decreased primarily as a result of a reduction in
personnel related costs and consulting fees incurred to develop the Company's
products, partially offset by costs associated with restructuring costs incurred
during the three months ended June 30, 2002. Consulting fees were $196,000 in
the second quarter of 2002 compared to $1.6 million in the second quarter of
2001. During the three months ended June 30, 2002, the Company had an average of
52.5% fewer employees in the research and development area compared to the same
period of 2001. Consulting fees were $706,000 in the first six months of 2002
compared to $3.7 million in the first six months of 2001. During the six months
ended June 30, 2002, the Company had an average of 46.5% fewer employees in the
research and development area compared to the same period of 2001. The Company
incurred costs related to employee severance and related costs of $747,000
during the three months ended June 30, 2002. The Company did not incur any
severance or related costs during the three or six month periods ended June 30,
2001.
Sales and Marketing Expense, exclusive of non-cash expense
Sales and marketing expenses decreased 71.3% to $2.7 million, or 105.3% of total
revenues, during the quarter ended June 30, 2002 from $9.3 million, or 150.6% of
total revenues, during the same period in 2001. Sales and marketing expenses
decreased 64.2% to $6.2 million, or 96.0% of total revenues, during the six
months ended June 30, 2002 from $17.4 million, or 157.7% of total revenues,
during the same period in 2001. The decrease was primarily attributable to a
decrease in variable compensation as a result of lower license revenue during
the period and a decrease in sales and marketing personnel, partially offset by
costs associated with restructuring costs incurred during the three months ended
June 30, 2002. The Company had an average of 72.1% fewer employees during the
second quarter of 2002 in the sales, marketing and business development areas
compared to the second quarter of 2001. The Company had an average of 67.5%
fewer employees during the first six months of 2002 in the sales, marketing and
business development areas compared to the first six months of 2001. The Company
incurred severance and related costs of $634,000 and $432,000, respectively,
during the three and six months ended June 30, 2002. The company incurred no
costs during the three months ended June 30, 2001 and $134,000 during the six
months ended June 30, 2001.
Noncash Sales and Marketing Expense
During the three months ended June 30, 2002 and 2001, noncash sales and
marketing expenses of approximately $352,000 and $1.7 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. The
Company recognized $450,000 and $3.4 million, respectively, associated with
these agreements during the six months ended June 30, 2002 and 2001. In
connection with these agreements, the Company issued warrants and shares of
common stock to certain strategic partners, all of whom were also customers, in
exchange for their participation in the Company's sales and marketing efforts.
The decrease in noncash sales and marketing expense during 2002 is
16
due to the termination of the sales and marketing agreement with one customer
during the fourth quarter of 2001. As of June 30, 2002 all deferred sales and
marketing costs, previously capitalized, have been expensed.
General and Administrative, Exclusive of Noncash Expense
General and administrative expenses, including the provision for doubtful
accounts, increased 24.6% to $3.6 million during the quarter ended June 30,
2002, or 141.3% of total revenue from $2.9 million, or 46.6% of total revenues,
during the same period in 2001. General and administrative expenses, including
the provision for doubtful accounts, decreased 33.2% to $5.1 million during the
six months ended June 30, 2002, or 78.7% of total revenue from $7.6 million, or
69.2% of total revenues, during the same period in 2001. The increase in general
and administrative expense for the three months ended June 30, 2002 was
primarily attributable to severance related costs and facility restructuring
costs partially offset by a decrease in the provision for doubtful accounts and
reduced headcount. The Company had approximately $313,000 of severance related
costs and approximately $1.6 million in facility restructuring expenses during
the three months ended June 20, 2002. The Company had an average of 50.5% fewer
employees during the three months ended June 30, 2002 in the general and
administrative areas compared to the same period of 2001. The Company recorded a
provision for doubtful accounts of $1,000 during the three months ended June 30,
2002 compared to a provision of $555,000 for the three months ended June 30,
2001. The decrease in general and administrative expense for the six months
ended June 30, 2002 was primarily attributable to a decrease in the provision
for doubtful accounts and reduced headcount, partially offset by severance and
related costs and facility restructuring costs. The Company had an average of
50.9% fewer employees during the six months ended June 30, 2002 in the general
and administrative areas compared to the same period of 2001. The Company
recorded a provision for doubtful accounts of $3,000 during the six months ended
June 30, 2002 compared to a provision of $2.6 million for the six months ended
June 30, 2001.
Noncash General and Administrative Expense
For the three months ended March 31, 2001, noncash general and administrative
expenses were $112,000, or 1.8% of total revenues. For the six months ended June
30, 2001, noncash general and administrative expenses were $224,000, or 2.0% of
total revenues. 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. The amount expensed during 2001 relates primarily to these options.
Loss on Impairment of Intangible Assets
In the second quarter of 2002, the Company recognized a goodwill impairment loss
of $6.7 million and an intangible asset impairment loss of $3.6 million as a
result of a change in the Company's strategic direction. The Company
periodically evaluates the carrying value of its long-lived assets, including
intangibles, according to Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets" and SFAS 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets". As a result of a change in the
Company's strategic direction during the second quarter of 2002, the Company
determined that remaining goodwill and intangible assets should be tested for
further impairment. The Company's evaluation of the present value of future cash
flows based on the change in strategic direction indicated the carrying value of
the Company's assets exceeded fair value. As a result the Company recorded an
additional impairment charge to goodwill and intangible assets of $10.4 million
during the three months ended June 30, 2002.
