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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2004
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from _________ to _________
Commission File Number: 0-24277
CLARUS CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 58-1972600
------------------------------ ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Landmark Square
Stamford, Connecticut 06901
----------------------------------------
(Address of principal executive offices)
(Zip code)
(203) 428-2000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO [_]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES X NO [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
COMMON STOCK, ($.0001 PAR VALUE)
16,588,240 shares outstanding as of November 1, 2004
INDEX
CLARUS CORPORATION
PART I FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) -
September 30, 2004 and December 31, 2003..................... 1
Condensed Consolidated Statements of Operations (unaudited) -
Three and nine months ended September 30, 2004 and 2003...... 2
Condensed Consolidated Statements of Cash Flows (unaudited) -
Nine months ended September 30, 2004 and 2003................ 3
Notes to Unaudited Condensed Consolidated Financial
Statements (unaudited) - September 30, 2004.................. 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 11
Item 4. Procedures and Controls....................................... 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................. 13
Item 6. Exhibits...................................................... 13
SIGNATURES................................................................ 14
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CLARUS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 46,299 $ 15,045
Marketable securities 38,356 73,685
Interest receivable 262 507
Prepaids and other current assets 372 132
--------- ---------
Total current assets 85,289 89,369
PROPERTY AND EQUIPMENT, NET 2,456 38
OTHER ASSETS:
Deposits and other long-term assets 40 38
--------- ---------
TOTAL ASSETS $ 87,785 $ 89,445
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 2,455 $ 1,520
Deferred revenue -- 1,106
--------- ---------
Total current liabilities 2,455 2,626
LONG-TERM LIABILITIES:
Other long-term liabilities 78 --
--------- ---------
Total liabilities 2,533 2,626
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value; 5,000,000 shares authorized; none
issued -- --
Common stock, $.0001 par value; 100,000,000 shares authorized;
16,663,240 and 16,649,048 shares issued and 16,588,240 and 16,574,048
outstanding in 2004 and 2003, respectively 2 2
Additional paid-in capital 367,857 367,031
Accumulated deficit (278,733) (276,767)
Treasury stock, at cost (2) (2)
Accumulated other comprehensive loss (95) (17)
Deferred compensation (3,777) (3,428)
--------- ---------
Total stockholders' equity 85,252 86,819
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 87,785 $ 89,445
========= =========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
1
CLARUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
2004 2003 2004 2003
-------- -------- -------- --------
REVENUES:
Services fees $ 1,106 $ 25 $ 1,106 $ 104
---------------------- ----------------------
Total revenues 1,106 25 1,106 104
COST OF REVENUES:
Services fees -- -- -- --
---------------------- ----------------------
Total cost of revenues -- -- -- --
OPERATING EXPENSES:
General and administrative 404 848 2,329 4,363
Transaction expenses 1,461 -- 1,461 --
Provision for doubtful accounts -- (48) -- 18
Depreciation and amortization 86 -- 100 762
---------------------- ----------------------
Total operating expenses 1,951 800 3,890 5,143
OPERATING LOSS (845) (775) (2,784) (5,039)
OTHER INCOME (LOSS) -- (125) 17 3
INTEREST INCOME 313 228 801 976
INTEREST EXPENSE -- -- -- (66)
---------------------- ----------------------
NET LOSS $ (532) $ (672) $ (1,966) $ (4,126)
====================== ======================
Loss per common share:
Basic $ (0.03) $ (0.04) $ (0.12) $ (0.26)
Diluted $ (0.03) $ (0.04) $ (0.12) $ (0.26)
Weighted average shares outstanding:
Basic 16,082 15,975 16,082 15,867
Diluted 16,082 15,975 16,082 15,867
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
CLARUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NINE MONTHS
ENDED SEPTEMBER 30,
------------------------
2004 2003
--------- ---------
OPERATING ACTIVITIES:
Net loss $ (1,966) $ (4,126)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization on property and equipment 100 762
Amortization of deferred employee compensation 426 --
Noncash general and administrative expense -- 182
Amortization of premium on purchase of marketable securities 857 --
(Gain) loss on sale of marketable securities (17) 125
Loss/(Gain) on disposal of property & equipment -- 36
Provision for doubtful accounts -- 18
Changes in operating assets and liabilities:
Accounts receivable -- 449
Prepaids and other current assets 5 282
