UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2001
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3970 Johns Creek Court
Suwanee, Georgia 30024
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(Address of principal executive offices)
(Zip code)
(770) 291-3900
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(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(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)
--------------------------------------------------------
15,545,629 shares outstanding as of August 6, 2001
1
INDEX
- -----
CLARUS CORPORATION
PART I FINANCIAL INFORMATION 3
- -----------------------------
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets (unaudited) -
June 30, 2001 and December 31, 2000; 3
Condensed Consolidated Statements of Operations (unaudited) -
Three and six months ended June 30, 2001 and 2000; 5
Condensed Consolidated Statements of Cash Flows (unaudited) -
Six months ended June 30, 2001 and 2000; 6
Notes to Condensed Consolidated Financial Statements (unaudited) -
June 30, 2001 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
PART II OTHER INFORMATION 29
- --------------------------
Item 1. Legal Proceedings 29
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 6. Exhibits and Reports on Form 8-K 30
SIGNATURES 30
2
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
CLARUS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share and per share amounts)
June 30, December 31,
2001 2000
--------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 81,910 $118,303
Marketable securities 53,890 50,209
Accounts receivable, less allowance for doubtful accounts
of $4,364 and $3,917 in 2001 and 2000, respectively 6,598 8,126
Deferred marketing expense, current 2,459 5,321
Prepaids and other current assets 3,546 2,731
-------- --------
Total current assets 148,403 184,690
PROPERTY AND EQUIPMENT, NET 8,623 7,619
OTHER ASSETS:
Deferred marketing expense, net of current portion 1,994 2,508
Investments 10,113 13,619
Intangible assets, net of accumulated amortization of $10,629 and
$6,146 in 2001 and 2000, respectively 51,550 58,214
Deposits and other long-term assets 271 254
-------- --------
Total other assets 63,928 74,595
-------- --------
TOTAL ASSETS $220,954 $266,904
======== ========
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
3
CLARUS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(unaudited)
(in thousands, except share and per share amounts)
June 30, December 31,
2001 2000
-------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 8,870 $ 11,059
Deferred revenue 3,537 2,295
--------- ---------
Total current liabilities 12,407 13,354
LONG-TERM LIABILITIES:
Deferred revenue 416 881
Long-term debt 5,000 5,000
Other long-term liabilities 856 847
--------- ---------
Total liabilities 18,679 20,082
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value; 5,000,000 shares authorized; none
issued - -
Common stock, $.0001 par value; 100,000,000 shares authorized;
15,571,698 and 15,609,029 shares issued and 15,496,698 and 15,534,029
outstanding in 2001 and 2000, respectively 2 2
Additional paid-in capital 360,400 362,415
Accumulated deficit (158,317) (114,769)
Treasury stock, at cost (2) (2)
Accumulated other comprehensive income/(loss) 220 (572)
Deferred compensation (28) (252)
--------- ---------
Total stockholders' equity 202,275 246,822
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 220,954 $ 266,904
========= =========
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4
CLARUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in thousands, except per share amounts)
Three months ended Six months ended
June 30 June 30
------------------------------ ------------------------------
2001 2000 2001 2000
REVENUES:
License fees $ 3,600 $ 7,845 $ 5,910 $ 13,641
Services fees 2,393 2,240 4,655 3,450
------------------------------ ------------------------------
Total revenues 5,993 10,085 10,565 17,091
COST OF REVENUES:
License fees 80 59 124 98
Services fees 3,139 2,440 6,649 3,928
------------------------------ ------------------------------
Total cost of revenues 3,219 2,499 6,773 4,026
OPERATING EXPENSES:
Research and development, exclusive of
noncash expense 4,570 5,269 10,125 8,356
Noncash research and development - - - 826
In-process research and development
expense - 8,300 - 8,300
Sales and marketing, exclusive of
noncash expense 9,329 8,704 17,398 15,248
Noncash sales and marketing 1,688 2,017 3,376 3,829
General and administrative, exclusive of
noncash expense 2,885 2,369 7,634 4,995
Noncash general and administrative 112 331 224 1,476
Depreciation and amortization 3,301 1,564 6,166 2,264
------------------------------ ------------------------------
Total operating expenses 21,885 28,554 44,923 45,294
OPERATING LOSS (19,111) (20,968) (41,131) (32,229)
GAIN/(LOSS) ON SALE OF ASSETS (7) 547 (7) 547
LOSS ON IMPAIRMENT OF INVESTMENTS (3,386) - (6,484) -
REALIZED GAIN ON SALE OF INVESTMENTS 11 - 10 -
AMORTIZATION OF DEBT DISCOUNT - - - (982)
INTEREST INCOME 1,762 3,576 4,184 4,562
INTEREST EXPENSE (56) (58) (120) (232)
------------------------------ ------------------------------
NET LOSS $(20,787) $(16,903) $(43,548) $(28,334)
============================== ==============================
Loss per common share:
Basic $ (1.34) $ (1.16) $ (2.81) $ (2.12)
Diluted $ (1.34) $ (1.16) $ (2.81) $ (2.12)
Weighted average shares outstanding
Basic 15,507 14,538 15,507 13,392
Diluted 15,507 14,538 15,507 13,392
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5
CLARUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands, except share amounts)
Six months ended
June 30,
--------------------------------------
2001 2000
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OPERATING ACTIVITIES:
Net loss $(43,548) $(28,334)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization on property and equipment 1,683 1,103
Amortization of intangible assets 4,483 1,161
In-process research and development - 8,300
Loss on impairment of investments 5,506 -
Loss on impairment of marketable securities 979
Gain on sale of investments (10) -
Noncash interest expense associated with original issue discount on debt - 982
Provision for doubtful accounts 2,610 516
Noncash research and development expense - 826
Noncash sales and marketing expense 3,376 3,829
Noncash general and administrative expense 224 1,476
Exchange of software for cost-method investments - (3,429)
(Gain)/loss on sale of assets 7 (547)
Changes in operating assets and liabilities:
Accounts receivable (1,082) (6,670)
Prepaid and other current assets (815) 109
Deposits and other long-term assets (17) (41)
Accounts payable and accrued liabilities (2,189) 4,321
Deferred revenue 777 1,190
Other long-term liabilities 9 -
-------- ---------
NET CASH USED IN OPERATING ACTIVITIES (28,007) (15,208)
INVESTING ACTIVITIES:
Purchase of marketable securities (40,794) (15,632)
Proceeds from sale and maturity of marketable securities 36,853 -
Acquisitions, net of cash acquired - (33,453)
Purchase of investments (2,000) (1,620)
Proceeds from sale of assets - 1,864
Purchases of property and equipment (2,694) (3,211)
-------- ---------
NET CASH USED IN INVESTING ACTIVITIES (8,635) (52,052)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock related to secondary offering - 244,427
Proceeds from long-term debt - 5,000
Repayment of long-term debt and capital lease obligations - (7,021)
Proceeds from the exercises of stock options 70 1,880
Proceeds from issuance of common stock related to employee stock purchase
plan 96 -
-------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 166 244,286
-------- ---------
Effect of exchange rate change on cash 83 8
CHANGE IN CASH AND CASH EQUIVALENTS (36,393) 177,034
CASH AND CASH EQUIVALENTS, beginning of period 118,303 14,127
-------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 81,910 $ 191,161
======== =========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 64 $ 232
======== =========
NONCASH TRANSACTIONS:
Issuance of warrants to purchase 50,000 shares of common stock in
connection with marketing agreements at fair value $ - $ 986
======== =========
Issuance of 39,118 shares of common stock in connection with marketing
agreements $ - $ 4,361
======== =========
Issuance of 1,148,000 shares of common stock in connection with SAI
acquisition $ - $ 30,353
======== =========
Receipt of marketable securities in satisfaction of trade account receivable $ - $ 250
======== =========
Retirement of 82,500 shares of common stock pursuant to terminated
employment agreements with former owners of the SAI/Redeo Companies $ 2,181 $ -
======== =========
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 and subsidiaries (the "Company") for the three and six months ended
June 30, 2001, have been prepared in accordance with generally accepted
accounting principles 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 condensed
consolidated financial statements have been included. The results of the three
and six months ended June 30, 2001 are not necessarily indicative of the results
to be obtained for the year ending December 31, 2001. 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, 2000, filed with the Securities and
Exchange Commission.
NOTE 2. EARNINGS PER SHARE
Basic and diluted net loss per share were computed in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share", using
the weighted average number of common shares outstanding. The diluted net loss
per share for the three and six months ended June 30, 2001 and 2000 does not
include the effect of common stock equivalents, calculated using the treasury
stock method, as their impact would be antidilutive. The potentially dilutive
effect of excluded common stock equivalents are as follows (in thousands):
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2001 2000 2001 2000
---- ----- ---- -----
Effect of shares issuable under stock options 196 1,150 289 1,348
Effect of shares issuable pursuant to warrants to
purchase common stock - 157 1 190
------------------- -------------------
Total 196 1,307 290 1,538
------------------- -------------------
NOTE 3. STOCK OPTION EXCHANGE PROGRAM
On April 9, 2001, the Company announced a voluntary stock option exchange
program for its employees. Under the program, employees were given the
opportunity, if they so choose, to cancel outstanding stock options previously
granted to them on or after November 1, 1999 in exchange for an equal number of
new options to be granted at a future date. The exercise price of these new
options will be equal to the fair market value of the Company's common stock on
the date of grant, which the Company expects to be later than November 9, 2001.
During the first phase of the program 366,174 options were canceled and will be
reissued on November 9, 2001. The Company offered employees a second opportunity
to exchange outstanding stock options beginning on July 9, 2001 and ending on
August 6, 2001. Employees who participated in the first exchange will not be
eligible for the second exchange. The exchange program has been designed to
comply with Financial Accounting Standards Board ("FASB") Interpretation No. 44
"Accounting for Certain Transactions Involving Stock Compensation" and is not
expected to result in any additional compensation charges or variable plan
accounting. Members of the Company's Board of Directors and its officers are not
eligible to participate in the exchange program.
NOTE 4. MARKETABLE SECURITIES
During the second quarter of 2001, the Company recognized a charge of $979,000
for other than temporary losses from equity investments in a publicly traded
company. The Company had recorded unrealized losses on this investment of $1.0
million through March 31, 2001. The securities were originally acquired as
settlement of a trade accounts receivable.
NOTE 5. INVESTMENTS
During the second quarter of 2001, the Company made an equity investment of $2.0
million in a privately held strategic partner. Prior to 2001, the Company made
equity investments of $17.7 million in eleven privately held companies. The
Company's equity interest in these entities ranges from 2.5% to 12.5% and the
Company is accounting for these investments using the cost method of accounting.
During the second quarter of 2001, the first quarter of 2001 and the fourth
quarter of 2000, the Company recorded a charge of $2.4 million, $3.1 million and
$4.1 million, respectively, for other than temporary losses on these
investments. These
7
companies are primarily early-stage companies and are subject to
significant risk due to their limited operating history and current economic
conditions. The Company has not recognized any material revenue from these
companies during 2001. During the year ended December 31, 2000, the Company
recognized $17.2 million in total revenue from these companies. In the second
quarter of 2000, the Company made equity investments of $5.3 million and
recognized $2.9 million in total revenue from four privately held companies. For
the six months ended June 30, 2000, the Company made equity investments of $6.0
million and recognized $4.1 million in total revenue from five privately held
companies.
