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, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
Commission File Number: 0-24277
Clarus Corporation
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(Exact name of registrant as specified in its charter)
Delaware 58-1972600
------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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)
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(Former name, former address and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO _
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, ($.0001 Par Value)
11,072,151 shares outstanding as of July 31, 1999
INDEX
CLARUS CORPORATION
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) - June 30, 1999,
and December 31, 1998;
Condensed Consolidated Statements of Operations (unaudited) - Three
months and six months ended June 30, 1999 and 1998;
Condensed Consolidated Statements of Cash Flows (unaudited) - Six
months ended June 30, 1999 and 1998;
Notes to Condensed Consolidated Financial Statements (unaudited) -
June 30, 1999
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk - Not
Applicable
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CLARUS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in thousands, except share and per share amounts)
June 30, December 31,
1999 1998
---------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,072 $ 14,799
Trade accounts receivable, less allowance
for doubtful accounts of $799 and $401
in 1999 and 1998, respectively 11,248 8,998
Prepaid and other current assets 759 553
----------- -----------
Total current assets 20,079 24,350
PROPERTY AND EQUIPMENT - net 4,358 3,454
OTHER ASSETS:
Intangible assets, net of accumulated
amortization of $2,834 and $1,967 in
1999 and 1998, respectively 11,170 11,963
Deposits and other long-term assets 134 315
------------ -----------
Total other assets 11,304 12,278
------------ -----------
TOTAL ASSETS $ 35,741 $ 40,082
============ ===========
See Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
3
Item 1. Financial Statements (continued)
CLARUS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (continued)
(in thousands, except share and per share amount)
June 30, December 31,
1999 1998
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 6,927 $ 7,426
Deferred revenue 7,129 7,397
Current maturities of long-term debt 392 526
---------- ----------
Total current liabilities 14,448 15,349
NON-CURRENT LIABILITIES:
Deferred revenue 1,654 2,302
Long-term debt, net of current maturities 70 245
Other non-current liabilities 235 75
----------- ---------
Total liabilities 16,407 17,971
STOCKHOLDERS' EQUITY:
Common Stock, $.0001 par value; 25,000,000 shares
authorized in 1999 and 1998; 11,084,334 and
11,002,508 shares issued in 1999 and 1998,
respectively 1 1
Additional paid in capital 61,505 61,393
Accumulated deficit (41,694) (38,721)
Warrants 40 40
Treasury stock, at cost (2) (2)
Deferred compensation (516) (600)
----------- ----------
Total stockholders' equity 19,334 22,111
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 35,741 $ 40,082
=========== ===========
See Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
4
Item 1. Financial Statements (continued)
CLARUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in thousands, except per share amounts)
Three months ended Six months ended
June 30 June 30
-------------------------- --------------------------
1999 1998 1999 1998
REVENUES:
License fees $ 4,220 $ 4,814 $ 7,879 $ 8,443
Services fees 4,551 3,838 10,053 6,890
Maintenance fees 2,508 1,814 4,748 3,414
---------- -------- --------- --------
Total revenues 11,279 10,466 22,680 18,747
COST OF REVENUES:
License fees 365 305 711 565
Services fees 3,321 2,376 6,640 4,507
Maintenance fees 939 835 1,970 1,516
---------- -------- --------- --------
Total cost of revenues 4,625 3,516 9,321 6,588
OPERATING EXPENSES:
Research and development 2,358 1,386 4,552 2,529
Sales and marketing 3,444 2,904 6,817 5,391
General and administrative 1,603 1,191 3,222 2,548
Depreciation and amortization 963 525 1,833 929
Non-cash compensation 42 749 84 803
---------- -------- --------- --------
Total operating expenses 8,410 6,755 16,508 12,200
OPERATING INCOME (LOSS) (1,756) 195 (3,149) (41)
INTEREST INCOME 111 129 228 159
INTEREST EXPENSE 24 61 51 121
MINORITY INTEREST -0- -0- -0- 36
----------- --------- ---------- ---------
NET INCOME (LOSS) $ (1,669) $ 263 $ (2,972) $ (39)
=========== =========== =========== =========
Income (loss) per common share:
Basic $ (0.15) $ 0.06 $ (0.27) $ (0.01)
Diluted (0.15) $ 0.03 $ (0.27) $ (0.01)
Weighted average shares