Assets held for sale -- 48
Deposits and other long-term assets (2) 31
Accounts payable and accrued liabilities 935 (61)
Deferred revenue (1,106) (116)
Liabilities to be assumed -- (220)
Other long-term liabilities 78 --
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES (690) (2,590)
INVESTING ACTIVITIES:
Purchases of marketable securities (55,091) (100,915)
Proceeds from sale of marketable securities 51,244 14,025
Proceeds from maturity of marketable securities 38,258 61,899
Proceeds from sale of equipment -- 11
Purchases of property and equipment (2,518) (4)
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 31,893 (24,984)
FINANCING ACTIVITIES:
Proceeds from the exercises of stock options 51 1,243
Repayment of debt -- (5,000)
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 51 (3,757)
--------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS 31,254 (31,331)
CASH AND CASH EQUIVALENTS, Beginning of Period 15,045 42,225
--------- ---------
CASH AND CASH EQUIVALENTS, End of Period $ 46,299 $ 10,894
========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH OPERATING, INVESTING, AND
FINANCING ACTIVITIES:
Issuance of Restricted Stock $ 50 $ 2,680
========= =========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
CLARUS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Clarus
Corporation and subsidiaries ("Clarus" or the "Company," which may be referred
to as "we," "us," or "our") as of and for the three and nine months ended
September 30, 2004 and 2003, have been prepared in accordance with accounting
principles generally accepted in the United States of America and instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information in notes required by accounting principles generally
accepted in the United States of America for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the unaudited condensed
consolidated financial statements have been included. The results of the three
and nine months ended September 30, 2004 are not necessarily indicative of the
results to be obtained for the year ending December 31, 2004. These interim
financial statements should be read in conjunction with the Company's audited
consolidated financial statements and footnotes thereto included in the
Company's Form 10-K for the fiscal year ended December 31, 2003, filed with the
Securities and Exchange Commission.
NOTE 2. SIGNIFICANT EVENTS
As part of our previously announced strategy to limit operating losses and
enable the Company to redeploy its assets and use its substantial cash and cash
equivalent assets to enhance stockholder value, on December 6, 2002, we sold
substantially all of our electronic commerce business, which represented
substantially all of our revenue-generating operations and related assets.
During January 2003, we sold the assets relating to our Cashbook product
representing the remainder of our operating assets.
As previously disclosed in our Report on Form 8-K filed with the Securities and
Exchange Commission on October 4, 2004, our securities were delisted from the
Nasdaq National Market effective with the open of business on Tuesday, October
5, 2004. On October 11, 2004, the Company's common stock commenced trading on
the OTC Bulletin Board, under the symbol "CLRS.OB".
In the third quarter of 2004, the Company recognized $1.5 million in transaction
expenses arising out of negotiations relating to a previously announced
acquisition that terminated in September 2004 without the consummation of the
acquisition. The expenses recognized in the period ended September 30, 2004
represent the costs incurred during negotiations, such as legal, accounting,
appraisal and other related fees and expenses. There were no comparable expenses
in the same period for 2003.
We are continuing to work to identify suitable merger partners or acquisition
opportunities. Although we are not targeting specific industries for potential
acquisitions, we plan to seek businesses with substantial cash flow, experienced
management teams, and operations in markets that appear to offer substantial
growth opportunities.
NOTE 3. EARNINGS (LOSS) PER SHARE
Basic net loss per share attributable to common stockholders is computed by
dividing the net loss attributable to common stockholders by the weighted
average number of shares of common stock outstanding for each period. Diluted
net loss per share attributable to common stockholders is computed by giving
effect to all potentially dilutive securities, including options, and warrants.
Potentially dilutive securities are excluded from the computation of diluted net
loss per share attributable to common stockholders. For the periods ended
September 30, 2004 and 2003, basic net loss per share attributable to common
stockholders is the same as diluted net loss per share attributable to common
stockholders because all potentially dilutive securities were excluded in
computing diluted net loss per share for these periods.