NOTE 6. ACQUISITIONS
On May 31, 2000, the Company acquired all of the outstanding capital stock of
SAI (Ireland) Limited, SAI Recruitment Limited, i2Mobile.com Limited and SAI
America Limited (the "SAI/Redeo Companies"). The SAI/Redeo Companies specialize
in electronic payment settlement. The purchase consideration was approximately
$63.2 million, consisting of approximately $30.0 million in cash (exclusive of
$350,000 of cash acquired), 1,148,000 shares of the Company's common stock with
a fair value of $30.4 million, assumed options to acquire 163,200 shares of the
Company's common stock with an exercise price of $23.50 (estimated fair value of
$1.8 million using the Black-Scholes option pricing model) and acquisition costs
of approximately $995,000.
The acquisition was treated as a purchase for accounting purposes, and
accordingly, the assets and liabilities were recorded based on their preliminary
fair value at the date of acquisition. The Company evaluated the developed
technologies and the in-process research and development to determine their
stage of development, their expected income generating ability, as well as risk
factors associated with achieving technological feasibility. The Company
expensed approximately $8.3 million to in-process research and development in
the second quarter of 2000. The goodwill, $48.2 million, and the developed
technologies, $4.1 million, are being amortized over eight years. The assembled
workforce, $450,000, and the customer base, $100,000, are being amortized over
seven and four years, respectively. The goodwill balance was reduced in the
first quarter of 2001 by $1.5 million as a result of 55,000 shares issued as
part of the original purchase consideration being cancelled when a related
employment agreement was terminated prior to the first anniversary of the
acquisition date. The goodwill balance was further reduced in the second quarter
of 2001 by $0.7 million as a result of 27,500 shares issued as part of the
original purchase consideration being cancelled when a related employment
agreement was terminated prior to the second anniversary of the acquisition
date.
On April 28, 2000, the Company acquired all of the capital stock of iSold.com,
Inc., a Delaware corporation ("iSold"). iSold has developed a software program
that provides auctioning capabilities to its clients. The purchase
consideration was approximately $2.5 million in cash of which $1.6 million was
paid at the date of acquisition and $900,000 was paid in April 2001. The
acquisition was treated as a purchase for accounting purposes with approximately
$500,000 of the purchase consideration allocated to developed technologies and
approximately $2.0 million to goodwill. The developed technologies are being
amortized over three years and the goodwill is being amortized over four years.
NOTE 7. COMPREHENSIVE INCOME (LOSS)
SFAS No. 130 "Reporting Comprehensive Income", establishes standards of
reporting and display of comprehensive income (loss) and its components of net
income (loss) and "Other Comprehensive Income (Loss)". "Other Comprehensive
Income (Loss)" refers to revenues, expenses and gains and losses that are not
included in net income (loss) but rather are recorded directly in stockholders'
equity. The components of comprehensive income (loss) for the three and six
months ended June 30, 2001 and 2000 were as follows (in thousands):
Three months ended Six months ended
June 30, June 30,
-------------------------- -------------------------
2001 2000 2001 2000
Net loss $(20,787) $(16,903) $(43,548) $(28,334)
Unrealized gain on marketable securities 812 293 709 293
Foreign currency translation adjustments (7) 8 83 8
-------------------------- -------------------------
Comprehensive loss $(19,982) $(16,602) $(42,756) $(28,033)
========================== =========================
NOTE 8. CREDIT AND CUSTOMER CONCENTRATIONS
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. As of June 30, 2001, four
customers accounted for more than 10% each, totaling $6.9 million or 63.4% of
the gross accounts receivable balance on that date. The percentage by customer
was 12.3%, 14.7%, 17.3%, and 19.1%, respectively, at June 30, 2001. As of
December 31, 2000, four customers accounted for more than 10% each, totaling
$6.7 million or 56.0% of the gross accounts receivable balance on that date.
The percentage by customer was 10.4%, 11.2%, 14.5%, and 19.9%, respectively, at
December 31, 2000.
8
During the quarter ended June 30, 2001, three customers accounted for more than
10% each, totaling $4.0 million or 66.0%, of total revenue. The percentage by
customer was 15.4%, 24.7% and 25.9%, respectively, for the quarter ended June
30, 2001. During the quarter ended June 30, 2000, two customers accounted for
more than 10% each, totaling $3.6 million or 35.4% of total revenue. The
percentage by customer was 16.5% and 18.9%, respectively, for the quarter ended
June 30, 2000. During the six months ended June 30, 2001, three customers
accounted for more than 10% each, totaling $6.3 million or 59.5%, of total
revenue. The percentage by customer was 14.0%, 16.0% and 29.5%, respectively,
for the six months ended June 30, 2001. During the six months ended June 30,
2000, two customers accounted for more than 10% each, totaling $3.9 million or
22.8% of total revenue. The percentage by customer was 11.1% and 11.7%,
respectively, for the six months ended June 30, 2000.
NOTE 9. CONTINGENCIES
The Company is a party to lawsuits in the normal course of its business.
Litigation in general, and securities litigation in particular, can be expensive
and disruptive to normal business operations. Moreover, the results of complex
legal proceedings are difficult to predict. An unfavorable resolution of one or
more of the following lawsuits could adversely affect the Company's business,
results of operations, or financial condition.
Following its public announcement on October 25, 2000, of its financial results
for the third quarter, the Company and certain of its directors and officers
were named as defendants in fourteen putative class action lawsuits filed in the
United States District Court for the Northern District of Georgia on behalf of
all purchasers of common stock of the Company during various periods beginning
as early as October 20, 1999 and ending on October 25, 2000. The fourteen class
action lawsuits filed against the Company were consolidated into one case, Case
No. 1:00-CV-2841, pursuant to an order of the court dated November 17, 2000. On
March 22, 2001, the Court entered an order appointing as the lead Plaintiffs
John Nittolo, Dean Monroe, Ronald Williams, V&S Industries, Ltd., VIP World
Asset Management, Ltd., Atlantic Coast Capital Management, Ltd., and T.F.M.
Investment Group. Pursuant to the previous Consolidation Order of the Court, a
Consolidated Amended Complaint was filed on May 14, 2001. On June 29, 2001, the
Company filed a motion to dismiss the consolidated case. The plaintiffs
responded to the Company's motion to dismiss on August 6, 2001.
The class action complaint alleges claims against the Company and other
defendants for violations of Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934, as amended, and Rule 10b-5 promulgated thereunder with respect to
alleged material misrepresentations and omissions in public filings made with
the Securities and Exchange Commission and certain press releases and other
public statements made by the Company and certain of its officers relating to
its business, results of operations, financial condition and future prospects,
as a result of which, it is alleged, the market price of the Company's common
stock was artificially inflated during the class periods. The class action
complaint focuses on statements made concerning an account receivable from one
of the Company's customers. The plaintiffs seek unspecified compensatory
damages and costs (including attorneys' and expert fees), expenses and other
unspecified relief on behalf of the class. The Company believes that it has
complied with all of its obligations under the Federal securities laws and the
Company intends to defend this lawsuit vigorously. As a result of consultation
with legal representation and current insurance coverage, the Company does not
believe the lawsuit will have a material impact on the Company's results of
operations or financial position.
NOTE 10. COMMITMENTS
In March 2001, the Company terminated a services agreement with a development
partner. As a result, the Company paid termination fees of $300,000 in the
second quarter of 2001. The remaining $300,000 liability is included in the
accounts payable and accrued liabilities balance in the accompanying condensed
consolidated balance sheet as of June 30, 2001 and was paid in July, 2001. The
expense is recorded in research and development expenses in the accompanying
condensed consolidated statement of operations for the six months ended June 30,
2001.
NOTE 11. NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets". SFAS 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. SFAS 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually. SFAS 142 will also require that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of".
The Company is required to adopt the provisions of SFAS 141 immediately and SFAS
142 effective January 1, 2002. Goodwill and intangible assets determined to have
an indefinite useful life acquired in a purchase business combination completed
after June
9
30, 2001, but before SFAS 142 is adopted in full will not be amortized, but will
continue to be evaluated for impairment in accordance with the accounting
literature in effect prior to the issuance of SFAS 142. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of SFAS 142.
At June 30, 2001, the Company's unamortized goodwill and intangibles totaled
$51.6 million. Amortization expense related to goodwill was $4.7 million and
$4.0 million for the year ended December 31, 2000 and the six months ended June
30, 2001, respectively. Because of the extensive effort needed to comply with
adopting SFAS 141 and SFAS 142, it is not practicable to reasonably estimate the
impact of adopting these Statements on the Company's financial statements at the
date of this report, including whether it will be required to recognize any
transitional impairment losses as the cumulative effect of a change in
accounting principle.
In September 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement was amended in June 2000 by
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities." The Company adopted these new pronouncements in January of
2001. The new Statements require all derivatives to be recorded on the balance
sheet at fair value and establish accounting treatment for three types of
hedges: hedges of changes in the fair value of assets, liabilities or firm
commitments; hedges of the variable cash flows of forecasted transactions; and
hedges of foreign currency exposures of net investments in foreign operations.
The Company has no derivatives and the adoption of these pronouncements had no
impact on the Company's results of operations or financial position.
NOTE 12. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current
period presentation.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company develops, markets and supports Internet-based business-to-business
electronic commerce solutions that automate the procurement and management of
operating resources. The Company's multiple solutions provide a framework to
enable Internet-based digital marketplaces, allowing companies to create trading
communities and additional revenue opportunities. The Company's multiple
solutions, based on a free trade model, provide a direct Internet-based
connection between buyer and supplier without requiring transactions to be
executed through a centralized portal. The Company's product line includes
solutions that serve "market makers" (businesses utilizing the Internet for the
purpose of facilitating and increasing the efficiency of the distribution
channels of chosen vertical markets) as well as other solutions that best serve
the purchasing processes of business enterprises. The Company also provides
implementation and ongoing customer support services as part of its complete
procurement solutions. To achieve broad market adoption of the Company's
solutions and services, the Company has developed a multi-channel distribution
strategy that includes both a direct sales force and a growing number of
indirect channels, including application service providers, system integrators
and resellers.
Forward-Looking Statements
This report contains certain forward-looking statements related to our future
prospects or results, including certain projections and business trends.
Assumptions relating to forward-looking statements involve judgments with
respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control. When
used in this report, the words "estimate", "project", "intend", "believe" and
"expect" and similar expressions are intended to identify forward-looking
statements. Although we believe that assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate, and we
may not realize the results contemplated by the forward-looking statement.
Management decisions are subjective in many respects and susceptible to
interpretations and periodic revisions based upon actual experience and business
developments, the impact of which may cause us to alter our business strategy or
capital expenditure plans that may, in turn, affect our results of operations.
In light of the significant uncertainties inherent in the forward-looking
information included in this report, you should not regard the inclusion of such
information as our representation that we will achieve any strategy, objectives
or other plans. The forward-looking statements contained in this report speak
only as of the date of this report, and we have no obligation to update publicly
or revise any of these forward-looking statements.
These and other statements, which are not historical facts, are based largely
upon our current expectations and assumptions and are subject to a number of
risks and uncertainties that could cause actual results to differ materially
from those contemplated by such forward-looking statements. These risks and
uncertainties include, among others, the risks and uncertainties described in
the "Risk Factors" section of this discussion beginning on page 18 herein.
