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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 September 30, 2003
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
------------------
(Exact name of registrant as specified in its charter)
Delaware 58-1972600
- ------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or Identification Number)
organization)
One Pickwick Plaza
Greenwich, Connecticut 06830
----------------------------
(Address of principal executive offices)
(Zip code)
(203) 302-2000
--------------
(Registrant's telephone number,
including area code)
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 by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). 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)
--------------------------------
16,502,058 shares outstanding as of November 10, 2003
INDEX
CLARUS CORPORATION
PART I FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited) -
September 30, 2003 and December 31, 2002....................................... 1
Consolidated Statements of Operations (unaudited) -
Three and nine months ended September 30, 2003 and 2002........................ 2
Consolidated Statements of Cash Flows (unaudited) -
Nine months ended September 30, 2003 and 2002.................................. 3
Notes to Unaudited Consolidated Financial Statements (unaudited) -
September 30, 2003............................................................. 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................... 15
Item 4. Procedures and Controls......................................................... 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders.............................. 16
Item 6. Exhibits and Reports on Form 8-K................................................. 17
SIGNATURE...................................................................................... 17
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CLARUS CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
2003 2002
-------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $10,894 $42,225
Marketable securities 77,702 52,885
Accounts receivable, less allowance for doubtful accounts
of $0 and $586 in 2003 and 2002, respectively -- 467
Prepaids and other current assets 980 1,262
Assets held for sale -- 48
--------- -----------
Total current assets 89,576 96,887
PROPERTY AND EQUIPMENT, NET 4 809
OTHER ASSETS:
Deposits and other long-term assets 37 68
--------- -----------
TOTAL ASSETS $89,617 $97,764
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $1,875 $1,936
Deferred revenue 1,132 1,248
Current portion of long-term debt -- 5,000
Liabilities to be assumed -- 220
--------- -----------
Total current liabilities 3,007 8,404
LONG-TERM LIABILITIES: -- --
Other long-term liabilities -- --
--------- -----------
Total liabilities 3,007 8,404
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value; 5,000,000 shares authorized; none issued -- --
Common stock, $.0001 par value; 100,000,000 shares authorized;
16,564,358 and 15,762,707 shares issued and 16,489,358 and 15,687,707
outstanding in 2003 and 2002, respectively 2 2
Additional paid-in capital 366,393 361,715
Accumulated deficit (276,562) (272,436)
Treasury stock, at cost (2) (2)
Accumulated other comprehensive income 98 146
Deferred compensation (3,319) (65)
--------- -----------
Total stockholders' equity 86,610 89,360
--------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $89,617 $97,764
========= ===========
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
1
CLARUS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- ----------------------------
2003 2002 2003 2002
---- ---- ---- ----
REVENUES:
License fees $ -- $ 162 $ -- $ 2,649
Services fees 25 1,354 104 5,352
--------------------------- ----------------------------
Total revenues 25 1,516 104 8,001
COST OF REVENUES:
License fees -- 5 -- 21
Services fees -- 990 -- 4,809
--------------------------- ----------------------------
Total cost of revenues -- 995 -- 4,830
OPERATING EXPENSES:
Research and development -- 1,255 -- 6,437
Sales and marketing -- 1,020 -- 7,699
General and administrative 848 2,090 4,363 7,973
Intangible impairment loss -- -- -- 10,360
Provision for doubtful accounts (48) (300) 18 (297)
Depreciation and amortization -- 971 762 3,859
--------------------------- ----------------------------
Total operating expenses 800 5,036 5,143 36,031
OPERATING LOSS (775) (4,515) (5,039) (32,860)
OTHER INCOME/(EXPENSE) (125) 14 3 26
INTEREST INCOME 228 568 976 1,986
INTEREST EXPENSE -- (56) (66) (169)
--------------------------- ----------------------------
NET LOSS $ (672) $ (3,989) $ (4,126) $ (31,017)
=========================== ============================
Loss per common share:
Basic $ (0.04) $ (0.26) $ (0.26) $ (1.99)
Diluted $ (0.04) $ (0.26) $ (0.26) $ (1.99)
Weighted average shares outstanding:
Basic 15,975 15,630 15,867 15,597
Diluted 15,975 15,630 15,867 15,597
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
2
CLARUS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NINE MONTHS
ENDED SEPTEMBER 30,
------------------------
2003 2002
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,126) $(31,017)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization on property and equipment 762 3,404
Loss/(Gain) on sale of marketable securities 125 (15)
Impairment of intangible assets -- 10,360
Amortization of intangible assets -- 455
Noncash sales and marketing expense -- 450
Noncash general and administrative expense 182 --
Provision for doubtful accounts 18 (297)
Loss/(Gain) on disposal of property & equipment 36 918
Changes in operating assets and liabilities:
Accounts receivable 449 1,900
Prepaid and other current assets 282 984
Assets held for sale 48 --
Deposits and other long-term assets 31 443
Accounts payable and accrued liabilities (61) (1,306)
Deferred revenue (116) (4,923)
Liabilities to be assumed (220) --
Other long-term liabilities -- (9)
-------- ---------
NET CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES (2,590) (18,653)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (100,915) (97,690)
Proceeds from sale of marketable securities 14,025 4,228
Proceeds from maturity of marketable securities 61,899 73,717
Proceeds from sale of investments -- 200
Proceeds from sale of property & equipment 11 83
Purchases of property and equipment (4) (182)
-------- ---------
NET CASH (USED IN)/PROVIDED BY INVESTING ACTIVITIES (24,984) (19,644)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercises of stock options 1,243 268
Repayment of debt (5,000) --
Proceeds from issuance of common stock related to employee
stock purchase plan -- 119
-------- ---------
NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES (3,757) 387
-------- ---------
Effect of exchange rate change on cash -- 27
DECREASE IN CASH AND CASH EQUIVALENTS (31,331) (37,883)
CASH AND CASH EQUIVALENTS, Beginning of Period 42,225 55,628
-------- ---------
CASH AND CASH EQUIVALENTS, End of Period $10,894 $17,745
======== =========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
-------- ---------
Cash paid for interest $ -- $113
Significant Non-Cash Transaction: Grant of restricted stock to
Warren B. Kanders on April 12, 2003 $2,680 $ --
======== =========
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
3
CLARUS CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Clarus
Corporation and subsidiaries ("Clarus" or the "Company," which may be referred
to as "we," "us," or "our") for the three and nine months ended September 30,
2003 and 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 in notes 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 consolidated financial statements have
been included. The results of the three and nine months ended September 30, 2003
are not necessarily indicative of the results to be obtained for the year ending
December 31, 2003. 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, 2002, filed with the Securities and Exchange Commission.