Options to acquire 400,000 and 983,334 shares of common stock during the periods
ended September 30, 2004 and 2003, respectively, were outstanding, but not
included in the calculation of weighted average number of diluted shares
outstanding because the option exercise prices were higher than the average
market price of the Company's common stock during that period. In addition,
diluted net loss per share attributable to common stockholders excludes the
potentially dilutive effect of options to purchase 1,714,138 and 149,097 shares
of the Company's common stock whose exercise prices were lower than the average
market price of the Company's common stock during the periods ended September
30, 2004 and 2003, respectively, as their inclusion would have been
anti-dilutive because the Company incurred losses during those periods.
NOTE 4. STOCK-BASED COMPENSATION PLAN
The Company has an employee stock option plan that provides for the issuance of
stock options and restricted stock. In December 2002, the Financial Accounting
Standards Board ("FASB") issued Statement No. 148, "Accounting for Stock-Based
Compensation - Transition and
4
Disclosure" which amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a change to the
fair 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 No. 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 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 with re-evaluations on a quarterly basis for variable
awards.
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 over ten years
or earlier upon the satisfaction of various conditions including performance
based conditions relating to the price of the Company's common stock. Under the
provisions of APB Opinion No. 25, the Company recognizes compensation expense
for this variable award over the vesting period. Compensation expense is
re-measured on a quarterly basis based upon the current market value of the
underlying stock at the end of the period.
The following table shows the effect on net loss and loss 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.
Three months ended Nine months ended
September 30 September 30
------------------------ -------------- ---------
2004 2003 2004 2003
--------- --------- --------- ---------
Net loss, as reported ................................................... $ (532) $ (672) $ (1,966) $ (4,126)
Add (deduct)stock-based employee compensation expense (credit)included
in reported net loss, net of tax ..................................... (52) 96 426 182
Deduct total stock-based employee compensation expense determined
under fair-value based method for all awards, net of tax ............. (670) (946) (2,007) (4,072)
--------- --------- --------- ---------
Pro forma net loss ...................................................... $ (1,254) $ (1,522) $ (3,547) $ (8,016)
========= ========= ========= =========
Basic and diluted net loss per share:
As reported ............................................................. $ (0.03) $ (0.04) $ (0.12) $ (0.26)
Add stock-based employee compensation expense included in reported
net loss, net of tax ................................................. 0.00 0.01 0.03 0.01
Deduct total stock-based employee compensation expense determined
under fair-value based method for all awards, net of tax ............. (0.04) (0.06) $ (0.12) $ (0.26)
--------- --------- --------- ---------
Pro forma basic and diluted net loss per share ........................ $ (0.07) $ (0.09) $ (0.21) $ (0.51)
========= ========= ========= =========
For computing the fair value of stock-based employee awards, the fair value of
each option grant has been estimated as of the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
2004 2003
---- ----
Dividend yield.......................... 0.0% N/A
Expected volatility..................... 62.0% N/A
Risk-free interest rate................. 2.7% N/A
Expected life........................... Four years N/A
As there were no stock options granted in the three-month periods ended
September 30, 2004 and 2003, respectively, nor in the nine-month period ended
September 30, 2003, the above assumptions are not applicable. Using these
assumptions, the fair value of the stock options granted during the nine-month
period ended September 30, 2004, was approximately $148,000, which would be
amortized over the vesting period of the options. The weighted-average
grant-date fair value per share of the stock options granted during the
nine-month period ended September 30, 2004 was $4.24.
NOTE 5. RESTRUCTURING AND RELATED COSTS
During 2002 and 2001, the Company's management approved restructuring plans to
reorganize and reduce operating costs. During 2003, the Company determined that
actual restructuring and related costs would exceed the amount previously
provided and recorded an additional restructuring cost of $250,000, comprised of
$223,000 for employee separation costs and $27,000 for facility closure and
consolidation costs. In 2004, the Company determined that facility closure costs
would exceed the amount previously provided and recorded an additional facility
closure and consolidation cost of $20,000.