Sources of Revenue
The Company's revenue consists of license fees and services fees. License fees
are generated from the licensing of the Company's products. Services fees are
generated from consulting, implementation, training, content aggregation and
maintenance and support services.
Revenue Recognition
The Company recognizes revenue from two primary sources, software licenses and
services. Revenue from software licensing and services fees is recognized in
accordance with Statement of Position ("SOP") 97-2, "Software Revenue
Recognition", and SOP 98-9, "Software Revenue Recognition with Respect to
Certain Transactions". Accordingly, the Company recognizes software license
revenue when: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred; (3) the fee is fixed or determinable; and (4) collectibility is
probable.
SOP No. 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair values of the elements. The fair value of an element must be
based on evidence that is specific to the vendor. License fee revenue allocated
to software products generally is recognized upon delivery of the products or
deferred and recognized in future periods to the extent that an arrangement
includes one or more elements to be delivered at a future date and for which
fair values have not been established. Services fee revenue allocated to
maintenance is recognized ratably over the maintenance term, which is typically
twelve months, and services fee revenue allocated to training and other service
elements is recognized as the services are performed.
11
Under SOP No. 98-9, if evidence of fair value does not exist for all elements of
a license agreement and post-contract customer support is the only undelivered
element, then all revenue for the license arrangement is recognized ratably over
the term of the agreement as license revenue. If evidence of fair value of all
undelivered elements exists but evidence does not exist for one or more
delivered elements, then revenue is recognized using the residual method. Under
the residual method, the fair value of the undelivered elements is deferred and
the remaining portion of the arrangement fee is recognized as revenue. Revenue
from hosted software agreements are recognized ratably over the term of the
hosting arrangements.
Operating Expenses
Cost of license fees includes royalties and software duplication and
distribution costs. The Company recognizes these costs as the applications are
shipped.
Cost of services fees includes personnel related expenses and third-party
consulting fees incurred to provide implementation, training, maintenance,
content aggregation, and upgrade services to customers and partners. These costs
are recognized as they are incurred.
Research and development expenses consist primarily of personnel related
expenses and third-party consulting fees. The Company accounts for software
development costs under Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed". The Company charges research and development costs related to new
products or enhancements to expense as incurred until technological feasibility
is established, after which the remaining costs are capitalized until the
product or enhancement is available for general release to customers. The
Company defines technological feasibility as the point in time at which a
working model of the related product or enhancement exists. Historically, the
costs incurred during the period between the achievement of technological
feasibility and the point at which the product is available for general release
to customers have not been material.
Sales and marketing expenses consist primarily of personnel related expenses,
including sales commissions and bonuses, expenses related to travel, customer
meetings, trade show participation, public relations, promotional activities,
regional sales offices, and advertising.
General and administrative expenses consist primarily of personnel related
expenses for financial, administrative and management personnel, fees for
professional services, and the provision for doubtful accounts. The Company
allocates the total cost of its information technology function and costs
related to the occupancy of its corporate headquarters, to each of the
functional areas. Information technology expenses include personnel related
expenses, communication charges, and software support. Occupancy charges
include rent, utilities, and maintenance services.
The Company has incurred significant costs to develop its business-to-business
e-commerce technology and products and to recruit and train personnel. The
Company believes its success is contingent upon increasing its customer base and
investing in further development of its products and services. This will
require significant expenditures for sales, marketing, research and development,
and to a lesser extent support infrastructure. The Company therefore expects to
continue to incur substantial operating losses for the foreseeable future.
Limited Operating History
The Company has a limited operating history as an e-commerce business that makes
it difficult to forecast its future operating results. Prior period results
should not be relied on to predict the Company's future performance.
Results of Operations
Revenues
In the second half of 2000, the Company expanded its business model to include
ratable revenue recognition. Total revenues for the three and six months ended
June 30, 2001 were impacted by the use of programs that result in revenues
recognized ratably. The Company includes in its definition of ratable programs
contracts which do not result in all license revenue being recognized at the
time the contract is executed. Examples of ratable programs include but are not
limited to: traditional, perpetual license contracts with extended payment
terms, subscriptions and milestone arrangements. For the three months ended
June 30, 2001, the Company recognized 54.2% of license revenue from ratable
programs. For the six months ended June 30, 2001, the Company recognized 46.6%
of license revenue from ratable programs. Although lowering reported total
revenue and license revenue for the three and six months ended June 30, 2001,
the Company believes that the benefits achieved over time of the ratable model
are a more linear revenue pattern as well as increased visibility and
predictability of financial results.
12
Total Revenues. Total revenues for the quarter ended June 30, 2001 decreased
40.6% to $6.0 million from $10.1 million during the same period in 2000. Total
revenues for the six months ended June 30, 2001 decreased 38.2% to $10.6 million
from $17.1 million during the same period in 2000. The decrease in total
revenues resulted primarily from the expansion of the Company's business model
discussed above, and the softening demand for business-to-business software and
related services and the information technology market generally. The decrease
in license fee revenues was partially offset by an increase in services fees,
resulting from an increase in new license customers signed during 2000. During
the quarter ended June 30, 2001, three customers accounted for more than 10%
each, totaling $4.0 million or 66.0%, of total revenue. The percentage by
customer was 15.4%, 24.7% and 25.9%, respectively, for the quarter ended June
30, 2001. During the quarter ended June 30, 2000, two customers accounted for
more than 10% each, totaling $3.6 million or 35.4% of total revenue. The
percentage by customer was 16.5% and 18.9%, respectively, for the quarter ended
June 30, 2000. During the six months ended June 30, 2001, three customers
accounted for more than 10% each, totaling $6.3 million or 59.5%, of total
revenue. The percentage by customer was 14.0%, 16.0% and 29.5%, respectively,
for the six months ended June 30, 2001. During the six months ended June 30,
2000, two customers accounted for more than 10% each, totaling $3.9 million or
22.8% of total revenue. The percentage by customer was 11.1% and 11.7%,
respectively, for the six months ended June 30, 2000.
License Fees. License fees decreased 54.1% to $3.6 million, or 60.1% of total
revenues, for the quarter ended June 30, 2001 from $7.8 million, or 77.8% of
total revenues, for the same period in 2000. License fees decreased 56.7% to
$5.9 million, or 55.9% of total revenues, for the six months ended June 30, 2001
from $13.6 million, or 79.8% of total revenues, for the same period in 2000.
The decrease in license fees was primarily attributable to the expansion of the
Company's business model, discussed above, and the softening demand for
business-to-business software and the information technology market generally.
Services Fees. Services fees increased 6.8% to $2.4 million, for the quarter
ended June 30, 2001, from $2.2 million for the same period in 2000, and also
increased as a percentage of total revenues to 39.9%, for the quarter ended June
30, 2001, from 22.2% for the same period in 2000. Services fees increased 34.9%
to $4.7 million, for the six months ended June 30, 2001, from $3.5 million for
the same period in 2000, and also increased as a percentage of total revenues to
44.1%, for the six months ended June 30, 2001, from 20.2% for the same period in
2000. The increase in services fees is primarily due to an increase in new
license customers signed during 2000 partially offset by the softening demand
for business-to-business software and related services and the information
technology market generally.
Cost of Revenues
Total Cost of Revenues. Cost of revenues increased 28.8% to $3.2 million, or
53.7% of total revenue, during the quarter ended June 30, 2001 from $2.5
million, or 24.8% of total revenue, during the same period in 2000. Cost of
revenues increased 68.2% to $6.8 million, or 64.1% of total revenue, during the
six months ended June 30, 2001 from $4.0 million, or 23.6% of total revenue,
during the same period in 2000. The increase in the cost of revenues, both in
total and as a percentage of total revenues, is primarily a result of an
increase in the cost of services fees due to higher personnel related costs.
During the three months ended June 30, 2001, the Company had an average of 8.5%
more employees compared to the same period in 2000. During the six months ended
June 30, 2001, the Company had an average of 44.0% more employees compared to
the same period in 2000. Severance expenses, related to nine employees of
approximately $168,000, also negatively impacted the cost of revenues for the
six months ended June 30, 2001.
Cost of License Fees. Cost of license fees increased 35.6% to $80,000 in the
second quarter of 2001 from $59,000 in the second quarter of 2000. Cost of
license fees increased 26.5% to $124,000 for the six months ended June 30, 2001
from $98,000 in the same period of 2000. Cost of license fees may vary from
period to period depending on the product mix licensed, but are expected to
remain a small percentage of license fees.
Cost of Services Fees. Cost of services fees increased 28.7% to $3.1 million,
or 131.2% of total services fees revenues, during the quarter ended June 30,
2001 compared to $2.4 million, or 108.9% of total services fees revenues, during
the same period in 2000. Cost of services fees increased 69.3% to $6.6 million,
or 142.8% of total services fees revenues, during the six months ended June 30,
2001 compared to $3.9 million, or 113.9% of total services fees revenues, during
the same period in 2000. As discussed above, the increase in the cost of
services fees for the three and six months ended June 30, 2001 was primarily
attributable to higher personnel related costs in both the services
implementation and customer support areas. The Company has incurred cost of
services fees in excess of services revenues due primarily to the hiring and
training of personnel in anticipation of future growth. As a result of slower
than anticipated growth, the Company instituted cost control actions in the
first quarter of 2001, including the reduction in personnel discussed above, to
more closely align the cost structure with the anticipated growth. While the
Company believes these costs will continue to be greater than services fees in
the near term, the Company anticipates that services fees will exceed costs by
late 2001.
Research and Development, Exclusive of Noncash Expense
13
Research and development expenses decreased 13.3% to approximately $4.6 million,
or 76.3% of total revenues, during the quarter ended June 30, 2001 from $5.3
million, or 52.3% of total revenues, during the same period in 2000. Research
and development expenses increased 21.2% to approximately $10.1 million, or
95.8% of total revenues, during the six months ended June 30, 2001 from $8.4
million, or 48.9% of total revenues, during the same period in 2000. Research
and development expenses decreased in the quarter ended June 30, 2001 compared
to the quarter ended June 30, 2000 as a result of a reduction of consulting fees
partially offset by an increase in the number of employees and the Company's
acquisition of the SAI/Redeo companies in May 2000. Consulting fees were $1.6
million in the second quarter of 2001 compared to $3.0 million in the second
quarter of 2000. During the second quarter of 2001, the Company had an average
of 32.3% more employees compared to the same period of 2000. Research and
development expenses increased for the six months ended June 30, 2001 compared
to the six months ended June 30, 2000 primarily due to increased personnel
related expenses incurred to develop the Company's products and the acquisition
of the SAI/Redeo companies partially offset by a decrease in consulting fees.
During the six months ended June 30, 2001, the Company had an average of 37.7%
more employees in the research and development area compared to the same period
of 2000. Consulting fees were $3.7 million for the six months ended June 30,
2001 compared to $4.4 million for the same period of 2000. The results for the
six months ended June 30, 2001 were also negatively impacted by $600,000 as a
result of terminating a services agreement with a development partner. The
Company plans to utilize in-house research and development personnel in the
future, but expects to incur consulting fees for certain specialized development
projects.
