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, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________ .
Commission File Number 0-24277
Clarus Corporation
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(Exact name of registrant as specified in its charter)
Delaware 58-1972600
- ------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3950 Johns Creek Court, Suite 100
Suwanee, Georgia 30024
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(Address of principal executive offices)
(Zip code)
(770) 291-3900
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(Registrant's telephone number, including area code)
SQL Financials International, Inc.
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(Former name, former address and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO _
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, ($.0001 Par Value)
------------------------------------------
10,605,870 shares outstanding as of November 6, 1998
INDEX
- -----
CLARUS CORPORATION
PART I FINANCIAL INFORMATION
- ------ ---------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) - September 30,
1998 and December 31, 1997;
Condensed Consolidated Statements of Operations (unaudited-Three
months and nine months ended September 30, 1998 and 1997;
Condensed Consolidated Statements of Cash Flows (unaudited)-Nine
months ended September 30, 1998 and 1997;
Notes to Condensed Consolidated Financial Statements (unaudited) -
September 30, 1998
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk - Not
Applicable
PART II OTHER INFORMATION
- ------- -----------------
Item 1. Legal proceedings.
Item 2. Changes in Securities and Use of Proceeds.
Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
2
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,
1998 1997
----------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 23,984 $ 7,213
Trade accounts receivable, less allowance for
doubtful accounts of $484 and $338 in 1998
and 1997, respectively 10,918 4,050
Prepaid and other current assets 407 494
------ ------
Total current assets 35,309 11,757
PROPERTY AND EQUIPMENT - net 2,227 1,507
OTHER ASSETS:
Intangible assets, net of accumulated
amortization of $1,758 and
$1,127 in 1998 and 1997, respectively 5,843 1,267
Deposits and other long-term assets 215 150
------ ------
Total other assets 6,058 1,417
------ ------
TOTAL ASSETS $ 43,594 $ 14,681
========== ===========
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
3
Item 1. Financial Statements (continued)
CLARUS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (continued)
(in thousands, except share and per share amount)
September 30, December 31,
1998 1997
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Note payable, net of discount of $110 in 1998 $ 990 $ -0-
Accounts payable and accrued liabilities 6,778 4,598
Accounts payable-related party -0- 54
Deferred revenue 6,415 5,717
Current maturities of long-term debt 244 1,841
------ ------
Total current liabilities 14,427 12,210
NONCURRENT LIABILITIES:
Deferred revenue 3,600 4,480
Long-term debt, net of current maturities 310 497
Other non-current liabilities 70 49
------ -----
Total liabilities 18,407 17,236
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY -0- 243
------ ------
REDEEMABLE CONVERTIBLE PREFERRED STOCK: -0- 25,112
STOCKHOLDERS' EQUITY (DEFICIT) (Note 3):
Common Stock, $.0001 par value; 25,000,000 and
9,000,000 shares authorized in 1998 and 1997,
respectively; 9,197,312 and 1,467,160 shares
outstanding in 1998 and 1997, respectively 1 0
Additional paid in capital 51,306 489
Accumulated deficit (26,918) (28,019)
Warrants 1,440 652
Treasury stock, at cost (2) (2)
Note from stockholder 0 (612)
Deferred compensation (640) (418)
-------- --------
Total stockholders' equity (deficit) 25,187 (27,910)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 43,594 $ 14,681
======== ==========
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4
Item 1. Financial Statements (continued)
CLARUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in thousands, except per share amounts)
Three months ended Nine months ended
September 30 September 30
-------------------------- --------------------------
1998 1997 1998 1997
REVENUES:
License fees $ 5,623 $ 4,299 $ 14,066 $ 9,026
Services fees 4,387 2,064 11,277 5,340
Maintenance fees 1,937 1,250 5,351 3,168
----- ----- ----- -----
Total revenues 11,947 7,613 30,694 17,534
COST OF REVENUES:
License fees 960 478 1,525 856
Services fees 2,717 1,366 7,223 3,688
Maintenance fees 925 510 2,442 1,360
----- ------ ------ -----
Total cost of revenues 4,602 2,354 11,190 5,904
OPERATING EXPENSES:
Research and development 1,630 1,481 4,157 5,305
Sales and marketing 3,029 2,354 8,419 6,958
General and administrative 1,175 754 3,723 2,103
Depreciation and amortization 526 352 1,456 1,049
Non-cash compensation 38 13 842 36
----- ----- ------ ------
Total operating expenses 6,398 4,954 18,597 15,451
OPERATING INCOME (LOSS) 947 305 907 (3,821)
INTEREST INCOME 243 1 402 28
INTEREST EXPENSE 51 133 172 251
MINORITY INTEREST -0- 133 36 322
----- ------ ----- -------
NET INCOME (LOSS) $ 1,139 $ 40 $ 1,101 $ (4,366)
===== ====== ===== =======
Income (loss) per common share:
Basic $ 0.12 $ 0.03 $ 0.22 $ (3.15)
Diluted 0.11 $ 0.01 $ 0.13 $ (3.15)
Weighted average shares
outstanding
Basic 9,123 1,390 5,080 1,384
Diluted 10,039 6,595 8,767 1,384
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5
Item 1. Financial Statements (continued)
CLARUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
Nine months ended
September 30
--------------------------
1998 1997
----------- ------------
OPERATING ACTIVITIES
Net income (loss) $ 1,101 $ (4,366)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,456 1,049
Minority interest in subsidiary 36 322
Amortization of debt discount 55 18
Deferred compensation 842 46
Changes in operating assets and liabilities:
Accounts receivable (6,867) (3,073)
Prepaid and other current assets 87 (110)
Deposits and other long-term assets (63) 28
Accounts payable and accrued liabilities 2,051 1,721
Deferred revenue (181) 1,091
Other noncurrent liabilities 21 (22)
---------- --------
NET CASH USED IN OPERATING ACTIVITIES (1,462) (3,296)
INVESTING ACTIVITIES
Increase of intangible assets (709) (90)
Purchase of minority interest in subsidiary (326) -0-
Additions to property and equipment (1,551) (557)
------------ --------
NET CASH USED IN INVESTING ACTIVITIES (2,586) (647)
FINANCING ACTIVITIES:
Dividends paid to holder of minority interest (241) (190)
Repayment of note receivable from holder of
minority interest -0- 38
Proceeds from notes payable and short term
borrowings 1,645 29,802
Repayments of notes payable and short term
borrowings (3,428) (30,225)
Proceeds from the exercise of warrants 612 10
Proceeds from issuance of common stock, net 22,081 -0-
Proceeds from issuance of preferred stock 150 5,987
--------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 20,819 5,422
------- -----
INCREASE IN CASH AND CASH EQUIVALENTS 16,771 1,479
CASH AND CASH EQUIVALENTS, beginning of period 7,213 3,278
-------- -------
CASH AND CASH EQUIVALENTS, end of period 23,984 $ 4,757
========= =======
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 123 $ 259
========= ===========
See Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
6
CLARUS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Clarus
Corporation (the "Company") have been prepared in accordance with Generally
Accepted Accounting Principles for interim financial information 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 Generally Accepted
Accounting Principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation of the unaudited financial statements for this interim
period have been included. The results of the interim periods are not
necessarily indicative of the results to be obtained for the year ended December
31, 1998. These interim financial statements should be read in conjunction with
the Company's audited consolidated financial statements and footnotes thereto
included in i) the Company's Prospectus dated May 26, 1998, filed under Form S-1
(Registration No. 333 - 46685) with the Securities and Exchange Commission, and
ii) the Company's Prospectus dated October 28, 1998, filed under form S-4
(Registration No. 333 - 63535) with the Securities and Exchange Commission.
NOTE 2. EARNINGS PER SHARE
Basic and diluted net income (loss) per share was computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share," using
the weighted average number of common shares outstanding. The diluted net loss
per share for the nine months ended September 30, 1997, does not include the
effect of common stock equivalents, including redeemable convertible preferred
stock, as their effect would be antidilutive. Diluted net income per share for
the quarters ended September 30, 1998 and 1997, and the nine months ended
September 30, 1998, includes the effect of common stock equivalents.
NOTE 3. STOCKHOLDERS' EQUITY
On May 26, 1998, the Company completed its initial public offering of 2.5
million shares of its common stock at an offering price of $10.00 per share (the
"Offering"). The proceeds, net of expenses, from this public offering of
approximately $22.0 million were placed in investment grade cash equivalents.
Immediately prior to the effective date of the Company's Registration Statement
the redeemable convertible preferred stock was converted to common stock.
NOTE 4. ACQUISITION OF MINORITY INTEREST IN THE SERVICES SUBSIDIARY
On February 5, 1998, the Company purchased the 20% interest in SQL Financial
Services, LLC (the "Services Subsidiary") from Technology Ventures, LLC
("Technology Ventures") a related party controlled by Joseph S. McCall, a
director of the Company. In exchange for the 20% interest in the Services
Subsidiary, the Company issued 225,000 shares of common stock to Technology
Ventures and granted Technology Ventures a warrant to purchase an additional
300,000 shares of common stock at a purchase price of $3.67 per share. The
warrant expires on February 5, 2000. In addition, the Company agreed to pay
Technology Ventures the sum of $1.1 million due February 5, 2000, pursuant to a
non-negotiable, non-interest-bearing subordinated promissory note. Technology
Ventures has agreed not to sell any of its shares for a period of 180 days after
the effective date of the Offering. The Company also agreed to pay Technology
Ventures a monthly sum equal to 20% of the net profits of the Services
Subsidiary until the completion of the Company's Initial Public Offering.
The Company as additional purchase price recorded payments made to Technology
Ventures for this 20% of net profits of the Services Subsidiary at the time of
payment.
7
CLARUS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5. MERGER OF ELEKOM CORPORATION
On November 6, 1998, the Company completed its acquisition of Elekom Corporation
("Elekom") for approximately $15.7 million, consisting of $8.0 million in cash
and approximately 1.39 million shares of the Company's common stock. Elekom was
merged with and into Clarus CSA, Inc., a wholly owned subsidiary of the Company
and the separate existence of Elekom ceased. Immediately following consummation
of the merger, the former holders of Elekom common and preferred stock (the
"Elekom Shareholders") owned approximately 13% of the outstanding common stock
of the Company. The former Elekom Shareholders have agreed not to sell any of
their shares of the Company's common stock for a period ending on August 6,
1999. The Company, as additional purchase price, recorded i) payments of
$500,000 made to fund the operations of Elekom from October 1, 1998, through the
closing date, and ii) expenses of approximately $750,000 to complete the merger.
