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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-24277
CLARUS CORPORATION
(Exact name of Registrant as specified in its Charter)
Delaware 58-1972600
(State of Incorporation) (R.S. Employer Identification No.)
One Pickwick Plaza
Greenwich, Connecticut 06830
(Address of principal office, including zip code)
(203) 302-2000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK,
par value $.0001
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). [X]
The aggregate market value of the voting stock and non-voting common equity held
by non-affiliates of the Registrant at June 30, 2003 was approximately $86.6
million based on $6.28 per share, the closing price of the common stock as
quoted on the Nasdaq National Market.
The number of shares of the Registrant's common stock outstanding at March 1,
2004 was 16,582,426 shares.
DOCUMENT INCORPORATED BY REFERENCE
Portions of our Proxy Statement for the 2004 Annual Meeting of Stockholders to
be filed with the Securities and Exchange Commission within 120 days of the
Registrant's 2003 fiscal year end are incorporated by reference into Part III of
this report.
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 7
ITEM 3. LEGAL PROCEEDINGS 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 8
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 8
ITEM 6. SELECTED FINANCIAL DATA 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 49
ITEM 9A. CONTROLS AND PROCEDURES 49
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 49
ITEM 11. EXECUTIVE COMPENSATION 49
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 49
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 49
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 49
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 50
SIGNATURES 53
EXHIBIT INDEX 56
PART I
ITEM 1. BUSINESS
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
and use our substantial cash and cash equivalent assets to enhance stockholder
value following the sale of substantially all of our electronic commerce
business, which represented substantially all of our revenue generating
operations and related assets, and the risks and uncertainties set forth in the
section headed "Factors That May Affect Our Future Results" of Part I of this
Report and described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of Part II of this Report. The Company
cannot guarantee its future performance.
OVERVIEW
Clarus Corporation ("Clarus" or the "Company," which may be referred to as "we,"
"us," or "our") was formerly a provider of e-commerce business solutions until
the sale of substantially all of its operating assets in December 2002. We are
currently seeking to redeploy our cash and cash equivalent assets to enhance
stockholder value and are seeking, analyzing and evaluating potential
acquisition and merger candidates. We were incorporated in Delaware in 1991
under the name SQL Financials, Inc. In August 1998, we changed our name to
Clarus Corporation. Our principal corporate office is located at One Pickwick
Plaza, Greenwich, Connecticut 06830 and our telephone number is (203) 302-2000.
PRIOR BUSINESS
Prior to the sale of substantially all of our operating assets in December 2002,
we developed, marketed and supported Internet-based business-to-business ("B2B")
e-commerce software that automated the procurement, sourcing, and settlement of
goods and services. Our software was designed to help organizations reduce the
costs associated with the purchasing and payment settlement of goods and
services, and help to maximize procurement economies of scale. Our client
services organization provided our customers and strategic partners with
implementation services, training and technical support.
There were several milestones in the evolution of our business prior to the
December 2002 sale including:
o Initial Public Offering. On May 26, 1998, we completed an initial
public offering of our common stock in which we sold 2.5 million
shares of common stock at $10.00 per share, resulting in net proceeds
to us of approximately $22.0 million.
o ELEKOM Acquisition. On November 6, 1998, we acquired ELEKOM
Corporation ("ELEKOM") for approximately $15.7 million, consisting of
$8.0 million in cash and approximately 1.4 million shares of our
common stock (valued in the transaction at $5.50 per share). ELEKOM
developed a software program that provided electronic corporate
procurement capabilities to its clients.
o Sale of our Financial and Human Resources Software Business. On
October 18, 1999, we sold substantially all of the assets of our
financial and human resources software ("ERP") business to Geac
Computer Systems, Inc. and Geac Canada Limited. In this sale we
received approximately $13.9 million. Approximately $2.9 million of
the purchase price was placed in escrow and was subsequently settled
during 2000.
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o Follow-on Public Offering. On March 10, 2000, we sold 2,243,000 shares
of common stock in a secondary public offering at $115.00 per share
resulting in net proceeds to us of approximately $244.4 million.
o iSold.com Acquisition. On April 28, 2000, we acquired all the capital
stock of iSold.com, Inc. ("iSold") for approximately $2.5 million in
cash. iSold developed a software program that provided auctioning
capabilities to its clients.
o SAI/Redeo Companies Acquisition. On May 31, 2000, we acquired all the
outstanding stock of SAI (Ireland) Limited, SAI Recruitment Limited
and its subsidiaries and related companies, i2Mobile.com Limited and
SAI America Limited (the "SAI/Redeo Companies") for approximately
$63.2 million, consisting of approximately $30.0 million in cash
(exclusive of $350,000 of cash acquired), 1,148,000 shares of the
Company's common stock with a fair value of $30.4 million, assumed
options to acquire 163,200 shares of the Company's common stock with
an exercise price of $23.50 (estimated fair value of $1.8 million
using the Black-Scholes option pricing model with the following
variables: no expected dividend yield, volatility of 70%, risk-free
interest rate of 6.5%, and an expected life of two years) and
acquisition costs of approximately $995,000. The SAI/Redeo Companies
specialized in electronic payment settlement software.
E-Commerce Strategic Alliances and Relationships. To ensure that our prior
business would deliver a comprehensive solution to our customers, we established
and developed strategic relationships with application service providers,
systems integrators, resellers, OEMs and other complementary technology
partners. These relationships were focused on the expansion of our sales reach
to markets not covered by our direct sales organization.
Sales and Marketing. Our prior business sold software and services through our
direct sales force and a number of indirect channels. Our direct sales force was
organized geographically into two regions: (i) the Americas and (ii) Europe,
Middle East and Africa ("EMEA"). The sales cycle for our business-to-business
e-commerce products typically averaged four to nine months. In addition, our web
site, www.claruscorp.com was integrated with our sales, marketing, recruiting
and fulfillment operations.
Competition. The market for the products of our prior business was highly
competitive and subject to rapid technological change. The principal competitive
factors affecting our market included having a significant base of referenceable
customers, breadth and depth of solution, a critical mass of buyers and
suppliers, product quality and performance, customer service, architecture,
product features, the ability to implement, and value of the overall solution.
Research and Development. Our research and development expenditures relating to
our prior business were approximately $0, $7.3 million and $16.2 million for the
years ended December 31, 2003, 2002, and 2001, respectively. The majority of our
research and development expenditures were related to our e-commerce products.
Proprietary Rights and Licensing. We applied for registration for certain
trademarks and evaluated the registration of copyrights and additional
trademarks as appropriate. We entered into license agreements with each of our
customers. Each of our license agreements provided for the customer's
non-exclusive right to use the object code version of our products, prohibited
the customer from disclosing to third parties or reverse engineering our
products and disclosing our other confidential information.
RECENT DEVELOPMENTS
At the 2002 annual meeting of our stockholders held on May 21, 2002, Warren B.
Kanders, Burtt R. Ehrlich and Nicholas Sokolow were elected by our stockholders
to serve on our Board of Directors. Under the leadership of these new directors,
our Board of Directors adopted a strategy of seeking to enhance stockholder
value by pursuing opportunities to redeploy our assets through an acquisition
of, or merger with, an operating business that will serve as a platform company,
using our substantial cash, other non-operating assets (including, to the extent
available, our net operating loss carry-forward) and our publicly-traded stock
to enhance future growth. The strategy also sought to reduce significantly our
cash expenditure rate by targeting, to the extent practicable, our overhead
expenses to the amount of our investment income until the completion of an
acquisition or merger. While the Company's expenses have been significantly
reduced, management currently believes that the Company's operating expenses
will exceed investment income during 2004.
As part of our strategy to enhance stockholder value, on December 6, 2002, we
consummated the sale of substantially all of the assets of our electronic
commerce business, which represented substantially all of our revenue generating
operations and related assets, to Epicor Software Corporation ("Epicor"), a
Delaware corporation, for a purchase price of $1.0 million in cash (the "Asset
Sale"). Epicor is traded on the Nasdaq National Market under the symbol "EPIC."
The sale included licensing, support and maintenance activities from our
eProcurement, Sourcing, View (for eProcurement), eTour (for eProcurement),
-2-
ClarusNET, and Settlement software products, our customer lists, certain
contracts and certain intellectual property rights related to the purchased
assets, maintenance payments that we received between October 17, 2002 and the
December 6, 2002 closing date of the Asset Sale for maintenance and services to
be performed by Epicor after the closing date of the Asset Sale, and certain
furniture and equipment. In connection with the sale we entered into a
Transition Services Agreement until March 31, 2003, that allowed Epicor to use a
portion of our facility in Suwanee, Georgia to operate the electronic commerce
business that Epicor purchased in the Asset Sale.
We did not transfer to Epicor our cash, marketable securities or other
investments or our Cashbook, eMarket, eXpense, View (for eMarket) or eTour (for
eMarket) products or related assets. We also did not transfer the name and
trademark "Clarus," although we granted Epicor a 24-month license to use the
trademark "Clarus" in connection with its operation of the purchased assets and
the right to acquire the trademark for no additional consideration if we cease
using it as our corporate name within two years after the closing of the Asset
Sale. Epicor agreed to assume certain of our liabilities, such as executory
obligations arising under certain contracts, agreements and commitments related
to the transferred assets. We remain responsible for all of our other
liabilities including liabilities under certain contracts, including any
violations of environmental laws and for our obligations related to any of our
indebtedness, employee benefit plans or taxes that are or were due and payable
in connection with the acquired assets on or before the closing date of the
Asset Sale.
Upon the closing of the sale to Epicor, Warren B. Kanders assumed the position
of Executive Chairman of the Board of Directors, Stephen P. Jeffery ceased to
serve as Chief Executive Officer and Chairman of the Board, and James J.
McDevitt ceased to serve as Chief Financial Officer and Corporate Secretary. Mr.
Jeffery has agreed to continue to serve on the Board of Directors and serve in a
consulting capacity for a period of three years. In addition, the Board of
Directors appointed Nigel P. Ekern as Chief Administrative Officer to oversee
the operations of Clarus and to assist with our asset redeployment strategy.
On January 1, 2003, we sold the assets related to our Cashbook product, which
were excluded from the Epicor transaction, to an employee group headquartered in
Limerick, Ireland. Our Cashbook product provided process improvements such as
bill-to-pay in accounts payable and order-to-cash in accounts receivable. This
completed the sale of nearly all of our active software operations as part of
our strategy to limit operating losses and enable us to reposition our business
in order to enhance stockholder value. In anticipation of the redeployment of
our assets, our cash balances are being held in short-term, highly-rated
instruments designed to preserve safety and liquidity and to exempt us from
registration as an investment company under the Investment Company Act of 1940.
We are currently working to identify suitable merger partners or acquisition
opportunities. In connection with the strategy of redeployment of assets, we had
retained Morgan Joseph & Co. Inc., a New York based investment banking firm
serving middle market companies, to assist us in implementing this strategy by
identifying suitable merger partners or acquisition opportunities. Although we
are not targeting specific business industries for potential acquisitions, we
plan to seek businesses with substantial cash flow, experienced management
teams, and operations in markets offering substantial growth opportunities. In
addition, we believe that our common stock, which is publicly traded on the
Nasdaq National Market and has a strong institutional stockholder base, offers
us flexibility as acquisition currency and will enhance our attractiveness to
potential merger or acquisition candidates. This strategy is, however, subject
to certain risks. See "Factors That May Affect Our Future Results" below.
At the Company's annual stockholders meeting on July 24, 2003, the stockholders
approved an amendment, (the "Amendment") to our Amended and Restated Certificate
of Incorporation to restrict certain acquisitions of Clarus' securities in order
to help assure the preservation of its net operating loss tax carryforward
("NOL"). Although the transfer restrictions imposed on our securities is
intended to reduce the likelihood of an impermissible ownership change, there is
no guaranty that such restrictions would prevent all transfers that would result
in an impermissible ownership change. The Amendment generally restricts and
requires prior approval of our Board of Directors of direct and indirect
acquisitions of the Company's equity securities if such acquisition will affect
the percentage of our capital stock that is treated as owned by a 5%
stockholder. The restrictions will generally only affect persons trying to
acquire a significant interest in our common stock.
EMPLOYEES
All of our employees are based in the United States. As of December 31, 2003, we
had a total of five employees, all of which are located in our Greenwich,
Connecticut headquarters. We closed our office in Georgia in March 2003. Our
employees were previously based in the United States, Canada, the United Kingdom
and Ireland. As of December 31, 2002, we had a total of 20 employees.
None of our employees are represented by a labor union or are subject to a
collective bargaining agreement. We have not experienced any work stoppages and
consider our relationship with our employees to be good.
FACTORS THAT MAY AFFECT OUR FUTURE RESULTS
-3-
In addition to other information in this annual report on Form 10-K, the
following risk factors should be carefully considered in evaluating our business
because such factors may have a significant impact on our business, operating
results, liquidity and financial condition. As a result of the risk factors set
forth below, actual results could differ materially from those projected in any
forward-looking statements.
RISKS RELATED TO CLARUS
WE CONTINUE TO INCUR OPERATING LOSSES.
As a result of the sale of substantially all of our electronic commerce
business, we will no longer generate revenue previously associated with the
products and contracts comprising our electronic commerce business. We are not
profitable and have incurred an accumulated deficit of $276.8 million from our
inception through December 31, 2003. Our current ability to generate revenues
and to achieve profitability and positive cash flow will depend on our ability
to redeploy our assets and use our substantial cash to reposition our business
whether it is through a merger or acquisition. Our ability to become profitable
will depend, among other things, (i) on our success in identifying and acquiring
a new operating business, (ii) on our development of new products or services
relating to our new operating business, and (iii) on our success in distributing
and marketing our new products or services.
WE MAY BE UNABLE TO REDEPLOY OUR ASSETS SUCCESSFULLY.
As part of our strategy to limit operating losses and enable Clarus to redeploy
its assets and use its substantial cash and cash equivalent assets to enhance
stockholder value, we have sold our electronic commerce business, which
represented substantially all of our revenue-generating operations and related
assets. We are pursuing a strategy of identifying suitable merger partners and
acquisition candidates that will serve as a platform company. Although we are
not targeting specific business industries for potential acquisitions, we plan
to seek businesses with substantial cash flow, experienced management teams, and
operations in markets offering substantial growth opportunities. We may not be
successful in acquiring such a business or in operating any business that we
acquire. Failure to redeploy successfully will result in our inability to become
profitable.
WE WILL LIKELY HAVE NO OPERATING HISTORY IN OUR NEW LINE OF BUSINESS, WHICH IS
YET TO BE DETERMINED, AND THEREFORE WE WILL BE SUBJECT TO THE RISKS INHERENT IN
ESTABLISHING A NEW BUSINESS.
We have not identified what our new line of business will be; therefore, we
cannot fully describe the specific risks presented by such business. It is
likely that we will have had no operating history in the new line of business
and any target company may have a limited operating history in its business.
Accordingly, there can be no assurance that our future operations will generate
operating or net income, and as such our success will be subject to the risks,
expenses, problems and delays inherent in establishing a new business. Such new
business may involve an unproven product, technology or marketing strategy, the
ultimate success of which cannot be assured.
Any acquisitions that we attempt or complete could prove difficult to integrate
or require a substantial commitment of management time and other resources.
Any acquisitions that we attempt or complete may involve a number of unique
risks including: (i) executing successful due diligence; (ii) our exposure to
unforeseen liabilities of acquired companies; (iii) increased risk of costly and
time-consuming litigation, including stockholder lawsuits; and (iv) our ability
to successfully integrate and absorb the acquired company. We may be unable to
address these problems successfully. Moreover, our future operating results will
depend to a significant degree on our ability to successfully manage operations
while also controlling our expenses. In addition, if we or any investment
adviser, identify an appropriate acquisition opportunity, we may be unable to
negotiate favorable terms for that acquisition. We may be unable to select,
manage or absorb or integrate any future acquisitions successfully, particularly
acquisitions of large companies. Any acquisition, even if effectively
integrated, may not benefit our stockholders.
WE MAY BE UNABLE TO REALIZE THE BENEFITS OF OUR NET OPERATING LOSS ("NOL")
CARRYFORWARDS.
NOLs may be carried forward to offset federal and state taxable income in future
years and eliminate income taxes otherwise payable on such taxable income,
subject to certain adjustments. Based on current federal corporate income tax
rates, our NOL and other carryforwards could provide a benefit to us, if fully
utilized, of significant future tax savings. However, our ability to use these
tax benefits in future years will depend upon the amount of our otherwise
taxable income. If we do not have sufficient taxable income in future years to
use the tax benefits before they expire, we will lose the benefit of these NOL
carryforwards permanently. Consequently, our ability to use the tax benefits
associated with our substantial NOL will depend significantly on our success in
identifying suitable merger partners and/or acquisition candidates, and once
identified, successfully consummate a merger with and/or acquisition of these
candidates.
-4-
Additionally, if we underwent an ownership change, the NOL carryforward
limitations would impose an annual limit on the amount of the taxable income
that may be offset by our NOL generated prior to the ownership change. If an
ownership change were to occur, we would be unable to use a significant portion
of our NOL to offset taxable income. In general, an ownership change occurs
when, as of any testing date, the aggregate of the increase in percentage points
of the total amount of a corporation's stock owned by "5-percent stockholders"
within the meaning of the NOL carryforward limitations whose percentage
ownership of the stock has increased as of such date over the lowest percentage
of the stock owned by each such "5-percent stockholder" at any time during the
three-year period preceding such date is more than 50 percentage points. In
general, persons who own 5% or more of a corporation's stock are "5-percent
stockholders," and all other persons who own less than 5% of a corporation's
stock are treated, together, as a single, public group "5-percent stockholder,"
regardless of whether they own an aggregate of 5% of a corporation's stock.