Noncash Research and Development Expense
Noncash research and development expenses of approximately $826,000 were
recognized during the first quarter of 2000. The expenses resulted from the
Company's agreement with a third party to develop certain software that the
Company intends to sell in the future. The agreement required the third party
to reach certain milestones related to the software development in order to
receive warrants to purchase 50,000 shares of the Company' common stock with an
exercise price of $56.78. The third party completed two of the three scheduled
milestones in the first quarter of 2000 and they were granted warrants to
purchase 33,334 shares of common stock. The third milestone was not reached by
the scheduled due date, and as a result the warrants to purchase the remaining
16,666 shares of common stock were forfeited. The warrants to purchase 33,334
shares remain outstanding at June 30, 2001 and expire in the first quarter of
2003. At the end of the first quarter of 2000, the value of the warrants earned
approximated $826,000 and was computed using the Black-Scholes option pricing
model.
In-Process Research and Development Expense
In-process research and development expense was approximately $8.3 million for
the three and six months ended June 30, 2000. The Company recorded this expense
in the second quarter of 2000 related to its acquisition of the SAI/Rodeo
companies on May 31, 2000 (the "Valuation Date").
At the Valuation Date, the SAI/Redeo companies had technology under development
that had not yet reached technological feasibility and had no alternative future
use in the event that the proposed products did not prove to be feasible. The
product under development was a settlement portal that completes the B2B
commerce chain cycle for the buy side, sell side, and net marketmakers. The
Company's goal is to complete the procurement cycle from order fulfillment to
settlement automatically and at the lowest possible cost. The initial
development and commercial release of the Company's Settlement product was
completed during the third quarter of 2000. The Company is continuing to invest
in further development and enhancements of the Settlement product. During the
six months ended December 31, 2001 25.9% of the Company's license revenue was
derived from licensing the Settlement product. During the six months ended June
30, 2001 21.4% of the Company's license revenue was derived from licensing the
Company's Settlement product.
The value of the IPR&D was determined using a discounted cash flow model,
focusing on the income-producing capabilities of the in-process technologies and
taking into consideration (i) the analysis of the stage of completion of each
project and (ii) the exclusion of value related to research and development yet-
to-be completed as part of the on-going IPR&D projects. Under this approach,
the value is determined by estimating the revenue contribution generated by each
of the identified products classified within the classification segments.
Revenue estimates were based on (i) individual product revenues, (ii)
anticipated growth rates, (iii) anticipated product development and introduction
schedules, (iv) product sales cycles, and (v) the estimated life of a product's
underlying technology.
Based upon the revenue estimates, operating expense projections, including cost
of sales, general and administrative, selling and marketing, income taxes and a
use charge for contributory assets, were deducted to arrive at operating income.
Revenue growth rates were estimated by management for each product with
consideration to relevant market sizes and growth factors, expected industry
trends, the anticipated nature and timing of new product introductions by the
Company as well as competitors, individual product sales cycles, and the
estimated life of each product's underlying technology. Operating expense
estimates reflect the Company's historical expense ratios. Additionally, these
projects will require continued research and development after they have reached
a state of technological and commercial feasibility. The resulting operating
income stream was discounted to reflect its
14
present value at the date of the acquisition.
The rate used to discount the net cash flows from the purchased IPR&D was 28%.
This rate is equal to the weighted average cost of capital of the Company,
taking into account (i) the required rates of return from investments in various
areas of the enterprise, (ii) reflecting the inherent uncertainties in future
revenue estimates from technology investments including the uncertainty
surrounding the successful development of the acquired IPR&D, (iii) the useful
life of such technology, (iv) the profitability levels of such technology, if
any, and (v) the uncertainty of technological advances, all of which were
unknown at the time.
No assurance can be given that actual revenues and operating profit attributable
to the purchased IPR&D will not deviate from the projections used to value such
technology. Ongoing operations and financial results for acquired businesses,
and the Company as a whole, are subject to a variety of factors which may not
have been known or estimable at the Valuation Date. To date, actual costs of
completing the project and the timing thereof have been consistent with the
estimates used in developing the valuation of the purchased IPR&D.
Sales and Marketing, Exclusive of Noncash Expense
Sales and marketing expenses increased 7.2% to $9.3 million, or 155.7% of total
revenues, during the quarter ended June 30, 2001 from $8.7 million, or 86.3% of
total revenues, during the same period in 2000. Sales and marketing expenses
increased 14.1% to $17.4 million, or 164.7% of total revenues, during the six
months ended June 30, 2001 from $15.2 million, or 89.2% of total revenues,
during the same period in 2000. The increase was primarily attributable to an
increase in sales and marketing personnel related costs, recruiting costs and
the acquisition of the SAI/Redeo companies. The increased personnel related
costs are primarily related to additions made to the Company's sales force.
During the three and six month periods ended June 30, 2001, the Company had an
average of 3.0% and 11.7% more employees, respectively in the sales, marketing
and business development areas compared to the same periods of 2000.
Noncash Sales and Marketing Expense
During the quarters ended June 30, 2001 and 2000, noncash sales and marketing
expenses of approximately $1.7 million and $2.0 million, respectively, were
recognized in connection with sales and marketing agreements signed by the
Company during the fourth quarter of 1999 and the first quarter of 2000. During
the six months ended June 30, 2001 and 2000, noncash sales and marketing
expenses of approximately $3.4 million and $3.8 million, respectively, were
recognized in connection with these agreements. In connection with these
agreements, the Company issued warrants and shares of common stock to certain
strategic partners, all of whom are also customers, in exchange for their
participation in the Company's sales and marketing efforts. The Company
recorded the value of these warrants and common stock as deferred sales and
marketing expenses, which are being amortized over the life of the agreements
which range from nine months to five years.
General and Administrative, Exclusive of Noncash Expense
General and administrative expenses increased 21.8% to $2.9 million during the
quarter ended June 30, 2001, or 48.1% of total revenue from $2.4 million, or
23.5% of total revenues, during the same period in 2000. General and
administrative expenses increased 52.8% to $7.6 million during the six months
ended June 30, 2001, or 72.3% of total revenue from $5.0 million, or 29.2% of
total revenues, during the same period in 2000. The increase in general and
administrative expense for the three months ended June 30, 2001 was primarily
attributable to an increase in the provision for doubtful accounts and the
acquisition of the SAI/Redeo companies. The increase in general and
administrative expense for the six months ended June 30, 2001 was primarily
attributable to an increase in personnel related costs, an increase in the
provision for doubtful accounts and the acquisition of the SAI/Redeo companies.
During the six month period ended June 30, 2001, the Company had an average of
19.1% more employees in the finance and administration areas compared to the
same period of 2000. The Company recorded a provision for doubtful accounts of
$554,000 and $2.6 million for the three and six months ended June 30, 2001,
respectively. The Company recorded a provision for doubtful accounts of
$253,000 and $516,000 for the three and six months ended June 30, 2000,
respectively.
Noncash General and Administrative Expense
Noncash general and administrative expenses decreased to approximately $112,000,
or 1.9% of total revenues, during the second quarter of 2001, from $331,000, or
3.3% of total revenues, during the same period in 2000. Noncash general and
administrative expenses decreased to approximately $224,000, or 2.1% of total
revenues, during the six months ended June 30, 2001, from $1.5 million, or 8.6%
of total revenues, during the same period in 2000. The decrease in the six
months ended June 30, 2001 was primarily attributable to the termination in the
fourth quarter of 2000 of an arrangement where the Company granted 160,000
options to a senior executive during the first quarter of 2000 at an exercise
price below the fair market value at the date of grant. Fifteen percent of
these options vested immediately and the remainder vested over four years. In
the first quarter of 2000, the
15
Company immediately expensed $814,500 associated with the intrinsic value of the
vested options and recorded the intrinsic value of the unvested options, $4.6
million, as deferred compensation to be amortized evenly over the four-year
vesting period. Approximately $577,000 was expensed in the first six months of
2000 related to the unvested options. As a result of the termination, all
options except those that were vested on the original grant date were forfeited
and the Company reversed in the fourth quarter of 2000 approximately $864,000 of
compensation expense related to the forfeited, unvested options. In the third
quarter of 2000, the Company granted 18,750 options to a new board member at a
price below the fair market value at the date of grant. Deferred compensation of
approximately $266,000 was recorded related to this grant. The amount expensed
during 2001 relates primarily to these options.
Depreciation and Amortization
Depreciation and amortization increased to $3.3 million in the quarter ended
June 30, 2001 from $1.6 million in the same period of 2000. Depreciation and
amortization increased to $6.2 million in the six months ended June 30, 2001
from $2.3 million in the same period of 2000. The increase is primarily the
result of the Company's amortization of its intangible assets associated with
the acquisitions of iSold.com and the SAI/Redeo companies completed in the
second quarter of 2000.
Gain/(Loss) on Sale of Assets
For the three and six month periods ended June 30, 2001, the Company recorded a
loss on the sale property and equipment of $7,000. For the three and six month
periods ended June 30, 2000, the Company recorded a gain on the sale of its
human resources and financial software business to Geac Computer Systems, Inc.,
and Geac Canada Limited of $547,000. The gain was recorded following an escrow
settlement from the original sale in October, 1999.
Loss on Impairment of Investments
During the three and six months ended June 30, 2001, the Company recorded a loss
on impairment of investments of approximately $3.4 million and $6.5 million
respectively. The losses were necessitated by other than temporary losses to
the value of investments the Company has made in privately held companies and
marketable securities of one publicly traded company. The privately held
companies are primarily early-stage companies and are subject to significant
risk due to their limited operating history and current economic conditions.
Interest Income
Interest income decreased to $1.8 million in the second quarter of 2001, or
29.4% of total revenues from $3.6 million, or 35.5% of total revenues, in the
same period of 2000. Interest income decreased to $4.2 million for the six
months ended June 30, 2001, or 39.6% of total revenues from $4.6 million, or
26.7% of total revenues, in the same period of 2000. The decrease in interest
income was due to lower levels of cash available for investment. The Company
expects to continue to use cash to fund operating losses and, as a result,
interest income on available cash is expected to decline in future quarters.
Interest Expense and Amortization of Debt Discount
Interest expense decreased 3.5% to $56,000 in the second quarter of 2001 from
$58,000 in the same period of 2000. Interest expense decreased 48.3% to $120,000
for the six months ended June 30, 2001 from $232,000 in the same period of 2000.
This decrease in interest expense is primarily due to higher levels of debt in
the first quarter of 2000 as compared to 2001. In March of 2000, the Company
entered into a $5.0 million borrowing arrangement with Wachovia Capital
Investments, Inc. The interest expense in 2001 is primarily related to this
agreement.
As part of a funding agreement discussed above, the Company also issued warrants
valued at approximately $982,000 using the Black-Scholes option pricing model as
debt discount to be amortized over the life of the financing agreement. The
entire $7.0 million plus interest was paid prior to the end of the first quarter
of 2000. As result, the entire value of the warrants was amortized as a debt
discount in the quarter ended March 31, 2000.
Income Taxes
As a result of the operating losses incurred since the Company's inception, no
provision or benefit for income taxes was recorded during the three and six
months ended June 30, 2001 and 2000, respectively.
16
Liquidity and Capital Resources
On March 10, 2000, the Company completed a follow-on offering of 2,243,000
shares of common stock at an offering price of $115.00 per share. The proceeds,
net of expenses, from this public offering of approximately $244.4 million were
placed in investment grade cash equivalents and marketable securities. Although
operating activities may provide cash in certain periods, to the extent the
Company experiences growth in the future, the Company's operating and investing
activities will use significant amounts of cash. The Company believes its
liquid current assets should adequately meet the Company's needs until the
Company achieves break-even cash flow, which is currently forecasted to occur in
2002.