Depreciation and Amortization on Property and Equipment
Depreciation and amortization on property and equipment increased to $1.3
million in the quarter ended June 30, 2002 from $838,000 in the same period of
2001. Depreciation and amortization on property and equipment increased to $2.4
million in the six months ended June 30, 2002 from $1.7 million in the same
period of 2001. The increase in depreciation and amortization on property and
equipment during 2002 is primarily due to financial, professional services
management and customer relationship software implemented during 2001.
Amortization of Intangible Assets
Amortization of intangible assets decreased to $227,000 during the three months
ended June 30, 2002 from $2.5 million during the same period of 2001.
Amortization of intangible assets decreased to $455,000 during the six months
ended June 30, 2002 from $4.5 million during the same period of 2001. The
decrease is primarily the result of adopting SFAS 142, effective January 1,
2002, which requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized. The amortization during 2002 relates to intangible
assets with definite lives. As a result of adopting SFAS 142, the Company did
not recognize any amortization related to goodwill during 2002. The Company
recorded $2.2 million of amortization expense related to goodwill during the
three months ended June 30, 2001 and $4.0 million during the six months ended
June 30, 2001. The Company recorded $227,000 of amortization related to
intangible assets with definite lives during the three months ended June 30,
2001 and $455,000 during the six months ended June 30, 2001.
17
Loss on Disposal of Assets
For the three and six month periods ended June 30, 2002, the Company recorded a
loss on the disposal of assets of $795,000 and $785,000, respectively. For the
three and six month periods ended June 30, 2001, the Company recorded a loss on
the disposal of assets of $7,000. The increase in the loss on the disposal of
assets in the second quarter of 2002 is primarily attributable to the write down
of assets located in the Maidenhead and Limerick offices to their net realizable
value.
Other Income
For the three months ended June 30, 2002 and 2001, the Company recorded other
income of $6,000 and $11,000, respectively. For the six months ended June 30,
2002, and 2001 the Company recorded other income of $12,000 and $10,000
respectively. These amounts are comprised of losses on foreign currency and
realized gains and losses on marketable securities.
Loss on Impairment of Investments
During the three and six months ended June 30, 2001, the Company recorded a loss
on impairment of investments of approximately $3.4 million and $6.5 million,
respectively. These losses were 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 current economic and capital
market conditions.
Interest Income
Interest income decreased to $685,000 in the second quarter of 2002, or 26.9% of
total revenues from $1.8 million, or 28.4% of total revenues, in the same period
of 2001. Interest income decreased to $1.4 million in the first six months of
2002, or 21.9% of total revenues from $4.2 million, or 37.9% of total revenues,
in the same period of 2001. 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 quarters.
Interest Expense
Interest expense for the three months ended June 30, 2002 and 2001 was $56,000.
Interest expense for the six months ended June 30, 2002 was $112,000 compared to
$120,000 during the same period of 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 2002 and 2001 is
primarily related to this agreement. The $5.0 million is due on March 15, 2005.
Income Taxes
As a result of the operating losses incurred since the Company's inception, no
provision or benefit for income taxes was recorded during the three and six
months ended June 30, 2002 and 2001, respectively.
Liquidity and Capital Resources
The Company's cash and cash equivalents decreased to $38.7 million at June 30,
2002 from $55.6 million at December 31, 2001. Marketable securities increased to
$68.6 million at June 30, 2002 from $65.3 million at December 31, 2001. The
overall decrease in cash and cash equivalents and marketable securities is due
primarily to cash used to fund operating losses.
Cash used in operating activities was approximately $13.8 million during the six
months ended June 30, 2002. The cash used was primarily attributable to the
Company's net loss and to a decrease in deferred revenue partially offset by
noncash items, an increase in accounts payable and a decrease in accounts
receivable and prepaid and other assets. Cash used in operating activities was
approximately $28.0 million during the six months ended June 30, 2001. The cash
used was primarily attributable to the Company's net loss, an increase in
accounts receivable and prepaid and other current assets, and a decrease in
accounts payable and accrued liabilities partially offset by noncash items and
an increase in deferred revenue.
Cash used for investing activities was approximately $3.4 million during the six
months ended June 30, 2002. The cash was used primarily for purchases of
marketable securities partially offset by the sale of investments and the sale
and maturity of marketable securities. Cash used by investing activities was
approximately $8.6 million during the six months ended June 30, 2001. The cash
used by investing activities was primarily attributable to the purchase of
marketable securities, the purchase of property and equipment and an investment
in a private company partially offset by proceeds received from the sale and
maturity of marketable securities.
18
Cash provided by financing activities was approximately $214,000 during the six
months ended June 30, 2002, and approximately $166,000 during the six months
ended June 30, 2001. The cash provided by financing activities during the six
months ended June 30, 2002 and 2001 was primarily attributable to proceeds from
shares issued under the employee stock purchase plan and stock option exercises.