The amount of NOL carryforwards that we have claimed has not been audited or
otherwise validated by the U.S. Internal Revenue Service. The IRS could
challenge our calculation of the amount of our NOL or our determinations as to
when a prior change in ownership occurred and other provisions of the Internal
Revenue Code, may limit our ability to carry forward our NOL to offset taxable
income in future years. If the IRS was successful with respect to any such
challenge, the potential tax benefit of the NOL carryforwards to us could be
substantially reduced.
CERTAIN TRANSFER RESTRICTIONS IMPLEMENTED BY US TO PRESERVE OUR NOL MAY NOT BE
EFFECTIVE OR MAY HAVE SOME UNINTENDED NEGATIVE EFFECTS.
On July 24, 2003, at our Annual Meeting of Stockholders, our stockholders
approved an amendment (the "Amendment") to our Amended and Restated Certificate
of Incorporation to restrict certain acquisitions of our securities in order to
help assure the preservation of our NOL. The Amendment generally restricts
direct and indirect acquisitions of our equity securities if such acquisition
will affect the percentage of Clarus' capital stock that is treated as owned by
a "5-percent stockholder."
Although the transfer restrictions imposed on our capital stock is intended to
reduce the likelihood of an impermissible ownership change, there is no
guarantee that such restrictions would prevent all transfers that would result
in an impermissible ownership change. The transfer restrictions also will
require any person attempting to acquire a significant interest in us to seek
the approval of our Board of Directors. This may have an "anti-takeover" effect
because our Board of Directors may be able to prevent any future takeover.
Similarly, any limits on the amount of capital stock that a stockholder may own
could have the effect of making it more difficult for stockholders to replace
current management. Additionally, because the transfer restrictions will have
the effect of restricting a stockholder's ability to dispose of or acquire our
common stock, the liquidity and market value of our common stock might suffer.
WE COULD BE REQUIRED TO REGISTER AS AN INVESTMENT COMPANY UNDER THE INVESTMENT
COMPANY ACT OF 1940, WHICH COULD SIGNIFICANTLY LIMIT OUR ABILITY TO OPERATE AND
ACQUIRE AN ESTABLISHED BUSINESS.
The Investment Company Act of 1940 (the "Investment Company Act") requires
registration, as an investment company, for companies that are engaged primarily
in the business of investing, reinvesting, owning, holding or trading
securities. We have sought to qualify for an exclusion from registration
including the exclusion available to a company that does not own "investment
securities" with a value exceeding 40% of the value of its total assets on an
unconsolidated basis, excluding government securities and cash items. This
exclusion, however, could be disadvantageous to us and/or our stockholders. If
we were unable to rely on an exclusion under the Investment Company Act and were
deemed to be an investment company under the Investment Company Act, we would be
forced to comply with substantive requirements of Investment Company Act,
including: (i) limitations on our ability to borrow; (ii) limitations on our
capital structure; (iii) restrictions on acquisitions of interests in associated
companies; (iv) prohibitions on transactions with affiliates; (v) restrictions
on specific investments; (vi) limitations on our ability to issue stock options;
and (vii) compliance with reporting, record keeping, voting, proxy disclosure
and other rules and regulations. Registration as an investment company would
subject us to restrictions that would significantly impair our ability to pursue
our fundamental business strategy of acquiring and operating an established
business. In the event the Securities and Exchange Commission or a court took
the position that we were an investment company, our failure to register as an
investment company would not only raise the possibility of an enforcement action
by the Securities and Exchange Commission or an adverse judgment by a court, but
also could threaten the validity of corporate actions and contracts entered into
by us during the period we were deemed to be an unregistered investment company.
Moreover, the Securities and Exchange Commission could seek an enforcement
action against us to the extent we were not in compliance with the Investment
Company Act during any point in time.
OUR INDEMNIFICATION OBLIGATIONS TO EPICOR FOR BREACHES OF CERTAIN OF OUR
REPRESENTATIONS IN THE ASSET PURCHASE AGREEMENT MAY SIGNIFICANTLY EXCEED THE
CONSIDERATION WE RECEIVED IN THE ASSET SALE.
-5-
We have an obligation to indemnify Epicor for any losses from breaches of our
representations or warranties in the Asset Purchase Agreement that occur within
24 months after the closing date of the Asset Sale (December 6, 2002) or within
the applicable statute of limitations period for claims relating to payment of
applicable taxes and our compliance with applicable environmental laws, if
longer. Our indemnification obligations with respect to our breach of
representations or warranties are subject to a maximum aggregate limit of $1.0
million, except that: (i) the maximum aggregate limit is $3.0 million with
respect to indemnification for any losses Epicor suffers that are related to our
breach of representations and warranties relating to our ownership of the assets
to be sold to Epicor, our intellectual property or our compliance with
applicable "bulk sales" laws; and (ii) there is no limit on our obligation to
indemnify Epicor for losses resulting from the conduct of our business before
the closing date of the Asset Sale, the assets not purchased or the liabilities
not assumed by Epicor in the Asset Sale or a breach of any representation or
warranty regarding our payment of applicable taxes or our compliance with
applicable environmental laws. The payment of any such indemnification
obligations could materially and adversely impact our cash resources and our
ability to pursue additional business opportunities.
FOR FIVE YEARS AFTER THE CLOSING OF THE ASSET SALE TO EPICOR, WE WILL BE
PROHIBITED FROM COMPETING WITH THE ASSETS SOLD TO EPICOR.
The Noncompetition Agreement we entered into with Epicor provides that for a
period of five years after the closing of the Asset Sale (December 6, 2002),
neither we nor any of our affiliated entities are permitted, directly or
indirectly, anywhere in the world: (i) to engage in any business that competes
with the business of developing, marketing and supporting Internet-based
business-to-business, electronic commerce solutions that automate the
procurement, sourcing and settlement of goods and services including through the
eProcurement, Sourcing, View (for eProcurement), eTour (for eProcurement),
ClarusNET, and Settlement software products and all improvements and variations
of these products; (ii) to attempt to persuade any customer or vendor of Epicor
to cease to do business with Epicor or reduce the amount of business being
conducted with Epicor; (iii) to solicit the business of any customer or vendor
of Epicor, if the solicitation could cause a reduction in the amount of business
that Epicor does with the customer or vendor; or (iv) to hire, solicit for
employment or encourage to leave the employment of Epicor any person who was an
employee of Epicor within 90 days before the closing of the Asset Sale.
The prohibitions contained in our Noncompetition Agreement with Epicor will
restrict the business opportunities available to us and therefore may have a
material adverse effect on our ability to successfully redeploy our remaining
assets.
RISKS RELATED TO OUR COMMON STOCK
WE ARE VULNERABLE TO VOLATILE MARKET CONDITIONS.
The market prices of our common stock have been highly volatile. The market has
from time to time experienced significant price and volume fluctuations that are
unrelated to the operating performance of particular companies. Please see the
table contained in Item 5 of this Report which sets forth the range of high and
low closing prices of our common stock for the calendar quarters indicated.
WE DO NOT EXPECT TO PAY DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE FUTURE.
Although our stockholders may receive dividends if, as and when declared by our
Board of Directors, we do not intend to pay dividends on our common stock in the
foreseeable future. Therefore, you should not purchase our common stock if you
need immediate or future income by way of dividends from your investment.
OUR COMMON STOCK IS CURRENTLY QUOTED ON NASDAQ BUT COULD BE DELISTED
To continue to be listed on the Nasdaq National Market System, we must maintain
certain requirements. If we fail to satisfy one or more of the requirements, our
common stock may be delisted. If our common stock is delisted, and does not
become listed on another stock exchange, then it will be traded, if at all, in
the over-the-counter market commonly referred to as the OTC Bulletin Board
and/or the "pink sheets". If this occurs, it may be more difficult for you to
sell our common stock, since there is generally less market-maker interest, and
less liquidity, in Bulletin Board stocks than in Nasdaq listed securities.
OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AUTHORIZES THE ISSUANCE OF
SHARES OF PREFERRED STOCK.
Our Amended and Restated Certificate of Incorporation provides that our Board of
Directors will be authorized to issue from time to time, without further
stockholder approval, up to 5,000,000 shares of preferred stock in one or more
series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each series,
including the dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, including sinking fund provisions, redemption price or
prices, liquidation preferences and the number of shares constituting any series
or designations of any series. Such shares of preferred stock could have
preferences over our common stock with respect to dividends and
-6-
liquidation rights. We may issue additional preferred stock in ways, which may
delay, defer or prevent a change in control of Clarus without further action by
our stockholders. Such shares of preferred stock may be issued with voting
rights that may adversely affect the voting power of the holders of our common
stock by increasing the number of outstanding shares having voting rights, and
by the creation of class or series voting rights.
WE MAY ISSUE A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK IN CONNECTION WITH FUTURE
ACQUISITIONS AND THE SALE OF THOSE COULD ADVERSELY AFFECT OUR STOCK PRICE.
As part of our growth strategy, we anticipate issuing additional shares of our
common stock, preferred stock, and/or warrants. We may file shelf registration
statements with the Securities and Exchange Commission that we may use to
register shares of our common stock, preferred stock, and warrants issuable in
connection with acquisitions. To the extent that we are able to consummate
acquisitions through the issuance of our common or preferred stock or warrants
to purchase our common stock, the number of our outstanding shares of common
stock and/or preferred stock that will be eligible for sale in the future is
likely to increase substantially. Persons receiving warrants or shares of our
common or preferred stock in connection with these acquisitions may be more
likely to sell large quantities of their warrants and stock which may influence
the price of our common stock. In addition, the potential issuance of additional
shares in connection with anticipated acquisitions could lessen demand for our
common stock and result in a lower price than would otherwise be obtained.
WHERE YOU CAN FIND MORE INFORMATION
Our Internet address is www.claruscorp.com. We will make available free of
charge on or through our Internet website our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports filed as soon as reasonably practicable after such material was
electronically filed with, or furnished to, the Securities and Exchange
Commission. The Company will also provide to any person without charge, upon
request, a copy of its Code of Business Conduct & Ethics. The Company intends to
disclose future amendments to the provisions of the Code of Business Conduct &
Ethics and waivers from the Code of Business Conduct & Ethics, if any, made with
respect to any of our directors and executive officers, on its Internet site
and/or through the filing of a Current Report on Form 8-K with the Securities
and Exchange Commission. Materials the Company files with the Securities and
Exchange Commission may be read and copied at the Securities and Exchange
Commission's Public Reference Room at 450 Fifth Street, NW, Washington, D.C.
20549. This information may also be obtained by calling the Securities and
Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission
also maintains an internet website that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the Securities and Exchange Commission at www.sec.gov. The Company will
provide a copy of any of the foregoing documents to stockholders upon request.
Any such requests should be made in writing to the Company's Chief
Administrative Officer, Nigel P. Ekern at One Pickwick Plaza, Greenwich,
Connecticut 06830.
ITEM 2. PROPERTIES
Our corporate headquarters is currently located in Greenwich, Connecticut where
we lease approximately 2,700 square feet for $11,312 a month, pursuant to a
lease, which expires on June 30, 2004.
In September 2003, the Company and Kanders & Company, an entity owned and
controlled by the Company's Executive Chairman, Warren B. Kanders, 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 the total lease payments of
$24,438 per month 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 increases during the lease
term. 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. The bank that issued the letter of credit holds an
$850,000 deposit against the letter of credit. Kanders & Company reimburses the
Company for a pro rata portion of the approximately $5,000 annual cost of the
letter of credit. We expect to commence our occupation of this space in June
2004 upon the completion of the build-out construction.
In early 2003, the Company entered into an oral agreement with Kanders &
Company, 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. The Company was reimbursed
$95,000 by Kanders & Company in 2003 for rent and other costs incurred by the
Company related to this property as a result of the voluntary termination of the
lease.
-7-
We also lease approximately 5,200 square feet near Toronto, Canada, at a cost of
approximately $9,000 per month, which was used for the delivery of services as
well as research and development through October 2001. This lease expires in
February 2006. This facility has been sub-leased for approximately $4,000 a
month, pursuant to a sublease, which expires on January 30, 2006. The cost, net
of the estimated sublease income has been included in general and administrative
expense in the accompanying statement of operations for the year ended December
31, 2002.
In December 2002, the Company executed a lease termination agreement pursuant to
which it agreed to abandon its principal facility in Suwanee, Georgia on March
31, 2003. Pursuant to the terms of the termination agreement, the Company paid
to the lessor $2.9 million in cash, which has been included in general and
administrative expense in the accompanying statement of operations for the year
ended December 31, 2002. The lease terminated in accordance with the lease
termination agreement on March 31, 2003.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to the following pending judicial and administrative
proceedings. After reviewing the proceedings that are currently pending
(including the probable outcome, reasonably anticipated costs and expenses,
availability and limits of insurance coverage, and our established reserves for
uninsured liabilities) we do not believe that any liabilities that may result
from these proceedings are reasonably 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 following proceedings could materially 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 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.
On April 18, 2003, Peachtree Equity Partners L.P., as the assignee of a
five-year promissory note made by the Company in the amount of $5.0 million,
agreed to dismiss with prejudice, an action commenced by Peachtree Equity in
the Georgia state court for prepayment of the promissory note, plus interest
and attorneys fees. In connection with such dismissal, the Company made a
payment to Peachtree Equity comprised of the $5.0 million outstanding
principal amount of the promissory note.
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.
In addition to the above, in the normal course of business, we are subjected to
claims and litigations in the areas of general liability. We believe that we
have adequate insurance coverage for most claims that are incurred in the normal
course of business. In such cases, the effect on our financial statements is
generally limited to the amount of our insurance deductibles. At this time, we
do not believe any such claims will have a material impact on the Company's
consolidated financial position or results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
2003.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
-8-
Our common stock has been listed on the Nasdaq National Market System ("NASDAQ")
since May 26, 1998, the effective date of our initial public offering. On August
28, 1998, we changed our name from SQL Financials International, Inc. to Clarus
Corporation. Effective September 2, 1998, we changed our NASDAQ symbol from
"SQLF" to "CLRS". Prior to May 26, 1998, there was no established trading market
for our common stock. The following table sets forth, for the indicated periods,
the high and low closing sales prices for our common stock as reported by the
NASDAQ.
High Low
---- ---
Calendar Year 2002
First Quarter $6.25 $3.44
Second Quarter $6.04 $3.73
Third Quarter $5.20 $4.16
Fourth Quarter $6.00 $4.53
Calendar Year 2003
First Quarter $5.87 $4.92
Second Quarter $6.40 $5.05
Third Quarter $7.50 $5.95
Fourth Quarter $7.76 $6.99
Calendar Year 2004
First Quarter (through March $8.50 $7.34
1, 2004)
STOCKHOLDERS
On March 1, 2004, the last reported sales price for our common stock on the
NASDAQ was $8.41 per share. As of March 1, 2004, there were 164 holders of
record of our common stock.
DIVIDENDS
We currently anticipate that we will retain all future earnings for use in our
business and do not anticipate that we will pay any cash dividends in the
foreseeable future. The payment of any future dividends will be at the
discretion of our Board of Directors and will depend upon, among other things,
our results of operations, capital requirements, general business conditions,
contractual restrictions on payment of dividends, if any, legal and regulatory
restrictions on the payment of dividends, and other factors our Board of
Directors deems relevant.
-9-
ITEM 6. SELECTED FINANCIAL DATA
Our selected financial information set forth below should be read in conjunction
with our consolidated financial statements, including the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of Part II of this Report. The following statement of operations and
balance sheet data have been derived from our audited consolidated financial
statements and should be read in conjunction with those statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of Part II of this Report.
Years ended December 31,
------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Statement of Operations Data: (in thousands, except per share data)
- ----------------------------
Revenues:
License Fees............................................................ $ -- $ 2,808 $ 7,807 $ 24,686 $ 15,101
Service Fees............................................................ 130 6,226 9,866 10,327 25,676
-------- --------- ---------- --------- --------
Total Revenues.......................................... 130 9,034 17,673 35,013 40,777
Cost of Revenues:
License Fees............................................................ -- 26 211 154 1,351
Service Fees............................................................ -- 5,498 12,921 12,901 17,152
-------- --------- ---------- --------- --------
Total Cost of Revenues................................. -- 5,524 13,132 13,055 18,503
Operating expenses:
Research and Development................................................ -- 7,263 16,220 31,114 9,003
Sales and Marketing..................................................... -- 7,938 34,034 43,231 17,912
General and Administrative.............................................. 4,986 12,574 9,633 10,995 5,870
Provision for Doubtful Accounts......................................... 18 (560) 5,537 5,824 1,245
Loss on impairment of goodwill and intangible assets.................... -- 10,360 36,756 -- --
Loss/(Gain) on sale or disposal of assets............................... 36 1,748 (20) (1,347) (9,417)
Depreciation and Amortization........................................... 762 4,243 12,212 8,132 3,399
-------- --------- ---------- --------- --------
Total Operating Expenses................................ 5,802 43,566 114,372 97,949 28,012
-------- --------- ---------- --------- --------
Operating Loss............................................................ (5,672) (40,056) (109,831) (75,991) (5,738)
Other income (expense).................................................... 169 27 96 (100) --
Loss on impairment of marketable securities and investments............... -- -- (16,461) (4,128) --
Interest Income........................................................... 1,238 2,441 6,570 10,902 442
Interest Expense, including amortization of debt discount................. (66) (225) (228) (1,330) (105)
-------- --------- ---------- --------- --------
Net loss.................................................................. $ (4,331) $ (37,813) $ (119,854) $ (70,647) $ (5,401)
========= ========== =========== ========== =========
Loss Per Share............................................................