Approximately $14.0 million of the purchase price was recorded as purchased
in-process research and development. These interim financial statements should
be read in conjunction with the Company's Prospectus dated October 28, 1998,
filed under form S-4 (Registration No. 333-63535) with the Securities and
Exchange Commission.
NOTE 6. LEGAL PROCEEDINGS
The Company is subject to claims and litigation in the ordinary course of
business, including, but not limited to, a lawsuit recently filed against the
Company alleging patent infringement, but does not believe based on its current
assessment of such claims and litigation that any such claim or litigation will
have a material adverse effect on its consolidated financial position.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Clarus Corporation (the "Company") was formed in November 1991 to develop,
market, license and support financial applications. During 1998 and 1997 the
Company introduced a series of additional modules and product enhancements.
Specifically, in the third quarter of 1998 the Company introduced its Corporate
Service Applications, which include E-procurement, a business-to-business buy
side web based solution designed for the acquisition of non-industrial goods and
services; and budgeting. In the first quarter of 1997, the Company introduced
its human resource applications, which included the Personnel, Benefits and
Payroll modules. In 1997, the Company introduced its Financial Statement
Accelerator module, a distributed management reporting solution, and a 32-bit
version of its financial applications (the "Denver Release"), which included two
new modules, Purchasing Control and Solution/Graphical Architect. The Company
intends to release a 32-bit version of its human resources applications by the
end of 1998. The Company currently markets its products in the United States and
Canada through its direct sales force and has licensed its client/server
applications to more than 250 customers in a variety of industry segments,
including insurance, financial services, communications, retail, printing and
publishing, transportation and manufacturing. The Company also offers fee-based
implementation, training and upgrade services and ongoing maintenance and
support of its products for a 12-month renewable term.
On November 6, 1998, the Company completed its acquisition of Elekom Corporation
("Elekom") for approximately $15.7 million, consisting of $8.0 million in cash
and approximately 1.39 million shares of the Company's common stock. Elekom was
merged with and into Clarus CSA, Inc., a wholly owned subsidiary of the Company
and the separate existence of Elekom ceased. Immediately following consummation
of the merger, the former holders of Elekom common and preferred stock (the
"Elekom Shareholders") owned approximately 13% of the outstanding common stock
of the Company. The former Elekom Shareholders have agreed not to sell any of
their shares of the Company's common stock for a period ending on August 6,
1999. The Company, as additional purchase price, recorded i) payments of
$500,000 made to fund the operations of Elekom from October 1, 1998, through the
closing date, and ii) expenses of approximately $750,000 to complete the merger.
Approximately $14.0 million of the purchase price was recorded as purchased
in-process research and development.
On May 26, 1998, the Company completed an initial public offering of its common
stock in which it sold 2.5 million shares for approximately $22.0 million after
deducting offering expenses and underwriting discounts.
Through 1997 the Company recognized revenue in compliance with Statement of
Position ("SOP") 91-1 "Software Revenue Recognition." Effective January 1, 1998,
the Company adopted SOP 97-2 "Software Revenue Recognition." The adoption of
this SOP has not had a significant impact on the Company's consolidated
financial statements. Revenues from software licenses have been recognized upon
delivery of the product if there are no significant obligations on the part of
the Company following delivery and collection of the related receivable, if any,
is deemed probable by management. Revenues from service fees relate to
implementation, training and upgrade services performed by the Company and have
been recognized as the services are performed. Maintenance fees relate to
customer maintenance and support and have been recognized ratably over the term
of the software support agreement, which is typically 12 months. A majority of
the Company's customers renew the maintenance and support agreements after the
initial term. Revenues that have been prepaid or invoiced, but that do not yet
qualify for recognition under the Company's policies are reflected as deferred
revenue.
Cost of license fees includes royalties and software duplication and
distribution costs. The Company recognizes these costs as the applications are
shipped. Cost of services fees include personnel and related costs incurred to
provide implementation, training and upgrade services to customers. These costs
are recognized as the services are performed. Cost of maintenance fees includes
personnel and related costs incurred to provide the ongoing support and
maintenance of the Company's products. These costs are recognized as incurred.
Research and development expenses consist primarily of personnel costs. The
Company accounts for software development costs under Statement of Financial
Accounting Standards ("SFAS") No. 86 "Accounting For the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed." Research and development
expenses are
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Overview (continued)
charged to expense as incurred until technological feasibility is established,
after which remaining costs are capitalized. The Company defines technological
feasibility as the point in time at which the Company has a working model of the
related product. 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. Accordingly,
the Company charges all internal software development costs to expense as
incurred.
Sales and marketing expenses consist primarily of salaries, commissions and
benefits to sales and marketing personnel, travel, trade-show participation,
public relations and other promotional expenses. General and administrative
expenses consist primarily of salaries for financial, administrative and
management personnel and related travel expenses, as well as occupancy,
equipment and other administrative costs.