outstanding
Basic 10,989 4,496 10,968 3,026
Diluted 10,989 8,758 10,968 3,026
See Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
5
Item 1. Financial Statements (continued)
CLARUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
Six months ended
June 30
--------------------------
1999 1998
----------- ------------
OPERATING ACTIVITIES
$
Net loss (2,972) $ (39)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 1,006 547
Amortization 867 382
Minority interest in subsidiary -0- 36
Amortization of debt discount -0- 34
Deferred compensation 84 803
Loss on disposal of property and equipment 52 -0-
Changes in operating assets and liabilities:
Accounts receivable (2,250) (1,768)
Prepaid and other current assets (206) 140
Deposits and other long-term assets 181 (32)
Accounts payable and accrued liabilities (499) 335
Deferred revenue (916) (961)
Other non-current liabilities 160 16
----------- ----------
NET CASH USED IN OPERATING ACTIVITIES (4,493) (507)
INVESTING ACTIVITIES
Purchases of property and equipment (2,037) (1,089)
Purchases of intangible assets -0- (150)
Purchase of minority interest in subsidiary -0- (326)
----------- ----------
NET CASH USED IN INVESTING ACTIVITIES (2,037) (1,565)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 112 22,126
Proceeds from notes payable and short-term
borrowings -0- 1,645
Repayments of notes payable and short-term
borrowings (309) (3,343)
Proceeds from issuance of preferred stock -0- 150
Proceeds from the exercise of warrants -0- 612
Dividends paid to holder of minority interest -0- (241)
----------- ----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (197) 20,949
----------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,727) 18,877
CASH AND CASH EQUIVALENTS, beginning of period 14,799 7,213
----------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 8,072 $ 26,090
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 51 $ 93
========== ==========
See Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
6
CLARUS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Clarus
Corporation (the "Company") have been prepared in accordance with Generally
Accepted Accounting Principles for interim financial information and
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information in notes required by Generally Accepted
Accounting Principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation of the unaudited financial statements for this interim
period have been included. The results of the interim periods are not
necessarily indicative of the results to be obtained for the year ended December
31, 1999. 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, 1998,
filed with the Securities and Exchange Commission.
NOTE 2. EARNINGS PER SHARE
Basic and diluted net income (loss) per share was computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share," using
the weighted average number of common shares outstanding. The diluted net loss
per share for the six month periods ended June 30, 1999 and 1998, and the
quarter ended June 30, 1999, do not include the effect of common stock
equivalents, including redeemable convertible preferred stock, as their effect
would be antidilutive. Diluted net income per share for the quarter ended June
30, 1998, includes the effect of common stock equivalents.
NOTE 3. REVENUE RECOGNITION
The Company's revenue consists of revenues from the licensing of software and
fees from consulting, implementation, training, and maintenance services.
Effective January 1, 1998, the Company adopted Statement of Position No. 97-2,
"Software Revenue Recognition" ("SOP No. 97-2"). Under SOP No. 97-2, the Company
recognizes software license revenue when the following criteria are met: (i) a
signed and executed contract is obtained, (ii) shipment of the product has
occurred, (iii) the license fee is fixed and determinable, (iv) collectibility
is probable, and (v) remaining obligations under the license agreement are
insignificant.
During the second quarter ended June 30, 1999, the Company entered a license and
support agreement with a customer in exchange for approximately $1,549,000,
consisting of $380,000 in cash and equity securities valued at $1,169,000. The
cash portion is due by December 31, 1999. The number of equity securities to be
issued to the Company will be determined based on the same terms and conditions
set forth in the customer's first sale of its equity securities with an
independent third-party bona-fide purchaser. If the offering is not complete by
September 30, 1999, the customer is required to pay the Company cash in the
amount of $1,169,000 on September 30, 1999.