NOTE 2. SIGNIFICANT EVENTS
As part of our previously announced strategy to limit operating losses and
enable the Company to redeploy its assets and use its substantial cash and cash
equivalent assets to enhance stockholder value, on December 6, 2002, we sold
substantially all of our electronic commerce business, which represented
substantially all of our revenue-generating operations and related assets.
During January 2003, we sold the assets relating to our Cashbook product
representing the remainder of our operating assets.
NOTE 3. EARNINGS PER SHARE
Basic net loss per share attributable to common stockholders is computed by
dividing the net loss attributable to common stockholders by the weighted
average number of shares of common stock outstanding for each period. Diluted
net loss per share attributable to common stockholders is computed by giving
effect to all potentially dilutive securities, including options, warrants and
redeemable convertible preferred stock. Potentially dilutive securities are
excluded from the computation of diluted net loss per share attributable to
common stockholders if their effect is anti-dilutive. For the periods ended
September 30, 2003 and 2002, basic net loss per share attributable to common
stockholders is the same as diluted net loss per share attributable to common
stockholders because all potentially dilutive securities were anti-dilutive in
computing diluted net loss per share for these periods.
Options and warrants to acquire 983,334 and 1,288,974 shares of common stock
during the periods ended September 30, 2003 and 2002, respectively, were
outstanding, but not included in the calculation of weighted average shares
outstanding because the option and warrant exercise prices were higher than the
average market price of the Company's common stock during those periods. In
addition, diluted net loss per share attributable to common stockholders
excludes the potentially dilutive effect of options and warrants to purchase
approximately 149,097 and 764,454 shares of the Company's common stock during
the periods ended September 30, 2003 and 2002, respectively, as the Company
incurred losses and their inclusion would have been anti-dilutive.
NOTE 4. STOCK-BASED COMPENSATION
The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. As such,
compensation expense is measured on the date of grant only if the current market
price of the underlying stock exceeds the exercise price. Such compensation
expense is recorded on a straight-line basis over the related vesting period.
SFAS No. 123, "Accounting for Stock-Based Compensation", permits entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma net
income (loss) and pro forma net income (loss) per share disclosures for employee
stock option grants as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosures required by SFAS No.
123.
4
In April 2003, the Company granted 500,000 shares of restricted stock to Warren
B. Kanders, the Executive Chairman of the Board. The shares vest in ten years or
earlier upon satisfaction of various conditions including performance based
conditions relating to the price of the Company's common stock. Deferred
compensation of $2,680,000 was recorded at the date of grant representing the
fair value of the shares and adjusted as of September 30, 2003 to $3,435,000 to
account for the increase in fair market value from grant date through September
30, 2003. During the three months ended September 30, 2003, $93,250 was
amortized to compensation expense and $171,500 was amortized to compensation
expense during the nine months ended September 30, 2003 to reflect vesting
through those periods.
Had compensation cost been determined consistent with the provisions of SFAS No.
123, the Company's pro forma net loss and pro forma net loss per share in
accordance with SFAS No. 123 for the three- and nine-month periods ended
September 30, 2003 and 2002 would have been as follows (in thousands, except per
share amounts):
Three months ended Nine months ended
September 30, September 30,
2003 2002 2003 2002
-------------------------- ------------------------
Net loss, as reported...................................................... $ (672) $(3,989) $(4,126) $(31,017)
Add stock-based employee compensation expense included in reported
net loss, net of tax.................................................... 96 18 182 196
Deduct total stock-based employee compensation expense determined
under fair-value based method for all awards, net of tax................ (946) (87) (4,072) (478)
-------- --------- -------- --------
Pro forma net loss......................................................... $(1,522) $(4,058) $(8,016) $(31,299)
======== ========= ======== =========
Basic and diluted net loss per share:
As reported................................................................ $ (.04) $ (.26) $ (.26) $(1.99)
Add stock-based employee compensation expense included in reported
net loss, net of tax.................................................... $ .01 $ -- $ .01 $ .01
Deduct total stock-based employee compensation expense determined
under fair-value based method for all awards, net of tax $ (.06) $ (.01) $ (.26) $ (.03)
------- ------- ------- -------
Pro forma basic and diluted net loss per share.......................... $ (.09) $ (.27) $ (.51) $(2.01)
======= ======= ======= =======
For computing the fair value of stock-based employee awards, the fair value of
each option grant has been estimated as of the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
2003 2002
---- ----
Dividend yield................. N/A 0%
Expected volatility............ N/A 76%
Risk-free interest rate........ N/A 2.63%-4.43%
Expected life.................. N/A Four years
As there were no grants issued during the three-month or nine-month periods
ended September 30, 2003 the assumptions are not applicable.