The Company had net operating loss carryforwards ("NOLs") of approximately $24.5
million at September 30, 1998, which begin expiring in 2007. The Company
established a valuation allowance equal to the NOLs and all other deferred tax
assets. The benefits from these deferred tax assets will be recorded when
realized which will reduce the Company's effective tax rate for future taxable
income, if any. Due to changes in the Company's ownership structure, the
Company's use of its NOLs as of May 26, 1998 of approximately $26.0 million will
be limited to approximately $3.8 million in any given year to offset future
taxes. If the Company does not realize taxable income in excess of the
limitation in future years, certain NOLs will be unrealizable.
Affiliate Relationships
In March 1995 the Company and Technology Ventures, which is controlled by Joseph
S. McCall, formed the Services Subsidiary to provide implementation, training,
and upgrade services exclusively for the Company's customers. On February 5,
1998, Technology Ventures sold its 20% interest in the Services Subsidiary to
the Company. The consideration for the 20% interest was 225,000 shares of the
Company's Common Stock, a warrant to purchase an additional 300,000 shares of
Common Stock at a price of $3.67 per share, and a non-interest bearing
promissory note in the principal amount of $1.1 million. The purchase of the
remaining 20% of the Services Subsidiary was accounted for using the purchase
method of accounting and will result in goodwill in the amount of $4.2 million,
which is being amortized over 15 years. The Company assigned a 15-year
amortization period to the goodwill acquired in the purchase of the 20% interest
in the Services Subsidiary.
In the second quarter of 1998, the Company accelerated the vesting of certain
employee stock options issued in the first quarter of 1998, for approximately
283,000 shares of Common Stock, at an exercise price of between $3.67 per share
and $8.00 per share. As a result of this accelerated vesting, the Company
recognized a non-cash, non-recurring charge of approximately $705,000 during the
quarter ended June 30, 1998, representing the previously remaining unamortized
deferred compensation recorded on these options.
Summary of the Effects of the Merger
The Company anticipates the integration and consolidation of ELEKOM will require
substantial management, financial and other resources. The acquisition of ELEKOM
involves a number of significant risks including potential difficulties in
assimilating the technologies, services and products of ELEKOM or in achieving
the expected synergies and cost reductions, as well as other unanticipated risks
and uncertainties. As a result, there can be no assurance as to the extent to
which the anticipated benefit with respect to the Merger will be realized, or
the timing of any such realization. See the Company Registration Statement
dated October 28, 1998, filed under form S-4 with the Securities and Exchange
Commission.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Overview (continued)
Summary of the Effects of the Merger (continued)
The Merger is expected to lower the net earnings of the Company through 1998 as
a result of a substantial increase in amortization of intangible and other
long-lived assets and various other adjustments resulting from purchase
accounting. The 1997 unaudited pro forma condensed combined net loss before
non-recurring charges would have been approximately $10.2 million, a net loss
which is approximately 149% greater than the Company's actual historical results
for 1997. The Company believes that earnings beyond 1998 should improve as a
result of the web-based, electronic procurement market presence and recognition
afforded the Company as a result of the completion of the Merger. No assurances
can be given as to the amount or timing of such benefit that may actually be
realized or that any such growth may occur.
The Merger will be accounted for as a purchase. Under purchase accounting, the
total purchase cost and fair value of liabilities assumed were allocated to the
tangible and intangible assets of ELEKOM based upon their respective fair values
on November 6, 1998.
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations
The following table sets forth certain statement of operations data as a
percentage of total revenues for the periods indicated:
Three months ended Nine months ended
September 30 September 30
----------------------- -------------------------
1998 1997 1998 1997
Revenues:
License fees 47.1% 56.5% 45.8% 51.4%
Services fees 36.7 27.1 36.8 30.5
Maintenance fees 16.2 16.4 17.4 18.1
----------------------- -------------------------
Total revenues 100.0 100.0 100.0 100.0
Cost of revenues:
License fees 8.1 6.3 5.0 4.9
Services fees 22.7 17.9 23.5 21.0
Maintenance fees 7.7 6.7 7.9 7.8
----------------------- -------------------------
Total cost of revenues 38.5 30.9 36.4 33.7
Operating expenses:
Research and development 13.7 19.5 13.5 30.3
Sales and marketing 25.4 30.9 27.4 39.6
General and
administrative 9.8 9.9 12.1 12.0
Depreciation and
amortization 4.4 4.6 4.8 6.0
Non-cash compensation 0.3 0.2 2.8 0.2
----------------------- -------------------------
Total expenses 53.6 65.1 60.6 88.1
Operating income (loss) 7.9 4.0 3.0 (21.8)
Interest income 2.0 0.1 1.3 0.2
Interest expense 0.4 1.8 0.6 1.4
Minority interest 0.0 1.8 0.1 1.7
======================= =========================
Net income (loss) 9.5 0.5 3.6 (24.9)
======================= =========================
Gross margin on license fees 82.9 88.9 89.2 90.5
Gross margin on services
fees 38.1 33.8 36.0 30.9
Gross margin on maintenance
fees 52.3 59.2 54.4 57.1
Quarter and Nine Months Ended September 30, 1998, Compared to Quarter and Nine
Months Ended September 30, 1997.
Revenues
Total Revenues. For the quarter ended September 30, 1998, total revenues
increased 56.9% to $11.9 million from $7.6 million in the comparable period in
1997. For the nine months ended September 30, 1998, total revenues increased
75.1% to $30.7 million from $17.5 million in the comparable period in 1997.