5
The facility closure costs relate to the abandonment of the Company's leased
facilities near Toronto, Canada. Total facility closure and consolidation costs
include remaining lease liability 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 employee separation costs relate to the employees who remained to close down
the Suwanee, Georgia office and the separation agreement for Stephen Jeffery,
the Company's former Chief Executive Officer and Chairman of the Board of
Directors.
The following is a reconciliation of the components of the accrual for
restructuring and related costs, the amounts charged against the accrual during
2003 and 2004 and the balance of the accrual as of September 30, 2004:
Employee Facility Total
Separation Closing Restructuring
(in thousands) Costs Costs and Related Costs
- -------------- ---------- -------- -----------------
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
Accruals during 2004 -- 20 20
Expenditures during 2004 (94) (43) (137)
------- ------- -------
Balance at September 30, 2004 $ 31 $ 82 $ 113
======= ======= =======
The accrual for restructuring and related costs is included in accounts payable
and accrued liabilities in the accompanying condensed consolidated balance
sheets.
NOTE 6. COMPREHENSIVE INCOME (LOSS)
The Company utilizes SFAS No. 130, "Reporting Comprehensive Income." SFAS No.
130 establishes standards for reporting and presentation of comprehensive income
(loss) and its components of net income (loss) and "Other Comprehensive Income
(Loss)." "Other Comprehensive Income (Loss)" refers to revenues, expenses and
gains and losses that are not included in net income (loss) but rather are
recorded directly in stockholders' equity. The components of comprehensive loss
for the three and nine months ended September 30, 2004 and 2003, were as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(in thousands) 2004 2003 2004 2003
------- ------- ------- -------
Net loss $ (532) $ (672) $(1,966) $(4,126)
(Increase)/decrease in unrealized
loss on marketable securities 34 3 (78) (48)
------- ------- ------- -------
Comprehensive loss $ (498) $ (669) $(2,044) $(4,174)
======= ======= ======= =======
NOTE 7. CONTINGENCIES
The Company is a party to the following pending judicial proceeding.
Following its public announcement on October 25, 2000, of its financial results
for the third quarter of 2000, the Company and certain of its directors and
officers were named as defendants in fourteen putative class action lawsuits
filed in the United States District Court for the Northern District of Georgia.
The fourteen class action lawsuits were consolidated into one case, Case No.
1:00-CV-2841, pursuant to an order of the court dated November 17, 2000. A
consolidated amended complaint was then filed on May 14, 2001 on behalf of all
purchasers of
6
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 sought unspecified compensatory damages and costs (including
attorneys' and expert fees), expenses and other unspecified relief on behalf of
the classes. In July 2004, the Company entered into a memorandum of
understanding with the plaintiffs' counsel, on behalf of the consolidated class.
Pursuant to the memorandum, and a subsequent definitive agreement, the Company
agreed in principle to settle the consolidated class action in exchange for a
payment of $4.5 million which is expected to be covered by insurance. The final
settlement of the consolidated class action is subject to certain action
including approval by the Court.
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 operations.
NOTE 8. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current
period presentation.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements, including information
about or related to our future results, certain projections and business trends.
Assumptions relating to forward-looking statements involve judgments with
respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control. When
used in this report, the words "estimate," "project," "intend," "believe,"
"expect" and similar expressions are intended to identify forward-looking
statements. Although we believe that our assumptions underlying the
forward-looking statements are reasonable, any or all of the assumptions could
prove inaccurate, and we may not realize the results contemplated by the
forward-looking statements. Management decisions are subjective in many respects
and susceptible to interpretations and periodic revisions based upon actual
experience and business developments, the impact of which may cause us to alter
our business strategy or capital expenditure plans that may, in turn, affect our
results of operations. In light of the significant uncertainties inherent in the
forward-looking information included in this report, you should not regard the
inclusion of such information as our representation that we will achieve any
strategy, objectives or other plans. The forward-looking statements contained in
this report speak only as of the date of this report, and we have no obligation
to update publicly or revise any of these forward-looking statements.
These and other statements, which are not historical facts, are based largely
upon our current expectations and assumptions and are subject to a number of
risks and uncertainties that could cause actual results to differ materially
from those contemplated by such forward-looking statements. These risks and
uncertainties include, among others, our planned effort to redeploy our assets
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 our
Annual Report on Form 10-K, as amended, for the fiscal year ended December 31,
2003 and described below. The Company cannot guarantee its future performance.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
The Company's discussion of financial condition and results of operations are
based on the consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these condensed consolidated 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 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
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 condensed consolidated financial statements.