Basic................................................... $(0.27) $(2.42) $(7.72) $(4.90) $(0.49)
Diluted................................................. $(0.27) $(2.42) $(7.72) $(4.90) $(0.49)
Weighted Average common shares outstanding
Basic................................................... 15,905 15,615 15,530 14,420 11,097
Diluted................................................. 15,905 15,615 15,530 14,420 11,097
Balance Sheet Data: As of December 31,
- ------------------ ------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Cash and Cash Equivalents................................................. $15,045 $42,225 $55,628 $118,303 $14,127
Marketable securities..................................................... 73,685 52,885 65,264 50,209 --
Total Assets............................................................ 89,445 97,764 145,274 266,904 48,563
Long-term Debt, net of current portion.................................... -- -- 5,000 5,000 --
Total Stockholders' Equity................................................ 86,819 89,360 126,328 246,822 32,615
-10-
ITEM 7. 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
and use our substantial cash and cash equivalent assets to enhance stockholder
value following the sale of substantially all of our electronic commerce
business, which represented substantially all of our revenue generating
operations and related assets, and the risks and uncertainties set forth in the
section headed "Factors That May Affect Our Future Results" of Part I of this
Report and described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of Part II of this Report. The Company
cannot guarantee its future performance.
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
YEAR ENDED DECEMBER 31, 2003 PRIMARILY REFLECTS, AND FUTURE PERIODS PRIOR TO A
REDEPLOYMENT OF OUR 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.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
The Company's discussion of financial condition and results of operations is
based on the consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. 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, 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. Our accounting policies are more fully
described in Note 1 of our consolidated financial statements.
- - The Company has recognized revenue in connection with its prior business 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 recognized 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.
-11-
- - The Company accounts for its marketable securities under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". Pursuant to the provisions
of SFAS No. 115, the Company has classified its marketable securities as
available-for-sale. Available-for-sale securities have been recorded at fair
value and related unrealized gains and losses have been excluded from earnings
and are reported as a separate component of accumulated other comprehensive
income (loss) until realized.
- - The Company maintains allowances for doubtful accounts based on expected
losses resulting from the inability of the Company's customers to make required
payments. The Company recorded a provision for doubtful accounts of $18,000
during the year ended December 31, 2003. The Company recorded a reversal of the
provision for doubtful accounts of ($560,000) during the year ended December 31,
2002. The Company recorded a provision for doubtful accounts of $5.5 million in
the year ended December 31, 2001.
- - 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." The Company recorded impairment
charges on goodwill of $6.8 million and $36.8 million in 2002 and 2001,
respectively, and impairment charges on intangible assets of $3.5 million in
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 year
ended December 31, 2001, the Company recorded an impairment charge on
investments of $15.4 million. The Company did not record an impairment charge on
investments during 2003 and 2002.
- - The Company is a party to the pending judicial and administrative proceedings
described elsewhere herein. An unfavorable resolution of those proceedings could
materially adversely affect the Company's business, results of operations,
liquidity or financial condition.
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 granted 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 granted
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 with
respect to the new grants. Members of the Company's Board of Directors and its
executive officers were not eligible to participate in the exchange program.
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. The remaining
deferred revenue is expected to be fully recognized by September 2004. Prior to
a redeployment of the Company's assets, the Company's principal income will
consist of interest, dividend and other investment income from short-term
investments, which 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 97-2, "Software Revenue
Recognition", and SOP 98-9, "Software
-12-
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 includes royalties and software duplication and
distribution costs. The Company recognized these costs as the applications were
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
were recognized as they were incurred for time and material arrangements and are
recognized using the percentage of completion method for fixed price
arrangements.
Research and development expenses consisted 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 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. Before the sale of substantially all of the Company's operating assets
in December 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.
RESTRUCTURING AND RELATED COSTS
During 2002 and 2001, the Company's management approved restructuring plans to
reorganize and reduce operating costs. Restructuring and related charges of $4.2
million were expensed in 2001 to align better the Company's cost structure with
projected revenue. The charges were comprised of $3.0 million for employee
separation and related costs for 181 employees and $1.2 million for facility
closure 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 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.
During 2003, the Company determined that actual restructuring and related
charges were in excess of the amounts provided for in 2002 and recorded
additional restructuring charges of $250,000. This amount was debited to general
and administrative costs in the accompanying consolidated statement of
operations during 2003. The charges for 2003 were comprised of $223,000 for
employee separation costs and $27,000 for facility closure and consolidation
costs.
The facility closures and consolidation costs for 2001 and 2002 relate to the
abandonment of the Company's leased facilities in Suwanee, Georgia; Limerick,
Ireland; Maidenhead, England; and near 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 a 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
2003, 2002 and 2001 and the balance of the accrual as of December 31, 2003 (in
thousands):
-13-
Employee Facility
Separation Closing Total Restructuring
Costs Costs and Related Costs
----- ----- -----------------
Accruals during 2001 $ 2,939 $ 1,218 $ 4,157
Expenditures during 2001 2,259 9 2,268
------- ------- -------
Balance at December 31, 2001 680 1,209 1,889
Accruals during 2002 4,645 3,905 8,550
Expenditures during 2002 4,196 4,977 9,173
Credits in 2002 202 -- 202
------- ------- -------
Balance at December 31, 2002 927 137 1,064
Accruals during 2003 223 27 250
Expenditures during 2003 1,025 59 1,084
------- ------- -------
Balance at December 31, 2003 $ 125 $ 105 $ 230
======= ======= =======
COMPARISON OF RESULTS OF OPERATIONS BETWEEN THE YEARS ENDED DECEMBER 31, 2003
AND 2002
The following discussion covers historical results of operations for the periods
indicated for the Company's prior businesses. On December 6, 2002, the Company
completed the disposition of substantially all its operating assets, and the
Company is now evaluating alternative ways to redeploy its assets into new
businesses. The discussion below is therefore not material to an understanding
of future revenue, earnings, operations, business or prospects of the Company.
REVENUES
Total revenues declined to $0.1 million in 2003 compared to $9.0 million in
2002. This decline is due entirely to the sale of substantially all of the
Company's operating assets in December 2002.
COST OF REVENUES
The Company did not have any significant cost of revenues in 2003, since all
2003 revenue was the recognition of deferred revenue related to maintenance
arrangements.
RESEARCH AND DEVELOPMENT
The Company did not have any research and development costs in 2003. This
compares favorably with over $7.3 million expensed in 2002.
SALES AND MARKETING
The Company did not have any sales and marketing costs in 2003. This compares
favorably with over $7.9 million expensed in 2002.
GENERAL AND ADMINISTRATIVE EXPENSE
During the year ended December 31, 2003, general and administrative expenses
were reduced to $5.0 million compared to $12.6 million in 2002. This trend is
consistent with management's stated strategy to reduce our expenditure rate to
the extent practicable, to levels of our investment income until the completion
of an acquisition or merger. General and administrative expenses were
approximately $725,000 in the fourth quarter of 2003 including salaries and
employee benefits, rent, insurance, legal, accounting and other professional
fees as well as public company expenses such as transfer agent and listing fees
and expenses.
-14-
LOSS ON IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS
As a result of a change in the Company's strategic direction during the second
quarter of 2002, the Company determined that the carrying value of the remaining
goodwill and intangible assets exceeded fair value. As a result, the Company
recorded an additional impairment charge to goodwill of $6.9 million and an
impairment charge to intangible assets of $3.5 million during the year ended
December 31, 2002, that reduced the cost basis of goodwill and intangible assets
to $0. The total impairment was $10.4 million. There was no comparative
impairment charge in 2003.
LOSS/(GAIN) ON SALE OR DISPOSAL OF ASSETS
During 2003, the Company recorded a loss on the sale or disposal of assets of
$36,000.
In 2002, the Company sold its e-commerce software business to Epicor Software
Corporation for approximately $1.0 million. The Company recorded a gain during
the fourth quarter of 2002 on the sale of this business of approximately
$500,000 that has been included in gain on sale or disposal of assets in the
accompanying statement of operations for the year ended December 31, 2002. Also
in 2002, the Company recorded a loss on the disposal of property and equipment
of $2.3 million. The loss on the disposal of assets during the year ended
December 31, 2002 is primarily attributable to the write down of assets located
in the Suwanee, Limerick and Maidenhead offices.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense in 2003 declined to $0.8 million compared
to $4.2 million in 2002 a reduction of 81%. The decline in the expense primarily
is attributable to the sale of substantially all of the Company's operating
assets in the fourth quarter of 2002, resulting in lower depreciation and
amortization on property and equipment coupled with the write off of intangibles
assets with definite lives during 2002. As a result of this write off of assets
during 2002, there was no amortization expense on intangible assets in 2003. The
Company recorded $455,000 of amortization expense relating to intangible assets
with definite lives in 2002.
INTEREST INCOME
Interest income decreased to $1.2 million or approximately 50% for the year
ended December 31, 2003 compared to $2.4 million in 2002. The decrease in
interest income was due to lower levels of cash, cash equivalents and marketable
securities available for investment in 2003, coupled with lower interest rates
during 2003, that resulted in lower rates of return on investments.
INTEREST EXPENSE
Interest expense in 2003 was $66,000 compared to an expense of $225,000 in 2002,
a decline of 71%, due to the repayment of $5.0 million of indebtedness that
resulted in the interest expense in 2002.
INCOME TAXES
As a result of the operating losses incurred since the Company's inception, no
provision or benefit for income taxes was recorded in 2003 or in 2002.
COMPARISON OF RESULTS OF OPERATIONS BETWEEN THE YEARS ENDED DECEMBER 31, 2002
AND 2001
The following discussion covers historical results of operations for the periods
indicated for the Company's prior businesses. On December 6, 2002, the Company
completed the disposition of substantially all its operating assets, and the
Company is now evaluating alternative ways to redeploy its assets into new
businesses. The discussion below is therefore not material to an understanding
of future revenue, earnings, operations, business or prospects of the Company.
REVENUES
Total Revenues. Total revenues decreased 48.9% to $9.0 million in 2002 from
$17.7 million in 2001. The decrease in total revenues resulted primarily from a
decrease in information technology spending and the announcement by the Company
during the quarter ended June 30, 2002 to explore all strategic alternatives as
part of its strategy to limit operating losses and enable it to reposition its
business in order to enhance stockholder value. For the year ended December 31,
2002, one customer accounted for more than 10%, totaling $2.7 million or 29.9%
of total revenue. For the year ended December 31, 2001, three customers
accounted for more than 10% each, totaling $6.2 million or 35.3% of total
revenue. The percentage of total revenue recognized from these three customers
was 12.2%, 11.9% and 11.2%.
-15-
License Fees. License fees decreased 64.0% to $2.8 million, or 31.1% of total
revenues, in 2002 from $7.8 million, or 44.2% of total revenues, in 2001. The
decrease in license fees was the result of a decrease in the amount of software
licensed. This decrease is due to the factors discussed above in Total Revenue.
Services Fees. Services fees decreased 36.9% to $6.2 million from $9.9 million
in 2002, but increased as a percentage of total revenues to 68.9% in 2002 from
55.8% in 2001. This decrease is primarily attributable to a decrease in
implementation and training services and maintenance fees, a direct result of
the decrease in the amount of software licensed.
COST OF REVENUES
Total Cost of Revenues. Cost of revenues decreased 57.9% to $5.5 million, or
61.1% of total revenues, during the year ended December 31, 2002 from $13.1
million, or 74.3% of total revenues, during the same period in 2001. The
decrease in the total cost of revenues is primarily attributable to a decrease
in personnel related costs.
Cost of License Fees. Cost of license fees decreased to $26,000 in 2002 from
$211,000 in 2001. Cost of license fees includes royalties and software
duplication and distribution costs. The decrease in cost of license fees is
primarily attributable to a decrease in royalty fees paid by the Company
pursuant to equipment manufacturer agreements for certain of its applications.
The cost of license fees may vary from period to period depending on the product
mix licensed, but remain a small percentage of license fees.
Cost of Services Fees. Cost of services fees decreased 57.4% to $5.5 million, or
88.3% of total services fees, in 2002 compared to $12.9 million, or 131.0% of
total services fees, in 2001. The decrease in the cost of services fees was
primarily attributable to a decrease in personnel related costs, a decrease in
consulting fees and a decrease in expenses related to employee separation and
facility closure costs. The Company had an average of 73.9% fewer employees
during the year ended December 31, 2002 compared to the same period during 2001.
Consulting fees related to subcontracted services during the year ended December
31, 2002 were approximately $289,000 compared to approximately $422,000 during
the year ended December 31, 2001. The Company incurred $858,000 of expense
related to employee separation and related benefit costs incurred as part of the
Company's restructuring initiative during the twelve months ended December 31,
2002 compared to $1.0 million during the twelve months ended December 31, 2001.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased 55.2% to $7.3 million, or 80.4% of
total revenues, in 2002 from $16.2 million, or 91.8% of total revenues, in 2001.
Research and development expenses decreased primarily due to decreased
consulting fees incurred to develop the Company's products and a decrease in
personnel related costs partially offset by increased employee separation and
related benefit costs. Consulting fees decreased to approximately $798,000
during the year ended December 31, 2002 from approximately $3.6 million during
the year ended December 31, 2001. The Company had an average of 64.0% fewer
employees in the research and development area during 2002 compared to the same
period of 2001. The Company incurred $1.3 million of expense related to employee
separation and related benefit costs incurred as part of the Company's
restructuring initiative during the twelve months ended December 31, 2002
compared to $217,000 during the twelve months ended December 31, 2001.
SALES AND MARKETING
Sales and marketing expenses, exclusive of non-cash expenditures decreased 72.6%
to $7.5 million, or 82.9% of total revenues, in 2002 from $27.3 million, or
154.4% of total revenues, in 2001. The decrease was primarily attributable to
the reduction of sales and marketing personnel, a decrease in variable
compensation as a result of lower license revenue during 2002, and a reduction
of promotional activities associated with building market awareness of the
Company's e-commerce products. The Company had an average of 80.4% fewer sales
and marketing employees during 2002 compared to the same period in 2001. The
Company incurred $1.2 million of expense related to employee separation and
related benefit costs incurred as part of the Company's restructuring initiative
during the twelve months ended December 31, 2002 compared to $1.1 million during
the twelve months ended December 31, 2001.
During the years ended December 31, 2002 and 2001, non-cash sales and marketing
expenses of approximately $450,000 and $6.7 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. 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 Company recorded the value of these warrants and common stock as deferred
sales and marketing costs, which were being amortized over the life of the
agreements which ranged from nine months to five years. Included in the results
for 2001 is $1.4 million of expense recorded in the fourth quarter as a result
of terminating the sales and marketing agreement with one customer.
-16-
GENERAL AND ADMINISTRATIVE
General and administrative expenses, exclusive of non-cash expenditures but
including the provision for doubtful accounts, decreased 19.5% to $12.0 million
in 2002 from $14.9 million in 2001. As a percentage of total revenues, general
and administrative expenses increased to 133.0% in 2002 from 84.4% in 2001.
During 2002 the Company recorded a reversal of the provision for doubtful
accounts of $560,000 compared to a provision for doubtful accounts of
approximately $5.5 million for the year ended December 31, 2001. The decrease in
general and administrative expenses was primarily attributable to decreases in
personnel related costs and a decrease in the provision for doubtful accounts
partially offset by employee separation and related benefit costs and facility
closure and consolidation costs. The Company had an average of 54.9% fewer
general and administrative employees during 2002 compared to the same period in
2001. The Company incurred $1.1 million of expense related to employee
separation and related benefit costs incurred as part of the Company's
restructuring initiative during the twelve months ended December 31, 2002
compared to $526,000 during the twelve months ended December 31, 2001. The
Company incurred $3.9 million of expense related to facility closure and
consolidation costs during the twelve months ended December 31, 2002 compared to
$1.2 million for the twelve months ended December 31, 2001.
The Company did not incur any non-cash general and administrative expenses
during 2002. The Company incurred non-cash general and administrative expenses
of approximately $252,000, or 1.4% of total revenues, during 2001. 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 GOODWILL AND INTANGIBLE 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 of $6.8
million and an impairment charge to intangible assets of $3.5 million during the
three months ended June 30, 2002. The Company evaluates the carrying value of
its long-lived assets, including intangibles, according to 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
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 goodwill exceeded
expected cash flows. The $36.8 million write-down in 2001 was based on the
amount by which the carrying amount of goodwill exceeded fair value.
LOSS/(GAIN) ON SALE OR DISPOSAL OF ASSETS
On December 6, 2002, the Company sold its e-commerce software business to Epicor
Software Corporation for approximately $1.0 million, of which $200,000 was
placed in escrow. The Company recorded a gain during the fourth quarter of 2002
on the sale of this business of approximately $514,000.
During the years ended December 31, 2002 and 2001, the Company recorded a loss
on the disposal of property and equipment of $2.3 million and a gain on the
disposal of property and equipment of $20,000, respectively. The loss on the
disposal of assets during the year ended December 31, 2002 is primarily
attributable to the write down of assets located in the Suwanee, Limerick, and
Maidenhead offices.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization decreased 65.3% to $4.2 million, or 47.0% of total
revenues, in 2002, from $12.2 million, or 69.1% of total revenues, in 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. The Company recorded $455,000 and $909,000 of
amortization expense related to intangible assets with definite lives during the
twelve months ended December 31, 2002 and 2001, respectively. The Company
recorded $7.6 million of amortization expense related to goodwill during the
twelve months ended December 31, 2001. As a result of adopting SFAS 142, the
Company did not record amortization expense related to goodwill during 2002.
-17-
LOSS ON IMPAIRMENT OF INVESTMENTS
During the year ended December 31, 2001, the Company recorded a loss on
impairment of investments of approximately $16.5 million. These losses were
necessitated by other than temporary losses to the value of investments the
Company had made in privately held companies and marketable securities of one
publicly traded company. The privately held companies were primarily early-stage
companies and subject to significant risk due to their limited operating history
and volatile industry-based economic conditions. As of December 31, 2001, all
investments but one had been written off. The remaining balance, representing a
single investment and valued at $200,000 in the December 31, 2001 balance sheet,
was sold and cash of $200,000 was received during the first quarter of 2002.