On March 14, 2000, the Company entered into a securities purchase agreement with
Wachovia Capital Investments, Inc. Wachovia purchased a 4.5% convertible
subordinated promissory note (the "Note") in the original principal amount of
$5.0 million. The Note provides for the ability of the holder to convert, at
its option, all or any portion of the principal of the Note into common stock of
the Company at the price of $147.20 per share. If at any time after the date of
the Note, the quoted price per share of the Company's common stock exceeds 200%
of the conversion price then in effect for at least twenty trading days in any
period of thirty consecutive trading days, the Company has the right to require
that the holder of the Note convert all of the principal of the Note into common
stock of the Company at the price of $147.20 per share. The Note is due March
15, 2005 and the $5.0 million principal amount was placed in investment grade
cash equivalents.
Cash used in operating activities was approximately $28.0 million during the six
months ended June 30, 2001. The cash used was primarily attributable to the
Company's net loss, an increase in accounts receivable and prepaid and other
current assets, and a decrease in accounts payable and accrued liabilities
partially offset by noncash items and an increase in deferred revenue. Cash used
in operating activities was approximately $15.2 million during the six months
ended June 30, 2000. This was primarily attributable to the Company's net loss,
and an increase in accounts receivable, partially offset by noncash items, an
increase in accounts payable and accrued liabilities and an increase in deferred
revenue.
Cash used by investing activities was approximately $8.6 million during the six
months ended June 30, 2001. The cash used by investing activities was primarily
attributable to the purchase of marketable securities, the purchase of property
and equipment and an investment in a strategic partner partially offset by
proceeds received from the sale and maturity of marketable securities. Cash
used by investing activities was approximately $52.1 million during the six
months ended June 30, 2000. The cash used by investing activities was primarily
attributable to the acquisitions of the SAI/Redeo companies and iSold.com, Inc.,
the purchase of marketable securities, the purchase of property and equipment
and investments in strategic partners partially offset by proceeds received from
the sale of assets of $1.9 million.
Cash provided by financing activities was approximately $166,000 during the six
months ended June 30, 2001. The cash provided by financing activities was
primarily attributable to proceeds from shares issued under the employee stock
purchase plan and stock option exercises. Cash provided by financing activities
was approximately $244.3 million during the six months ended June 30, 2000. The
cash provided by financing activities during the six months ended June 30, 2000
was primarily attributable to the proceeds from the sale of 2,243,000 shares of
common stock for approximately $244.4 million, the issuance of long-term debt of
$5.0 million, and the proceeds from stock option exercises, partially offset by
the repayment of $7.0 million in interim funding provided by Transamerica
Business Credit Corp., Silicon Valley Bank and Sand Hill Capital II, L.P.
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. As of the six months ended June
30, 2001, four customers accounted for more than 10% each, totaling $6.9 million
or 63.4% of the gross accounts receivable balance on that date. The percentage
by customer was 12.3%, 14.7%, 17.3%, and 19.1%, respectively, at June 30, 2001.
As of December 31, 2000, four customers accounted for more than 10% each,
totaling $6.7 million or 56.0% of the gross accounts receivable balance on that
date. The percentage by customer was 10.4%, 11.2%, 14.5%, and 19.9%,
respectively, at December 31, 2000.
During the second quarter of 2001, the Company made an equity investment of $2.0
million in a privately held strategic partner. Prior to 2001, the Company made
equity investments of $17.7 million in eleven privately held companies. The
Company's equity interest in these entities ranges from 2.5% to 12.5% and the
Company is accounting for these investments using the cost method of accounting.
During the second quarter of 2001, the first quarter of 2001 and the fourth
quarter of 2000, the Company recorded a charge of $2.4 million, $3.1 million and
$4.1 million, respectively, for other than temporary losses on these
investments. These companies are primarily early-stage companies and are
subject to significant risk due to their limited operating history and current
economic conditions.
At June 30, 2001, the Company had net operating loss carryforwards, research and
experimentation credit, and alternative minimum tax credit carryforwards for
U.S. federal income tax purposes which expire in varying amounts beginning in
the year 2009. The Company's ability to benefit from certain net operating loss
carryforwards is limited under section 382 of the Internal
17
Revenue Code as the Company is deemed to have had an ownership change of greater
than 50%. Accordingly, certain net operating losses may not be realizable in
future years due to this limitation.
During the first quarter of 2000, the Company issued 50,000 warrants and
approximately 39,000 shares of the Company's common stock to certain strategic
partners, all of whom are also customers, in exchange for their participation in
the Company's sales and marketing efforts. The sales and marketing agreement
signed with one strategic partner also included cash payments of $300,000 in
each of the last two years of the related agreement. For the quarter ended
March 31, 2000, the Company recorded the fair value of these warrants, common
stock, and cash payments as deferred sales and marketing expense of
approximately $986,000, $3.8 million, and $600,000, respectively. The strategic
partners earned the warrants pro-rata on a quarterly basis over the first three
quarters of 2000. One of the strategic partners failed to earn any of the
25,000 warrants while the other strategic partner met the predetermined sales
and marketing milestones and earned all of the 25,000 warrants. Deferred sales
and marketing expenses are amortized over the term of the sales and marketing
agreements, which range from nine months to five years.
On May 31, 2000, the Company acquired the SAI/Redeo companies. As part of the
acquisition, two former executives of the SAI/Redeo companies signed employment
agreements. As a result of the voluntary termination of one agreement prior to
the first anniversary of the acquisition date, the executive was required to
return to the Company for cancellation 55,000 shares of common stock issued in
connection with the agreement. During the first quarter of 2001, the Company
recorded the fair value of these shares as of the acquisition date,
approximately $1.5 million, as a reduction to the intangible balance associated
with the SAI/Redeo acquisition. As a result of the voluntary termination of the
second agreement prior to the second anniversary of the acquisition date, the
executive was required to return to the Company for cancellation 27,500 shares
of common stock issued in connection with the agreement. During the second
quarter of 2001, the Company recorded the fair value of these shares as of the
acquisition date, approximately $727,000, as a reduction to the intangible
balance associated with the SAI/Redeo acquisition.
New Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets". SFAS 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. SFAS 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually. SFAS 142 will also require that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of".
The Company is required to adopt the provisions of SFAS 141 immediately and SFAS
142 effective January 1, 2002. Goodwill and intangible assets determined to have
an indefinite useful life acquired in a purchase business combination completed
after June 30, 2001, but before SFAS 142 is adopted in full will not be
amortized, but will continue to be evaluated for impairment in accordance with
the accounting literature in effect prior to the issuance of SFAS 142. Goodwill
and intangible assets acquired in business combinations completed before July 1,
2001 will continue to be amortized prior to the adoption of SFAS 142.
At June 30, 2001, the Company's unamortized goodwill and intangibles totaled
$51.6 million. Amortization expense related to goodwill was $4.7 million and
$4.0 million for the year ended December 31, 2000 and the six months ended June
30, 2001, respectively. Because of the extensive effort needed to comply with
adopting SFAS 141 and SFAS 142, it is not practicable to reasonably estimate the
impact of adopting these Statements on the Company's financial statements at the
date of this report, including whether it will be required to recognize any
transitional impairment losses as the cumulative effect of a change in
accounting principle.
In September 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement was amended in June 2000 by
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities." The Company adopted these new pronouncements in January of
2001. The new Statements require all derivatives to be recorded on the balance
sheet at fair value and establish accounting treatment for three types of
hedges: hedges of changes in the fair value of assets, liabilities or firm
commitments; hedges of the variable cash flows of forecasted transactions; and
hedges of foreign currency exposures of net investments in foreign operations.
The Company has no derivatives and the adoption of these pronouncements had no
impact on the Company's results of operations or financial position.
Risk Factors
In addition to other information in this quarterly report on Form 10-Q, the
following risk factors should be carefully considered in evaluating the Company
and its business because such factors currently may have a significant impact on
its business, operating
18
results and financial condition. As a result of the risk factors set forth
below, actual results could differ materially from those projected in any
forward-looking statements.
The softening demand for business-to-business software and related services
could negatively affect our business, operating results, financial condition,
and stock price.
Our revenue growth and operating results depend significantly on the overall
demand for technological goods and services, and in particular demand for
business-to-business software and services. Softening demand for these products
and services caused by ongoing economic uncertaintly may contribute to lower
revenues. Continued delays or reductions in techology spending could have a
material adverse effect on demand for our products and services, and
consequently our business, operating results, financial condition, and stock
price.
Our success depends upon market acceptance of e-commerce as a reliable method
for corporate procurement and other commercial transactions.
Market acceptance of e-commerce, generally, and the Internet specifically, as a
forum for corporate procurement is uncertain and subject to a number of risks.
The success of our suite of business-to-business e-commerce applications,
including Clarus eProcurement and Clarus eMarket, depends upon the development
and expansion of the market for Internet-based software applications, in
particular e-commerce applications. This market is new and rapidly evolving.
Many significant issues relating to commercial use of the Internet, including
security, reliability, cost, ease of use, quality of service and government
regulation, remain unresolved and could delay or prevent Internet growth. If
widespread use of the Internet for commercial transactions does not develop or
if the Internet otherwise does not develop as an effective forum for corporate
procurement, the demand for our product suite and our overall business,
operating results and financial condition will be materially and adversely
affected.
If the market for Internet-based procurement applications fails to develop or
develops more slowly than we anticipate or if our Internet-based products or new
Internet-based products we may develop do not achieve market acceptance, our
business, operating results and financial condition could be materially and
adversely affected. The adoption of the Internet for corporate procurement and
other commercial transactions requires accepting new ways of transacting
business. In particular, enterprises with established patterns of purchasing
goods and services that have already invested substantial resources in other
means of conducting business and exchanging information may be particularly
reluctant to adopt a new strategy that may make some of their existing personnel
and infrastructure obsolete. Also, the security and privacy concerns of existing
and potential users of Internet-based products and services may impede the
growth of online business generally and the market's acceptance of our products
and services in particular. A functioning market for these products may not
emerge or be sustained.
Our quarterly operations are volatile and difficult to predict. If we fail to
meet the expectations of public market analysts or investors, the market price
of our common stock may decrease significantly.
We believe that our quarterly and annual operating results will fluctuate
significantly in the future, and our results of operations may fall below the
expectations of securities analysts and investors. If this occurs or if market
analysts perceive that it will occur, the market price of our common stock could
decrease substantially. Recently, when the market price of a security has been
volatile, holders of that security have often instituted securities class action
lawsuits against the company that issued the security. We have been the subject
of such lawsuits. These lawsuits divert the time and attention of our management
and an adverse judgment could cause our financial condition or operating results
to suffer.
Because the percentage of our revenues represented by maintenance services and
other recurring forms of revenue is smaller than that of many software companies
with a longer history of operations, we do not have a significant recurring
revenue stream that could lessen the effect of quarterly fluctuations in
operating results. Many factors may cause significant fluctuations in our
quarterly and annual operating results, including:
. changes in the demand for our products;
. the timing, composition and size of orders from our customers;
. customer spending patterns and budgetary resources;
. our success in generating new customers;
. the timing of introductions of or enhancements to our products;
19
. changes in our pricing policies or those of our competitors;
. our ability to anticipate and adapt effectively to developing
markets and rapidly changing technologies;
. our ability to attract, retain and motivate qualified personnel,
particularly within our sales and marketing and research and
development organizations;
. the publication of opinions or reports about us, our products, our
competitors or their products;
. unforeseen events affecting business-to-business e-commerce;
. changes in general economic conditions;
. bad debt write-offs;
. impairment of strategic investments;
. actions taken by our competitors, including new product introductions
and enhancements;
. our ability to scale our network and operations to support large
numbers of customers, suppliers and transactions;
. our success in maintaining and enhancing existing relationships and
developing new relationships with strategic partners, including
application service providers, systems integrators, resellers,
value-added trading communities and other partners; and
. our ability to control costs.