- - 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 accumulated other comprehensive income (loss) until
realized.
- - The Company is party to a pending judicial and administrative proceeding
described more fully in Part I, Item 3 of the Company's Annual Report on Form
10-K, as amended, for the fiscal year ended December 31, 2003 and Part II, Item
1 of this Quarterly Report on Form 10-Q. In July 2004, the Company entered into
a memorandum of understanding with the plaintiffs' counsel, on behalf of the
consolidated class, to settle a securities class action brought against the
Company that was originally filed in 2000. Pursuant to the memorandum, and a
subsequent definitive agreement, the Company agreed in principle to settle the
consolidated class action in exchange for a payment of $4.5 million which is
expected to be covered by insurance. The final settlement of the consolidated
class action is subject to certain action including approval by the Court.
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 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 remaining operating assets, the
Company's revenue consists primarily of the recognition of deferred service fees
that are recognized ratably over the maintenance term. The remaining deferred
revenue was fully recognized during the period ended September 30, 2004. Prior
to a redeployment of the Company's assets, the Company's income sources will
consist of interest, dividend and other investment income from short-term
investments that is reported as interest income in the Company's consolidated
statement of operations.
8
REVENUE RECOGNITION
Prior to the December 6, 2002 sale of substantially all of the Company's revenue
generating operations and assets, the Company recognized revenues 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 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.
OPERATING EXPENSES
General and administrative expenses consist primarily of personnel-related
expenses for financial, administrative and management personnel, franchise
taxes, fees for professional services, occupancy fees, insurance, board of
director fees and in 2003, a provision for doubtful accounts. Occupancy charges
include rent, utilities and maintenance services.
RESTRUCTURING AND RELATED COSTS
See "Restructuring and Related Costs" Note 5 of the Notes to the Unaudited
Condensed Consolidated Financial Statements.
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
THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2004 PRIMARILY REFLECT, 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.
RESULTS OF OPERATIONS - COMPARISON OF THIRD QUARTER 2004 TO THIRD QUARTER 2003
REVENUE
Revenues from operations for the three-month periods ended September 30, 2004
and 2003 were $1.1 million and $25,000, respectively. Total revenue for the nine
months ended September 30, 2004 and 2003 were $1.1 million and $104,000,
respectively. The increase in revenue resulted solely from the recognition of
deferred service revenue due to the expiration of maintenance agreements in 2004
and 2003.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased to $404,000 during the quarter
ended September 30, 2004, compared to $848,000 during the quarter ended
September 30, 2003. General and administrative expenses declined to $2.3 million
during the nine-month period ended September 30, 2004 compared to $4.4 million
during the same period in 2003. This trend is consistent with management's
stated strategy to maintain our expenditure rate, to the extent practicable,
near the level of our investment income until the completion of an acquisition
or merger in connection with our asset redeployment strategy. General and
administrative expenses include salaries and employee benefits, franchise taxes,
rent, insurance, legal, accounting and other professional fees as well as public
company expenses such as transfer agent and listing fees and expenses. The
decrease in general and administrative expense for the three and nine months
ended September 30, 2004, compared to the same periods last year, primarily was
attributable to decreased professional fees, non-recurring costs in 2003
associated with the closing of the Company's facility in Suwanee, Georgia, and
the windup costs associated with the Company's subsidiaries located overseas,
and the recognition of deferred compensation expense for the restricted stock
issued to Warren B. Kanders in April of 2003.
TRANSACTION EXPENSES
In the third quarter of 2004, the Company recognized $1.5 million in transaction
expenses arising out of negotiations relating to a previously announced
acquisition that terminated in September 2004 without the consummation of the
acquisition. Transaction expenses recognized in the quarter ended September 30,
2004 represent legal, accounting, appraisal and other related fees and expenses.
There were no comparable expenses during the same period in 2003.