NOTE 5. RESTRUCTURING AND RELATED COSTS
During 2002 and 2001, the Company's management approved restructuring plans to
reorganize and reduce operating 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 consolidated statement of operations during 2002. Restructuring and
related charges of $8.6 million were expensed during 2002. The charges for 2002
were comprised of $4.6 million for employee separation and related costs for 183
employees and $4.0 million for facility closures and consolidation costs.
The facility closures and consolidation costs for 2002 relate to the abandonment
of the Company's leased facilities in Suwanee, Georgia; Limerick, Ireland;
Maidenhead, England; and Toronto, Canada. Total facilities closure and
consolidation costs include remaining lease liabilities, construction costs and
brokerage fees to sublet the abandoned spaces, net of estimated
5
sublease income. The estimated costs of abandoning these leased facilities,
including estimated costs to sublease, were based on market information trend
analysis provided by a commercial real estate brokerage firm retained by the
Company. The Company incurred an additional charge in the fourth quarter 2002 of
$2.1 million for facility closure and consolidation costs as a result of the
termination of its lease for the facility in Suwanee, Georgia.
The following is a reconciliation of the components of the accrual for
restructuring and related costs, the amounts charged against the accrual during
2002 and 2003 and the balance of the accrual as of September 30, 2003:
NINE MONTHS ENDED SEPTEMBER 30, 2003
---------------------------------------------
BALANCE ACCRUALS BALANCE BALANCE
DECEMBER DURING EXPENDITURES ADJUSTMENTS DECEMBER 31, EXPENDITURES SEPTEMBER 30,
31, 2001 2002 DURING 2002 DURING 2002 2002 DURING 2003 2003
-------- --------- ------------ ----------- ------------ ------------ --------
(in thousands)
Employee separation
costs $680 $4,645 $(4,196) $(202) $927 $(708) $219
Facility closure costs 1,209 3,905 (4,977) -- 137 (12) 125
-------- --------- ------------ ----------- ------------ ------------ --------
Total restructuring and
related costs $1,889 $8,550 $(9,173) $(202) $1,064 $(720) $344
======== ========= ============ =========== ============ ============= =======-
The accrual for restructuring and related costs is included in accounts payable
and accrued liabilities in the accompanying consolidated balance sheets.
NOTE 6. COMPREHENSIVE INCOME (LOSS)
The Company utilizes SFAS No. 130 "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting and presentation 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 nine months ended September 30, 2003 and 2002 were as follows:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2003 2002 2003 2002
-------------- --------------- ------------- --------------
(in thousands)
Net loss $ (672) $ (3,989) $ (4,126) $(31,017)
Increase/(decrease) in unrealized gain
on marketable securities 3 (28) 30 (192)
Foreign currency translation adjustments -- 24 (78) 27
-------------- --------------- ------------- --------------
Comprehensive loss $ (669) $ (3,993) $(4,174) $(31,182)
============== =============== ============= ==============
NOTE 7. CONTINGENCIES
The Company is a party to the following pending judicial and administrative
proceeding. Following its public announcement on October 25, 2000, of its
financial results for the third quarter of 2000, 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. The fourteen class action lawsuits were consolidated into
one case, Case No. 1:00-CV-2841, pursuant to an order of the court dated
November 17, 2000. A consolidated amended complaint was then filed on May 14,
2001 on behalf of all purchasers of common stock of the Company during the
period beginning December 8, 1999 and ending on October 25, 2000.
Generally the amended complaint alleges claims against the Company and the 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. Generally, it is
alleged that the defendants made material misrepresentations and omissions in
public filings made with the Securities and Exchange Commission and in certain
press releases and other public statements. The amended complaint alleges that
the market price of the Company's common stock was artificially inflated during
the class periods. The plaintiffs seek unspecified compensatory damages and
costs (including attorneys' and expert fees), expenses and other unspecified
relief on behalf of the classes. The Court denied a motion to dismiss brought by
the defendants and the case is currently in discovery.
6
After reviewing the proceeding that is currently pending (including the probable
outcome, reasonably anticipated costs and expenses, availability and limits of
insurance coverage) the Company believes the outcome of this proceeding will not
have a material adverse effect on our liquidity, financial condition or results
of operations. However, the results of complex legal proceedings are difficult
to predict. An unfavorable resolution of the proceeding that is currently
pending could adversely affect the Company's business, results of operations,
liquidity or financial condition. The Company has not reflected any amounts in
the financial statements related to this matter.
NOTE 8. NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51." This interpretation addresses the consolidation
by business enterprises of variable interest entities as defined in the
interpretation. The application of this interpretation did not have a material
effect on the Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation, Transition and Disclosure", an amendment of SFAS No. 123. SFAS
No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation. In addition,
this statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements. Certain
of the disclosures are required for quarterly financial reporting and are
included in the notes to these consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34". This interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. Interpretation No. 45
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the interpretation are
applicable to guarantees issued or modified after December 31, 2002. The
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002. The Company does not currently
have any guarantees requiring disclosure. Accordingly the application of this
interpretation did not have a material effect on the Company's consolidated
financial statements.