INTEREST INCOME
Interest income decreased 62.8% to $2.4 million in 2002, or 27.0% of total
revenues, from $6.6 million, or 37.2% of total revenues, in 2001. The decrease
in interest income was due to lower levels of cash available for investment and
lower interest rates.
INTEREST EXPENSE
Interest expense decreased 1.3% to $225,000 in 2002 from $228,000 in 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 borrowing
arrangement.
INCOME TAXES
As a result of the operating losses incurred since the Company's inception, no
provision or benefit for income taxes was recorded in 2002 or in 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased to $15.0 million at December
31, 2003 from $42.2 million at December 31, 2002. Marketable securities
increased to $73.7 million at December 31, 2003 from $52.9 million at December
31, 2002. The overall combined decrease of $6.4 million in cash and cash
equivalents and marketable securities is due primarily to liquidity used to
reduce long-term debt coupled with operating activities.
Cash used in operating activities was approximately $2.9 million during 2003.
The cash used was primarily attributable to the Company's net loss. Cash used in
operating activities was approximately $27.4 million during 2002. The cash used
was primarily attributable to the Company's net loss and to decreases in
accounts payable and accrued liabilities, deferred revenue, accounts receivable
and prepaid and other current assets. The trend in cash used in operating
activities is consistent with management's stated strategy, following the sale
of substantially all of the Company's operating assets in December 2002, to
reduce significantly our cash expenditure rate by targeting, to the extent
practicable, our overhead expenses to the amount of our investment income until
the completion of an acquisition or merger. While the Company's expenses have
been significantly reduced, management currently believes that the Company's
operating expense will exceed its investment income in 2004. The cash used in
operating activities was approximately $0.3 million for the three months ended
December 31, 2003.
Cash used in investing activities was approximately $21.0 million during 2003.
The cash was used for purchases of investments and marketable securities,
partially offset by the sale and maturity of marketable securities. Cash
provided by investing activities was approximately $13.5 million during 2002.
The cash provided by investing activities during 2002 was primarily attributable
to the sale and maturity of marketable securities and proceeds related to the
sale of the e-commerce assets partially offset by purchases of marketable
securities and property and equipment.
Cash used in financing activities was approximately $3.3 million during 2003
compared to cash provided by financing of $0.5 million during 2002. The cash
used by financing activities in 2003 was attributed to the repayment of the
Company's outstanding indebtedness of $5.0 million, offset by proceeds from the
exercise of stock options. The cash provided by financing activities during 2002
was attributable to proceeds from shares issued under the employee stock
purchase plan and stock option exercises.
As of December 31, 2003, the Company had no trade accounts receivables. As of
December 31, 2002, four customers accounted for more than 10% each, totaling
$814,000 or 77.3% of the gross accounts receivable balance on that date. The
percentage of total accounts receivable due from these four customers was 42.3%,
12.4%, 11.5% and 11.1%, respectively, at December 31, 2002.
On December 6, 2002, the Company granted options to purchase 1,250,000 shares of
common stock to three senior executives.
-18-
450,000 of these options were issued with an exercise price of $5.35 per share,
400,000 were issued with an exercise price of $7.50 per share and 400,000 were
issued with an exercise price of $10.00 per share. The options issued at $5.35
per share were issued at less than the fair market value on that date of $5.45
and will result in compensation charges of $65,000 recognized over the vesting
period. Twenty percent of the options vest annually over five years on the
anniversary of the date of grant.
At December 31, 2003, the Company has net operating loss, capital loss, research
and experimentation credit and alternative minimum tax credit carryforwards for
U.S. federal income tax purposes of approximately $129.4 million, $15.2 million,
$1.3 million and $53,000, respectively, which expire in varying amounts
beginning in the year 2009. The Company also has incurred foreign losses in the
amount of approximately $4.0 million that are available to offset future taxable
income in foreign jurisdictions. The Company's ability to benefit from certain
net operating loss carryforwards is limited under section 382 of the Internal
Revenue Code due to a prior ownership change of greater than 50%. Accordingly,
approximately $113.4 million of the $129.4 million of U.S. net operating loss
carryforward is available currently to offset taxable income that the Company
may recognize in the future.
CONTRACTUAL OBLIGATIONS
The following summarizes the Company's contractual obligations and commercial
commitments at December 31, 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: (in thousands)
Contractual Obligations Payment Due By Period
(in thousands) ---------------------
Total 1 Year 2-3Years 4-5Years After 5 Years
----- ------ -------- -------- -------------
Operating Leases $ 4,059 $ 328 $ 887 $ 823 $ 2,021
------- ----- ----- ----- -------
Total $ 4,059 $ 328 $ 887 $ 823 $ 2,021
======= ===== ===== ===== =======
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
below.
The Company does not engage in any transactions or have relationships or other
arrangements with unconsolidated entities. These include special purpose and
similar entities or other off- balance sheet arrangements. The Company also does
not engage in energy, weather or other commodity-based contracts.
Our corporate headquarters is currently located in Greenwich, Connecticut where
we lease approximately 2,700 square feet for $11,312 a month, pursuant to a
lease, which expires on June 30, 2004.
In September 2003, the Company and Kanders & Company, an entity owned and
controlled by the Company's Executive Chairman, Warren B. Kanders, 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 the total lease payments of
$24,438 per month 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 during the term
of the lease. 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. The bank that issued the letter of credit
holds an $850,000 deposit against the letter of credit. Kanders & Company
reimburses the Company for a pro rata portion of the approximately $5,000 annual
cost of the letter of credit. We expect to commence occupation of this space in
June 2004 upon the completion of all build-out construction.
In early 2003, the Company entered into an oral agreement with Kanders &
Company, 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.
We also lease approximately 5,200 square feet near Toronto, Canada, at a cost of
approximately $9,000 per month, which was used for the delivery of services as
well as research and development through October 2001. This lease expires in
February 2006. This facility has been sub-leased for approximately $4,000 a
month, pursuant to a sublease, which expires on January 30, 2006. The cost, net
of the estimated sublease income, has been included in general and
administrative expense in the accompanying statement of operations in 2002.
-19-
RELATED-PARTY TRANSACTIONS
In September 2003, the Company and Kanders & Company, an entity owned and
controlled by the Company's Executive Chairman, Warren B. Kanders, 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 the total lease payments of
$24,438 per month 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 during the term
of the lease. 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.
In early 2003, the Company entered into an oral agreement with Kanders &
Company, 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. The Company was reimbursed
$95,000 by Kanders & Company in 2003 for rent and other costs incurred by the
Company related to this property as a result of the voluntary termination of the
lease.
During the year ended December 31, 2003, the Company expensed approximately
$45,000, for payments to Kanders Aviation LLC, an affiliate of the Company's
Executive Chairman, Warren B. Kanders, relating to aircraft travel by directors
and officers of the Company for Board meetings, the closing of the Atlanta
facility, and meetings for potential redeployment transactions. Kanders &
Company reimburses the Company for expenses such as rent, telecommunication
charges and other office expenses incurred on behalf of Kanders & Company.
These expenses may be offset by travel expenses incurred by Kanders Aviation
LLC on behalf of the Company as previously discussed. As of December 31, 2003,
the Company had outstanding a net payable of approximately $10,000 to Kanders &
Company and Kanders Aviation LLC. The amounts due to Kanders Aviation LLC are
included in accounts payable and accrued liabilities in the accompanying
consolidated balance sheet and the amounts due from Kanders & Company are
included in prepaids and other current assets in the accompanying consolidated
balance sheet.
After the closing of the sale of the e-commerce software business in December
2002, 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 two years. At December 31, 2003, $125,000
of this balance remained outstanding and is included in accounts payable and
accrued liabilities in the accompanying consolidated balance sheet.
During December 2002, the Company reimbursed legal fees and other expenses in
the amount of $531,343 incurred by Warren B. Kanders on behalf of himself, Burtt
R. Ehrlich, and Nicholas Sokolow, all of whom are members of the Company's Board
of Directors, in connection with their successful solicitation of proxies for
the May 21, 2002 Annual Meeting of Stockholders. The Company recorded this
amount in the fourth quarter of 2002 as a general and administrative expense in
the accompanying consolidated statement of operations.
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 2002 that is included in general and
administrative in the accompanying consolidated statement of operations and
expensed $131,000 during 2001. The Company expensed an additional $54,000,
outside the original engagement, during 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 as a director of
the Company.
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
-20-
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 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 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.
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 December 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46 (revised December 2003), "Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51", which addresses how a
business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities", which was issued in January 2003.
The Company will be required to apply FIN 46R to variable interests in VIEs
created after December 31, 2003. For variable interests in VIEs created before
January 1, 2004, the Interpretation will be applied beginning on January 1,
2005. For any VIEs that must be consolidated under FIN 46R that were created
before January 1, 2004, the assets, liabilities and noncontrolling interests of
the VIE initially would be measured at their carrying amounts with any
difference between the net amount added to the balance sheet and any previously
recognized interest being recognized as the cumulative effect of an accounting
change. If determining the carrying amounts is not practicable, fair value at
the date FIN 46R first applies may be used to measure the assets, liabilities
and noncontrolling interest of the VIE. The application of this Interpretation
did not have a material effect on the Company's financial statements.
In December 2002, the FASB issued Statement of Financial Accounting Standards
("SFAS") 148, "Accounting for Stock-Based Compensation, Transition and
Disclosure, an amendment of FASB Statement No. 123". SFAS 148 amends SFAS 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 123 to require prominent disclosures in both
annual and interim financial statements. Certain of the disclosure modifications
are required for fiscal years ending after December 15, 2002 and are included in
the notes to the 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 adoption of this
Interpretation did not have a material impact on the Company's consolidated
financial statements. The Company has provided the required disclosures with
respect to indemnifications in Note 12 to the consolidated financial statements.
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 exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The adoption of of SFAS
No.146 did not have a material impact on the Company's consolidated 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
-21-
a material impact on the Company's consolidated 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 adoption of SFAS 143 did not have a material
impact on the Company's consolidated financial statements.
In November 2002, the EITF reached consensus on Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables" . This EITF provided guidance on how to
account for arrangements that involve delivery or performance of multiple
products, services and /or rights to use assets. The provision of EITF Issue No.
00-21 applies to revenue arrangements entered into in quarters beginning after
June 15, 2003. The adoption of EITF Issue No. 00-21 did not have a material
impact on the Company's consolidated financial statements.
In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150
requires certain financial instruments that are settled in cash, including
certain types of mandatorily redeemable securities, to be classified as
liabilities rather than equity or temporary equity. SFAS No. 150 is generally
effective for financial instruments entered into or modified after May 31, 2003,
and is otherwise effective at the beginning of the first interim period after
June 15, 2003. The application of this statement did not have a material impact
on the Company's consolidated financial statements.
QUARTERLY DATA
The following table sets forth selected quarterly data for the years ended
December 31, 2003 and 2002 (in thousands, except per share data). The operating
results are not indicative of results for any future period.
2003
----
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenues................................... $ 53 $ 25 $ 25 $ 27
Operating loss............................. (2,666) (1,497) (775) (734)
Net loss................................... (2,412) (1,042) (672) (205)
Net loss per share:........................
Basic.................................. $(0.15) $(0.07) $(0.04) $(0.01)
Diluted................................ $(0.15) $(0.07) $(0.04) $(0.01)
2002
----
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenues................................... $3,941 $2,544 $1,516 $1,033
Operating loss............................. (7,139) (21,206) (4,515) (7,196)
Net loss................................... (6,457) (20,571) (3,989) (6,796)
Net loss per share:........................
Basic.................................. $(0.41) $(1.32) $(0.26) $(0.43)
Diluted................................ $(0.41) $(1.32) $(0.26) $(0.43)
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion concerning the Company's market risk involves
forward-looking statements that are subject to risks and uncertainties. Actual
results could differ materially from those discussed in the forward-looking
statements. The Company is exposed to market risk related to interest rates and
investment values. The Company currently does not use derivative financial
instruments to hedge these risks or for trading purposes.
INTEREST RATE RISK
The Company is exposed to market risk from changes in interest rates due to its
investing activities. The primary objective of the Company's investment
activities is to preserve investment capital, generate investment income and
manage interest rate exposure by investing in short-term, highly-rated liquid
investments. As a result of this strategy, the Company believes that there is
little exposure. The Company's investments are carried at market value, which
approximates cost. Since most of the
-22-
Company's investments have maturities of less than one year, a 1% change would
not have a material effect on the Company's financial position while impacting
the results of operations by approximately $0.8 million.
INVESTMENTS
Prior to 2002, the Company made several equity investments in privately held
companies. The Company's equity ownership in these entities ranged from 2.5% to
12.5%. These investments were accounted for using the cost method of accounting.
The Company did not recognize any material revenue from these companies during
2003, 2002 or 2001. During 2001, the Company recorded charges of $15.4 million
for other than temporary losses on these investments. The Company continues to
retain ownership interest in several of the companies although they have been
written down to a zero cost basis in the Company's consolidated balance sheet at
December 31, 2003.
-23-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
CLARUS CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report..................................................................................25
Consolidated Balance Sheets--December 31, 2003 and 2002.......................................................26
Consolidated Statements of Operations--Years Ended December 31, 2003, 2002 and 2001...........................27
Consolidated Statements of Stockholders' Equity and Comprehensive Loss--Years Ended December 31, 2003, 2002
and 2001 .....................................................................................................28
Consolidated Statements of Cash Flows--Years Ended December 31, 2003, 2002 and 2001...........................30
Notes to Consolidated Financial Statements....................................................................31
-24-
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Clarus Corporation:
We have audited the consolidated balance sheets of Clarus Corporation and
subsidiaries (the "Company") as of December 31, 2003 and 2002, and the related
consolidated statements of operations, stockholders' equity and comprehensive
loss, and cash flows for each of the years in the three-year period ended
December 31, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Clarus Corporation
and subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in note 1 to the consolidated financial statements, the Company (i)
sold substantially all of its operating assets on December 6, 2002, and (ii)
changed its method of accounting for goodwill and other intangible assets in
2002.
/s/ KPMG LLP
Atlanta, Georgia
February 27, 2004
-25-
CLARUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
(In Thousands, Except Share and Per Share Amounts)
ASSETS
2003 2002
---- ----
CURRENT ASSETS:
Cash and cash equivalents................................................................... $ 15,045 $ 42,225
Marketable securities....................................................................... 73,685 52,885
Accounts receivable, less allowance for doubtful accounts of $0 and $586 in
2003 and 2002, respectively.............................................................. -- 467
Interest receivable......................................................................... 507 573
Prepaids and other current assets........................................................... 132 689
Assets held for sale........................................................................ -- 48
--------- ---------
Total current assets..................................................................... 89,369 96,887
--------- ---------
PROPERTY AND EQUIPMENT, NET..................................................................... 38 809
--------- ---------
OTHER ASSETS:
Deposits and other long-term assets ........................................................ 38 68
--------- ---------
Total assets............................................................................. $ 89,445 $ 97,764
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.................................................... $ 1,520 $ 1,936
Deferred revenue............................................................................ 1,106 1,248
Current portion of long-term debt........................................................... -- 5,000
Liabilities to be assumed related to assets held for sale................................... -- 220
--------- ---------
Total current liabilities................................................................ 2,626 8,404
--------- ---------
Total liabilities........................................................................ 2,626 8,404
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 12)
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value; 5,000,000 shares authorized; none issued................. -- --
COmmon stock, $.0001 par value; 100,000,000 shares authorized;
16,649,048 and 15,762,707 shares issued and 16,574,048 and 15,687,707 outstanding in
2003 and 2002, respectively ........................................................... 2 2
Additional paid-in capital.................................................................. 367,031 361,715
Accumulated deficit......................................................................... (276,767) (272,436)
Less treasury stock, 75,000 shares at cost.................................................. (2) (2)
Accumulated other comprehensive income (loss).............................................. (17) 146
Deferred compensation....................................................................... (3,428) (65)
--------- ---------
Total stockholders' equity............................................................... 86,819 89,360
--------- ---------
Total liabilities and stockholders' equity............................................... $ 89,445 $ 97,764
========= =========
See accompanying notes to consolidated financial statements.