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. As of June 30, 2002, four
customers accounted for more than 10% each, totaling $1.1 million or 64.2% of
the gross accounts receivable balance on that date. The percentage by customer
was 23.8%, 18.2%, 11.8%, and 10.4%, respectively, at June 30, 2002. 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.
During the quarter ended June 30, 2002, two customers accounted for more than
10% of total revenue, totaling $1.0 million or 40.7% of total revenue. The
percentage by customer was 30.6% and 10.1% respectively, for the quarter ended
June 30, 2002. During the quarter ended June 30, 2001, three customers accounted
for more than 10% each, totaling $4.0 million or 63.8% of total revenue. The
percentage by customer was 25.0%, 23.9%, and 14.9%, respectively, for the
quarter ended June 30, 2001. During the six months ended June 30, 2002, one
customer accounted for more than 10% of total revenue, totaling $2.6 million or
39.5% of total revenue. During the six months ended June 30, 2001, three
customers accounted for more than 10% each, totaling $6.3 million or 57.0% of
total revenue. The percentage by customer was 28.2%, 15.3%, and 13.5%,
respectively, for the six months ended June 30, 2001.
As a result of BarclaysB2B's recent decision to discontinue its external
operations to focus on internal cost reduction, the Company was notified that
BarclaysB2B will terminate its current software license and service agreements
with the Company effective August 31, 2002. Upon termination the Company will be
required to refund to BarclaysB2B prepaid software license and support fees of
approximately $2.7 million less costs incurred by the Company associated with
terminating the contract. During the six months ended June 30, 2002, revenues
from the Company's agreements with BarclaysB2B represented 39.5% of the
Company's total revenues for this period.
At the July 15, 2002 meeting of the Company's Board of Directors, the Board
resolved to recommend to the stockholders of the Company for approval at the
next meeting called for any purpose, that costs incurred by Warren B. Kanders,
Burtt R. Erlich and Nicholas Sokolow in connection with the solicitation of
proxies for the 2002 annual meeting, be reimbursed by the Company. These costs
are approximately $500,000.
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 is due March 15, 2005 and the $5.0 million principal
amount was placed in investment grade cash equivalents. Upon the occurrence of a
change of control, as defined in the Note, the Company would be required to
prepay the outstanding principal amount of the Note, together with any unpaid
interest, within five business days after the occurrence of a change of control.
As part of the Company's announced strategic alternatives process, many
strategic options could constitute a change of control, as defined in the Note,
and require a prepayment of the Note, together with any unpaid interest.
At June 30, 2002, the Company had net operating loss carryforwards, research and
experimentation credit, and alternative minimum tax credit carryforwards for
U.S. federal income tax purposes, which expire in varying amounts beginning in
the year 2009. 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.
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 continue to use
cash. The Company currently estimates uses of cash to fund operating losses and
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
for the foreseeable future.
The following summarizes the Company's contractual obligations and commercial
commitments at June 30, 2002, 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 6,990 914 1,774 1,803 1,802 644 53
-------- ------ ------- ------- ------- ------- ------
Total $ 11,990 $ 914 $ 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.
19
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.
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 former
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 the engagement during the fourth quarter of 2001 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 contract
was terminated by the Company during January 2002. No expense was incurred
during 2002 and all amounts due E.Com were paid in January, 2002. At the May 21,
2002 Annual Meeting of stockholders, Mr. Johnson was not re-elected a director
of the Company.
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 $145,000 during the three months ended March 31,
2002 that is included in general and administrative in the accompanying
consolidated statement of operations and expensed $131,000 during the fourth
quarter of 2001. The Company expensed an additional $54,000 during the three
months ended March 31, 2002 related to further services performed by The Chasm
Group that is included in general and administrative in the accompanying
consolidated statement of operations. At the May 21, 2002 Annual Meeting of
stockholders, Mr. Hewlin was not re-elected a director of the Company.
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.
New Accounting Pronouncements
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities". SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". The provisions of SFAS
146 are effective for the Company's 2003 fiscal year. The Company does not
believe that SFAS 146 will have a material impact on its financial statements
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". SFAS
145 rescinds SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt",
SFAS 44, "Accounting for Intangible Assets of Motor Carriers" and SFAS 64,
"Extinguishments of Debt Made to Satisfy Sinking Fund Requirements". SFAS 145
amends SFAS 13, "Accounting for Leases", eliminating an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications with similar economic effects as
sale-leaseback transactions. This statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under certain conditions. The
provisions related to SFAS 13 are effective for transactions occurring after May
15, 2002. All other provisions of the statement are effective for financial
statements issued on or after May 15, 2002. The adoption of SFAS 145 did not
have a material impact on the Company's financial statements.
At the November 2001 EITF meeting, the FASB released Staff Announcement Topic
D-103, "Income Statement Characterization of Reimbursements Received for
`Out-of-Pocket' Expenses Incurred" stating that the Staff believes that
reimbursements received for out-of-pocket expenses should be characterized as
revenue. The Company adopted this Staff Announcement effective January 1, 2002.