In September 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 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 No. 146 are effective for exit or disposal activities that are initiated
after December 31, 2002, with early application encouraged. The adoption of SFAS
No. 146 did not have a material impact on the Company's consolidated financial
statements.
In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations". SFAS No. 143 addresses financial accounting and reporting
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Company adopted SFAS No. 143 on January
1, 2003. The adoption of SFAS No. 143 did not have a material impact on the
Company's consolidated financial statements.
In November 2002, the EITF reached a consensus on Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables". EITF Issue No. 00-21 provides guidance
on how to account for arrangements that involve the delivery or performance of
multiple products, services and/or rights to use assets. The provisions of EITF
Issue No. 00-21 will apply only to revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. Clarus Corporation does not expect the
adoption of EITF Issue No. 00-21 to have any impact on its financial position or
results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150
requires that certain financial instruments that are settled in cash, including
certain types of mandatorily redeemable securities, be classified as liabilities
rather than as equity or temporary equity. SFAS No. 150 becomes effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period after June 15, 2003
except for private companies in which the effective date is January 1, 2004.
SFAS No. 150 will not affect Clarus Corporation's consolidated financial
statements.
NOTE 9. RELATED PARTY TRANSACTIONS
In 2003, the Company entered into an oral agreement with Kanders & Company, an
entity owned and controlled by the Company's Executive Chairman, Warren B.
Kanders, pursuant to which the Company subleased approximately 1,989 square feet
in Greenwich, Connecticut from Kanders & Company for $9,572 a month (subject to
increases every three years). In June 2003, this agreement with Kanders &
Company was terminated as the underlying lease held by Kanders & Company for the
7
Greenwich property was voluntarily terminated. Included in prepaids and other
current assets is $102,000 which represents all out-of-pocket expenses incurred
by the Company in connection with the Greenwich property.
In September 2003, the Company and Kanders & Company, entered into a 15-year
lease with a five-year renewal option, as co-tenants to lease approximately
11,500 square feet in Stamford, Connecticut. The Company and Kanders & Company
have initially agreed to allocate lease payments on the basis of Kanders &
Company renting 2,900 square feet initially for $6,163 per month, and the
Company renting 8,600 square feet initially for $18,275 per month, which are
subject to increase every three years. The lease provides the co-tenants with an
option to terminate the lease in years eight and ten in consideration for a
termination payment. The Company and Kanders & Company have also agreed to pay
for their proportionate share of the build-out construction costs, fixtures,
equipment and furnishings related to preparation of the space. In connection
with the lease, the Company obtained a stand-by letter of credit in the amount
of $850,000 to secure lease obligations for the Stamford facility. Kanders &
Company reimburses the Company for a pro rata portion of the approximately
$5,000 annual cost of the letter of credit.
During the three- and nine-month periods ended September 30, 2003, the Company
expensed $30,000 and $88,000, respectively, for accruals and payments to Kanders
Aviation LLC, an affiliate of the Company's Executive Chairman, Warren B.
Kanders, for reimbursement of expenses relating to aircraft travel by directors
and officers of the Company. This travel related to Board meetings, the closing
of the Atlanta facility and meetings for potential redeployment transactions. As
of September 30, 2003, $60,000 of this expense remained outstanding and is
included in accounts payable and accrued liabilities in the accompanying balance
sheet.
As of September 30, 2003, the Company had outstanding receivables of $199,000
from Kanders & Company and Kanders Aviation LLC, less accounts payable of
$60,000 for a net receivable of $139,000. Both of these companies are owned and
controlled by Warren B. Kanders, the Company's Executive Chairman. The expenses
relate to out-of-pocket expenses incurred by the Company related to the
Greenwich property, travel as discussed above and general and administrative
costs paid by the Company on behalf of Kanders & Company. The amount outstanding
due from these related parties of $199,000 at September 30, 2003 is included in
prepaids and other assets in the accompanying balance sheet.
NOTE 10. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current
period presentation.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements, including information
about or related to our future results, 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,"
"expect" and similar expressions are intended to identify forward-looking
statements. Although we believe that our assumptions underlying the
forward-looking statements are reasonable, any or all of the assumptions could
prove inaccurate, and we may not realize the results contemplated by the
forward-looking statements. 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, our planned effort to redeploy our assets
to enhance stockholder value following the sale of substantially all of our
revenue generating operations and assets, and the risks and uncertainties set
forth in the section headed "Factors That May Affect Our Future Results" of Part
I of our Annual Report on Form 10-K, as amended, for the fiscal year ended
December 31, 2002. The Company cannot guarantee its future performance.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
The Company's discussion of financial condition and results of operations are
based on its consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these consolidated 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
consolidated 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,
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 has recognized 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") No. 97-2, "Software Revenue
Recognition", and SOP No. 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 maintained allowances for doubtful accounts based on expected
losses resulting from the inability of the Company's customers to make required
payments.
- - The Company had significant long-lived assets, primarily intangibles, as a
result of acquisitions completed during 2000. During 2002, the Company evaluated
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 to goodwill
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
9
tested for further impairment. 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 September 30, 2002. The Company
recorded no amortization expense related to intangible assets with definite
lives during the three and nine months ended September 30, 2003. As a result of
adopting SFAS No. 142, the Company did not record amortization expense related
to goodwill during 2002.