9
PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts for the three months ended September 30,
2003 reflected a recovery of $48,000. The provision for doubtful accounts in the
nine months ended September 30, 2003 was $18,000. The changes in the provision
for doubtful accounts were due to the collection of accounts previously thought
to be uncollectible. There was no provision for doubtful accounts for the three-
and nine-month periods ended September 30, 2004.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased to $86,000 in the quarter ended
September 30, 2004 from an amount less than $1,000 in the same period of 2003.
Depreciation decreased to $100,000 in the nine months ended September 30, 2004
from $762,000 in the same period of 2003. The commencement of the Company's
occupancy of its corporate headquarters in Stamford, Connecticut in June 2004,
caused the increase in third quarter depreciation and amortization due to
recognition of amortization on leasehold improvements. The decrease from the
nine-month period ended 2003 was primarily attributable to the write-down of
certain assets and the sale of substantially all of the Company's operating
assets.
OTHER INCOME
For the quarter ended September 30, 2004, the Company had no gains or losses as
compared to the same period of 2003, when the Company recorded a loss of
$125,000 from the sale of securities. During the nine months ended September 30,
2004, the Company recorded a gain of $17,000 from the sale of marketable
securities as compared to the same period of 2003, when the Company recorded a
gain of $3,000.
INTEREST INCOME
Interest income increased to $313,000 in the quarter ended September 30, 2004
from $228,000, in the same period of 2003. The increase in interest income was
due to a modest increase in interest rates. For the nine-month period ended
September 30, 2004, interest income decreased to $801,000 from $976,000 during
the same period of 2003. The decrease in interest income was due to lower levels
of cash and cash equivalents available for investment and lower overall interest
rates.
INTEREST EXPENSE
Interest expense was zero for the three- and nine-month periods ended September
30, 2004, compared to interest expense of zero and $66,000, respectively, in the
same periods of 2003. In March 2000, the Company entered into a $5.0 million
borrowing arrangement with an interest rate of 4.5% with Peachtree Equity
Partners L.P., assignee of Wachovia Capital Investments, Inc. The interest
expense in 2003 is related to this agreement. The debt was repaid on April 17,
2003, and interest owing at the time of repayment was waived, resulting in a
gain of $66,000 that was recognized in other income during the nine months ended
September 30, 2003.
INCOME TAXES
As a result of the operating losses incurred since the Company's inception, no
provision or benefit for income taxes was recorded during the three- and
nine-month periods ended September 30, 2004 and 2003.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased to $46.3 million at September
30, 2004 from $15.0 million at December 31, 2003. Marketable securities
decreased to $38.4 million at September 30, 2004 from $73.7 million at December
31, 2003. The overall decrease of $4.0 million in cash and cash equivalents and
marketable securities is due to the Company's investment in leasehold
improvements at our corporate headquarters in Stamford, Connecticut, coupled
with cash used in operating activities (including potential acquisition costs).
Cash used by operating activities was approximately $0.7 million during the
nine-month period ended September 30, 2004. This was primarily attributable to
the Company's net loss, an increase in accounts payable and accrued liabilities,
offset by a decrease in deferred revenue, prepaid and other current assets,
partially offset by non-cash items. Cash used in operating activities was
approximately $2.6 million during the nine-month period ended September 30,
2003. This was primarily attributable to the Company's net loss partially offset
by a decrease in accounts receivable and prepaid and other current assets.
Cash provided by investing activities was approximately $31.9 million during the
nine-month period ended September 30, 2004. The cash was provided primarily from
the sale and maturity of marketable securities partially offset by the purchase
of marketable securities, and an increase in construction costs associated with
the leasehold improvements at our corporate headquarters in Stamford,
Connecticut. Cash used in investing activities was approximately $25.0 million
during the nine-month period ended September 30, 2003. The cash was used
primarily for the purchase of marketable securities.
10
Cash provided by financing activities was approximately $51,000 during the
nine-month period ended September 30, 2004, compared to cash used by financing
activities of approximately $3.7 million during the same period of 2003. The
cash provided by financing activities during the nine-month period ended
September 30, 2004 was attributable to proceeds from the exercise of stock
options. The cash used by financing activities during the nine months ended
September 30, 2003 was primarily attributable to the early repayment of debt to
Peachtree Partners, L.P. as discussed earlier, partially offset by proceeds from
stock option exercises.