Historically the Company has not reflected such reimbursements as revenue in its
consolidated statements of operations. Upon adoption of this FASB Staff
Announcement, comparative financial statements for prior periods were
reclassified to provide consistent presentation. The adoption of this FASB Staff
Announcement did not have any impact on the Company's financial position or
results of operations, however, the Company's services fees revenue and cost of
services fees revenue increased by an
20
equal amount as a result of the gross-up of revenues and expenses for
reimbursable expenses. For the three and six months ended June 30, 2002, the
Company recorded revenue from reimbursement of out-of-pocket expenses of
approximately $62,000 and $150,000, respectively. For the three and six months
ended June 30, 2001, the Company's services fees revenue and cost of services
fees revenue increased by approximately $202,000 and $470,000, respectively, as
a result of the reclassification of these reimbursements.
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 adopted SFAS 144 effective January 1, 2002, which did not have
a material impact on the Company's financial statements.
In August 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations". SFAS 143 addresses financial accounting and reporting obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The provisions of SFAS 143 are effective for the
Company's 2003 fiscal year. The Company does not believe that SFAS 143 will have
a material impact on its 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 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually. SFAS 142 also requires that intangible assets with
estimable useful lives be amortized over their respective estimated useful lives
to their estimated residual values. The Company adopted SFAS 141 upon issuance
and adopted SFAS 142 effective January 1, 2002. Upon adoption, the Company
tested goodwill for impairment at January 1, 2002 according to the provisions of
SFAS 142, which resulted in no impairment required as a cumulative effect of
accounting change. In the second quarter of 2002, the Company tested goodwill
for impairment according to the provisions of SFAS 142 and intangible assets
with definite lives according to SFAS 144 due to certain changes in business
strategy that effected the Company's business plans, which resulted in an
impairment of $6.7 million of goodwill and $3.6 million of intangible assets
with definite lives. The Company recorded $2.2 million and $4.0 million,
respectively, of amortization expense related to goodwill during the three and
six months ended June 30, 2001. As a result of adopting SFAS 142, the Company
did not recognize any goodwill amortization during the three and six months
ended June 30, 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.
Risk Factors
In addition to other information in this quarterly report on Form 10-Q, the
following risk factors should be carefully considered in evaluating the Company
and its business because such factors currently may have a significant impact on
the Company's 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.
The Company's announced plans to pursue all strategic alternatives to enhance
stockholder value have, and are likely to continue to, reduce the demand for the
Company's software.
In May 2002 the Company announced that it had retained an investment banking
firm to assist the Company in exploring all strategic alternatives to enhance
stockholder value. As a result of this announced strategy and steps taken by the
Company to reduce its operating expenses, the Company has experienced a decline
in the demand for its software and its ability to acquire new customers. The
Company has significantly reduced the number of its sales and marketing
personnel from approximately 46 in April, 2002 to approximately 3 in August,
2002. Management believes that demand for the Company's software will continue
to decline as a result of the Company's announced strategy. Continued decline in
demand for the Company's products and services will negatively affect the
Company's business, results of operations, liquidity and financial condition.
The Company's announced plans to pursue strategic alternatives has caused, and
is likely to continue to cause, the Company to lose its customers.
21
The uncertainty surrounding the Company's announced strategy to pursue strategic
alternatives has caused the Company's customers to question the Company's
long-term commitment to its software and electronic commerce products and
services. As a result, certain customers have indicated that they may terminate
their relationships with the Company. If this uncertainty continues, the Company
expects to lose existing software customers.
The Company's ability to execute on its announced strategy to pursue strategic
alternatives has been adversely effected by market conditions and the Company's
declining business.
Market conditions and the Company's public announcement to seek alternatives
such as the sale of the Company, its assets, product lines or adopt a plan of
liquidation has made it more difficult for the Company to negotiate the terms of
any such transaction. As a result, the Company may not be able to sell the
Company, its assets or product lines on terms that are acceptable to the Company
or at all. If the Company does not successfully negotiate the sale of the
Company, its assets or product lines, the Company may cease operating its
software and electronic commerce business.
As the Company pursues its announced strategy of pursuing strategic
alternatives, the Company is dependent on certain key executives and employees.
To execute on the Company's announced strategy to reduce its operating expenses
and pursue a sale of the Company, its assets, product lines, or plan of
liquidation, the Company must retain critical executives and certain employees
that work in the support and services and development areas. The familiarity of
these individuals with the Company's current products and services makes them
especially critical to the Company's success in executing on any of its
announced strategies. The loss of any such key executives or employees could
make it more difficult for the Company to pursue and execute on its announced
strategies.
There is no guarantee that the Company will continue to operate its software and
electronic commerce business.
The Company may use a substantial portion of its cash to acquire a business or
businesses that are not related or complementary to the Company's current
software and electronic commerce business. The Company may determine not to
continue any operations and it may adopt a plan of liquidation. The Company may
not be successful in any business it may acquire.
Any acquisitions that the Company attempts or makes could prove difficult to
integrate or require a substantial commitment of management time and other
resources.