- - The Company is a party to a pending judicial and administrative proceeding
described more fully in Part I, Item 3 of the Company's Annual Report on Form
10-K, as amended, for the fiscal year ended December 31, 2002, Part II, Item 1
of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2003, and this Quarterly Report on Form 10-Q. After reviewing the proceeding
that is currently pending (including the probable outcome, reasonably
anticipated costs and expenses, availability and limits of insurance coverage),
the Company believes the outcome of this proceeding will not have a material
adverse effect on our liquidity, financial condition or results of operations.
However, the results of complex legal proceedings are difficult to predict. An
unfavorable resolution of the proceeding that is currently pending could
adversely affect the Company's business, results of operations, liquidity or
financial condition.
SOURCES OF REVENUE
Prior to December 6, 2002, the Company's revenue consisted of license fees and
services fees. License fees were generated from the licensing of the Company's
suite of software products. Services fees were generated from consulting,
implementation, training, content aggregation and maintenance support services.
Following the sale of substantially all of the Company's operating assets, the
Company's revenue has consisted solely of the recognition of deferred service
fees that are recognized ratably over the maintenance term. This revenue will
continue to decrease during 2003 and will be fully recognized by September 30,
2004. Prior to a redeployment of the Company's assets, the Company's principal
income, net of general and administrative expenses, will consist of interest,
dividend and other investment income from short-term investments that is
reported as interest income in the Company's statement of operations.
REVENUE RECOGNITION
Prior to the December 6, 2002 sale of substantially all of the Company's revenue
generating operations and assets, the Company recognized revenue from two
primary sources, software licenses and services. Revenue from software licensing
and services fees was recognized in accordance with SOP No. 97-2, "Software
Revenue Recognition", and SOP No. 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.
COST OF REVENUES AND OPERATING EXPENSES
Cost of license fees historically included royalties and software duplication
and distribution costs. The Company recognized these costs as the products were
shipped.
Cost of services fees historically included 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 were recognized as they were incurred for time and
material arrangements and were recognized using the percentage of completion
method for fixed price arrangements.
Research and development expenses historically consisted primarily of personnel
related expenses and third-party consulting fees. The Company accounted for
software development costs under SFAS No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed". The Company charged
research and development costs related to new products or enhancements to
expense as incurred until technological feasibility was established, after which
the remaining costs were capitalized until the product or enhancement was
available for general release to customers. The Company defined 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 were not material.
Sales and marketing expenses historically consisted 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. During 2002, the Company allocated 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
included personnel related expenses, communication charges, and software
support. Occupancy charges include rent, utilities, and maintenance services.
10
RESTRUCTURING AND RELATED COSTS
During 2002 and 2001, the Company's management approved restructuring plans to
reorganize and reduce operating 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 consolidated statement of operations during 2002. Restructuring and
related charges of $8.6 million were expensed during 2002. The charges for 2002
were comprised of $4.6 million for employee separation and related costs for 183
employees and $4.0 million for facility closures and consolidation costs.
The facility closures and consolidation costs for 2002 relate to the abandonment
of the Company's leased facilities in Suwanee, Georgia; Limerick, Ireland;
Maidenhead, England; and Toronto, Canada. Total facilities closure and
consolidation costs include remaining lease liabilities, construction costs and
brokerage fees to sublet the abandoned space, net of estimated sublease income.
The estimated costs of abandoning these leased facilities, including estimated
costs to sublease, were based on market information trend analysis provided by a
commercial real estate brokerage firm retained by the Company. The Company
incurred an additional charge in the fourth quarter 2002 of $2.1 million for
facility closure and consolidation costs as a result of the termination of its
lease for the facility in Suwanee, Georgia.
The following is a reconciliation of the components of the accrual for
restructuring and related costs, the amounts charged against the accrual during
2002 and 2003 and the balance of the accrual as of September 30, 2003:
NINE MONTHS ENDED SEPTEMBER 30, 2003
---------------------------------------------
BALANCE ACCRUALS BALANCE BALANCE
DECEMBER DURING EXPENDITURES ADJUSTMENTS DECEMBER 31, EXPENDITURES SEPTEMBER 30,
31, 2001 2002 DURING 2002 DURING 2002 2002 DURING 2003 2003
-------- --------- ------------ ----------- ------------ ------------ --------
(in thousands)
Employee separation
costs $680 $4,645 $(4,196) $(202) $927 $(708) $219
Facility closure costs 1,209 3,905 (4,977) -- 137 (12) 125
-------- --------- ------------ ----------- ------------ ------------ --------
Total restructuring and
related costs $1,889 $8,550 $(9,173) $(202) $1,064 $(720) $344
======== ========= ============ =========== ============ ============= ========
The accrual for restructuring and related costs is included in accounts payable
and accrued liabilities in the accompanying consolidated balance sheets.
OVERVIEW
AS PART OF OUR PREVIOUSLY ANNOUNCED STRATEGY TO LIMIT OPERATING LOSSES AND
ENABLE THE COMPANY TO REDEPLOY ITS ASSETS AND USE ITS SUBSTANTIAL CASH AND CASH
EQUIVALENT ASSETS TO ENHANCE STOCKHOLDER VALUE, ON DECEMBER 6, 2002 WE SOLD
SUBSTANTIALLY ALL OF OUR ELECTRONIC COMMERCE BUSINESS, WHICH REPRESENTED
SUBSTANTIALLY ALL OF OUR REVENUE-GENERATING OPERATIONS AND RELATED ASSETS. THE
INFORMATION APPEARING BELOW, WHICH RELATES TO PRIOR PERIODS, IS THEREFORE NOT
INDICATIVE OF THE RESULTS THAT MAY BE EXPECTED FOR ANY SUBSEQUENT PERIODS. THE
FISCAL 2003 THREE-MONTH AND NINE-MONTH PERIODS PRIMARILY REFLECT, AND FUTURE
PERIODS PRIOR TO A REDEPLOYMENT OF ASSETS ARE EXPECTED TO PRIMARILY REFLECT,
GENERAL AND ADMINISTRATIVE EXPENSES ASSOCIATED WITH THE CONTINUING
ADMINISTRATION OF THE COMPANY AND ITS EFFORTS TO REDEPLOY ITS ASSETS.