7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Clarus Corporation develops, markets, licenses, and supports (i) Internet-based
business-to-business e-commerce solutions designed to help customers better
manage their operating resources, the non-production goods and services required
to operate a company, and (ii) financial and human resources software
applications for mid- to large-sized companies. Our applications create high
lifetime value by delivering sophisticated functionality, while substantially
reducing the time required for implementation, maintenance, and upgrades.
During 1998, we introduced a series of modules and product enhancements.
Specifically, in the third quarter of 1998, we introduced our Web-commerce
applications, which include E-Procurement, a business-to-business buy-side
Web-based solution designed for the acquisition of non-industrial goods and
services, Clarus E-Budget, and a 32-bit version of our human resources
applications.
We currently market our products in the United States and Canada through a
direct sales force, and we have licensed our applications to more than 290
customers in a variety of industry segments, including insurance, financial
services, communications, retail, printing and publishing, transportation, and
manufacturing. We also offer fee-based implementation, training and upgrade
services, and ongoing maintenance and support of our products for a 12-month to
three-year renewable term.
On November 6, 1998, we completed the acquisition of ELEKOM Corporation
("ELEKOM") for approximately $15.7 million, consisting of $8.0 million in cash
and approximately 1.4 million shares of our common stock. ELEKOM was merged with
and into Clarus CSA, Inc., a wholly owned subsidiary of ours, and the separate
existence of ELEKOM ceased (the "Merger"). Immediately following consummation of
the Merger, the former holders of ELEKOM common and preferred stock (the "ELEKOM
Shareholders") owned approximately 13% of our outstanding common stock. We
recorded, as additional purchase price, (i) payments of $500,000 made to fund
the operations of ELEKOM from October 1, 1998, through the closing date, and
(ii) expenses of approximately $1.0 million to complete the merger. We also
recorded $10.5 million of the purchase price as purchased in-process research
and development.
On May 26, 1998, we completed an initial public offering of our common stock in
which we sold 2.5 million shares for approximately $22.0 million after deducting
offering expenses and underwriting discounts.
Our revenue consists of revenues from the licensing of software and fees from
consulting, implementation, training, and maintenance services. Effective
January 1, 1998, we adopted Statement of Position No. 97-2, "Software Revenue
Recognition" ("SOP No.97-2"). Paragraphs 11 and 12 of SOP No. 97-2 were amended
by Statement of Position No. 98-9, "Software Revenue Recognition, With Respect
to Certain Transactions" ("SOP No. 98-9"). SOP No. 98-9 requires recognition of
revenue using the "residual method" when: (i) there is vendor-specific objective
evidence of the fair values of all undelivered elements in a multiple-element
arrangement that is not accounted for using long-term contract accounting, (ii)
vendor-specific objective evidence of fair value does not exist for one or more
of the delivered elements in the arrangement, and (iii) all revenue-recognition
criteria in SOP No. 97-2 other than the requirement for vendor-specific
objective evidence of the fair value of each delivered element of the
arrangement are satisfied. SOP No. 98-9 was effective for transactions entered
into after March 15, 1999. Under SOP No. 97-2, we recognize software license
revenue when the following criteria are met: (i) a signed and executed contract
is obtained, (ii) shipment of the product has occurred, (iii) the license fee is
fixed and determinable, (iv) collectibility is probable, and (v) remaining
obligations under the license agreement are insignificant.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Overview (continued)
Revenues from software licenses have been recognized upon delivery of our
product if there are no significant obligations on our part following delivery,
and collection of the related receivable, if any, is deemed probable by
management. Revenues from services fees relate to implementation, training, and
upgrade services performed by us and have been recognized as the services are
performed. Maintenance fees relate to customer maintenance and support and have
been recognized rateably over the term of the software support agreement, which
is typically 12 months. A majority of our customers renew the maintenance and
support agreements after the initial term. Revenues that have been prepaid or
invoiced, but that do not yet qualify for recognition under our policies, are
reflected as deferred revenue.
Cost of license fees includes royalties, and software duplication and
distribution costs. We recognize these costs as the applications are shipped.
Cost of services fees include personnel and related costs incurred to provide
implementation, training and upgrade services to customers. These costs are
recognized as the services are performed. Cost of maintenance fees includes
personnel and related costs incurred to provide the ongoing support and
maintenance of our products. These costs are recognized as incurred.