As part of the Company's announced strategy, the Company may seek to acquire or
invest in additional businesses, products or technologies that may or may not
complement or expand its current business. The Company's management may not have
experience in operating the types of business that may be acquired by the
Company. In addition, acquisitions, particularly acquisitions of unrelated
businesses, involve a number of special problems including:
. executing successful due diligence;
. difficulty integrating acquired technologies, operations and personnel
with the existing businesses;
. diversion of management attention in connection with both negotiating
the acquisitions and integrating the assets;
. strain on managerial and operational resources as management tries to
oversee larger operations;
. the funding requirements for acquired companies may be significant;
. exposure to unforeseen liabilities of acquired companies;
. increased risk of costly and time-consuming litigation, including
stockholder lawsuits; and
. the requirement to record potentially significant additional future
operating costs for the amortization of intangible assets.
The Company may not be able to successfully address these problems. Moreover,
the Company's future operating results will depend to a significant degree on
its ability to successfully integrate acquisitions (if any) and manage
operations while also controlling expenses.
22
In addition, if the Company identifies an appropriate acquisition opportunity,
the Company may not be able to negotiate the terms of that acquisition
successfully. The Company may not be able to select, manage or absorb or
integrate any future acquisitions successfully, particularly acquisitions of
large companies. Any acquisition, even if successfully integrated, may not
benefit the stockholders.
The softening demand for business-to-business software and related services has
and is likely to continue to negatively affect the Company's software business,
operating results, liquidity and financial condition.
The Company's 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 and recently, the
Company's announced strategy to pursue strategic alternatives has contributed to
and will continue to contribute to lower revenues.
The success of the Company's software business 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
the Company's 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 the Company's product suite and our overall business, operating
results, liquidity and financial condition will be materially and adversely
affected.
The Company's settlement platform is a new technology product in an evolving
market.
The Company's settlement product is a technology that is currently being
marketed to early-adopting customers. The Company has limited experience in
marketing this product. If the market for the settlement product fails to
completely develop or develops more slowly than the Company anticipates or if
the Company fails to develop and gain market acceptance of this product, the
Company's software business, operating results, liquidity and financial
condition could be materially and adversely affected.
The Company's quarterly operations are volatile and default to predict. If the
Company fails to meet the expectations of public market analysts or investors
the market price of the Company's common stock may decrease significantly.
The Company believes that its quarterly and annual operating results will
fluctuate significantly in the future, and the 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 the
Company's common stock could decrease substantially.
Because the percentage of the Company's 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, the Company does 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 the Company's quarterly and annual operating results, including:
. changes in the demand for the Company's products;
. the timing, composition and size of orders from the Company's
customers;
. customer spending patterns and budgetary resources;
. the Company's success in attracting new customers;
. the timing of introductions or enhancements to the Company's products;
. changes in the Company's pricing policies or those of the Company's
competitors;
. the Company's ability to anticipate and adapt effectively to
developing markets and rapidly changing technologies;
23
. the Company's ability to retain and motivate critical personnel,
particularly within the Company's finance and support and services
organizations;
. the publication of opinions or reports about the Company, its
products, its 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 investments;
. actions taken by the Company's competitors, including new product
introductions and enhancements;
. restructuring of the Company's operations and related charges;
. the Company's ability to scale its network and operations to support
large numbers of customers, suppliers and transactions;
. the Company's 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
. the Company's ability to control its costs.
The Company's quarterly revenues are especially subject to fluctuation because
they can depend on the sale of relatively large orders for the Company's
products and related services. As a result, the Company's quarterly operating
results may fluctuate significantly if the Company is unable to complete one or
more substantial sales in a given quarter.
The Company's stock price is highly volatile.
The Company's stock price has fluctuated dramatically. The market price of the
Company's common stock may decrease significantly in the future in response to
the following factors, some of which are beyond the Company's control:
. variations in the Company's quarterly operating results;
. announcements that the Company's revenue or income are below analysts'
expectations;
. changes in analysts' estimates of the Company's performance or
industry performance;
. changes in market valuations of similar companies;
. sales of large blocks of the Company's common stock;
. announcements by the Company or its 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.
24
The Company 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 the Company's financial results.
The Company 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
significant 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 the Company's license agreements meet specific
criteria in order to recognize revenue when we initially deliver software.
Although the Company has standard form license agreements that are designed to
meet the GAAP criteria for immediate revenue recognition on delivered elements,
the Company does on some occasions negotiate the terms of its license
agreements. Some of these negotiated agreements may not meet the GAAP criteria
for immediate software revenue recognition on delivered elements.
Although the Company's business model allows for time-based license agreements,
the Company continues to record some of its 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.
The Company may not generate the additional revenues and cut operating cost
necessary to become profitable.
The Company has incurred significant net losses in each year since its
formation. In addition, the Company has incurred significant costs to develop
its e-commerce technology and products, and to recruit and train personnel. The
Company believes its success is contingent upon increasing its customer base and
reducing operating costs. The Company cannot guarantee that it will be able to
generate the additional revenue and cut operating costs necessary to be
profitable.