RESULTS OF OPERATIONS
REVENUES
Total Revenues. Total revenues for the three months ended September 30, 2003
decreased to $25,000 from $1.5 million during the same period in 2002. Total
revenues for the nine months ended September 30, 2003 decreased to $104,000 from
$8.0 million during the same period in 2002. The decrease in total revenues in
both periods resulted primarily from the sale of substantially all of the
Company's operating assets, discussed above.
License Fees. As a result of the sale of substantially all of the Company's
operating assets, discussed above, the Company did not recognize any license fee
revenue during 2003. License fees were $162,000 or 10.7% of total revenues for
the
11
three months ended September 30, 2002. License fees were $2.6 million or 33.1%
of total revenues for the nine months ended September 30, 2002.
Services Fees. Services fees decreased to $25,000 or 100% of total revenues for
the three months ended September 30, 2003, from $1.4 million or 89.3% of total
revenues for the same period in 2002. Services fees decreased to $104,000 or
100.0% of total revenues for the nine months ended September 30, 2003, from $5.4
million or 66.9% of total revenues for the same period in 2002. This decrease is
primarily attributable to the sale of substantially all of the Company's
operating assets, discussed above.
COST OF REVENUES
Total Cost of Revenues. As a result of the sale of substantially all of the
Company's operating assets, the Company did not record any cost of revenues
during 2003. Cost of revenues were $995,000 and $4.8 million during the three
and nine months ended September 30, 2002.
Cost of License Fees. As a result of the sale of substantially all of the
Company's operating assets, the Company did not record any cost of license fees
during 2003. Cost of license fees was $5,000 during the three months ended
September 30, 2002 and $21,000 for the nine months ended September 30, 2002.
Cost of Services Fees. As a result of the sale of substantially all of the
Company's operating assets, the Company did not record any cost of services fees
during 2003. Cost of services fees were $990,000 during the three months ended
September 30, 2002 and $4.8 million during the nine months ended September 30,
2002.
RESEARCH AND DEVELOPMENT EXPENSE
As a result of the sale of substantially all of the Company's operating assets,
the Company did not record any research and development expenses during 2003.
Research and development expenses were approximately $1.3 million or 82.8% of
total revenues during the three months ended September 30, 2002 and $6.4 million
or 80.5% of total revenues during the nine months ended September 30, 2002.
SALES AND MARKETING
As a result of the sale of substantially all of the Company's operating assets,
the Company did not record any sales and marketing expenses during 2003. Sales
and marketing expenses were $1.0 million during the third quarter in 2002 and
$7.7 million during the nine months ended September 30, 2002.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased to $848,000 during the quarter
ended September 30, 2003 from $2.1 million during the same period in 2002.
General and administrative expenses decreased to $4.4 million during the nine
months ended September 30, 2003 from $8.0 million during the same period in
2002. The decrease in general and administrative expenses for the three and nine
months ended September 30, 2003 was primarily attributable to the reduction in
expenses due to the Company's change in strategic direction as discussed
earlier.
PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts for the three months ended September 30,
2003 reflected a recovery of $48,000 as compared to a recovery of $300,000 for
the comparable period in 2002. The provision for doubtful accounts in the nine
months ended September 30, 2003 were $18,000 as compared to a recovery of
$297,000 for the nine months ended September 30, 2002. The changes in the
provision for doubtful accounts were due to the collection of accounts
previously thought to be uncollectible.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased to an amount less than $1,000 in the
quarter ended September 30, 2003 from $971,000 in the same period of 2002.
Depreciation and amortization decreased to $762,000 in the nine months ended
September 30, 2003 from $3.9 million in the same period of 2002. The decrease is
primarily attributable to the sale of substantially all of the Company's
operating assets, the write-down of certain assets related to the Company's
Maidenhead, England, Limerick, Ireland and Suwanee, Georgia facilities during
2002 and the write-off of intangible assets with definite lives during 2002.
12
OTHER INCOME
For the three months ended September 30, 2003, the Company recorded a loss of
$125,000 from a loss on the sale of securities offset by a slight gain on
foreign currency. For the three months ended September 30, 2002, the Company
recorded other income of $14,000. For the nine months ended September 30, 2003,
the Company recorded realized gains and losses on marketable securities, foreign
currency, sale of assets and early extinguishment of debt totaling to a gain of
$3,000. For the nine months ended September 30, 2002, the Company recorded
other income of $26,000, which was comprised of losses on foreign currency and
realized gains and losses on marketable securities.
INTEREST INCOME
Interest income decreased to $228,000 in the three months ended September 30,
2003 from $568,000 in the same period of 2002. Interest income decreased to
$976,000 for the nine months ended September 30, 2003 from $2.0 million for the
same period of 2002. The decrease in interest income was due to lower levels of
cash and cash equivalents available for investment and a lower rate of return on
investments.