Our quarterly revenues are especially subject to fluctuation because they can
depend on the sale of relatively large orders for our products and related
services. As a result, our quarterly operating results may fluctuate
significantly if we are unable to complete one or more substantial sales in a
given quarter.
Recently, we announced our strategy to serve the large to mid-size enterprise
market that emphasizes license agreements that require the recognition of
revenue over a fixed period of time. In these cases, we recognize revenues on a
ratable basis over the life of the contract, which can be from two to 36 months.
Therefore, if we do not book a sufficient number of large orders in a particular
quarter, our revenues in future periods could be lower than expected. As we
emphasize license agreements requiring ratable revenue recognition, the
potential for fluctuations in our quarterly results could decrease but our
revenues could be lower than expected. Furthermore, our quarterly revenues may
be affected significantly by other revenue recognition policies and procedures.
These policies and procedures may evolve or change over time based on applicable
accounting standards and how these standards are interpreted.
We continue to invest in many areas, including research and development, sales
and marketing, services, and support infrastructure, based upon our expectations
of future revenue growth. These expenditures are relatively fixed in the short
term. If our revenues fall below expectations and we are not able to quickly
reduce spending in response, our operating results for that quarter and future
periods may be harmed.
Our stock price is highly volatile.
Our stock price has fluctuated dramatically. The market price of our common
stock may decrease significantly in the future in response to the following
factors, some of which are beyond our control:
. Variations in our quarterly operating results;
. Announcements that our revenue or income are below analysts'
expectations;
. Changes in analysts' estimates of our performance or industry
performance;
. Changes in market valuations of similar companies;
20
. Sales of large blocks of our common stock;
. Announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
. Loss of a major customer or failure to complete significant license
transactions;
. Additions or departures of key personnel; and
. Fluctuations in stock market price and volume, which are particularly
common among highly volatile securities of software and Internet-based
companies.
We may not effectively implement our business strategy.
Our future performance will depend in part on successfully developing,
introducing and gaining market acceptance of our products. On October 18, 1999,
we sold substantially all of the assets of our financial and human resources
software business to Geac Computer Systems, Inc. and Geac Canada Limited. Our
financial and human resources software business had historically been our
primary business. We began marketing our Clarus eProcurement solution in the
second quarter of 1998. We added Clarus eMarket and Clarus Auctions to our
product line in the second quarter of 2000, and introduced Clarus Settlement in
the third quarter of 2000. If we do not successfully implement our business-to-
business e-commerce growth strategy, our business will suffer materially and
adversely. Our focus as an organization is on the large to mid-size enterprise
(LME) market. While we anticipate that this market is increasingly more
receptive to purchasing our solutions, we cannot be sure of the adoption rate.
The actual rate may be slower or less than our expectations, which would
materially and adversely affect our business, results of operations and
financial condition.
We may be required to defer recognition of license fee revenue for a significant
period of time after entering into a license agreement, which could negatively
impact our financial results.
We may be required to defer recognition of license fee revenue for a significant
period of time after entering into a license agreement for a variety of
transactions, including:
. transactions that include both currently available software products and
products that are under development or other undeliverable elements;
. transactions where the customers demands services that include signficant
modifications or customizations that could delay product delivery or
acceptance;
. transactions that involve acceptance criteria that may preclude revenue
recognition or if there are identified product-related issues, such as
performance issues; and
. transactions that involve payment terms or fees that depend on
contingencies.
Generally accepted accounting principles ("GAAP") for software revenue
recognition requires that our license agreements meet specific criteria in order
to recognize revenue when we initially deliver software. Although we have
standard form license agreements that meet the GAAP criteria for immediate
revenue recognition on delivered elements, we do on some occasions negotiate the
terms of our license agreements. Some of these negotiated agreements may not
meet the GAAP criteria for immediate software revenue recogntion on delivered
elements.
Although our business model allows for time-based license agreements, we
continue to record some of our license fee revenue upon software delivery. The
deferral of license fee revenue recognition on these agreements could have an
adverse effect on our financial results.
We may not generate the substantial additional revenues necessary to become
profitable and we anticipate that we will continue to incur losses.
21
We have incurred significant net losses in each year since our formation. In
addition, we have incurred significant costs to develop our e-commerce
technology and products, and to recruit and train personnel. We believe our
success is contingent upon increasing our customer base and investing in further
development of our products and services. This will require significant
expenditures in research and development, sales and marketing, services, and
support infrastructure. As a result, we will need to generate significant
revenues to achieve and maintain profitability in the future. We cannot be
certain that we will ever achieve such growth in the future.
If our ratable business model is unsuccessful, the market may adopt our products
at a slower rate than anticipated, and our business may suffer materially.
We offer flexible payment methods to our customers. These programs are unproven
and represents a significant departure from the fee-based software licensing
strategies that our competitors and we have traditionally employed. If we do not
successfully develop and support our ratable business model, the market may
adopt our products at a slower rate than anticipated, and our business may
suffer materially. As of June 30, 2001, we have signed several customers to
ratable arrangements.
We expect to evolve to our ratable business model over time. The adoption rate
of our flexible business model may, from quarter to quarter, fluctuate or be
rejected by the market altogether. As we continue this evolution, we may find
that the majority of our revenues continue to come from traditional revenue
recognition license arrangements that result in revenues being taken up front.
If our ratable business model results fluctuate due to uneven adoption rates or
if our business model is rejected entirely, our business, results of operations,
and financial condition would be materially and adversely affected.
An increase in the length of our sales cycle may contribute to fluctuations in
our operating results.
As our products and competing products become increasingly sophisticated and
complex, the length of our sales cycle is likely to increase. The loss or delay
of orders due to increased sales and evaluation cycles could materially and
adversely affect our business, results of operations and financial condition
and, in particular, could contribute to significant fluctuations in our
quarterly operating results. A customer's decision to license and implement our
solutions may present significant enterprise-wide implications for the customer
and involve a substantial commitment of its management and resources. The period
of time between initial customer contact and the purchase commitment typically
ranges from four to nine months for our applications. Our sales cycle could
extend beyond current levels as a result of lengthy evaluation and approval
processes that typically accompany major initiatives or capital expenditures or
other delays over which we have little or no control.
Competition from other electronic procurement providers may reduce demand for
our products and cause us to reduce the price of our products.
The market for Internet-based procurement applications, and e-commerce
technology generally, is rapidly evolving and intensely competitive. The
intensity of competition has increased and is expected to further increase in
the future. We may not compete effectively in our markets. Competitive pressure
may result in our reducing the price of our products, which would negatively
affect our revenues and operating margins. If we are unable to compete
effectively in our markets, our business, results of operations and financial
condition would be materially and adversely affected.
In targeting the e-commerce market, we must compete with electronic procurement
providers such as Ariba and Commerce One. We also encounter competition with
respect to different aspects of our solution from companies such as Concur
Technologies, Extensity, VerticalNet, PurchasePro, FreeMarkets, and i2. We also
anticipate competition from some of the large enterprise software developers,
such as Oracle, PeopleSoft and SAP.
While we expect the large to mid-size enterprise (LME) market to begin the
adoption of business-to-business software, we may not be the supplier of choice
for this market. The mid-size market may prefer to purchase their business-to-
business software from their ERP vendors. Should this market not be receptive
to independent software vendors (ISV), such as Clarus, for their software our
business could be seriously harmed.
In addition, because there are relatively low barriers to entry in the business-
to-business exchange market, we expect additional competition from other
established and emerging companies, particularly if they acquire one of our
competitors.
Many of our current and potential competitors have longer operating histories,
significantly greater financial, technical, marketing and other resources,
significantly greater name recognition, and a larger installed base of customers
than we do. In addition, many of our competitors have well-established
relationships with our current and potential customers and have extensive
knowledge of
22
our industry. In the past, we have lost potential customers to competitors for
various reasons, including lower prices and incentives not matched by us. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products to address customer needs. Accordingly, it is possible
that new competitors or alliances among competitors may emerge and rapidly
acquire significant market share. We also expect that competition will increase
as a result of industry consolidations.
We may not be able to compete successfully against our current and future
competitors.
We may not be able to maintain referenceable accounts.
The implementation of our product suite by buying organizations can be complex,
time consuming and expensive. In many cases, these organizations must change
established business practices and conduct business in new ways. Our ability to
attract additional customers for our product suite will depend on using our
existing customers as referenceable accounts. As a result, our solutions may
not achieve significant market acceptance. In addition, current customers are
subject to the effects of being acquired, which may jeopardize their
referencability in the future.
We expect our product line to appeal to early-stage companies, which expose us
to higher than normal credit risk.
Our product line supports Internet-based business-to-business electronic
commerce solutions that automate the procurement and management of operating
resources. As a result of this functionality many early-stage businesses, in
addition to many companies with traditional business models, are interested in
acquiring our products. Many early-stage companies acquire their funding
periodically based upon investors' perception of their progress and likelihood
of success. Typically, they do not have internal operations sufficient to
generate cash, which would guarantee their ongoing viability. While we evaluate
all potential customers' ability to pay, if an increasing number of our
customers fail in their operations and are unable to continue to pay amounts due
under our license agreement, we will experience material and adverse financial
losses related to these sales.
Losses from our investments in strategic partners could negatively impact our
operating results.
We have made several financial investments in private companies. These
companies are primarily early-stage enterprises with limited operating
histories. If these partners are unsuccessful in executing their business plans,
we may experience losses on these investments, which would negatively impact our
operating results.
Market adoption of our solutions will be impeded if we do not continue to
establish and maintain strategic relationships.
Our success depends in part on the ability of our strategic partners to expand
market adoption of our solutions. If we are unable to maintain our existing
strategic partnerships or enter into new partnerships, we may need to devote
substantially more resources to direct sales of our products and services. We
would also lose anticipated customer introductions and co-marketing benefits.
We rely, and expect to continue to rely, on a number of third-party application
service providers to host our solutions. If we are unable to establish and
maintain effective, long-term relationships with our application service
providers, or if these providers do not meet our customers' needs or
expectations, our business would be seriously harmed. In addition, we lose a
significant amount of control over our solution when we engage application
service providers, and we cannot adequately control the level and quality of
their service. By relying on third-party application service providers, we are
wholly reliant on their information technology infrastructure, including the
maintenance of their computers and communication equipment. An unexpected
natural disaster or failure or disruption of an application service provider's
infrastructure would have a material adverse effect on our business.
We rely exclusively on two third-party content services providers to provide
catalog aggregation and management services to our customers, as part of our
procurement solution. If we are unable to maintain an effective, long-term
relationship with our content services providers, or if their services do not
meet our customers' needs or expectations, our business could be seriously
harmed.
If the demand for our solutions continues to increase, we will need to develop
relationships with additional third-party service providers to provide these
types of services. Our competitors have or may develop relationships with these
third parties and, as a result, these third parties may be more likely to
recommend competitors' products and services rather than ours.