Research and development expenses consist primarily of personnel costs. We
account for software development costs under Statement of Financial Accounting
Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed." Research and development expenses are
charged to expense as incurred until technological feasibility is established,
after which remaining costs are capitalized. We define technological feasibility
as the point in time at which we have a working model of the related product.
Historically, the costs incurred during the period between the achievement of
technological feasibility and the point at which the product is available for
general release to customers have not been material. Accordingly, we charge all
internal software development costs to expense as incurred.
Sales and marketing expenses consist primarily of salaries, commissions, and
benefits to sales and marketing personnel, travel, trade-show participation,
public relations, and other promotional expenses. General and administrative
expenses consist primarily of salaries for financial, administrative and
management personnel, and related travel expenses, as well as occupancy,
equipment, and other administrative costs.
We had net operating loss carryforwards ("NOL's") of approximately $29.3 million
at June 30, 1999, which begin expiring in 2007. We established a valuation
allowance equal to the NOL's and all other deferred tax assets. The benefits
from these deferred tax assets will be recorded when realized, which will reduce
our effective tax rate for future taxable income, if any. Our ability to benefit
from certain NOL carryforwards is limited under Section 382 of the Internal
Revenue Code, as we are deemed to have had an ownership change of more than 50%,
as defined. Accordingly, certain NOL's may not be realizable in future years due
to the limitation.
Affiliate Relationships
In March 1995, we, along with Technology Ventures, L.L.C. ("Technology
Ventures"), which is controlled by Joseph S. McCall, a former director of ours,
formed Clarus Professional Services, L.L.C. (formerly SQL Financial Services,
L.L.C.; the "Services Subsidiary") to provide implementation, training and
upgrade services exclusively for our customers. On February 5, 1998, Technology
Ventures sold its 20% interest in the Services Subsidiary to us in exchange for
225,000 shares of our common stock, a warrant to purchase an additional 300,000
shares of our common stock at a price of $3.67 per share, and a non-interest
bearing promissory note in the principal amount of $1.1 million. The purchase of
the remaining 20% of the Services Subsidiary was accounted for using the
purchase method of accounting and resulted in goodwill in the amount of $4.2
million, which is being amortized over 15 years.
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations
The following table sets forth certain statement of operations data as a
percentage of total revenues for the periods indicated:
Three months ended Six months ended
June 30 June 30
----------------------- -------------------------
1999 1998 1999 1998
Revenues:
License fees 37.4 % 46.0 % 34.7 % 45.0 %
Services fees 40.3 36.7 44.4 36.8
Maintenance fees 22.3 17.3 20.9 18.2
----------- ---------- ------------- ----------
Total revenues 100.0 100.0 100.0 100.0
Cost of revenues:
License fees 3.2 2.9 3.1 3.0
Services fees 29.4 22.7 29.3 24.0
Maintenance fees 8.3 8.0 8.7 8.1
---------- ----------- ------------ -----------
Total cost of revenues 40.9 33.6 41.1 35.1
Operating expenses:
Research and development 20.9 13.2 20.1 13.5
Sales and marketing 30.5 27.7 30.1 28.7
General and
administrative 14.2 11.4 14.2 13.6
Depreciation and
amortization 8.5 5.0 8.1 5.0
Non-cash compensation 0.4 7.2 0.4 4.3
---------- ----------- ----------- ------------
Total expenses 74.5 64.5 72.9 65.1
Operating income (loss) (15.4) 1.9 (14.0) (0.2)
Interest income 1.0 1.2 1.0 0.8
Interest expense 0.2 0.6 0.2 0.6
Minority interest 0.0 0.0 0.0 0.2
============ ========= ============ ===========
Net income (loss) (14.6) 2.5 (13.2) (0.2)
============ ========= ============ ===========
Gross margin on license fees 91.4 93.7 91.0 93.3
Gross margin on services
fees 27.0 38.1 34.0 34.6
Gross margin on maintenance
fees 62.6 54.0 58.5 55.6
Quarter and Six Months Ended June 30, 1999, Compared to Quarter and Six Months
Ended June 30, 1998
Revenues
Total Revenues. For the quarter ended June 30, 1999, total revenues increased
7.8% to $11.3 million from $10.5 million in the comparable period in 1998. For
the six months ended June 30, 1999, total revenues increased 21.0% to $22.7
million from $18.7 million in the comparable period in 1998. These increases
were attributable to a substantial increase in services fees and maintenance
fees.