These increases are attributable to substantial increases in license fees,
services fees and maintenance fees.
License Fees. License fees increased 30.8% to $5.6 million, or 47.1% of total
revenues, in the quarter ended September 30, 1998, from $4.3 million, or 56.5%
of total revenues, in the comparable period in 1997. License fees increased
55.8% to $14.1 million, or 45.8% of total revenues, in the nine months ended
September 30, 1998, from $9.0 million, or 51.4%, in the comparable period in
1997. These increases in license fees resulted primarily from
12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations (continued)
Quarter and Nine Months Ended September 30, 1998, Compared to Quarter and Nine
Months Ended September 30, 1997 (continued).
Revenues (continued)
License Fees (continued)
increases in the number of licenses sold, reflecting a continuing increase in
the demand for the Company's existing and new applications, and to a lesser
extent, to an increase in the average customer transaction size.
Services Fees. Services fees increased 112.5% to $4.4 million, or 36.7% of total
revenues, in the quarter ended September 30, 1998, from $2.1 million, or 27.1%
of total revenues, in the comparable period in 1997. Services fees increased
111.2% to $11.3 million, or 36.8% of total revenues, in the nine months ended
September 30, 1998, from $5.3 million, or 30.5% of total revenues, in the
comparable period in 1997. These increases in services fees are primarily due to
increased demand for professional services associated with the increase in
number of licenses sold.
Maintenance Fees. Maintenance fees increased 55.0% to $1.9 million, or 16.2% of
total revenues, in the quarter ended September 30, 1998, from $1.3 million, or
16.4% of total revenues, in the comparable period in 1997. Maintenance fees
increased 68.9% to $5.4 million, or 17.4% of total revenues, in the nine months
ended September 30, 1998, from $3.2 million, or 18.1% of total revenues, in the
comparable period in 1997. These increases in maintenance fees were primarily
due to the signing of license agreements with new customers and the renewal of
maintenance with existing customers during the respective periods.
Cost of Revenues
Total Cost of Revenues. Cost of revenues increased 95.5% to $4.6 million, or
38.5% of total revenues, in the quarter ended September 30, 1998, from $2.4
million, or 30.9% of total revenues, in the comparable period in 1997. Cost of
revenues increased 89.5% to $11.2 million, or 36.4% of total revenues, in the
nine months ended September 30, 1998, from $5.9 million, or 33.7% of total
revenues, in the comparable period in 1997. The increases in cost of revenues
were primarily due to an increase in personnel and related expenses and
increased royalty expenses for the respective periods.
Cost of License Fees. Cost of license fees increased 100.8% to $960,000, or
17.1% of total license fees, in the quarter ended September 30, 1998, compared
to $478,000, or 11.1% of total license fees, in the comparable period in 1997.
Cost of license fees increased 78.2% to $1.5 million, or 10.8% of total license
fees, in the nine months ended September 30, 1998, compared to $856,000, or 9.5%
of total license fees, in the comparable period in 1997. The increases in the
cost of license fees, and the increase as a percentage of total license fees,
were primarily attributable to increases in the sale of third-party software
products distributed by the Company.
Cost of Services Fees. Cost of services fees increased 98.9% to $2.7 million, or
61.9% of total services fees, in the quarter ended September 30, 1998, compared
to $1.4 million, or 66.2% of total services fees, in the comparable period in
1997. Cost of services fees increased 95.9% to $7.2 million, or 64.0% of total
services fees, in the nine months ended September 30, 1998, compared to $3.7
million, or 69.1% of total services fees, in the comparable period in 1997.
These increases in the cost of service fees are primarily attributable to an
increase in the personnel and related costs to provide implementation, training
and upgrade services.
13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations (continued)
Quarter and Nine Months Ended September 30, 1998, Compared to Quarter and Nine
Months Ended September 30, 1997 (continued).
Cost of Revenues (continued)
Cost of Services Fees (continued)
The decreases in cost of service fees as a percentage of revenue for the quarter
and nine months ended September 30, 1998, are primarily due to increased hourly
rates charged combined with increased utilization of services personnel.
Cost of Maintenance Fees. Cost of maintenance fees increased 81.4% to $925,000,
or 47.7% of total maintenance fees, in the quarter ended September 30, 1998,
compared to $510,000, or 40.8% of total maintenance fees, in the comparable
period in 1997. Cost of maintenance fees increased 79.6% to $2.4 million, or
45.6% of total maintenance fees, in the nine months ended September 30, 1998,
compared to $1.4 million, or 42.9% of total maintenance fees, in the comparable
period in 1997. These increases in the cost of maintenance fees were primarily
attributable to an increase in the personnel and related costs required to
provide support and maintenance. Cost of maintenance fees as a percentage of
total maintenance fees increased during the respective periods primarily due to
increased investment in personnel to support the maintenance customer base.