Many of our strategic partners have multiple strategic relationships, and they
may not regard us as important to their businesses. In addition, our strategic
partners may terminate their relationships with us, pursue other partnerships or
relationships or attempt to develop or acquire products or services that compete
with our solutions. Further, our existing strategic relationships may interfere
with our ability to enter into other desirable strategic relationships. A
significant number of our Clarus eProcurement and Clarus
23
eMarket customers have been retained through referrals from Microsoft, but
Microsoft is not obligated to refer any potential customers to us, and it has
entered into strategic relationships with other providers of electronic
procurement applications.
We rely on strategic selling relationships with our partners.
We have established strategic selling relationships with a number of outside
companies. Some of these companies have made significant revenue commitments to
us as part of these relationships. While we do not reflect these commitments in
our financial statements, this information is included in "backlog" information
we share with market analysts and investors. Some of these strategic selling
partners may not have the ability to meet their financial commitments to us if
they are not able to generate a sufficient level of sales to meet these
commitments.
Much of our sales growth and future success is expected to come from our channel
partners. While we expect to invest significantly in these relationships
including sales training, product integration and joint selling, we cannot
predict the channels partner's commitment or level of success. Additionally the
timetable for productivity of any channel partner may vary based on many factors
out of our control. We expect that the development of most relationships will
take three to six months, although we cannot be assured of this timetable or if
these relationships will ever deliver any results. Should our channel
relationship prove unproductive or take longer to deliver results our financial
results and path to profitability could suffer serious adverse consequences.
Our success depends on our continuing ability to attract, hire, train and retain
a substantial number of highly skilled managerial, technical, sales, marketing
and customer support personnel.
We may fail to retain our key employees or to attract or retain other highly
qualified personnel. In particular, there is competition for, research and
development and sales personnel. Even if we are able to attract qualified
personnel, new hires frequently require extensive training before they achieve
desired levels of productivity.
We have reduced our headcount in 2001 based on our expectations of future
revenue growth, and as part of our cost reduction initiative. These reductions
may make it more difficult for us to attract, hire and retain the personnel we
need. If we are unable to hire or fail to retain competent personnel, our
business, results of operations and financial condition could be materially and
adversely affected. We do not maintain key-man life insurance policies on any of
our employees.
If we are unable to manage our internal resources, we may incur increased
administrative costs and be unable to capitalize on revenue opportunities.
The growth of our e-commerce business coupled with the rapid evolution of our
market has strained, and may continue to strain, our administrative, operational
and financial resources and internal systems, procedures and controls. Our
inability to manage our internal resources effectively could increase
administrative costs and distract management. If our management is distracted,
we may not be able to capitalize on opportunities to increase revenues.
As we expand our international sales and marketing activities and international
operations, our business will be more susceptible to numerous risks associated
with international operations.
To be successful, we believe we must expand our international operations and
hire additional international personnel. As a result, we expect to commit
significant resources to expand our international sales and marketing
activities. We are subject to a number of risks associated with international
business activities. These risks generally include:
. currency exchange rate fluctuations;
. seasonal fluctuations in purchasing patterns;
. unexpected changes in regulatory requirements;
. tariffs, export controls and other trade barriers;
. longer accounts receivable payment cycles and difficulties in collecting
accounts receivable;
. difficulties in managing and staffing international operations;
24
. potentially adverse tax consequences, including restrictions on the
repatriation of earnings;
. increased transactions costs related to sales transactions conducted
outside the U.S.;
. reduced protection of intellectual property rights and increased risk of
piracy;
. challenges of retaining and maintaining strategic relationships with
customers and business alliances in international markets;
. foreign laws and courts may govern many of the agreements with customers
and resellers;
. difficulties in maintaining knowledgeable sales representatives in
countries outside the U.S.;
. adequacy of local infrastructures outside the U.S.;
. differing technology standards, translations, and localization
standards;
. uncertain demand for electronic commerce;
. linguistic and cultural differences;
. the burdens of complying with a wide variety of foreign laws; and
. political, social, and economic instability.
We have limited experience in marketing, selling and supporting our products and
services in foreign countries.
We intend to expand the geographic scope of our customer base and operations. We
opened our first international sales office in the United Kingdom during the
first quarter of 2000 and acquired the SAI/Redeo companies, which have
significant operations in Ireland, in the second quarter of 2000. We have
limited experience in managing geographically dispersed operations and in
operating in Ireland and the United Kingdom.
We may not be able to recover the carrying value of our intangibles.
We periodically assess the impairment of long-lived assets, including
identifiable intangibles and related goodwill, in accordance with the provisions
of Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Assets to be Disposed of". An impairment
review is performed whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. Although we have not incurred any
impairment charges to date, we can give no assurance that future impairment
charges will be required due to factors we consider important including, but not
limited to, significant underperformance relative to historical or projected
operating results, significant changes in the manner of use of the acquired
assets and significant negative industry or economic trends.
Any acquisitions that we attempt or make could prove difficult to integrate or
require a substantial commitment of management time and other resources.
As part of our business strategy, we may seek to acquire or invest in additional
businesses, products or technologies that may complement or expand our business.
If we identify an appropriate acquisition opportunity, we may not be able to
negotiate the terms of that acquisition successfully, finance it, or integrate
it into our existing business and operations. We have completed only three
acquisitions to date. We may not be able to select, manage or absorb any future
acquisitions successfully, particularly acquisitions of large companies.
Further, the negotiation of potential acquisitions, as well as the integration
of an acquired business, would divert management time and other resources. We
may use a substantial portion of our available cash to make an acquisition. On
the other hand, if we make acquisitions through an exchange of our securities,
our stockholders could suffer dilution. In addition, any particular acquisition,
even if successfully completed, may not ultimately benefit our business.
We may not be able to retain the existing employees of acquired companies.
We made two technology acquisitions in 2000: the SAI/Redeo companies and
iSold.com. In connections with these acquisitions, we acquired products
complementary to our procurement solution. We had no prior experience in
providing these types of
25
software products or services. We may not have the industry experience or
technical experience to successfully continue development, marketing and support
of these technologies without the continued involvement of these existing
employees.
The accounting treatment for our acquisition of the SAI/Redeo companies
negatively impacted our results of operations in the second quarter of 2000. We
recognized a write-off of acquired in-process research and development and
amortization expense related to this acquisition. Amortization of this
acquisition will adversely affect our results of operations through 2008. The
amounts allocated under purchase accounting to developed technology and in-
process research and development in the acquisition involved valuation
estimations of future revenues, expenses, operating profit, and cash flows. The
actual revenues, expenses, operating profits, and cash flows from the acquired
technology recognized in the future may vary materially from such estimates. If
the in-process research and development product is not successfully developed,
our sales and profitability may be adversely affected in future periods.
Additionally, the value of other intangible assets acquired may become impaired.
We may incur costs and liabilities related to potential or pending litigation.
In a number of lawsuits filed against us in the fourth quarter of 2000, our
company and several of our officers have been named as defendants in a number of
securities class action lawsuits filed in the United States District Court for
the Northern District of Georgia. The plaintiffs purport to represent a class of
all persons who purchased or otherwise acquired our common stock in certain
periods beginning on October 20, 1999 and through October 25, 2000. The
consolidated complaint alleges, among other things, that violations of Sections
10(b) and (20)a of the Securities Exchange Act of 1934, as amended and Rule 10b-
5 promulgated thereunder, with respect to alleged material misrepresentations
and omissions made in public filings made with the Securities and Exchange
Commission and certain press releases and other public statements. The
plaintiffs seek unspecified damages and costs. This lawsuit diverts the time and
attention of management and an adverse judgment could cause our financial
condition or operating results to suffer.
We expect to depend on our Clarus eProcurement and Clarus eMarket products for a
significant portion of our revenues for the foreseeable future.
We anticipate that revenues from our Clarus eProcurement and Clarus eMarket
products and related services will continue to represent a significant portion
of our revenues for the foreseeable future. As a result, a decline in the price
of, profitability of or demand for our Clarus eProcurement and Clarus eMarket
products would seriously harm our business. Our Clarus eMarket solution was
introduced in the second quarter of 2000.
Our products may perform inadequately in a high volume environment.
Any failure by our principal products to perform adequately in a high volume
environment could materially and adversely affect the market for these products
and our business, results of operations and financial condition. Our products
and the third party software and hardware on which it may depend may not operate
as designed when deployed in high volume environments.
Defects in our products could delay market adoption of our solutions or cause us
to commit significant resources to remedial efforts.
We could lose revenues as a result of software errors or other product defects.
As a result of their complexity, software products may contain undetected errors
or failures when first introduced or as new versions are released. Despite our
testing of our software products and their use by current customers, errors may
appear in new applications after commercial shipping begins. If we discover
errors, we may not be able to correct them.
Errors and failures in our products could result in the loss of customers and
market share or delay in market adoption of our applications, and alleviating
these errors and failures could require us to expend significant capital and
other resources. The consequences of these errors and failures could materially
and adversely affect our business, results of operations and financial
condition. Because we do not maintain product liability insurance, a product
liability claim could materially and adversely affect our business, results of
operations and financial condition. Provisions in our license agreements may not
effectively protect us from product liability claims.
Our success depends on the continued use of Microsoft technologies or other
technologies that operate with our products.
Our products operate with, or are based on, Microsoft's proprietary products. If
businesses do not continue to adopt these technologies as anticipated, or if
they adopt alternative technologies that we do not support, we may incur
significant costs in redesigning our products or lose market share. Our
customers may be unable to use our products if they experience significant
problems with Microsoft technologies that are not corrected.
26
The failure to maintain, support or update software licensed from third parties
could materially and adversely affect our products' performance or cause product
shipment delays.
We have entered into license agreements with third-party licensors for products
that enhance our products, are used as tools with our products, are licensed as
products complementary to ours or are integrated with our products. If these
licenses terminate or if any of these licensors fail to adequately maintain,
support or update their products, we could be required to delay the shipment of
our products until we could identify and license software offered by alternative
sources. Product shipment delays could materially and adversely affect our
business, operating results and financial condition, and replacement licenses
could prove costly. We may be unable to obtain additional product licenses on
commercially reasonable terms. Additionally, our inability to maintain
compatibility with new technologies could impact our customers' use of our
products.
Illegal use of our proprietary technology could result in substantial litigation
costs and divert management resources.
Our success will depend significantly on internally developed proprietary
intellectual property and intellectual property licensed from others. We rely on
a combination of patent, copyright, trademark and trade secret laws, as well as
on confidentiality procedures and licensing arrangements, to establish and
protect our proprietary rights in our products. Existing patent, trade secret
and copyright laws provide only limited protection of our proprietary rights. We
have applied for registration of our trademarks. We enter into license
agreements with our customers that give the customer the non-exclusive right to
use the object code version of our products. These license agreements prohibit
the customer from disclosing object code to third parties or reverse-engineering
our products and disclosing our confidential information. Despite our efforts to
protect our products' proprietary rights, unauthorized parties may attempt to
copy aspects of our products or to obtain and use information that we regard as
proprietary. Third parties may also independently develop products similar to
ours.
Litigation may be necessary to enforce our intellectual property rights, to
protect our trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
resources and could harm our business, operating results and financial
condition.
Claims against us regarding our proprietary technology could require us to pay
licensing or royalty fees or to modify or discontinue our products.