If the Company's flexible payment options are not well received, the market may
adopt the Company's products at a slower rate than anticipated, and the
Company's business may suffer materially.
The Company offers flexible payment methods to its customers. These programs are
unproven and represents a significant departure from the fee-based software
licensing strategies that the Company has traditionally employed. If the Company
does not successfully execute these programs, the market may adopt its products
at a slower rate than anticipated and the Company's business may suffer
materially.
The adoption rate of the Company's flexible payment options may, from quarter to
quarter, fluctuate or be rejected by the market altogether. As the Company
continues this program, the Company may find that the majority of its revenues
continue to come from traditional revenue recognition license arrangements that
result in revenues being recognized upon delivery. If the results of the
Company's flexible payment options program fluctuate due to uneven adoption
rates or if the Company's program is rejected entirely, its business, results of
operations, liquidity and financial condition would be materially and adversely
affected.
An increase in the length of the Company's sales cycle may contribute to
fluctuations in its operating results.
As the Company pursues its announced strategy of exploring and pursuing
strategic alternatives, the length of its sales cycle is likely to increase. The
loss or delay of orders due to increased sales and evaluation cycles could
materially and adversely affect its business, results of operations, liquidity
and financial condition and, in particular, could contribute to significant
fluctuations in its quarterly operating results. A customer's decision to
license and implement its 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 the
Company's applications. The Company's 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
the Company has little or no control.
25
The Company may not be able to maintain referenceable accounts.
The implementation of the Company's 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. The
Company's ability to attract additional customers for its product suite will
depend on using its existing customers as referenceable accounts. As a result,
the Company's 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 the Company's products and referencability in the
future.
Market adoption for the Company's solutions will be impeded if the Company does
not continue to establish and maintain strategic relationships.
The Company's success depends in part on the ability of its strategic partners
to expand market adoption of its solutions. If the Company is unable to maintain
its existing strategic partnerships or enter into new partnerships, the Company
would also lose anticipated customer introductions and co-marketing benefits.
The Company relies exclusively on third-party content services providers to
provide catalog aggregation and management services to its customers, as part of
its procurement solution. If the Company is unable to maintain effective,
long-term relationships with its content services providers, or if their
services do not meet the Company's customers' needs or expectations, the
Company's business could be seriously harmed. If the demand for the Company's
solutions increases, the Company will need to develop relationships with
additional third-party service providers to provide these types of services. The
Company's 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.
Many of the Company's strategic partners have multiple strategic relationships,
and they may not regard the Company as important to their businesses. In
addition, the Company's strategic partners may terminate their relationships
with the Company, pursue other partnerships or relationships or attempt to
develop or acquire products or services that compete with the Company's
solutions. Further, the Company's existing strategic relationships may interfere
with its ability to enter into other desirable strategic relationships. A
significant number of the Company's Clarus eProcurement and Clarus eMarket
customers have been obtained through referrals from Microsoft, but Microsoft is
not obligated to refer any potential customers to the Company, and it has
entered into strategic relationships with other providers of electronic
procurement applications.
The Company's international sales and marketing activities makes the Company's
business more susceptible to risks associated with international business
activities.
The Company is 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;
. potentially adverse tax consequences, including restrictions on the
repatriation of earnings;
. increased transaction costs related to sales transactions conducted
outside the United States;
. 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 United States;
26
. adequacy of local infrastructures outside the United States;
. 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.
The Company may incur costs and liabilities related to potential or pending
litigation.
In a number of lawsuits filed against the Company in the fourth quarter of 2000
that are now consolidated into one lawsuit, the Company and several of its
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. This lawsuit diverts the time and attention of management and an
adverse judgment could cause the Company's financial condition or operating
results to suffer.
In addition, if in connection with the Company's announced strategy to pursue
strategic alternatives the Company does not continue its current software
business operations, the Company may be subject to claims by its customers under
its license agreements.
The Company's estimate of costs associated with our restructuring and related
activities may not be adequate.
During 2001 and in April 2002, and in July 2002, the Company's management
approved restructuring plans to reorganize and reduce operating costs.
Restructuring and related charges of $4.2 million were expensed during 2001,
$3.8 million in April 2002 and approximately $1.3 million in July 2002 to better
align the Company's cost structure with projected revenue. These charges were
comprised of employee separation related costs and facility closures and
consolidation costs. If the estimates and assumptions used in the restructuring
plan prove to be incorrect the Company may incur additional costs related to
these activities. In addition the Company may pursue alternatives to the current
facility closures and consolidation plans, including a buy-out of remaining
lease obligations, which may result in additional costs.
Defects in the Company's products could delay market adoption of its solutions
or cause the Company to commit significant resources to remedial efforts
The Company could lose revenues as a result of software errors or other product
defects. The Company's products may perform inadequately in a high volume
environment. As a result of their complexity, software products may contain
undetected errors or failures when first introduced or as new versions are
released. Despite the Company's testing of its software products and their use
by current customers, errors may appear in new applications after commercial
shipping begins. If the Company discovers errors, it may not be able to correct
them.