Research and Development
Research and development expenses increased 10.1% to $1.6 million, or 13.7% of
total revenues, in the quarter ended September 30, 1998, from $1.5 million, or
19.5% of total revenues, in the comparable period in 1997. Research and
development expenses decreased 21.6% to $4.2 million, or 13.5% of total
revenues, in the nine months ended September 30, 1998, from $5.3 million, or
30.3% of total revenues, in the comparable period in 1997. Research and
development expenses increased during the quarter ended September 30, 1998,
primarily due to increased personnel costs related to continued development of
the Company's products. Research and development expenses decreased during the
nine months ended September 30, 1998, primarily due to decreased personnel and
contractor fees related to the effort required in 1997 to develop the Denver
Release, which was substantially completed by September 1997. The decreases in
research and development as a percentage of revenue for the periods ended
September 30, 1998, compared to the periods ended September 30, 1997, are
primarily due to the completion of the Denver Release, coupled with the
economies of scale realized through the growth in the Company's revenue. The
Company intends to continue to devote substantial resources toward research and
development efforts.
Sales and Marketing
Sales and marketing expenses increased 28.7% to $3.0 million, or 25.4% of total
revenues, in the quarter ended September 30, 1998, from $2.4 million, or 30.9%
of total revenues, in the comparable period in 1997. Sales and marketing
expenses increased 21.0% to $8.4 million, or 27.4% of total revenues, in the
nine months ended September 30, 1998, from $7.0 million, or 39.6% of total
revenues, in the comparable period in 1997. The increases in sales and marketing
expenses were primarily attributable to the costs associated with additional
sales and marketing personnel and promotional activities. The decreases in sales
and marketing expense, as a percentage of revenues for the respective periods,
reflects the higher productivity derived from the Company's sales force and
marketing efforts.
14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations (continued)
Quarter and Nine Months Ended September 30, 1998, Compared to Quarter and Nine
Months Ended September 30, 1997 (continued).
General and Administrative
General and administrative expenses increased 55.8% to $1.2 million, or 9.8% of
total revenues, in the quarter ended September 30, 1998, from $754,000, or 9.9%
of total revenues, in the comparable period in 1997. General and administrative
expenses increased 77.0% to $3.7 million, or 12.1% of total revenues, in the
nine months ended September 30, 1998, from $2.1 million, or 12.0% of total
revenues, in the comparable period in 1997. The increases in general and
administrative expenses were primarily attributable to increases in personnel
and related costs. The Company believes that its general and administrative
expenses will continue to increase in future periods to accommodate anticipated
growth and expenses associated with its responsibilities as a public company.
Depreciation and Amortization
Depreciation of tangible equipment and amortization of intangible assets
increased 49.4% to $526,000, or 4.4% of total revenues, in the quarter ended
September 30, 1998, from $352,000, or 4.6% of total revenues, in the comparable
period in 1997. Depreciation of tangible equipment and amortization of
intangible assets increased 38.8% to $1.5 million, or 4.8% of total revenues, in
the nine months ended September 30, 1998, from $1.0 million, or 6.0% of total
revenues, in the comparable period in 1997. The increases in depreciation and
amortization expense are due to increases in capital expenditures resulting from
the significant growth of the Company combined with increased goodwill resulting
from the acquisition of the minority interest in the Services Subsidiary.
Non-Cash Compensation
Non-cash compensation expense increased to $38,000, or 0.3% of total revenues,
in the quarter ended September 30, 1998, from $13,000, or 0.2% of total
revenues, in the comparable period in 1997. Non-cash compensation expense
increased to $842,000, or 2.8% of total revenues, in the nine months ended
September 30, 1998, from $36,000, or 0.2% of total revenues in the comparable
period in 1997. Increased levels of unamortized deferred non-cash compensation,
relative to certain stock options awarded in the first quarter of 1998, provided
for the increased non-cash compensation expense in the quarter ended September
30, 1998. Additionally, in the second quarter of 1998, the Company accelerated
the vesting of certain employee stock options issued in the first quarter of
1998, for approximately 283,000 shares of Common Stock, at an exercise price of
between $3.67 per share and $8.00 per share. As a result of this accelerated
vesting, the Company recognized a non-cash, non-recurring charge of
approximately $705,000 during the quarter ended June 30, 1998, representing the
previously remaining unamortized deferred compensation recorded on these
options. The recognition of the non-cash, non-recurring charge provided for the
increases in the non-cash compensation expense in the nine months ended
September 30, 1998, when compared to the same period of the prior year.
Other Income
Interest income increased to $243,000 in the quarter ended September 30, 1998,
from $1,000, in the comparable period in 1997. Interest income increased to
$402,000 in the nine months ended September 30, 1998, from $28,000, in the
comparable period in 1997. On May 26, 1998, the Company completed an initial
public offering of its common stock in which it sold 2.5 million shares, which
resulted in net proceeds of approximately $22.0 million. The increases in
interest income were primarily due to the results of the investment of the funds
from the initial public offering.
15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations (continued)
Quarter and Nine Months Ended September 30, 1998, Compared to Quarter and Nine
Months Ended September 30, 1997 (continued).
Interest Expense
Interest expense decreased 61.7% to $51,000 in the quarter ended September 30,
1998, from $133,000 in the comparable period in 1997. Interest expense also
decreased 31.5% to $172,000 in the nine months ended September 30, 1998, from
$251,000 in the comparable period in 1997. These decreases are primarily due to
lower average levels of debt in the periods ended September 30, 1998, as
compared to the periods ended September 30, 1997.