At September 30, 2004, the Company has net operating loss, capital loss,
research and experimentation credit and alternative minimum tax credit
carry-forwards for U.S. federal income tax purposes of approximately $130.0
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 has
recognized a full valuation allowance against the deferred tax assets
represented by these tax loss and tax credit carryforwards as of September 30,
2004. The Company's ability to benefit from certain net operating loss
carry-forwards is limited under section 382 of the Internal Revenue Code due to
a prior ownership change of greater than 50%. The Company estimates
approximately $116.1 million of the $130.0 million of U.S. net operating loss
carry-forward is available currently to offset taxable income that the Company
may recognize in the future. Additional net operating loss carryforwards in the
amount of approximately $11.9 million will become available to the Company in
various increments through the year 2011 as the utilization limitations imposed
by IRC section 382 gradually expire over the period. It is expected that
approximately $2.0 million of the total net operating loss carryforward will
expire without becoming available.
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 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 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.
Monthly lease payments began in March 2004 and the Company commenced occupancy
in June 2004.
As of September 30, 2004, the Company had outstanding receivables of less than
$1,000 from Kanders & Company primarily relating to build-out construction and
other costs of the Stamford office. The amount outstanding at September 30, 2004
is included in prepaids and other assets in the accompanying condensed
consolidated balance sheet. The outstanding amount was paid in October 2004.
During the three- and nine-month periods ended September 30, 2004, the Company
expensed $7,000 for accruals and payments to Kanders Aviation LLC, an affiliate
of the Company's Executive Chairman, Warren B. Kanders for reimbursement of
expenses relating to aircraft travel incurred during the acquisition process.
For the same three- and nine- month periods ended September 30, 2003, the
Company expensed $30,000 and $88,000, respectively, for accruals and payments to
Kanders Aviation LLC. This travel related to Board meetings, meetings for
potential redeployment transactions and the closing of the Atlanta facility.
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 received a
severance payment equal to one year's salary of $250,000. 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 September 30, 2004,
approximately $31,000 remained outstanding and is included in accounts payable
and accrued liabilities in the accompanying condensed consolidated balance
sheet.
In the opinion of management, the rates, terms and considerations of the
transactions with the related parties described above approximate those that the
Company would have received in transactions with unaffiliated parties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to our exposures to market risk since
December 31, 2003.
11
ITEM 4. PROCEDURES AND CONTROLS
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 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 September 30,
2004, 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 September 30, 2004 are
effective for gathering, analyzing and disclosing the information the Company is
required to disclose in the reports it files under the Exchange Act, within the
time periods specified in the Securities and Exchange Commission's rules and
forms. The Company's Chief Administrative Officer and Controller, also concluded
that the Company's disclosure controls and procedures as of September 30, 2004
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 occurred during the quarter ended
September 30, 2004 that have materially affected, or are reasonably likely to
materially affect the Company's internal control over financial reporting.
12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to judicial proceedings, described more fully in Part I,
Item 3 of the Company's Annual Report on Form 10-K, as amended, for the fiscal
year ended December 31, 2003. In July 2004, the Company entered into a
memorandum of understanding with the plaintiffs' counsel, on behalf of the
consolidated class, to settle a securities class action brought against the
Company that was originally filed in 2000. Pursuant to the memorandum, and a
subsequent definitive agreement, the Company agreed in principle to settle the
consolidated class action in exchange for a payment of $4.5 million which is
expected to be covered by insurance. The final settlement of the consolidated
class action is subject to certain action including approval by the Court.
ITEM 6. EXHIBITS
31.1 Certification of Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification Principal Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
13
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CLARUS CORPORATION
Date: November 5, 2004
/s/ Nigel P. Ekern,
---------------------
Nigel P. Ekern,
Chief Administrative Officer
(Principal Executive Officer)
/s/ Susan Luckfield,
----------------------
Susan Luckfield,
Controller
(Principal Financial Officer)
14
EXHIBIT INDEX
Number Exhibit
- ------ -------
31.1 Certification of Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification Principal Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
15