-26-
CLARUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In Thousands, Except Per Share Amounts)
2003 2002 2001
---- ---- ----
REVENUES:
License fees.................................................................. $ -- $ 2,808 $ 7,807
Services fees................................................................. 130 6,226 9,866
--------- --------- ---------
Total revenues............................................................. 130 9,034 17,673
COST OF REVENUES:
License fees.................................................................. -- 26 211
Services fees................................................................. -- 5,498 12,921
--------- --------- ---------
Total cost of revenues..................................................... -- 5,524 13,132
OPERATING EXPENSES:
Research and development...................................................... -- 7,263 16,220
Sales and marketing........................................................... -- 7,938 34,034
General and administrative.................................................... 4,986 12,574 9,633
Provision for doubtful accounts............................................... 18 (560) 5,537
Loss on impairment of goodwill and intangible assets.......................... -- 10,360 36,756
Loss/(Gain) on sale or disposal of assets..................................... 36 1,748 (20)
Depreciation and amortization................................................. 762 4,243 12,212
--------- ---------- ---------
Total operating expenses................................................... 5,802 43,566 114,372
--------- ---------- ---------
OPERATING LOSS.................................................................... (5,672) (40,056) (109,831)
OTHER INCOME...................................................................... 169 27 96
LOSS ON IMPAIRMENT OF INVESTMENTS................................................. -- -- (16,461)
INTEREST INCOME................................................................... 1,238 2,441 6,570
INTEREST EXPENSE.................................................................. (66) (225) (228)
--------- ------------ ---------
NET LOSS.......................................................................... $ (4,331) $ (37,813) $ (119,854)
========= ============ ===========
NET LOSS PER SHARE
Basic $ (0.27) $ (2.42) $ (7.72)
Diluted $ (0.27) $ (2.42) $ (7.72)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 15,905 15,615 15,530
Diluted 15,905 15,615 15,530
See accompanying notes to consolidated financial statements
-27-
CLARUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In Thousands)
Treasury Accumulated
Common Stock Additional Stock Other
----------------- Paid-In Accumulated --------------- Comprehensive
Shares Amount Capital Deficit Shares Amount Income (loss)
------- ------- ---------- ------------ ------ ------- -------------
BALANCES, December 31, 2000......... 15,609 $ 2 $ 362,415 $ (114,769) (75) $ (2) $ (572)
Amortization of deferred
compensation.................. -- -- -- -- -- -- --
Exercise of stock options ....... 63 -- 198 -- -- -- --
Issuance of shares under
employee stock purchase
purchase plans................ 55 -- 260 -- -- -- --
Retirement of shares related to
the SAI acquisition.......... (88) -- (2,203) -- -- -- --
Net loss......................... -- -- -- (119,854) -- -- --
Increase in foreign currency
translation adjustment ....... -- -- -- -- -- -- 87
Increase in unrealized gain on
marketable securities......... -- -- -- -- -- -- 766
Total comprehensive loss
- --------------------------------------------------------------------------------------------------------------------------
BALANCES December 31,2001 .......... 15,639 2 360,670 (234,623) (75) (2) 281
Exercise of stock options ....... 113 -- 400 -- -- -- --
Issuance of shares under
employee stock purchase plans. 19 -- 119 -- -- -- --
Retirement of shares related
to the termination of
marketing agreement .......... (8) -- (39) -- -- -- --
Modification to stock options ... -- -- 500 -- -- -- --
Issuance of stock options with
exercise prices below fair
market value ................. -- -- 65 -- -- -- --
Net loss......................... -- -- -- (37,813) -- -- --
Increase in foreign currency
translation adjustment ....... -- -- -- -- -- -- 10
Decrease in unrealized gain on
marketable securities ........ -- -- -- -- -- -- (145)
Total comprehensive loss ........
- -------------------------------------------------------------------------------------------------------------------------
BALANCES, December 31, 2002 15,763 2 361,715 (272,436) (75) (2) 146
Exercise of stock options ....... 384 -- 1,656 -- -- -- --
Issuance of restricted shares,
net of amortization........... 500 -- 3,650 -- -- -- --
Issuance of shares under
employee stock purchase plan. 2 10
Net loss......................... -- -- -- (4,331) -- -- --
Decrease in foreign currency
translation adjustment ....... -- -- -- -- -- -- (78)
Decrease in unrealized gain on
marketable securities ........ -- -- -- -- -- -- (85)
Total comprehensive loss ........
- -------------------------------------------------------------------------------------------------------------------------
BALANCES, December 31, 2003 16,649 $ 2 $ 367,031 $ (276,767) (75) $ (2) $ (17)
=========================================================================================================================
See accompanying notes to consolidated financial statements.
-28-
CLARUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE LOSS (CONT.)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In Thousands)
Total
Deferred Stockholders' Comprehensive
Compensation Equity Loss
------------ ------------ --------------
BALANCES, December 31, 2000......... $ (252) $ 246,822 $ --
Amortization of deferred
compensation.................. 252 252
Exercise of stock options ....... -- 198 --
Issuance of shares under
Employee stock purchase
purchase plans................ -- 260 --
Retirement of shares
related to the
SAI acquisition............... -- (2,203) --
Net loss......................... -- (119,854) (119,854)
Increase in foreign currency
translation adjustment ....... -- 87 87
Increase in unrealized gain on
marketable securities......... -- 766 766
---------------
Total comprehensive loss (119,001)
- ------------------------------------------------------------------------------ ===============
BALANCES, December 31,2001 ......... -- 126,328
Exercise of stock options ....... -- 400 --
Issuance of shares under
employee stock purchase plans. -- 119 --
Retirement of shares related
to the termination of
marketing agreement .......... -- (39) --
Modification to stock options ... -- 500 --
Issuance of stock options with
exercise prices below fair
market value ................. (65) -- --
Net loss......................... -- (37,813) (37,813)
Increase in foreign currency
translation adjustment ....... -- 10 10
Decrease in unrealized gain on
marketable securities ........ -- (145) (145)
---------------
Total comprehensive loss ........ (37,948)
- ------------------------------------------------------------------------------ ===============
BALANCES, December 31,2002 ......... (65) 89,360 --
Exercise of stock options ....... -- 1,656 --
Issuance of restricted shares,
net of amortization........... (3,363) 287 --
Issuance of shares under
employee stock purchase plan.. -- 10 --
Net loss......................... -- (4,331) (4,331)
Decrease in foreign currency
translation adjustment ....... -- (78) (78)
Decrease in unrealized gain on
marketable securities ........ -- (85) (85)
---------------
Total comprehensive loss ........ $ (4,494)
- ------------------------------------------------------------------------------- ================
BALANCES, December 31,2003 ......... $ (3,428) $ 86,819
===============================================================================
See accompanying notes to consolidated financial statements.
-29-
CLARUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In Thousands, Except Share Amounts)
2003 2002 2001
---- ---- ----
OPERATING ACTIVITIES:
Net loss............................................................................. $ (4,331) $ (37,813) $ (119,854)
Adjustments to reconcile net loss to net cash used in operating activities:..........
Depreciation and amortization of property and equipment............................ 762 3,788 3,750
Amortization of intangible assets.................................................. -- 455 8,462
Loss on impairment of investments.................................................. -- -- 15,419
Loss on impairment of intangible assets............................................ -- 10,360 36,756
Loss on impairment of marketable securities........................................ -- -- 1,042
Gain on sale of marketable securities and other.................................... -- (15) (11)
Provision for doubtful accounts.................................................... 18 (560) 5,537
Noncash sales and marketing expense................................................ -- 450 6,740
Noncash general and administrative expense......................................... -- -- 252
Noncash charge due to modification of stock options................................ -- 500 --
Amortization of deferred employee compensation plans............................... 287 -- --
Gain on sale of e-commerce assets to Epicor........................................ -- (514) --
Loss/(Gain) on sale or disposal of property and equipment.......................... 36 2,262 (20)
Changes in operating assets and liabilities:
Accounts receivable.............................................................. 449 2,618 23
Interest receivable, prepaids and other current assets........................... 623 1,203 259
Assets held for sale............................................................. 48 -- --
Deposits and other long-term assets.............................................. 30 420 (234)
Accounts payable and accrued liabilities......................................... (416) (4,539) (4,553)
Deferred revenue................................................................. (142) (5,738) 3,999
Liabilities to be assumed........................................................ (220) -- --
Other long-term liabilities...................................................... -- (265) 18
--------- --------- ---------
Net cash used in operating activities......................................... (2,856) (27,388) (42,415)
--------- --------- ---------
INVESTING ACTIVITIES:
Purchase of marketable securities.................................................. (117,881) (123,611) (95,527)
Proceeds from the sale and maturity of marketable securities....................... 96,918 135,860 80,185
Purchase of property and equipment................................................. (38) (182) (3,463)
Purchase of investments............................................................ -- -- (2,000)
Proceeds from sale of investment................................................... -- 200 --
Proceeds from sale of assets....................................................... -- 1,000 --
Proceeds from sale of property and equipment....................................... 11 189 --
--------- ---------- ---------
Net cash (used in) provided by investing activities............................ (20,990) 13,456 (20,805)
FINANCING ACTIVITIES:
Proceeds from the exercise of stock options.................................... 1,656 400 198
Proceeds from issuance of common stock related to employee stock
purchase plans............................................................... 10 119 260
Repayment of long-term debt.................................................... (5,000) -- --
--------- --------- ---------
Net cash (used in) provided by financing activities......................... (3,334) 519 458
--------- --------- ---------
Effect of exchange rate change on cash........................................... -- 10 87
CHANGE IN CASH AND CASH EQUIVALENTS............................................ (27,180) (13,403) (62,675)
CASH AND CASH EQUIVALENTS, beginning of year................................... 42,225 55,628 118,303
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year......................................... $ 15,045 $ 42,225 $ 55,628
========= ========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest......................................................... $ -- $ 225 $ 228
========= ========= =========
NONCASH TRANSACTIONS:
Retirement of 7,500 shares related to the termination of a sales and
marketing agreement.......................................................... $ -- $ 39 $ --
Grant of Restricted Stock...................................................... $ 2,680 $ -- $ --
Retirement of 82,500 shares related to SAI acquisition......................... $ -- $ -- $ (2,181)
See accompanying notes to consolidated financial statements.
-30-
CLARUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Clarus Corporation, a Delaware corporation, and its subsidiaries, (the
"Company") prior to the sale of substantially all of its operating assets in
December 2002, developed, marketed, and supported Internet-based
business-to-business electronic commerce solutions that automated the
procurement and management of operating resources.
During 2002, the Company adopted a strategic plan to sell or abandon all active
software operations and redeploy company capital to enhance stockholder value.
On December 6, 2002, the Company sold substantially all of its software
operations (comprised of the eProcurement, Sourcing and Settlement product
lines) to Epicor Software Corporation for $1.0 million in cash. Separately, on
January 1, 2003, the Company sold the assets related to the Cashbook product,
which were excluded from the Epicor transaction, to an employee group
headquartered in Limerick, Ireland. Therefore, as of December 31, 2002, the
Company has discontinued or abandoned substantially all software operations.
All of the revenues, cost of revenues and a substantial amount of the operating
expenses in the accompanying consolidated statements of operations, relate to
the divested products discussed above as well as other discontinued products.
The Company is not expected to recognize any significant amounts of revenue,
costs of revenue or incur operating expenses related to the Company's software
operations in the future.
Management now consists of four executive officers and a support staff of one,
all of whom are located in Greenwich, Connecticut. Management is now engaged in
analyzing and evaluating potential acquisition and merger candidates as part of
its strategy to redeploy its cash and cash equivalent assets to enhance
stockholder value.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All intercompany transactions and balances have
been eliminated. The Company's subsidiaries include Clarus International, Inc.,
Clarus eMEA Ltd., Clarus CSA, Inc., SAI America Limited, SAI Recruitment
Limited, i2Mobile.com Limited and SAI America LLC.
USE OF ESTIMATES
The preparation of these financial statements requires 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 regularly 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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. The Company had
approximately $15.0 million and $42.2 million in cash and cash equivalents
included in the accompanying consolidated balance sheets for the years ended
December 31, 2003 and 2002, respectively.
MARKETABLE SECURITIES
Marketable securities at December 31, 2003 and 2002 consist of government notes
and bonds, commercial paper, certificates of deposit and corporate debt. The
Company accounts for its marketable securities under the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Pursuant to the provisions of SFAS
No. 115, the Company has classified its marketable securities as
available-for-sale. Available-for-sale securities have been recorded at fair
value and related unrealized gains and losses have been excluded from earnings
and are reported as a separate component of accumulated other comprehensive
income (loss) until realized.
-31-
CREDIT AND CUSTOMER CONCENTRATIONS
The Company's accounts receivable have historically subjected the Company to
credit risk, as collateral is generally not required. As of December 31, 2003,
the Company had no trade accounts receivables. As of December 31, 2002, four
customers accounted for more than 10% each, totaling $814,000 or 77.3% of the
gross accounts receivable balance on that date. The percentage of accounts
receivable due from these four customers was 42.3%, 12.4%, 11.5% and 11.1%,
respectively, at December 31, 2002.
During the year ended December 31, 2002, one customer accounted for more than
10% of total revenue, totaling $2.7 million, or 29.9%. During the year ended
December 31, 2001, three customers each accounted for more than 10%,of total
revenue totaling $6.2 million, or 35.3%. The percentage of total revenue
recognized from these three customers was 12.2%, 11.9% and 11.2%, respectively.
During 2003, no revenue was derived from international markets. During 2002,
45.2% of the Company's revenue was derived from international markets, and 29.9%
was derived from one customer in the United Kingdom. During 2001, 32.2% of the
Company's revenue was derived from international markets, and 12.2% was derived
from one customer in Italy.
PROPERTY AND EQUIPMENT
Property and equipment consists of furniture and fixtures, computers and other
office equipment, purchased software and leasehold improvements. These assets
are depreciated on a straight-line basis over periods ranging from one to eight
years. Leasehold improvements are amortized over the shorter of the useful life
or the term of the lease. During 2002, the Company abandoned certain assets
located at its principal facilities in Suwanee, Georgia. and its offices in
Maidenhead, England and Limerick, Ireland. These fixed asset amounts and the
related accumulated depreciation were written off, resulting in an impairment
charge of $2.1 million that is included in the loss on sale or disposal of
assets in the accompanying consolidated statement of operations for the year
ended December 31, 2002.
Property and equipment are summarized as follows (in thousands):
December 31, Useful Life
----------------- -----------
2003 2002 (in years)
------ ------ -----------
Computers and equipment..................................... $ 52 $ 1,364 1 - 5
Purchased software.......................................... -- 1,005 1 - 5
Furniture and fixtures...................................... 35 35 1 - 7
Leasehold improvements...................................... 34 - 8
------- -------
121 2,404
Less: accumulated depreciation and amortization............. (83) (1,595)
------- -------
Property and equipment, net............................. $ 38 $ 809
======= =======
Depreciation and amortization expense related to property and equipment totaled
$0.8 million, $3.8 million, and $3.8 million for the years ended December 31,
2003, 2002 and 2001, respectively.
The Company has included purchased software in property and equipment, which
represents the cost of purchased integration software tools. It also includes
the cost of licenses to use, embed and sell software tools developed by others.
These costs are amortized ratably based on the projected revenue associated with
these purchased or licensed tools and products or the straight-line method over
two years, whichever method results in a higher level of annual amortization.
Amortization expense related to purchased software amounted to approximately
$0.3 million, $2.2 million and $1.3 million, in 2003, 2002, and 2001,
respectively. Accumulated amortization related to purchased software totaled $0
and $698,000 at December 31, 2003 and 2002, respectively.
INVESTMENTS
Prior to 2002, the Company made several equity investments in privately held
companies. The Company's equity ownership in these entities ranged from 2.5% to
12.5%. These investments were accounted for using the cost method of accounting.
The Company did not recognize any material revenue from these companies during
2003, 2002 or 2001. During 2001, the Company recorded charges of $15.4 million
for other than temporary losses on these investments. The Company continues to
retain ownership interest in several of the companies although they have been
written down to a zero cost basis in the Company's consolidated balance sheet at
December 31, 2003 and 2002, respectively.
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GOODWILL AND OTHER INTANGIBLE ASSETS
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". 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 and reviewed for impairment in accordance with SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets".
The Company 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. As a result of a change in the Company's strategic
direction during the second quarter of 2002, the Company tested goodwill and
intangible assets with definite lives for impairment according to the provisions
of SFAS 142 and SFAS 144, respectively, which resulted in an impairment of $6.8
million of goodwill and $3.5 million of intangible assets with definite lives.
No balances for goodwill or intangible assets remained as of December 31, 2003
and 2002, respectively.
Prior to the adoption of SFAS 142, the Company recorded $7.6 million of
amortization expense related to goodwill during the year ended December 31,
2001. As a result of adopting SFAS 142, the Company did not recognize any
goodwill amortization during the year ended December 31, 2003 and 2002.
The following table reconciles previously reported net income and earnings per
share as if the provisions of SFAS 142 were in effect in 2001.
2003 2002 2001
---- ---- ----
Reported net loss..................... $ (4,331) $ (37,813) $(119,854)
Add back goodwill amortization........ -- -- 7,600
--------- --------- ---------
Adjusted net loss..................... $ (4,331) $ (37,813) $(112,254)
========= ========= =========
Earnings per Share:
Basic - as reported................ $(0.27) $(2.42) $(7.72)
Basic - pro forma.................. $(0.27) $(2.42) $(7.23)
Diluted - as reported.............. $(0.27) $(2.42) $(7.72)
Diluted - pro forma ............... $(0.27) $(2.42) $(7.23)
======= ======= =======
As part of the acquisition of the SAI/Redeo companies, two former executives of
the SAI/Redeo companies signed employment agreements. As a result of the
voluntary terminations of the agreements, the executives were required to return
to the Company for cancellation a total of 82,500 shares of common stock issued
in connection with the agreements. During 2001, the Company recorded the fair
value of these shares as of the acquisition date, approximately $2.2 million, as
a reduction to the intangible assets associated with the SAI/Redeo acquisition.
Also during 2001, based on a revision to the Company's future cash flow
estimates, the Company recognized an impairment charge of $36.8 million related
to goodwill associated with the acquisition of the SAI/Redeo companies.
Prior to their impairment, intangible assets were being amortized on a
straight-line basis over periods ranging from three to ten years. Amortization
expense related to these intangible assets amounted to $0, $0.5 million, and
$8.5 million in 2003, 2002, and 2001, respectively.
LONG-LIVED ASSETS
On January 1, 2002 the Company adopted the provisions of SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144
provides a single accounting model for the impairment or disposal of long-lived
assets. SFAS 144 also changes the criteria for classifying an asset as held for
sale; and broadens the scope of businesses to be disposed of that qualify for
reporting as discontinued operations and changes the timing of recognizing
losses on such operations. The adoption of SFAS 144 did not have a significant
impact on the Company's consolidated financial statements.