Minority Interest
Minority interest decreased 100.0% in the quarter ended September 30, 1998, from
$133,000 in the comparable period in 1997. Minority interest decreased 88.8% to
$36,000 in the nine months ended September 30, 1998, from $322,000 in the
comparable period in 1997. These decreases in minority interest are related to
the purchase of the remaining 20% of the Services Subsidiary on February 5,
1998, which eliminated the minority interest related to the Services Subsidiary.
Income Taxes
As a result of the operating losses incurred since the Company's inception, the
Company has not recorded any provision or benefit for income taxes in the
quarter and nine month periods ended September 30, 1998 and 1997, respectively.
Liquidity and Capital Resources
On May 26, 1998, the Company completed its initial public offering of 2.5
million shares of its Common Stock at an offering price of $10.00 per share.
The proceeds, net of expenses, from this public offering of approximately $22.0
million were placed in investment grade cash equivalents. The Company's working
capital position (deficit) was $20.9 million and $(453,000) at September 30,
1998 and December 31, 1997, respectively. Management believes that current cash
balances and cash flows from operations will be adequate to provide for the
Company's capital expenditures and working capital requirements for the
forseeable future. Although operating activities may provide cash in certain
periods, to the extent the Company experiences growth in the future its
operating and investing activities may use significant cash.
On November 6, 1998, the Company completed the acquisition of Elekom Corporation
("Elekom") for approximately $15.7 million, consisting of $8.0 million in cash
and approximately 1.39 million shares of the Company's common stock. Elekom was
merged with and into Clarus CSA, Inc., a wholly owned subsidiary of the Company
and the separate existence of Elekom ceased. Immediately following consummation
of the merger, the former holders of Elekom common and preferred stock (the
"Elekom Shareholders") owned approximately 13% of the outstanding common stock
of the Company. The former Elekom Shareholders have agreed not to sell any of
their shares of the Company's common stock for a period ending on August 6,
1999. The Company as additional purchase price recorded i) payments of $500,000
made to fund the operations of Elekom from October 1, 1998, through the closing
date, and ii) expenses of approximately $750,000 to complete the merger.
Approximately $14.0 million of the purchase price was recorded as purchased
in-process research and development.
Cash used in operating activities was approximately $1.5 million and $3.3
million during the nine months ended September 30, 1998 and 1997, respectively.
Cash used by operations during the nine months ended September 30,
16
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources (continued)
1998, was primarily attributable to an increase in accounts receivable,
partially offset by an increase in accounts payable and accrued liabilities.
Cash used by operations during the nine months ended September 30, 1997, was
primarily attributable to an increase in accounts receivable, partially offset
by increases in deferred revenues and accounts payable and accrued liabilities.
Cash used in investing activities was approximately $2.6 million and $647,000
during the nine months ended September 30, 1998 and 1997, respectively. The cash
used in investing activities during the nine months ended September 30, 1998,
was primarily attributable to purchases of computer equipment and software and
an increase in intangible assets and costs related to the acquisition of
Elekom. The cash used in investing activities during the nine months ended
September 30, 1997, was primarily attributable to purchases of computer
equipment and software.
Cash provided by financing activities was approximately $20.8 million and $5.4
million during the nine months ended September 30, 1998 and 1997, respectively.
The cash provided by financing activities during the nine months ended September
30, 1998, was primarily attributable to the Company's initial public offering
effective May 26, 1998, for net proceeds of approximately $22.0 million. The
cash provided by financing activities during the nine months ended September 30,
1997, was primarily attributable to proceeds from the issuance of preferred
stock of approximately $6.0 million, and notes payable and short term borrowings
of approximately $29.8 million; offset by payments on notes payable and short
term borrowings of approximately $30.2 million.
In March 1997, the Company entered into a loan agreement and a master leasing
agreement for an equipment line of credit in the amount of $1.0 million (the
"Equipment Line") with a leasing company. The Equipment Line bears interest at
rates negotiated with each loan or lease schedule (generally 22.0% to 22.5%) and
is collateralized by all of the equipment purchased with the proceeds thereof.
As of September 30, 1998, the principal balance on the Equipment Line payable
was $515,000.
The Company has a revolving working capital line of credit and equipment
facility with Silicon Valley Bank. Borrowings outstanding under the line are
limited to the lesser of $3.0 million or 80% of accounts receivable. Interest on
the revolving credit facility is at prime rate and on the equipment facility at
prime plus 0.5% and is collateralized by all of the assets of the Company. The
line of credit and equipment term facility with Silicon Valley Bank will expire
on April 29, 1999. As of September 30, 1998, the Company had no outstanding
balance and had $3.5 million available for future borrowings under this
agreement.
The Company had available NOL's of approximately $24.5 million as of September
30, 1998, to reduce future income tax liabilities. These NOL's expire from 2007
through 2012 and are subject to review and possible adjustment by the
appropriate taxing authorities. Pursuant to the Tax Reform Act of 1986, the
utilization of NOL's for tax purposes may be subject to an annual limitation if
a cumulative change of ownership of more than 50% occurs over a three-year
period. As a result of this limitation, the Company will be limited to the use
of its NOL's in any given year. The Company had net deferred tax assets of
approximately $9.4 million at September 30, 1998, comprised primarily of net
operating loss carryforwards. The Company has fully reserved for these deferred
tax assets.
Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act
This quarterly report on Form 10-Q contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. When used
in this report, the words "believes," "expects," "anticipates," "estimates" and
similar words and expressions are generally intended to identify forward-looking
statements. Statements that describe the Company's future strategic plans,
goals, or objectives are also forward-looking statements. Readers of this report
are cautioned that any forward-looking statements, including those regarding the
17
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act (continued)
intent, belief or current expectations of the Company or management, are not
guarantees of future performance, results or events and involve risks and
uncertainties, and that actual results and events may differ materially from
those in the forward-looking statements as a result of various factors
including, but not limited to, (i) general economic conditions in the markets in
which the Company operates, (ii) competitive pressures in the markets in which
the Company operates, (iii) the effect of future legislation or regulatory
changes on the Company's operations and (iv) other factors described from time
to time in the Company's filings with the Securities and Exchange Commission.
The forward-looking statements included in this report are made only as of the
date hereof. The Company undertakes no obligation to update such forward-looking
statements to reflect subsequent events or circumstances.
Impact of Year 2000
The Company has designed and tested the most current versions of its products to
be Year 2000 compliant. There can be no assurances that the Company's current
products do not contain undetected errors or defects associated with Year 2000
date functions that may result in material costs to the Company. Some
commentators have stated that a significant amount of litigation will arise out
of Year 2000 compliance issues, and the Company is aware of a growing number of
lawsuits against other software vendors. Because of the unprecedented nature of
such litigation, it is uncertain whether or to what extent the Company may be
affected by it.
The Company is in the process of determining the extent to which third-party
licensed software distributed by the Company is Year 2000 compliant, as well as
the impact of any non-compliance on the Company and its customers.
Additionally, in the event relational database management systems used with the
Company's software are not Year 2000 compliant, there can be no assurance that
Company's customers will be able to continue to use the Company's products. The
Company does not currently believe that the effects of any Year 2000
non-compliance in the Company's installed base of software will result in a
material adverse impact on the Company's business or financial condition.
However, the Company's investigation with respect to third-party software is in
its preliminary stages, and no assurance can be given that the Company will not
be exposed to potential claims resulting from system problems associated with
the century change or that such claims would not have a material adverse effect
on the Company's business, financial condition or results of operations.
With respect to its internal systems, the Company is taking steps to prepare its
systems for the Year 2000 date change. The Company expects to substantially
complete inventory efforts during the first quarter of calendar year 1999, with
remediation and testing to continue through the third quarter of 1999. Although
the Company does not believe that it will incur any material costs or experience
material disruptions in its business associated with preparing its internal
systems for the Year 2000, there can be no assurances that the Company will not
experience unanticipated negative consequences and/or material costs caused by
undetected errors or defects in the technology used in its internal systems. The
Company is currently unable to estimate the most reasonably likely worst case
effects of the year 2000 and does not currently have a contingency plan in place
for any such unanticipated negative effects.
The Company is currently unable to estimate whether it is exposed to significant
risk of being adversely affected by Year 2000 noncompliance by third parties.
The Company is contacting third parties with which it has material
relationships, including its material customers, to attempt to determine their
preparedness with respect to Year 2000 issues and to analyze the risks to the
Company in the event any such third parties experience significant business
interruptions as result of Year 2000 noncompliance. The Company expects to
complete this review and analysis and to determine the need for contingency
planning in this regard by June 30, 1999.
18
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The Company filed a Form S-1 Registration Statement (Registration
No. 333-63535) in connection with its initial public offering that
was effective on May 26, 1998. On November 6, 1998, the Company used
approximately $8.0 million of the proceeds from its initial public
offering as a portion of the purchase price of Elekom Corporation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Agreement and Plan of Reorganization dated August 31, 1998,
by and among Clarus Corporation, Clarus CSA, Inc. and Elekom
Corporation (Incorporated by reference from Exhibit 2.1 and
Appendix A of the Company's Registration Statement on Form
S-4 (Registration No. 333-63535)).
2.2 Escrow and Minority Investment Agreement by and between the
Registrant and and Elekom Corporation and US Bank Trust
National Association (Incorporated by reference from Exhibit
2.2 to the Company's Registration Statement on Form S-4
(Registration No. 333-63535)).
4.1 Specimen Stock Certificate (Incorporated by reference from
Exhibit 4.2 to the Company's Registration Statement on Form
S-4 (Registration No. 333-63535)).
4.2 Voting Agreement by and among the Registrant and certain
shareholders of Elekom Corporation (Incorporated by reference
from Exhibit 4.3 to the Company's Registration Statement on
Form S-4 (Registration No. 333-63535)).
4.3 Registration Rights Agreement by and between the Registrant
and certain shareholders of Elekom Corporation.
4.4 Escrow and Indemnity Agreement by and among the Registrant,
Elekom Corporation and certain shareholders of Elekom
Corporation.
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K on September 4, 1998,
to report that it had entered into an Agreement and Plan of
Reorganization with Elekom Corporation.
19
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CLARUS CORPORATION
(Registrant)
Date: November 16, 1998 By: /s/William A. Fielder, III
---------------- ---------------------------------------
William A. Fielder, III
Chief Financial Officer and Treasurer
20