Any claim that our products infringe on the intellectual property rights of
others could materially and adversely affect our business, results of operations
and financial condition. Because knowledge of a third party's patent rights is
not required for a determination of patent infringement and because the United
States Patent and Trademark Office is issuing new patents on an ongoing basis,
infringement claims against us are a continuing risk. Infringement claims
against us could cause product release delays, require us to redesign our
products or require us to enter into royalty or license agreements. These
agreements may be unavailable on acceptable terms. Litigation, regardless of the
outcome, could result in substantial cost, divert management attention and delay
or reduce customer purchases. Claims of infringement are becoming increasingly
common as the software industry matures and as courts apply expanded legal
protections to software products. Third parties may assert infringement claims
against us regarding our proprietary technology and intellectual property
licensed from others. Generally, third-party software licensors indemnify us
from claims of infringement. However, licensors may be unable to indemnify us
fully for such claims, if at all.
If a court determines that one of our products violates a third party's patent
or other intellectual property rights, there is a material risk that the revenue
from the sale of the infringing product will be significantly reduced or
eliminated, as we may have to:
. pay licensing fees or royalties to continue selling the product;
. incur substantial expense to modify the product so that the third party's
patent or other intellectual property rights no longer apply to the
product; or
. stop selling the product.
In addition, if a court finds that one of our products infringes a third party's
patent or other intellectual property rights, then we may be liable to that
third party for actual damages and attorneys' fees. If a court finds that we
willfully infringed on a third party's patent, the third party may be able to
recover treble damages, plus attorneys' fees and costs.
A compromise of the encryption technology employed in our solutions could reduce
customer and market confidence in our products or result in claims against us.
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A significant barrier to Internet-based commerce is the secure exchange of
valued and confidential information over public networks. Any compromise of our
security technology could result in reduced customer and market confidence in
our products and in customer or third party claims against us. This could
materially and adversely affect our business, financial condition and operating
results. Clarus eProcurement and Clarus eMarket rely on encryption technology to
provide the security and authentication necessary to protect the exchange of
valuable and confidential information. Advances in computer capabilities,
discoveries in the field of cryptography or other events or developments may
result in a compromise of the encryption methods we employ in Clarus
eProcurement and Clarus eMarket to protect transaction data.
The market for business-to-business e-commerce solutions is characterized by
rapid technological change, and our failure to introduce enhancements to our
products in a timely manner could render our products obsolete and unmarketable.
The market for e-commerce applications is characterized by rapid technological
change, frequent introductions of new and enhanced products and changes in
customer demands. In attempting to satisfy this market's demands, we may incur
substantial costs that may not result in increased revenues due to the short
life cycles for business-to-business e-commerce solutions. Because of the
potentially rapid changes in the e-commerce applications market, the life cycle
of our products is difficult to estimate.
Products, capabilities or technologies others develop may render our products or
technologies obsolete or noncompetitive and shorten the life cycles of our
products. Satisfying the increasingly sophisticated needs of our customers
requires developing and introducing enhancements to our products and
technologies in a timely manner that keeps pace with technological developments,
emerging industry standards and customer requirements while keeping our products
priced competitively. Our failure to develop and introduce new or enhanced e-
commerce products that compete with other available products could materially
and adversely affect our business, results of operations and financial
condition.
Failure to expand Internet infrastructure could limit our growth.
Our ability to increase the speed and scope of our services to customers is
limited by and depends on the speed and reliability of both the Internet and our
customers' internal networks. As a result, the emergence and growth of the
market for our services depends on improvements being made to the entire
Internet infrastructure as well as to our individual customers' networking
infrastructures. The recent growth in Internet traffic has caused frequent
periods of decreased performance. If the Internet's infrastructure is unable to
support the rapid growth of Internet usage, its performance and reliability may
decline, and overall Internet usage could grow more slowly or decline. If
Internet reliability and performance declines, or if necessary improvements do
not increase the Internet's capacity for increased traffic, our customers will
be hindered in their use of our solutions, and our business, operating results
and financial condition could suffer.
Future governmental regulations could materially and adversely affect our
business and e-commerce generally.
We are not subject to direct regulation by any government agency, other than
under regulations applicable to businesses generally, and few laws or
regulations specifically address commerce on the Internet. In view of the
increasing use and growth of the Internet, however, the federal government or
state governments may adopt laws and regulations covering issues such as user
privacy, property ownership, libel, pricing and characteristics and quality of
products and services. We could incur substantial costs in complying with these
laws and regulations, and the potential exposure to statutory liability for
information carried on or disseminated through our application systems could
force us to discontinue some, or all of our services. These eventualities could
adversely affect our business operating results and financial condition. The
adoption of any laws or regulations covering these issues also could slow the
growth of e-commerce generally, which would also adversely affect our business,
operating results or financial condition. Additionally, one or more states may
impose sales tax collection obligations on out-of-state companies that engage in
or facilitate e-commerce. The collection of sales tax in connection with e-
commerce could impact the growth of e-commerce and could adversely affect sales
of our e-commerce products.
Legislation limiting further levels of encryption technology may adversely
affect our sales.
As a result of customer demand, it is possible that Clarus eProcurement and
Clarus eMarket will be required to incorporate additional encryption technology.
The United States government regulates the exportation of this technology.
Export regulations, either in their current form or as they may be subsequently
enacted, may further limit the levels of encryption or authentication technology
that we are able to use in our software and our ability to distribute our
products outside the United States. Any revocation or modification of our export
authority, unlawful exportation or use of our software or adoption of new
legislation or regulations relating to exportation or use of software and
encryption technology could materially and adversely affect our sales prospects
and, potentially, our business, financial condition and operating results as a
whole.
28
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following discussion concerning the Company's market risk involves forward-
looking statements that are subject to risks and uncertainties. Actual results
could differ materially from those discussed in the forward-looking statements.
The Company is exposed to market risk related to foreign currency exchange
rates, interest rates and investment values. The Company currently does not use
derivative financial instruments to hedge these risks or for trading purposes.
Foreign Currency Risk
A majority of the revenue recognized to date by the Company has been denominated
in U.S. dollars, including sales made internationally. As a result, a
strengthening of the U.S. dollar could make the Company's products less
competitive in foreign markets. In addition, the Company has foreign
subsidiaries which subject the Company to risks associated with foreign currency
exchange rates and weak economic conditions in these foreign markets. An
increase or decrease in foreign currency exchange rates of 10% would not have a
material effect on the Company's financial position or results of operations.
The Company does not use derivatives as a means of hedging against foreign
currency risk.
Interest Rate Risk
The Company is exposed to market risk from changes in interest rates primarily
through its investing activities. The primary objective of the Company's
investment activities is to manage interest rate exposure by investing in short-
term, highly liquid investments. As a result of this strategy, the Company
believes that the Company is subject to minimal interest rate exposure. The
Company's marketable securities are carried at market value, which approximates
cost. An increase or decrease in interest rates of 10% would not have a
material effect on the Company's financial position or results of operations.
Investments
During the second quarter of 2001, the Company made an equity investment of $2.0
million in a privately held strategic partner. Prior to 2001, the Company made
equity investments of $17.7 million in eleven privately held companies. The
Company's equity interests in these entities ranges from 2.5% to 12.5% and the
Company is accounting for these investments using the cost method of accounting.
During the second quarter of 2001, the first quarter of 2001 and the fourth
quarter of 2000, the Company recorded a charge of $2.4 million, $3.1 million and
$4.1 million, respectively, for other than temporary losses on these
investments. These companies are primarily early-stage companies and are
subject to significant risk due to their limited operating history and current
economic conditions. The Company has not recognized any material revenue from
these companies during 2001. During the year ended December 31, 2000, the
Company recognized $17.2 million in total revenue from these companies. In the
second quarter of 2000, the Company made equity investments of $5.3 million and
recognized $2.9 million in total revenue in four privately held companies. For
the six months ended June 30, 2000, the Company made equity investments of $6.0
million and recognized $4.1 million in total revenue in five privately held
companies.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to lawsuits in the normal course of its business.
Litigation in general, and securities litigation in particular, can be expensive
and disruptive to normal business operations. Moreover, the results of complex
legal proceedings are difficult to predict. An unfavorable resolution of one or
more of the following lawsuits could adversely affect the Company's business,
results of operations, or financial condition.
Following its public announcement on October 25, 2000, of its financial results
for the third quarter, the Company and certain of its directors and officers
were named as defendants in fourteen putative class action lawsuits filed in the
United States District Court for the Northern District of Georgia on behalf of
all purchasers of common stock of the Company during various periods beginning
as early as October 20, 1999 and ending on October 25, 2000. The fourteen class
action lawsuits filed against the Company were consolidated into one case, Case
No. 1:00-CV-2841, pursuant to an order of the court dated November 17, 2000. On
March 22, 2001, the Court entered an order appointing as the lead Plaintiffs
John Nittolo, Dean Monroe, Ronald Williams, V&S Industries, Ltd., VIP World
Asset Management, Ltd., Atlantic Coast Capital Management, Ltd., and T.F.M.
Investment Group. Pursuant to the previous Consolidation Order of the Court, a
Consolidated Amended Complaint was filed on May 14, 2001. On June 29, 2001, the
Company filed a motion to dismiss the consolidated case. The plaintiffs
responded to the Company's motion to dismiss on August 6, 2001.
29
The class action complaint alleges claims against the Company and other
defendants for violations of Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934, as amended, and Rule 10b-5 promulgated thereunder with respect to
alleged material misrepresentations and omissions in public filings made with
the Securities and Exchange Commission and certain press releases and other
public statements made by the Company and certain of its officers relating to
its business, results of operations, financial condition and future prospects,
as a result of which, it is alleged, the market price of the Company's common
stock was artificially inflated during the class periods. The class action
complaint focuses on statements made concerning an account receivable from one
of the Company's customers. The plaintiffs seek unspecified compensatory
damages and costs (including attorneys' and expert fees), expenses and other
unspecified relief on behalf of the classes. The Company believes that it has
complied with all of its obligations under the Federal securities laws and the
Company intends to defend this lawsuit vigorously. As a result of consultation
with legal representation and current insurance coverage, the Company does not
believe the lawsuit will have a material impact on the Company's results of
operations or financial position.
Item 4. Submission of Matters to a Vote of Security Holders
The following proposals were submitted to the Company's stockholders at its
annual stockholders' meeting on May 22, 2001.
1. The proposal to elect Stephen P. Jeffery as a Class III director to
serve until the 2004 annual stockholders' meeting was approved with
13,944,602 shares or 89% voting for the proposal and 1,434,206 shares or
11% withholding authority.
2. The proposal to elect Said Mohammadioun as a Class III director to serve
until the 2004 annual stockholders' meeting was approved with 13,944,602
shares or 89% voting for the proposal and 1,434,206 shares or 11%
withholding authority.
3. The proposal to ratify the appointment of KPMG LLP as the Company's
independent auditors for the year ending December 31, 2001 was approved
with 14,022,547 shares or 99.61% of the votes cast voting for the
proposal, 40,309 shares or .29% of the votes cast voting against the
proposal and 13,947 shares or .11% of the votes cast abstaining from the
proposal.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1* Employment Agreement between the Company and Steven M. Hornyak
(b) Reports on Form 8-K
None
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CLARUS CORPORATION
Date: August 10, 2001 /s/ James J. McDevitt
------------------------------
James J. McDevitt,
Chief Financial Officer
* Certain information in this Exhibit has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
30