Errors and failures in the Company's products could result in the loss of
customers and market share or delay in market adoption of the Company's
applications, and alleviating these errors and failures could require the
Company to expend significant capital and other resources. The consequences of
these errors and failures could materially and adversely affect the Company's
business, results of operations, liquidity and financial condition. Because the
Company does not maintain product liability insurance, a product liability claim
could materially and adversely affect the Company's business, results of
operations, liquidity and financial condition. Provisions in the Company's
license agreements may not effectively protect the Company from product
liability claims.
The success of the Company's software products depends on the continued use of
Microsoft technologies or other technologies that operate with the Company's
products.
The Company's 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 the Company does not
support, the Company may not be able to license its software products. Customers
may be unable to use the Company's products if they experience significant
problems with Microsoft technologies that are not corrected.
27
Competition from other electronic procurement providers may continue to reduce
demand for the Company's products and cause it to reduce the price of its
products.
The market for Internet-based procurement applications, and e-commerce
technology generally, is intensely competitive. The intensity of competition has
increased and is expected to increase in the future. The Company may not compete
effectively in its current market or new markets it develops or enters.
Competitive pressure has resulted in the Company reducing the price of its
products, which has negatively affect its revenues and operating margins. The
Company's competitors vary in size and in the scope and breath of the products
and services they offer. If the Company is unable to compete effectively in its
markets, the Company's business, results of operations, liquidity and financial
condition would be materially and adversely affected.
In the e-commerce market, the Company must compete with electronic procurement
providers such as Ariba and Commerce One. The Company also encounters
competition with respect to different aspects of its solution from companies
such as VerticalNet, PurchasePro, FreeMarkets, and i2. The Company also faces
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, the Company expects additional competition
from other established and emerging companies, particularly if they acquire one
of the Company's competitors.
Many of the Company's 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 the Company does. In addition, many of the Company's
competitors have well-established relationships with the Company's current and
potential customers and have extensive knowledge of the industry. In the past,
the Company has lost potential customers to competitors for various reasons,
including lower prices and incentives not matched by the Company. In addition,
current and potential competitors have established or may establish cooperative
relationships among themselves or with their partners 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. The Company also
expects that competition will increase as a result of industry consolidations.
The Company may not be able to compete successfully against its current and
future competitors.
The failure to maintain, support or update software licensed from third parties
could materially and adversely affect the Company's products performance or
cause product shipment delays.
The Company has entered into license agreements with third-party licensers for
products that enhance its products, are used as tools with the Company's
products, are licensed as products complementary to the Company's products or
are integrated with the Company's products. If these licenses terminate or if
any of these licensors fail to stay in business or adequately maintain, support
or update their products, the Company could be required to delay the shipment of
its products until it could identify and license software offered by alternative
sources. Product shipment delays could materially and adversely affect the
Company's business, operating results, liquidity and financial condition, and
replacement licenses could prove costly. The Company may be unable to obtain
additional product licenses on commercially reasonable terms. Additionally, the
Company's inability to maintain compatibility with new technologies could impact
the Company's customers' use of its products.
Illegal use of the Company's proprietary technology could result in substantial
litigation costs and divert management resources.
The Company's success will depend significantly on internally developed
proprietary intellectual property and intellectual property licensed from
others. The Company relies on a combination of patent, copyright, trademark and
trade secret laws, as well as on confidentiality procedures and licensing
arrangements, to establish and protect its proprietary rights in its products.
Existing patent, trade secret and copyright laws provide only limited protection
of the Company's proprietary rights. The Company has applied for registration of
its trademarks. The Company enters into license agreements with its customers
that give the customer the non-exclusive right to use the object code version of
the Company's products. These license agreements prohibit the customer from
disclosing object code to third parties or reverse-engineering its products and
disclosing the Company's confidential information. Despite the Company's efforts
to protect its products' proprietary rights, unauthorized parties may attempt to
copy aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. Third parties may also independently develop
products similar to the Company's products.
Litigation may be necessary to enforce the Company's intellectual property
rights, to protect its 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
28
could result in substantial costs and diversion of resources and could harm the
Company's business, operating results, liquidity and financial condition.
Claims against the Company regarding its proprietary technology could require
the Company to pay licensing or royalty fees or to modify or discontinue its
products.
Any claim that the Company's products infringe on the intellectual property
rights of others could materially and adversely affect the Company's 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 the Company
are a continuing risk. Infringement claims against the Company could cause
product release delays, require the Company to redesign its products or require
the Company to enter into royalty or license agreements. These agreements may be
unavailable on acceptable terms. Litigation, regardless of the outcome, could
result in substantial cost, divert management attention and delay or reduce
customer purchases. Claims of infringement are becoming increasingly common as
the software industry matures and as courts apply expanded legal protections to
software products. Third parties may assert infringement claims against the
Company regarding its proprietary technology and intellectual property licensed
from others. Generally, third-party software licensors indemnify the Company
from claims of infringement. However, licensors may be unable to indemnify the
Company fully for such claims, if at all.
If a court determines that one of the Company's 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 the Company 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 the Company's products infringes a
third party's patent or other intellectual property rights, then the Company may
be liable to that third party for actual damages and attorneys' fees. If a court
finds that the Company 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 the Company's solutions
could reduce customer and market confidence in the Company's products or result
in claims against the Company.