INTEREST EXPENSE
Interest expense was zero and $56,000 for the three months ended September 30,
2003 and 2002, respectively. Interest expense for the nine months ended
September 30, 2003 was $66,000 compared to $169,000 during the same period of
2002. In March 2000, the Company entered into a $5.0 million borrowing
arrangement with an interest rate of 4.5% with Peachtree Equity Partners L.P.,
assignee of Wachovia Capital Investments, Inc. The interest expense in 2003 and
2002 is related to this agreement. The debt was repaid on April 17, 2003 and
interest owing at the time of extinguishment was waived and a gain of $66,000
was recognized in other income during the nine months ended September 30, 2003.
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 months and
nine months ended September 30, 2003 and 2002, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased to $10.9 million at September
30, 2003 from $42.2 million at December 31, 2002. Marketable securities
increased to $77.7 million at September 30, 2003 from $52.9 million at December
31, 2002. The overall decrease in cash and cash equivalents and marketable
securities is due primarily to cash used in operating activities and repayment
of indebtedness.
Cash used in operating activities was approximately $2.6 million during the nine
months ended September 30, 2003. This was primarily attributable to the
Company's net loss partially offset by a decrease in accounts receivable and
prepaid and other current assets. Cash used in operating activities was
approximately $18.7 million during the nine months ended September 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 investing activities was approximately $25.0 million during the
nine months ended September 30, 2003. The cash was used primarily for the
purchase of marketable securities. Cash used for investing activities was
approximately $19.6 million during the nine months ended September 30, 2002. The
cash was used primarily for purchases of marketable securities partially offset
by the sale and maturity of marketable securities.
Cash used in financing activities was approximately $3.7 million during the nine
months ended September 30, 2003, compared to cash provided by financing
activities of $387,000 during the nine months ended September 30, 2002. The cash
used by financing activities during the nine months ended September 30, 2003 was
primarily attributable to repayment of the Company's outstanding indebtedness to
Peachtree Equity Partners, L.P. as mentioned earlier, offset by proceeds from
stock option exercises. For the nine-month period ending September 30, 2002,
cash provided by financing was attributable to proceeds from shares issued under
the employee stock purchase plan and stock option exercises.
At September 30, 2003, the Company had net operating loss carryforwards,
research and experimentation credit, and alternative minimum tax credit
carryforwards for U.S. federal income tax purposes that 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.
13
The following summarizes the Company's contractual obligations and commercial
commitments at September 30, 2003 with initial or remaining terms of one or more
years, and the effect such obligations are expected to have on our liquidity and
cash flow in future periods:
TOTAL 2003 2004 2005 2006 2007 THEREAFTER
------- ------ ------ ------ ------ ------ ------------
(in thousands)
Operating leases 2,180 42 277 315 231 219 1,096
------- ------ ------ ------ ------ ------ ------------
Total $2,180 $ 42 $277 $315 $231 $219 $1,096
======= ====== ====== ====== ====== ====== ============
The Company does not have commercial commitments under capital leases, lines of
credit, stand-by lines of credit, guaranties, stand-by repurchase obligations or
other such arrangements, other than the stand-by letter of credit described in
"Related Party Transactions" below.
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
In 2003, the Company entered into an oral agreement with Kanders & Company, an
entity owned and controlled by the Company's Executive Chairman, Warren B.
Kanders, pursuant to which the Company subleased approximately 1,989 square feet
in Greenwich, Connecticut from Kanders & Company for $9,572 a month (subject to
increases every three years). In June 2003, this agreement with Kanders &
Company was terminated as the underlying lease held by Kanders & Company for the
Greenwich property was voluntarily terminated. Included in prepaids and other
current assets is $102,000 which represents all out-of-pocket expenses incurred
by the Company in connection with the Greenwich property.
In September 2003, the Company and Kanders & Company, entered into a 15-year
lease with a five-year renewal option, as co-tenants to lease approximately
11,500 square feet in Stamford, Connecticut. The Company and Kanders & Company
have initially agreed to allocate lease payments on the basis of Kanders &
Company renting 2,900 square feet initially for $6,163 per month, and the
Company renting 8,600 square feet initially for $18,275 per month, which are
subject to increase every three years. The lease provides the co-tenants with an
option to terminate the lease in years eight and ten in consideration for a
termination payment. The Company and Kanders & Company have also agreed to pay
for their proportionate share of the build-out construction costs, fixtures,
equipment and furnishings related to preparation of the space. In connection
with the lease, the Company obtained a stand-by letter of credit in the amount
of $850,000 to secure lease obligations for the Stamford facility. Kanders &
Company reimburses the Company for a pro rata portion of the approximately
$5,000 annual cost of the letter of credit.
During the three- and nine-month periods ended September 30, 2003, the Company
expensed $30,000 and $88,000, respectively, for accruals and payments to Kanders
Aviation LLC, an affiliate of the Company's Executive Chairman, Warren B.
Kanders, for reimbursement of expenses relating to aircraft travel by directors
and officers of the Company. This travel related to Board meetings, the closing
of the Atlanta facility and meetings for potential redeployment transactions. As
of September 30, 2003, $60,000 of this expense remained outstanding and is
included in accounts payable and accrued liabilities in the accompanying balance
sheet.
As of September 30, 2003, the Company had outstanding receivables of $199,000
from Kanders & Company and Kanders Aviation LLC, less accounts payable of
$60,000 for a net receivable of $139,000. Both of these companies are owned and
controlled by Warren B. Kanders, the Company's Executive Chairman. The expenses
relate to out-of-pocket expenses incurred by the Company related to the
Greenwich property, travel as discussed above and general and administrative
costs paid by the Company on behalf of Kanders & Company. The amount outstanding
due from these related parties of $199,000 at September 30, 2003 is included in
prepaids and other assets in the accompanying balance sheet.