In accordance with SFAS 144, long-lived assets, such as property, plant, and
equipment, and purchased intangibles subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to estimated undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of
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an asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of are separately presented in
the balance sheet and reported at the lower of the carrying amount or fair value
less costs to sell, and are no longer depreciated. The assets and liabilities of
a disposed group classified as held for sale are presented separately in the
appropriate asset and liability sections of the balance sheet.
Prior to the adoption of SFAS 144, the Company accounted for long-lived assets
in accordance with SFAS 121, "Accounting for Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of".
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities include the following as of December
31, 2003 and 2002 (in thousands):
2003 2002
---- ----
Accounts payable................................. $ 432 $ 412
Accrued compensation, benefits and commissions... 187 31
Restructuring accruals........................... 230 1,064
Accrued professional services.................... 336 --
Accrued franchise taxes.......................... 180 --
Other............................................ 155 429
------ ------
$1,520 $1,936
====== ======
PRODUCT RETURNS AND WARRANTIES
The Company provided warranties for its products after the software was
purchased for an agreed-upon period. The Company generally supports only current
releases and the immediately prior releases of its products. The Company's
license agreements did not permit product returns by its customers. The Company
has not experienced significant warranty claims to date. Accordingly, the
Company has not provided a reserve for warranty costs at December 31, 2003 and
2002.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company uses financial instruments in the normal course of its business. The
carrying values of cash and cash equivalents, accounts receivable, accounts
payable and long-term debt approximates fair value. Marketable securities are
carried at market value. The fair value of the Company's investments in
privately held companies is not readily available. The Company believes the fair
values of these investments approximated their respective carrying values at
December 31, 2003 and 2002.
REVENUE
The Company historically 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") 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. The
Company uses
-34-
the residual method since it does not have fair value of license fees. Revenue
from hosted software agreements are recognized ratably over the term of the
hosting arrangements. Revenue from sales to resellers is recognized on a
sell-through basis.
Amounts that have been received in cash or billed but that do not yet qualify
for revenue recognition are reflected as deferred revenues. Deferred revenues at
December 31, 2003 and 2002, were as follows (in thousands):
2003 2002
---- ----
Deferred revenues:
Deferred license fees......................... $ 1,106 $ 1,106
Deferred maintenance fees..................... -- 142
------ ------
Total deferred revenues....................... 1,106 1,248
Less current portion.......................... 1,106 1,248
------ ------
Non-current deferred revenues.................. $ -- $ --
====== ======
Deferred license fees include amounts collected under reseller agreements for
which revenue has not been recognized. Deferred services, training fees and
maintenance fees consist of prepaid fees for the performance of these services
in the future.
In November 2001, the Emerging Issues Task Force ("EITF") issued EITF 01-14,
"Income Statement Characterization of Reimbursements Received for
'Out-of-Pocket' Expenses Incurred", stating that reimbursements received for
out-of-pocket expenses should be characterized as revenue. The Company adopted
this consensus effective January 1, 2002. Historically the Company has not
reflected such reimbursements as revenue in its consolidated statements of
operations. Upon adoption of this consensus, comparative financial statements
for prior periods were reclassified to provide consistent presentation. The
adoption of this consensus 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 fiscal
year ended December 31, 2002 the Company recorded services fees revenue and cost
of services fees revenue from out-of-pocket expenses of approximately $206,000.
For the fiscal years ended December 31, 2001, the Company's services fees
revenue and cost of services fees revenue increased by approximately $668,000,
as a result of the reclassification of these reimbursements.
RESEARCH AND DEVELOPMENT
Research and development expenses were charged to expense as incurred. Computer
software development costs were charged to research and development expense
until technological feasibility is established, after which remaining software
production costs are capitalized in accordance with SFAS No. 86, "Accounting for
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed". The
Company has defined technological feasibility as the point in time at which the
Company has a working model of the related product. Historically, the
development costs incurred during the period between the achievement of
technological feasibility and the point at which the product is available for
general release to customers have not been material. Therefore, the Company has
charged all software development costs to research and development expense for
the three years ended December 31, 2003.
ADVERTISING EXPENSES
Advertising costs are expensed as incurred and totaled $1,000, $5,000 and
$319,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
STOCK-BASED COMPENSATION PLAN
The Company has an employee stock option plan, which is described more fully in
Note 10. In December 2002, the Financial Accounting Standards Board ("FASB")
issued Statement No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure" which amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a change to the
fair based-value method of accounting for stock-based employee compensation. In
addition, SFAS No.148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. As permitted by SFAS 148 and SFAS
123, the Company has elected to follow the guidance of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" in
measuring and recognizing its stock-based transactions with employees. As such,
compensation expense is measured on the date of grant only
-35-
if the current market price on the date of the grant of the underlying stock
exceeds the exercise price. Such compensation expense is recorded on a
straight-line basis over the related vesting period.
The following table shows what the effect on net loss and earnings per share if
the fair value method of accounting had been applied. For purposes of this pro
forma disclosure, the estimated fair value of an option utilizing the
Black-Scholes option pricing model is assumed to be amortized to expense over
the option's vesting periods.
(in thousands, except per share amounts):
2003 2002 2001
---- ---- ----
Net loss, as reported................................................. $(4,331) $(37,813) $(119,854)
Add stock-based employee compensation expense included in reported
net loss,........................................................... 287 500 252
Deduct total stock-based employee compensation expense determined
under fair-value based method for all awards........................ (5,049) (1,913) (4,211)
--------- --------- ----------
Pro forma net loss $ (9,093) $(39,226) $(123,813)
========= ========= ==========
Earnings per Share:
Basic - as reported................................................. $(0.27) $(2.42) $(7.72)
Basic - pro forma................................................... $(0.57) $(2.51) $(7.97)
Diluted - as reported............................................... $(0.27) $(2.42) $(7.72)
Diluted - pro forma ................................................ $(0.57) $(2.51) $(7.97)
========= ========= ==========
Refer to Note 10 to the consolidated financial statements for assumptions used
in the Black-Scholes option pricing model.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
income tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred income tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred income tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
NET LOSS PER SHARE
Basic and diluted net loss per share was computed in accordance with SFAS No.
128, "Earnings Per Share," using the weighted average number of common shares
outstanding. The diluted net loss per share for the years ended December 31,
2003, 2002 and 2001 excludes incremental shares calculated using the treasury
stock method, assumed from the conversion of stock options due to the net loss
for the years ended December 31, 2003, 2002 and 2001. The potential effects of
excluded incremental shares are as follows (in thousands):
2003 2002 2001
---- ---- ----
Effect of shares issuable under stock option plan 202 107 194
Effect of shares issuable under
Restricted stock awards 28 - -
--- --- ---
Total effect of potential incremental shares 230 107 194
=== === ===
At December 31, 2003, 1,283,867 options were excluded in the computation of
diluted earnings per share due to the net loss for the year ended December 31,
2003 and 815,000 options were excluded in the computation of diluted earnings
per share because the options' exercise prices were greater than the average
market share price of the common shares.
At December 31, 2002, 326,034 options were excluded in the computation of
diluted earnings per share due to the net loss for the year ended December 31,
2002 and 2,528,872 options were excluded in the computation of diluted earnings
per share because the options' exercise prices were greater than the average
market share price of the common shares.
-36-
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 in a full set of financial statements. Comprehensive
income (loss) primarily consists of net income (loss), foreign currency
translation adjustments, and unrealized gains and losses from available-for-sale
marketable securities and is presented in the consolidated statements of
stockholders' equity as comprehensive income (loss).
SEGMENT AND GEOGRAPHIC INFORMATION
In accordance with the provisions of SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information", the Company has determined that
during 2003, 2002, and 2001 the Company operated in one principal business
segment, e-commerce software solutions, across domestic and international
markets.
Geographic revenue and the carrying value of property and equipment as of and
for the years ended December 31, 2003, 2002 and 2001 were as follows:
(in thousands) 2003 2002 2001
---- ---- ----
Revenue:
United States $ 130 $ 4,954 $ 11,980
England -- 2,702 571
Italy -- 319 2,503
Other international -- 1,059 2,619
------ ------- -------
Total $ 130 $ 9,034 $ 17,673
====== ======= =======
Property and equipment:
United States $ 38 $ 809 $ 6,661
International -- -- 537
------ ------ -------
Total $ 38 $ 809 $ 7,198
====== ======= =======
NEW ACCOUNTING PRONOUNCEMENTS
In December 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46 (revised December 2003), "Consolidation of Variable
Interest Entities an interpretation of ARB No. 51", which addresses how a
business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities", which was issued in January 2003.
The Company will be required to apply FIN 46R to variable interests in VIEs
created after December 31, 2003. For variable interests in VIEs created before
January 1, 2004, the Interpretation will be applied beginning on January 1,
2005. For any VIEs that must be consolidated under FIN 46R that were created
before January 1, 2004, the assets, liabilities and noncontrolling interests of
the VIE initially would be measured at their carrying amounts with any
difference between the net amount added to the balance sheet and any previously
recognized interest being recognized as the cumulative effect of an accounting
change. If determining the carrying amounts is not practicable, fair value at
the date FIN 46R first applies may be used to measure the assets, liabilities
and noncontrolling interest of the VIE. The application of this Interpretation
did not have a material effect on the Company's consolidated financial
statements.
In December 2002, the FASB issued Statement of Financial Accounting Standards
("SFAS") 148, "Accounting for Stock-Based Compensation, Transition and
Disclosure, an amendment of FASB Statement No. 123". SFAS 148 amends SFAS 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 123 to require prominent disclosures in both
annual and interim financial statements. Certain of the disclosure modifications
are required for fiscal years ending after December 15, 2002 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 adoption of this
interpretation did not have a material impact on the Company's consolidated
-37-
financial statements. The Company has provided the required disclosures with
respect to indemnifications in Note 12 to the consolidated financial statements.
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 exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The adoption of SFAS 146
did not have a material effect on the Company's consolidated 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 consolidated 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 adoption of SFAS 143 did not have a material
impact on the Company's consolidated financial statements.
In November 2002, the EITF reached consensus on Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables" . This EITF provided guidance on how to
account for arrangements that involve delivery or performance of multiple
products, services and /or rights to use assets. The provision of EITF Issue No.
00-21 applies to revenue arrangements entered into in quarters beginning after
June 15, 2003. The Company does no expect the adoption of EITF Issue No. 00-21
to have any material impact on its consolidated financial position or results of
operations.
In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150
requires certain financial instruments that are settled in cash, including
certain types of mandatorily redeemable securities , to be classified as
liabilities rather than equity or temporary equity. SFAS No 150 becomes
effective for financial instruments entered into or modified after May 31, 2003,
and is otherwise effective at the beginning of the first interim period after
June 15, 2003. The application of this statement did not impact the Company's
consolidated financial statements.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the current
year presentation.
2. MARKETABLE SECURITIES
As of December 31, 2003, and 2002, those investments with an original maturity
of three months or less are classified as cash equivalents and those investments
with original maturities beyond three months are classified as marketable
securities. Pursuant to the provisions of SFAS No. 115, the Company has
classified all of its marketable securities as available-for-sale.
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and fair value of these available-for-sale marketable securities by major
security type and class of security at December 31, 2003 were as follows (in
thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Holding Gains Holding Losses Value
------ ------------- -------------- -------
Commercial paper.................................. $ 2,195 $ -- $ -- $ 2,195
Corporate notes and bonds......................... 10,123 4 (28) 10,099
Government notes and bonds........................ 61,384 8 (1) 61,391
------ ----- ----- --------
Total.............................. $ 73,702 $ 12 $ (29) $73,685
======= ===== ===== ========
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The maturities of all securities are less than 18 months at December 31, 2003.
$67.6 million mature in less than 12 months and $6.1 million mature between 12
and 18 months. The Company had no sales of marketable securities for the year
ended December 31, 2003.
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and fair value of these available-for-sale marketable securities by major
security type and class of security at December 31, 2002 were as follows (in
thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Holding Gains Holding Losses Value
------ ------------- -------------- -------
Commercial paper.................................. $ 16,595 $ -- $ -- $ 16,595
Corporate notes and bonds......................... 15,115 22 (2) 15,135
Government notes and bonds........................ 19,106 48 -- 19,154
Certificates of Deposit........................... 2,001 -- -- 2,001
------ ----- ----- --------
Total.............................. $ 52,817 $ 70 $ (2) $ 52,885
======= ===== ===== =======
The maturities of all securities are less than one year at December 31, 2002.
The Company had $15,000 of realized gains and had no realized losses from sales
of marketable securities included in the accompanying consolidated statements of
operations for the year ended December 31, 2002. The Company received
approximately $15.0 million in proceeds from these sales.
The Company had no realized gains and had approximately $11,000 in realized
losses from sales of marketable securities included in the accompanying
consolidated statements of operations for the year ended December 31, 2001. The
Company received approximately $2.9 million in proceeds from these sales.
3. ACQUISITIONS AND DISPOSITIONS
SALE OF OPERATING ASSETS
On December 6, 2002, the Company sold its e-commerce software business to Epicor
Software Corporation for $1.0 million. Approximately $200,000 of the purchase
price was placed in escrow and is included in cash and cash equivalents in the
accompanying consolidated balance sheet at December 31, 2003. The Company
recorded a gain in 2002 on the sale of the business of approximately $514,000.
On January 1, 2003, the Company sold its Cashbook product to an employee group
in Limerick, Ireland. Assets held for sale and liabilities to be assumed related
to the sale of the Cashbook product as of December 31, 2002 were as follows (in
thousands):
DECEMBER 31,
2002
----
ASSETS HELD FOR SALE
- --------------------
Accounts receivable, net $ 41
Prepaids and other current assets 7
Property and equipment, net -
----
Total assets held for sale $ 48
====
LIABILITIES TO BE ASSUMED
- -------------------------
Deferred revenue $ 220
-----
Total liabilities to be assumed $ 220
====
The Company recognized a gain of approximately $157,000 related to the sale of
Cashbook during the first quarter of 2003.
4. RELATED-PARTY TRANSACTIONS
In September 2003, the Company and Kanders & Company, an entity owned and
controlled by the Company's Executive Chairman, Warren B. Kanders, entered into
a 15-year lease with a five-year renewal option, as co-tenants to lease
-39-
approximately 11,500 square feet in Stamford, Connecticut. The Company and
Kanders & Company have initially agreed to allocate the total lease payments of
$24,438 per month 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 increases during the term
of the lease. 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.
In early 2003, the Company entered into an oral agreement with Kanders &
Company, 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. The Company was reimbursed
$95,000 by Kanders & Company in 2003 for rent and other costs incurred by the
Company related to this property as a result of the voluntary termination of the
lease.
During the year ended December 31, 2003, the Company expensed approximately
$45,000, for payments to Kanders Aviation LLC, an affiliate of the Company's
Executive Chairman, Warren B. Kanders, relating to aircraft travel by directors
and officers of the Company for Board meetings, the closing of the Atlanta
facility, and meetings for potential redeployment transactions. Kanders &
Company reimburses the Company for expenses such as rent, telecommunication
charges and other office expenses incurred on behalf of Kanders & Company.
These expenses may be offset by travel expenses incurred by Kanders Aviation
LLC on behalf of the Company as previously discussed. As of December 31, 2003,
the Company had outstanding a net payable of approximately $10,000 to Kanders &
Company and Kanders Aviation LLC. The amounts due to Kanders Aviation LLC are
included in accounts payable and accrued liabilities in the accompanying
consolidated balance sheet and the amounts due from Kanders & Company are
included in prepaids and other current assets in the accompanying consolidated
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 continued to be a member of our Board of
Directors and entered into a three-year consulting agreement with the Company
and will receive total consideration of $250,000 payable over two years. At
December 31, 2003, $125,000 remained outstanding and is included in accounts
payable and accrued liabilities in the accompanying consolidated balance sheet.
During December 2002, the Company reimbursed legal fees and other expenses in
the amount of $531,343 incurred by Warren B. Kanders on behalf of himself, Burtt
R. Ehrlich, and Nicholas Sokolow, all of whom are members of the Company's Board
of Directors, in connection with their successful solicitation of proxies for
the May 21, 2002 Annual Meeting of Stockholders. The Company recorded this
amount in the fourth quarter of 2002 as a general and administrative expense in
the accompanying consolidated statement of operations.
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 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 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 as 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 2002 that is included in general and
administrative in the accompanying consolidated statement of operations and
-40-
expensed $131,000 during 2001. The Company expensed an additional $54,000,
outside the original engagement, during 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 as 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.
5. RESTRUCTURING AND RELATED COSTS
During 2002 and 2001, the Company's management approved restructuring plans to
reorganize and reduce operating costs. Restructuring and related charges of $4.2
million were expensed in 2001 to align better the Company's cost structure with
projected revenue. The charges were comprised of $3.0 million for employee
separation and related costs for 181 employees and $1.2 million for facility
closure 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 consolidated
statement of operations during 2002.
Additional 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.
During 2003, the Company determined that actual restructuring and related
charges were in excess of amounts provided for in 2002 and recorded additional
restructuring charges of $250,000. This amount was expensed to general and
administrative costs in the accompanying consolidated statement of operations
during 2003. The charges for 2003 were comprised of $223,000 for employee
separation costs and $27,000 for facility closure and consolidation costs.