A significant barrier to Internet-based commerce is the secure exchange of
valued and confidential information over public networks. Any compromise of the
Company's security technology could result in reduced customer and market
confidence in the Company's products and in customer or third party claims
against the Company. This could materially and adversely affect the Company's
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 the Company employs 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 the Company's failure to introduce enhancements
to its products in a timely manner could render the Company's 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, the Company
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 the Company's products is difficult to estimate.
Products, capabilities or technologies others develop may render the Company's
products or technologies obsolete or noncompetitive and shorten the life cycles
of the Company's products. Satisfying the increasingly sophisticated needs of
the Company's customers requires developing and introducing enhancements to the
Company's products and technologies in a timely manner that keeps pace with
technological developments, emerging industry standards and customer
requirements while keeping
29
the Company's products priced competitively. The Company's failure to develop
and introduce new or enhanced e-commerce products that compete with other
available products could materially and adversely affect the Company's software
business.
Future governmental regulations could materially and adversely affect the
Company's software business and e-commerce generally.
The Company is 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. The Company 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 the Company's application
systems could force the Company to discontinue some, or all of its services.
These eventualities could adversely affect the Company's software business. The
adoption of any laws or regulations covering these issues also could slow the
growth of e-commerce generally, which would also adversely affect the Company's
software business.
Foreign governmental regulations could also materially and adversely affect the
Company's 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 the
Company's business is uncertain. These laws could create uncertainty in the
marketplace that could reduce demand for the Company's 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 the Company's business, results of operations, liquidity and financial
condition.
In addition, because the Company's services are accessible worldwide, and the
Company facilitates sales of goods to users worldwide, other jurisdictions may
claim that the Company is required to qualify to do business as a foreign
corporation in a particular state or foreign country. The Company's failure to
qualify as a foreign corporation in a jurisdiction could subject the Company to
taxes and penalties and could result in the Company's 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 the Company's business, could have a material and adverse
effect on the Company's 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
the Company's 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 the Company's security measures could potentially
misappropriate proprietary information or cause interruptions in the Company's
operations. Because the Internet is a public network, computer viruses could be
introduced to the Company's system or those of the Company's customers or
suppliers, thereby disrupting the Company's operational network and making its
services inaccessible. In the event the Company's security measures ever failed,
the Company's business and financial condition would be substantially harmed.
Furthermore, the Company may be required to expend substantial capital and other
resources in order to protect against security breaches and interruptions and in
order to keep the Company's security system up-to-date.
Legislation limiting further levels of encryption technology may adversely
affect the Company's sales.
As a result of customer demand, it is possible that the Company's 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 the Company's software and the Company's ability to distribute its
products outside the United States. Any
30
revocation or modification of the Company's export authority, unlawful
exportation or use of the Company's software or adoption of new legislation or
regulations relating to exportation or use of software and encryption technology
could materially and adversely affect the Company's sales prospects and,
potentially, the Company's business, financial condition, operating results and
liquidity as a whole.
Future taxation could harm the Company's business and Internet commerce
generally.
The Company files tax returns in such states as required by law based on
principles applicable to traditional businesses. The Company does not collect
sales or similar taxes in respect of transactions conducted through its software
products or trading communications created with the Company's 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 the Company's 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 the
Company's ability to license its electronic commerce products.
Item 3. 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 company. 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.
PART II. OTHER INFORMATION
Item 1. 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.
31
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.
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
On May 21, 2002 the Annual Meeting of stockholders of the Company was held to
elect nominees for director and to ratify the appointment of the Company's
independent auditors. The following individuals were elected as directors with
terms to expire in 2005.
Nominee For Withheld
------- --- --------
Warren B. Kanders 5,223,790 16,658
Burtt R. Erlich 5,223,790 16,658
Nicholas Sokolow 5,223,790 16,658
With respect to the ratification of KPMG LLP as the Company's independent
auditors for the fiscal year ending December 31, 2002, the results were as
follows:
For Against Abstain
--------- ------- -------
9,102,552 25,959 20,235
Item 5. Other Information
At the July 15, 2002 meeting of the Company's Board of Directors, the Board
resolved to recommend to the stockholders of the Company for approval at the
next meeting called for any purpose, that costs incurred by Warren B. Kanders,
Burtt R. Erlich and Nicholas Sokolow in connection with the solicitation of
proxies for the 2002 annual meeting, be reimbursed by the Company. These costs
are approximately $500,000.
Item 6. Exhibits and Reports on Form 8-K
a) The following Exhibits are filed as part of this report
3.1 Amended and Restated Bylaws
10.1 Amendment to Employment Agreement with Stephen P. Jeffery
10.2 Amendment to Employment Agreement with Steven M. Hornyak
10.3 Amendment to Employment Agreement with Sean Feeney
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32
b) Reports on form 8-K
None
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CLARUS CORPORATION
Date: August 14, 2002 /s/ James J. McDevitt
-------------------------------------
James J. McDevitt,
Chief Financial Officer and Secretary
33