After the closing of the sale of the e-commerce software business, Steven
Jeffery resigned as the Company's Chief Executive Officer and Chairman of the
Board of Directors. Under Mr. Jeffery's employment agreement, he is entitled to
receive a severance payment equal to one year's salary of $250,000, payable over
one year. In addition, Mr. Jeffery entered into a three-year consulting
agreement with the Company and will receive total consideration of $250,000
payable over a term of two years. Both of these obligations were accrued as of
December 31, 2002. During the nine-month period ended September 30, 2003, Mr.
Jeffery received $281,000 related to these arrangements leaving a balance of
$219,000, which is included in accrued liabilities and accounts payable as of
September 30, 2003.
14
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to our exposures to market risk since
December 31, 2002.
ITEM 4. PROCEDURES AND CONTROLS
The Company's management carried out an evaluation, with the participation of
the Company's principal executive officer and principal financial officer, of
the effectiveness of the Company's disclosure controls and procedures. Based
upon that evaluation, management concluded that as of the end of the period
covered by this Form 10-Q the Company's disclosure controls and procedures are
effective.
Except as set forth below, there have been no changes in the Company's internal
control over financial reporting that have materially affected the Company's
internal control over financial reporting during the quarter ended September 30,
2003.
In the Company's Form 10-Q for the quarter ended June 30, 2003, the Company
noted that staff reductions arising out of the discontinuance of its operations
and its effort to reduce administrative expenses pending redeployment of its
assets resulted in management's recognition of a deficiency in the Company's
financial reporting process and the need to retain additional financial
reporting assistance to the extent necessary. The Company believes that it has
taken adequate steps to address the deficiencies previously noted by allowing
more time for the preparation of its financial statements and increasing the
internal review process over the preparation of the financial statements and the
related disclosures. Therefore, the Company believes there is no longer a need
to report the deficiency previously reported in the Company's Form 10-Q for the
quarter ended June 30, 2003.
15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to various pending judicial and administrative
proceedings, which, except as set forth below, are described more fully in Part
I, Item 3 of the Company's Annual Report on Form 10-K, as amended, for the
fiscal year ended December 31, 2002 and Part II, Item 1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003. After
reviewing the proceedings that are currently pending (including the probable
outcomes, reasonably anticipated costs and expenses, availability and limits of
insurance coverage), we do not believe that any liabilities that may result from
these proceedings are likely to have a material adverse effect on our liquidity,
financial condition or results of operations. However, the results of complex
legal proceedings are difficult to predict. An unfavorable resolution of the
proceedings that are currently pending could adversely affect the Company's
business, results of operations, liquidity or financial condition.
During 2002, ten former employees of the Company commenced an action in the
United States District Court for the Northern District of Georgia-Atlanta
Division seeking back pay, employee benefits, interest and attorneys' fees. On
July 31, 2003, the case was dismissed without prejudice to the right of any
party to reopen the matter on or before August 15, 2004.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
As previously disclosed in the Company's quarterly report on Form 10-Q for the
quarter ended June 30, 2003, we held our annual meeting of stockholders on July
24, 2003. Of the 16,463,024 shares of common stock entitled to vote at the
meeting, 14,657,320 shares of common stock were present in person or by proxy
and entitled to vote. Such number of shares represented approximately 89% of our
outstanding shares of common stock. Listed below are the matters voted upon at
our annual meeting of stockholders and the respective voting results:
Abstained/
Voted Broker
FOR Withheld Non-Votes
------------------------------------------------------------------------------
Election of Directors:
Tench Coxe 13,576,259 1,081,061 -
Burtt R. Ehrlich 13,684,924 972,396 -
Donald L. House 12,795,787 1,861,533 -
Stephen P. Jeffrey 13,033,075 1,624,245 -
Warren B. Kanders 12,536,156 2,121,164 -
Nicholas Sokolow 13,519,838 1,137,482 -
Voted Voted
FOR AGAINST Abstained
------------------------------------------------------------------------------
Approval of the proposal to amend our Amended
and Restated Certificate of Incorporation to
restrict certain transfers of its securities
in order to help assure the preservation of
our tax net operating loss carryforwards: 10,261,523 1,235,829 11,795
Ratification of the appointment of KPMG LLP
as our independent auditors for the year
ending December 31, 2003: 12,504,744 677,341 8,781
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Number Exhibit
- ----- -------
10.1 Lease dated as of September 23, 2003 between Reckson Operating
Partnership, L.P., Clarus Corporation, and Kanders & Company, Inc.
31.1 Certification of Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification Principal Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
During the quarter ended September 30, 2003, the Company filed Current Reports
on Form 8-K on August 18, 2003 and August 19, 2003, with respect to Items 7 and
9, relating to press releases dated August 18, 2003 and August 19, 2003,
announcing the Company's earnings for the three-month period ended June 30,
2003.
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 November 12, 2003
/s/ Nigel P. Ekern,
-------------------
Nigel P. Ekern,
Chief Administrative Officer
(Principal Executive Officer)
/s/ Susan Luckfield,
--------------------
Susan Luckfield,
Controller
(Principal Financial Officer)
17
EXHIBIT INDEX
Number Exhibit
- ------ -------
10.1 Lease dated as of September 23, 2003 between Reckson Operating
Partnership, L.P., Clarus Corporation, and Kanders & Company, Inc.
31.1 Certification of Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification Principal Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.