The facility closures and consolidation costs for 2001 and 2002 relate to the
abandonment of the Company's leased facilities in Suwanee, Georgia; Limerick,
Ireland; Maidenhead, England; and near Toronto, Canada. Total facility closures
and consolidation costs include remaining lease liabilities, construction costs
and brokerage fees to sublet the abandoned space offset by estimated sublease
income. The estimated costs of abandoning these leased facilities, including
estimated costs to sublease, were based on market information trend analysis
provided by a commercial real estate brokerage firm retained by the Company. The
Company incurred a charge in the fourth quarter 2002 of $2.1 million for
facility closures and consolidation costs as a result of the termination of its
lease for its principal 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
2003, 2002 and 2001 and the balance of the accrual as of December 31, 2003 (in
thousands):
Employee Facility
Separation Closing Total Restructuring
Costs Costs and Related Costs
----- ----- -----------------
Accruals during 2001 $2,939 $1,218 $4,157
Expenditures during 2001 2,259 9 2,268
------ ------ ------
Balance at December 31, 2001 680 1,209 1,889
Accruals during 2002 4,645 3,905 8,550
Expenditures during 2002 4,196 4,977 9,173
Credits in 2002 202 -- 202
------ ------ ------
Balance at December 31, 2002 927 137 1,064
Accruals during 2003 223 27 250
Expenditures during 2003 1,025 59 1,084
------ ------ ------
Balance at December 31, 2003 $ 125 $ 105 $ 230
====== ====== ======
-41-
For the years ended December 31, 2003, 2002 and 2001, the restructuring and
related costs were classified in the Company's consolidated statements of
operations as follows (in thousands):
YEAR ENDED
DECEMBER 31,
----------------------------------------------------------------------------
2003 2002 2001
---- ---- ----
Cost of revenues - services fees $ -- $ 858 $ 1,177
Research and development -- 1,291 217
Sales and marketing -- 1,242 1,218
General and administrative 250 5,159 1,545
--- ----- -----
Total $ 250 $ 8,550 $ 4,157
====== ======== ========
6. INCOME TAXES
For financial reporting purposes, losses from continuing operations before
income taxes includes the following components (in thousands):
YEAR ENDED
DECEMBER 31,
-----------------------------------------------
2003 2002 2001
------------- --------------- ------------
Pre-tax loss:
United States $ (4,331) $ (25,770) $ (66,995)
Foreign -- (12,043) (52,859)
------------ ------------ -----------
$ (4,331) $ (37,813) $ (119,854)
============ ============ ===========
The Company files a consolidated income tax return with its wholly owned
subsidiaries. The components of the income tax expense (benefit) for each of the
years in the three-year period ended December 31, 2003 are as follows (in
thousands):
YEAR ENDED
DECEMBER 31,
-----------------------------------------------
2003 2002 2001
------------- --------------- ------------
Current:
Federal $ -- $ -- $ --
State -- -- --
Foreign -- -- --
------------ ------------- ------------
-- -- --
------------ ------------- ------------
Deferred:
Federal (3,492) 579 (19,950)
State (513) 164 (4,809)
Foreign 5,962 (2,026) (2,513)
------------ ------------- ------------
1,957 (1,283) (27,272)
Increase/(Decrease) in valuation allowance for
deferred income taxes (1,957) 1,283 27,272
------------ ------------- ------------
$ -- $ -- $ --
============ ============= ============
The following is a summary of the items that caused recorded income taxes to
differ from income taxes computed using the statutory federal income tax rate of
34% for the years ended December 31, 2003, 2002 and 2001:
-42-
YEAR ENDED
DECEMBER 31,
-----------------------------------------------
2003 2002 2001
------------- --------------- ------------
Computed "expected" income tax expense (benefit) (34.0)% (34.0)% (34.0)%
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal income taxes (7.7) 0.3 (2.6)
Other, net 1.5 1.3 0.1
Benefit of prior year NOL adjustments (54.2) -- --
Nondeductible goodwill -- 9.6 12.8
Income tax effect attributable to foreign operations 135.6 2.6 0.9
Nondeductible expired/cancelled warrants and options 3.3 16.8 0.0
Increase in valuation allowance (44.5) 3.4 22.8
----------- ---------- ---------
Income tax expense (benefit) -- -- --
=========== =========== =========
Deferred income tax assets and liabilities are determined based on the
difference between the financial reporting carrying amounts and tax bases of
existing assets and liabilities and operating loss and tax credit carryforwards.
Significant components of the Company's existing deferred income tax assets and
liabilities as of December 31, 2003 and 2002 are as follows:
YEAR ENDED
DECEMBER 31,
----------------------------
2003 2002
------------- -------------
Deferred income tax assets:
Net operating loss, capital loss and research & $ 57,454 $ 57,616
experimentation credit carryforwards
Allowance for doubtful accounts -- 55
Depreciation and amortization 3 615
Non-cash compensation 112 321
Accrued liabilities 44 339
Reserves for investments 1,728 2,352
------------- -----------
Net deferred income tax assets before valuation allowance 59,341 61,298
Valuation allowance for deferred income tax assets (59,341) (61,298)
------------- -----------
Net deferred income tax assets $ -- $ --
============= ===========
The net decrease in the valuation allowance for deferred income tax assets for
2003 was $2.0 million as compared to an increase in 2002 and 2001 of $1.3
million and $27.3 million, respectively. In assessing the realizability of
deferred income tax assets, management considers whether it is more likely than
not that some portion or all of the deferred income tax assets will not be
realized. The ultimate realization of deferred income tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred income tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Management has provided a
valuation allowance against deferred income tax assets at December 31, 2003,
because the ultimate realization of those benefits and assets does not meet the
more likely than not criteria.
At December 31, 2003, the Company has net operating loss, capital loss, research
and experimentation credit and alternative minimum tax credit carryforwards for
U.S. federal income tax purposes of approximately $129.4 million, $15.2 million,
$1.3 million and $53,000, respectively, which expire in varying amounts
beginning in the year 2009. The Company also has incurred foreign losses in the
amount of approximately $4.0 million that are available to offset future taxable
income in foreign jurisdictions.
The Company's ability to benefit from certain net operating loss carryforwards
is limited under section 382 of the Internal Revenue Code due to a prior
ownership change of greater than 50%. Accordingly, approximately $113.4 million
of the $129.4 million of U.S. net operating loss carryforward is available
currently to offset taxable income that the Company may recognize in the future.
7. DEBT
The Company's debt consists of the following as of December 31, 2003 and 2002
(in thousands):
-43-
2003 2002
---- ----
Convertible subordinated promissory note with a commercial bank,
due March 15, 2005, interest payable quarterly at 4.5%.................. $ -- $ 5,000
------ ------
Less current portion of long-term debt........................................ -- 5,000
------ ------
$ -- $ --
====== ======
The Company had a $5.0 million convertible subordinated promissory note (the
"Note") with a commercial bank that was due March 15, 2005. The note provided
for the ability of the holder to convert, at its option, all or any portion of
the principal of the Note into common stock of the Company at the price of
$147.20 per share. If the quoted price per share of the Company's common stock
exceeded 200% of the conversion price then in effect for at least 20 trading
days in any period of 30 consecutive trading days, the Company had the right to
require that the holder of the Note convert all of the principal of the Note
into common stock of the Company at the price of $147.20 per share.
Upon the occurrence of a change of control, as defined in the Note, the Company
would be required to prepay the entire outstanding principal amount of the Note,
together with all accrued interest within five business days. On April 18, 2003,
Peachtree Equity Partners L.P., as the assignee of the note, agreed to dismiss
with prejudice, an action commenced by Peachtree Equity in the Georgia state
court for prepayment of the note, plus interest and attorneys fees. In
connection with such dismissal, the Company made a payment to Peachtree Equity
comprised of the $5.0 million outstanding principal amount of the note.
8. ROYALTY AGREEMENTS
The Company was previously a party to royalty and other original equipment
manufacturer agreements for certain of its applications. The Company incurred a
total of approximately $0, $24,000, and $169,000, in royalty expense for the
years ended December 31, 2003, 2002, and 2001, respectively, pursuant to these
agreements. The royalty fees paid are included in cost of revenues-license fees
in the accompanying consolidated statements of operations. Epicor Corporation
assumed all outstanding royalty agreements in connection with the sale of the
Company's e-commerce software business on December 6, 2002.
9. EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) Plan (the "Plan"), a defined contribution plan
covering substantially all employees of the Company. Under the Plan's deferred
compensation arrangement, eligible employees who elect to participate in the
Plan may contribute between 2% and 20% of eligible compensation, as defined, to
the Plan. The Company, at its discretion, may elect to provide for either a
matching contribution or discretionary profit-sharing contribution or both. The
Company made matching contributions of approximately $2,000, $55,000 and
$147,000 in 2003, 2002 and 2001, respectively.
On June 13, 2000, the Company adopted the Clarus Corporation Employee Stock
Purchase Plan (the "U.S. Plan") and the Global Employee Stock Purchase Plan (the
"Global Plan") (collectively, the "Plans"), which offers employees the right to
purchase shares of the Company's common stock at 85% of the market price, as
defined. Under the Plans, full-time employees, except persons owning 5% or more
of the Company's common stock, are eligible to participate after 90 days of
employment. Employees may contribute up to 15% of their annual salary toward the
Purchase Plan. A maximum of 1,000,000 shares of common stock may be purchased
under the Plans. Common stock is purchased directly from the Company on behalf
of the participants. During the years ended December 31, 2003, 2002 and 2001,
2,349, 18,548, and 55,420 shares were purchased for the benefit of the
participants under the Plans, respectively. As of December 31, 2003, there were
no participants in either the U.S. or Global Plans.
10. STOCK INCENTIVE PLANS
The Company had a stock option plan for employees, consultants, and other
individual contributors to the Company, which enabled the Company to grant up to
approximately 1.6 million qualified and nonqualified incentive stock options
(the "1992 Plan"). The plan terminated in November 2002 but 130,388 stock
options awarded under the plan are vested and eligible to be exercised at
December 31, 2003.
The Company adopted the 1998 Stock Incentive Plan (the "1998 Plan") in 1998.
Under the 1998 Plan, the Board of Directors has the flexibility to determine the
type and amount of awards to be granted to eligible participants, who must be
employees of the Company or its subsidiaries or consultants to the Company. The
1998 Plan provides for grants of incentive stock options, nonqualified stock
options, restricted stock awards, stock appreciation rights, and restricted
units. During 2000, the Board of Directors and stockholders adopted an
amendment, which increased the number of shares authorized and reserved for
issuance
-44-
from 1.5 million shares to 3.0 million shares. The aggregate number of shares of
common stock that may be granted through awards under the 1998 Plan to any
employee in any calendar year may not exceed 200,000 shares. The 1998 Plan will
continue in effect until February 2008 unless terminated sooner.
Upon the acquisition of the SAI/Redeo Companies on May 31, 2000, the Company
assumed the Stock Incentive Plan of Software Architects International, Limited
(the "SAI Plan"), and the options outstanding. The SAI Plan enabled the Company
to grant up to 750,000 nonqualified stock options. The Company could grant
options to eligible participants who had to be employees of the Company or its
subsidiaries or consultants, but not directors or officers of the Company.
On April 9, 2001, the Company announced a voluntary stock option exchange
program for its employees. Under the program, employees were given the
opportunity to cancel outstanding stock options previously granted to them on or
after November 1, 1999 in exchange for an equal number of new options to be
granted at a future date. The exercise price of the new options was equal to the
fair market value of the Company's common stock on the date of grant. During the
first phase of the program, 366,174 options with a weighted average exercise
price of $30.55 per share were canceled and new options to purchase 263,920
shares with an exercise price of $3.49 per share were issued on November 9,
2001. During the second phase of the program, 273,188 options with a weighted
average exercise price of $43.87 per share were canceled and new options to
purchase 198,052 shares with an exercise price of $4.10 per share were issued on
February 11, 2002. Employees who participated in the first exchange were not
eligible for the second exchange. The exchange program was designed to comply
with Financial Accounting Standards Board ("FASB") Interpretation No. 44
"Accounting for Certain Transactions Involving Stock Compensation" and did not
result in any additional compensation charges or variable accounting. Members of
the Company's Board of Directors and its executive officers were not eligible to
participate in the exchange program.
In December 2002, the Company granted options to purchase a total of 1,250,000
shares of common stock to three senior executives. 450,000 of these options were
issued with an exercise price of $5.35 per share, 400,000 were issued with an
exercise price of $7.50 per share and 400,000 were issued with an exercise price
of $10.00 per share. A portion of the options issued at $5.35 per share were
issued at less than the fair market value on the date of grant. The Company
recorded deferred compensation of $65,000 to be recognized over the vesting
period of five years.
In December 2002, the Company made an election to accelerate vesting of
substantially all of the Company's outstanding stock options in connection with
the acquisition by Epicor Software Corporation of the e-commerce assets of the
Company. This resulted in a non-cash stock compensation charge of approximately
$500,000 during 2002.
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 December 31, 2003 to $3,650,000 to
account for the increase in fair market value from grant date through December
31, 2003. During the year ended December 31, 2003, $274,000 was amortized to
compensation expense for this award. At December 31, 2003, these shares were
excluded from the computation of diluted earnings per share due to the net loss
for the year ended December 31, 2003.
At December 31, 2003, 1,283,867 options were excluded in the computation of
diluted earnings per share due to the net loss for the year ended December 31,
2003 and 815,000 options were excluded in the computation of diluted earnings
per share because the options' exercise prices were greater than the average
market share price of the common shares.
At December 31, 2002, 326,034 options were excluded in the computation of
diluted earnings per share due to the net loss for the year ended December 31,
2002 and 2,528,872 options were excluded in the computation of diluted earnings
per share because the options' exercise prices were greater than the average
market share price of the common shares.
The Company recorded total non-cash stock compensation expense of approximately
$287,000, $500,000 and $252,000 for the years ended December 31, 2003, 2002 and
2001, respectively.
Total options available for grant under all plans as of December 31, 2003 were
795,430.
A summary of changes in outstanding options during the three years ended
December 31, 2003 is as follows:
-45-
Weighted
Range of Average
Exercise Exercise
Shares Prices Price
------ -------- --------
December 31, 2000.............................................. 3,267,122 $0.67-$136.00 $23.51
Granted................................................... 1,923,240 $3.43-$ 9.25 $ 5.80
Canceled.................................................. (1,886,791) $1.00-$136.00 $25.80
Exercised................................................. (62,445) $0.67-$ 5.75 $ 3.17
-----------
December 31, 2001.............................................. 3,241,126 $1.00-$128.13 $12.06
Granted................................................... 2,238,882 $3.76-$ 10.00 $ 6.40
Canceled.................................................. (2,512,447) $1.00-$128.13 $12.13
Exercised................................................. (112,655) $1.00-$ 5.17 $ 3.51
-----------
December 31, 2002............................................. 2,854,906 $1.00-$ 82.56 $ 7.76
Granted................................................... 5,000 $7.30-$ 7.30 $ 7.30
Canceled.................................................. (377,047) $3.49-$ 82.56 $16.69
Exercised................................................. (383,992) $1.00-$ 6.13 $ 4.31
-----------
December 31, 2003.............................................. 2,098,867 $3.67-$ 10.00 $ 6.77
===========
Vested and exercisable at December 31, 2003.................... 864,392 $ 6.22
===========
Vested and exercisable at December 31, 2002.................... 1,158,508 $ 8.56
===========
Vested and exercisable at December 31, 2001................... 1,122,296 $15.40
===========
For SFAS No. 123 purposes, the fair value of each option grant has been
estimated as of the date of grant using the Black-Scholes option-pricing model
with the following assumptions:
2003 2002 2001
---- ---- ----
Dividend yield................. 0% 0% 0%
Expected volatility............ 62% 76% 90%
Risk-free interest rate........ 2.86% 2.63%-4.43% 3.56%-4.98%
Expected life.................. Four years Four years Four years
Using these assumptions, the fair values of the stock options granted during the
years ended December 31, 2003, 2002, and 2001, were approximately $18,000, $6.4
million and $7.4 million, respectively, which would be amortized over the
vesting period of the options. The weighted-average grant-date fair values of
the stock options granted during the years ended December 31, 2003, 2002 and
2001, were $3.50, $2.86, and $3.84, respectively.
The following table summarizes the exercise price range, weighted average
exercise price, and remaining contractual lives by significant ranges for
options outstanding and exercisable as of December 31, 2003:
Outstanding Exercisable
------------------------------------------------------- -------------------------------------------
Weighted
Number Weighted Average Number Weighted
Exercise of Shares Average Remaining of Shares Average
Price Outstanding at Exercise Contractual Exercisable at Exercise
Range December 31, 2003 Price Life (Years) December 31, 2003 Price
------ ----------------- -------- ------------- ----------------- -------
$ 3.67 - $ 5.50 1,037,888 $ 5.27 7.0 477,888 $ 5.18
$ 5.99 - $ 7.63 660,979 $ 7.18 7.2 306,504 $ 6.87
$ 10.00 - $10.00 400,000 $10.00 9.0 80,000 $10.00
--------- ---------
2,098,867 $6.77 7.4 864,392 $ 6.22
========= =========
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11. STOCKHOLDERS' EQUITY
COMMON STOCK
During 2000, the Company entered into agreements with three strategic partners,
who were also customers, to provide various sales and marketing efforts on
behalf of the Company in exchange for 39,118 shares of the Company's common
stock. The total value of these common stock grants was approximately $3.8
million based upon the value of the Company's common stock at the date of grant.
The Company recognized $0, $0.6 million and $1.6 million of total revenues from
these customers during the years ended December 31, 2003, 2002 and 2001,
respectively.
The sales and marketing agreement signed with one strategic partner also
required cash payments of $300,000 in each of the last two years of the related
agreement. The Company recorded the fair value of the common stock and the
expected cash payments as deferred sales and marketing costs during 2000. During
2001, the Company terminated the sales and marketing agreement with this
strategic partner resulting in a write-off of the remaining deferred sales and
marketing costs of $1.4 million. Also, as a result of the termination, the
Company is no longer required to make cash payments of $300,000 for the last two
years of the agreement
The Company recorded non-cash sales and marketing expense, including the
write-off discussed above, of approximately $0, $0.4 million and $2.5 million
during 2003, 2002 and 2001, respectively related to these agreements.
WARRANTS
During 1999, the Company issued warrants to purchase 225,000 shares of the
Company's common stock at exercise prices ranging from $10.00 to $53.75 per
share, which expired in December 2002. These warrants were issued to certain
strategic partners, who were also customers, in exchange for the agreement to be
party to a sales and marketing agreement between the Company and the strategic
partner to provide various sales and marketing efforts on behalf of the Company.
The total fair market value of the warrants was approximately $11.9 million,
which was recorded as additional paid-in capital and deferred sales and
marketing costs at the date of issuance. The Company recorded non-cash sales and
marketing expense of approximately $4.3 million related to these agreements
during the year ended December 31, 2001. These warrants were fully amortized as
of December 31, 2001 and expired in December 2002. The Company did not recognize
any revenue from these customers during 2003, 2002 or 2001.
The Company previously granted 25,000 warrants to a strategic partner in return
for completion of predetermined sales and marketing milestones. The exercise
price of these warrants was $53.75 per share and the warrants expired on October
31, 2003.
During 2000, the Company awarded 33,334 warrants to a third party software
developer in exchange for services. The exercise price of the 33,334 warrants
was $56.78 per share and the warrants expired on March 31, 2003. The fair market
value of the warrants on the date of grant was $424,000 and was recorded as
additional paid-in capital and non-cash research and development expense during
2000.
12. COMMITMENTS AND CONTINGENCIES
LEASES
The Company rents certain office space, under noncancelable operating leases.
Rents charged to expense were approximately $0.2 million, $1.2 million and $2.1
million for the years ended December 31, 2003, 2002, and 2001, respectively.
Future minimum lease payments for the next five years and thereafter under
noncancelable operating leases with remaining terms greater than one year as of
December 31, 2003, are as follows (in thousands):
Gross Rental Sub-Lease
Obligations Income
----------- ------
Year ending December 31,
2004 $ 328 $ 103
2005 474 140
2006 413 104
2007 403 101
2008 420 105
Thereafter 2,021 505
------- ------
Total $ 4,059 $ 1,058
======= ======
-47-
Our corporate headquarters is currently located in Greenwich, Connecticut where
we lease approximately 2,700 square feet for $11,312 a month, pursuant to a
lease, which expires on June 30, 2004.
In September 2003, the Company and Kanders & Company, an entity owned and
controlled by the Company's Executive Chairman, Warren B. Kanders, 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 the total lease payments of
$24,438 per month 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 during the term
of the lease. 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. The bank that issued the letter of credit
holds an $850,000 deposit against the letter of credit. Kanders & Company
reimburses the Company for a pro rata portion of the approximately $5,000 annual
cost of the letter of credit. We expect to commence occupation of this space in
June 2004 upon the completion of all build-out construction.
In early 2003, the Company entered into an oral agreement with Kanders &
Company, 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.
We also lease approximately 5,200 square feet near Toronto, Canada, at a cost of
approximately $9,000 per month, which was used for the delivery of services as
well as research and development through October 2001. This lease expires in
February 2006. This facility has been sub-leased for approximately $4,000 a
month, pursuant to a sublease, which expires on January 30, 2006. The cost, net
of the estimated sublease income has been included in general and administrative
expense in the accompanying consolidated statement of operations in 2002.
INDEMNIFICATION
The Company has agreed to indemnify Epicor Software Corporation, as part of the
sale of the Company's e-commerce business, for the conduct of this business
prior to December 6, 2002. Additionally, the Company had historically
indemnified its customers against damages and costs resulting from claims of
patent, copyright, or trademark infringement associated with use of the software
in its software licensing agreements.
The Company has not made any accruals or payments under such indemnifications.
However, the Company continues to monitor the conditions that are subject to the
indemnifications to identify whether it is probable that a loss has occurred,
and would recognize any such losses under the indemnifications when those losses
are reasonably estimable.
LITIGATION
The Company is a party to the following pending judicial and administrative
proceedings. After reviewing the proceedings that are currently pending
(including the probable outcome, reasonably anticipated costs and expenses,
availability and limits of insurance coverage, and our established reserves for
uninsured liabilities) we do not believe that any liabilities that may result
from these proceedings are reasonably 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 following proceedings could materially 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 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
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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.
On April 18, 2003, Peachtree Equity Partners L.P., as the assignee of a
five-year promissory note made by the Company in the amount of $5.0 million,
agreed to dismiss with prejudice, an action commenced by Peachtree Equity in the
Georgia state court for prepayment of the promissory note, plus interest and
attorneys fees. In connection with such dismissal, the Company made a payment to
Peachtree Equity comprised of the $5.0 million outstanding principal amount of
the promissory note.
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.
In addition to the above, in the normal course of business, we are subjected to
claims and litigations in the areas of general liability. We believe that we
have adequate insurance coverage for most claims that are incurred in the normal
course of business. In such cases, the effect on our financial statements is
generally limited to the amount of our insurance deductibles. At this time, we
do not believe any such claims will have a material impact on the Company's
financial position.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's management carried out an evaluation, under the supervision and
with the participation of the Company's Chief Administrative Officer and
Controller, its principal executive officer and principal financial officer,
respectively of the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act") as
of December 31, 2003, pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, the Company's Chief Administrative Officer and Controller concluded
that the Company's disclosure controls and procedures as of December 31, 2003
are effective in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) required to be included in the
Company's periodic filings under the Exchange Act. No changes in the Company's
internal control over financial reporting have come to management's attention
during the fourth quarter ended December 31, 2003 evaluation that have
materially affected, or are reasonably likely to materially affect the Company's
internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption "Election of Directors" in our Proxy
Statement used in connection with our 2004 Annual Meeting of Stockholders, is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" in our
Proxy Statement used in connection with our 2004 Annual Meeting of Stockholders,
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Principal Stockholders" in our
Proxy Statement used in connection with our 2004 Annual Meeting of Stockholders,
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and Related
Transactions" in our Proxy Statement used in connection with our 2004 Annual
Meeting of Stockholders, is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information set forth under the caption "Principal Accountant Fees and
Services" in our Proxy Statement used in connection with our 2004 Annual Meeting
of Stockholders, is incorporated herein by reference.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements, Financial Statement Schedules and Exhibits
(a) Financial Statements
(1) The following financial statements are filed with this report on
the following pages indicated:
Page
Independent Auditors' Report................................................................................ 25
Consolidated Balance Sheets--December 31, 2003 and 2002..................................................... 26
Consolidated Statements of Operations--Years Ended December 31, 2003, 2002 and 2001......................... 27
Consolidated Statements of Stockholders' Equity and Comprehensive Loss--Years Ended December 31, 2003,
2002 and 2001............................................................................................... 28
Consolidated Statements of Cash Flows--Years Ended December 31, 2003, 2002 and 2001......................... 30
Notes to Consolidated Financial Statements.................................................................. 31
(b) Financial Statement Schedule
Independent Auditors' Report on Financial Statement Schedule................................................ 54
Schedule II - Valuation and Qualifying Accounts............................................................. 55
(c) Reports on Form 8-K.
During the quarter ended December 31, 2003, the Company filed a
Current Report on Form 8-K on November 12, 2003, with respect to Items 7
and 9, relating to a press release dated November 11, 2003, announcing
the Company's earnings for the three-month period ended September 30,
2003.
(d) Exhibits
Exhibit
Number Exhibit
------ -------
3.1 Amended and Restated Certificate of Incorporation of the Company Incorporated
by reference from Exhibit 3.3 to the Company's Form S-1 Registration Statement (File
No. 333- 46685)).
3.2 Amendment to Amended and Restated Certificate of Incorporation (incorporated by
reference from Exhibit 9.1 to the Company's 10-Q filed on August 14, 2000).
3.3 Amendment to Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference from Exhibit 3.1 to the Company's Current Report on Form 8-K,
filed on July 31, 2003).
3.4 Amended and Restated Bylaws of the Company (incorporated by reference from Exhibit 3.2 to
the Company's Registration Statement on Form S-4 (File No. 333-63535)).
3.5 Amendment No. 1 to the Amended and Restated Bylaws of the Company. (filed as Exhibit 3.4 to
Company's Annual Report on Form 10-K, filed with the Securities and Exchange Commission
on March 31, 2003 and incorporated herein by reference).
4.1 See Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5 for provisions of the Amended and Restated
Certificate of Incorporation and Amended and Restated Bylaws of the Company defining
rights of the holders of Common Stock of the Company.
4.2 Specimen Stock Certificate (incorporated by reference from Exhibit 9.1 to Company's
Registration Statement on Form S-1 (File No. 333-46685)).
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4.3 Restricted Stock Agreement dated as of April 11, 2003 between the Company and
Warren B. Kanders (incorporated by reference from Exhibit 4.1 to the
Company's Form 10-Q filed on May 15, 2003). *
10.1 Lease Agreement between the Company and Technology Park/Atlanta, Inc.
dated July 24, 1998 (incorporated by reference from Exhibit 10.18 to the Company's
Form S-4 Registration Statement (File No. 333-63535)).
10.2 Assignment and Assumption of Leases between Technology Park/Atlanta, Inc. and
Metropolitan Life Insurance Company dated July 24, 1998 (incorporated by reference
from Exhibit 10.18 to the Company's Form S-4 Registration Statement
(File No. 333-63535)).
10.3 Asset Purchase Agreement, dated as of October 17, 2002, between Epicor Software
Corporation and the Company (incorporated by reference from Exhibit 2.1 to the
Company's Form 8-K filed on October 18, 2002).
10.4 Bill of Sale and Assumption Agreement, dated as of December 6, 2002, between
Epicor Software Corporation and the Company (incorporated by reference from
Exhibit 2.2 to the Company's (Form 8-K filed on October 18, 2002).
10.5 Trademark Assignment dated as of December 6, 2002, by the Company in favor of
Epicor Software Corporation, (incorporated by reference from Exhibit 2.3 to the
Company's Form 8-K filed on October 18, 2002).
10.6 Patent Assignment, dated as of December 6, 2002, between Epicor Software
Corporation and the Company (incorporated by reference from Exhibit 2.4 to the
Company's Form 8-K filed on October 18, 2002).
10.7 Noncompetition Agreement, dated as of December 6, 2002, between Epicor Software
Corporation and the Company (incorporated by reference from Exhibit 2.5 to the
Company's Form 8-K filed on October 18, 2002).
10.8 Transition Services Agreement, dated as of December 6, 2002, between Epicor
Software Corporation and the Company (incorporated by reference from Exhibit 2.7
to the Company's Form 8-K filed on October 18, 2002).
10.9 Escrow Agreement, dated as of December 6, 2002, between Epicor Software Corporation,
the Company and Branch Bank & Trust Company, Inc. (incorporated by reference from
Exhibit 2.8 to the Company's Form 8-K filed on October 18, 2002).
10.10 Form of Indemnification Agreement for Directors and Executive Officers of the Company,
(incorporated by reference as Exhibit 10.1 of the Company's Form 8-K filed on
December 23, 2002).
10.11 Employment Agreement, dated as of December 6, 2002, between the Company and
Warren B. Kanders (incorporated by reference from Exhibit 10.2 to the Company's
Form 8-K filed on December 23, 2002).*
10.12 Employment Agreement, dated as of December 6, 2002, between the Company and
Nigel P. Ekern. (incorporated by reference from Exhibit 10.3 to the Company's
Form 8-K filed on December 23, 2002).*
10.13 Consulting Agreement, dated as of December 6, 2002, between the Company and
Stephen P. Jeffery (incorporated by reference from Exhibit 10.4 to the Company's
Form 8-K filed on December 23, 2002).*
10.14 Amended and Restated Stock Incentive Plan (incorporated by reference from
Exhibit 10.2 to the Company's Form 10-Q filed on August 14, 2000). *
10.15 Employee Stock Purchase Plan (incorporated by reference from Exhibit 10.3 to the
Company's Form 10-Q filed on August 14, 2000). *
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10.16 Global Employee Stock Purchase Plan (incorporated by reference from Exhibit 10.4
to the Company's Form 10-Q filed on August 14, 2000). *
10.17 Form of Nonqualified Stock Option Agreement (incorporated by reference from
Exhibit 10.5 to the Company's Form 10-Q filed on August 14, 2000). *
10.18 Stock Incentive Plan of Software Architects International, Limited (incorporated
by reference from Exhibit 2.2 to the Company's Form 8-K filed on June 13, 2000). *
10.19 2000 Declaration of Amendment to Software Architects International Limited Stock
Incentive Plan (incorporated by reference from Exhibit 2.3 to the Company's Form
8-K filed on June 13, 2000). *
10.20 1992 Stock Option Plan, effective November 22, 1992 (incorporated by reference
from Exhibit 10.2 to Company's Registration on Form S-1 (File No. 333-46685)). *
10.21 Amendment to 1992 Stock Option Plan. (incorporated by reference from Exhibit
10.2 to the Company's Form 10-K filed on March 30, 2000). *
10.22 Lease dated as of September 23, 2003 between Reckson Operating Partnership,
L.P., the Company, and Kanders & Company, Inc. (incorporated by reference from
Exhibit 10.1 to the Company's 10-Q filed on November 12, 2003.
10.23 Transportation Services Agreement dated as of December 18, 2003 between Kanders
Aviation, LLC and the Company.
21.1 List of Subsidiaries.
23.1 Independent Auditors' Consent.
31.1 Certification of Principal Executive Officer, as required by Rule 13a-14(a) of
the Securities Exchange Act of 1934.
31.2 Certification of Principal Financial Officer, as required by Rule 13a-14(a) of
the Securities Exchange Act of 1934.
32.1 Certification of Principal Executive Officer, as required by Rule 13a-14(b) of
the Securities Exchange Act of 1934.
32.2 Certification of Principal Financial Officer, as required by Rule 13a-14(b) of
the Securities Exchange Act of 1934
* Management contract or compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CLARUS CORPORATION
Date: March 11, 2004
By: /s/ Nigel P. Ekern
------------------------------------
Nigel P. Ekern
Chief Administrative Officer
Signature Title Date
--------- ----- ----
/s/ Nigel P. Ekern Chief Administrative Officer March 11, 2004
- --------------------------------------------- (principal executive officer) ------------------------------------
Nigel P. Ekern
/s/ Susan Luckfield Controller March 11, 2004
- --------------------------------------------- (principal financial officer) ------------------------------------
Susan Luckfield
/s/ Warren B. Kanders Executive Chairman of the Board of March 11, 2004
- --------------------------------------------- Directors ------------------------------------
Warren B. Kanders
/s/ Stephen P. Jeffery Director March 11, 2004
- --------------------------------------------- ------------------------------------
Stephen P. Jeffery
/s/ Donald L. House Director March 11, 2004
- --------------------------------------------- ------------------------------------
Donald L. House
/s/ Tench Coxe Director March 11, 2004
- --------------------------------------------- ------------------------------------
Tench Coxe
/s/ Burtt R. Ehrlich Director March 11, 2004
- --------------------------------------------- ------------------------------------
Burtt R. Ehrlich
/s/ Nicholas Sokolow Director March 11, 2004
- --------------------------------------------- ------------------------------------
Nicholas Sokolow
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Clarus Corporation:
Under date of February 27, 2004, we reported on the consolidated balance sheets
of Clarus Corporation and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of operations, stockholders' equity and
comprehensive loss, and cash flows for each of the years in the three-year
period ended December 31, 2003, which are included in the Clarus Corporation
2003 Annual Report on Form 10-K. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
financial statement schedule as listed in the accompanying index. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
As discussed in note 1 to the consolidated financial statements, the Company (i)
sold substantially all of its operating assets on December 6, 2002, and (ii)
changed its method of accounting for goodwill and other intangible assets in
2002.
/s/ KPMG LLP
Atlanta, Georgia
February 27, 2004
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Schedule II
Valuation and Qualifying Accounts
Clarus Corporation and Subsidiaries
For the years ended December 31, 2003, 2002 and
2001 Allowance for Doubtful Accounts, Valuation
Allowance for Deferred
Income Tax Assets and Restructuring and Related Charges
Charged
Balance at (Credited) to Balance at
Beginning of Costs and End of
Period Expenses Deductions (a) Period
------ -------- -------------- ------
Allowance for Doubtful Accounts
2001 $3,870,000 $5,537,000 $8,771,000 $636,000
2002 636,000 (560,000) (510,000) 586,000
2003 586,000 18,000 604,000 --
Valuation Allowance for Deferred Income Tax Assets
2001 $32,743,000 $27,272,000 $ -- $60,015,000
2002 60,015,000 1,283,000 -- 61,298,000
2003 61,298,000 (1,957,000) -- 59,341,000
Restructuring Accruals
2001 $ -- $4,157,000 $2,268,000 $1,889,000
2002 1,889,000 8,550,000 9,375,000 1,064,000
2003 1,064,000 250,000 1,084,000 230,000
(a) Deductions related to the allowance for doubtful accounts represent the
write-off of uncollectible accounts receivable balances against the
allowance for doubtful accounts, net of recoveries. Deductions related to
restructuring and related accruals represent cash payments.
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EXHIBIT INDEX
Number Exhibit
- ------ -------
10.23 Transportation Services Agreement dated as of December 18, 2003 between Kanders
Aviation, LLC and the Company
21.1 List of Subsidiaries.
23.1 Independent Auditors' Consent.
31.1 Certification of Principal Executive Officer, as required by Rule 13a-14(a) of the
Securities Exchange Act of 1934.
31.2 Certification of Principal Financial Officer, as required by Rule 13a-14(a) of the
Securities Exchange Act of 1934.
32.1 Certification of Principal Executive Officer, as required by Rule 13a-14(b) of the
Securities Exchange Act of 1934.
32.2 Certification of Principal Financial Officer, as required by Rule 13a-14(b) of the
Securities Exchange Act of 1934
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