License Fees. License fees decreased 12.3% to $4.2 million, or 37.4% of total
revenues, in the quarter ended June 30, 1999, from $4.8 million, or 46.0% of
total revenues, in the comparable period in 1998. License fees decreased 6.7% to
$7.9 million, or 34.7% of total revenues, in the six months ended June 30, 1999,
from $8.4 million, or 45.0%, in the comparable period in 1998. The decrease in
license fees resulted from a decrease in the number of licenses sold for our
traditional financial and human resources product line, a reflection of the
market environment for ERP products, offset by increased sales of our newly
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Results of Operations (continued)
Quarter and Six Months Ended June 30, 1999, Compared to Quarter and Six Months
Ended June 30, 1998 (continued)
Revenues (continued)
License Fees (continued)
introduced Web-based Clarus Commerce products. The increased sales of our
Web-based Clarus Commerce products reflects the demand for our new solutions
combined with an increase in the average customer transaction size for Clarus
Commerce products when compared to the average transaction size for our
traditional products.
Services Fees. Services fees increased 18.6% to $4.6 million, or 40.3% of total
revenues, in the quarter ended June 30, 1999, from $3.8 million, or 36.7% of
total revenues, in the comparable period in 1998. Services fees increased 45.9%
to $10.0 million, or 44.4% of total revenues, in the six months ended June 30,
1999, from $6.9 million, or 36.8% of total revenues, in the comparable period in
1998. This increase in services fees was primarily due to the higher levels of
software licenses sold in the periods preceding the quarter ended June 30, 1999,
as compared to the level of licenses sold in the period preceding the quarter
ended June 30, 1998.
Maintenance Fees. Maintenance fees increased 38.3% to $2.5 million, or 22.3% of
total revenues, in the quarter ended June 30, 1999, from $1.8 million, or 17.3%
of total revenues, in the comparable period in 1998. Maintenance fees increased
39.1% to $4.7 million, or 20.9% of total revenues, in the six months ended June
30, 1999, from $3.4 million, or 18.2% of total revenues, in the comparable
period in 1998. This increase in maintenance fees was primarily due to the
signing of license agreements with new customers and the renewal of maintenance
agreements with existing customers.
Cost of Revenues
Total Cost of Revenues. Cost of revenues increased 31.5% to $4.6 million, or
40.9% of total revenues, in the quarter ended June 30, 1999, from $3.5 million,
or 33.6% of total revenues, in the comparable period in 1998. Cost of revenues
increased 41.5% to $9.3 million, or 41.1% of total revenues, in the six months
ended June 30, 1999, from $6.6 million, or 35.1% of total revenues, in the
comparable period in 1998. The increases in the cost of revenues were primarily
due to an increase in personnel and related expenses and increased royalty
expenses.
Cost of License Fees. Cost of license fees increased 19.7% to $365,000, or 8.6%
of total license fees, in the quarter ended June 30, 1999, compared to $305,000,
or 6.3% of total license fees, in the comparable period in 1998. Cost of license
fees increased 25.8% to $711,000, or 9.0% of total license fees, in the six
months ended June 30, 1999, compared to $565,000, or 6.7% of total license fees,
in the comparable period in 1998. The increase in the cost of license fees, and
the increase as a percentage of total license fees, were primarily attributable
to increases in the sale of third-party software products distributed.
Cost of Services Fees. Cost of services fees increased 39.8% to $3.3 million, or
73.0% of total services fees, in the quarter ended June 30, 1999, compared to
$2.4 million, or 61.9% of total services fees, in the comparable period in 1998.
Cost of services fees increased 47.3% to $6.6 million, or 66.0% of total
services fees, in the six months ended June 30, 1999, compared to $4.5 million,
or 65.4% of total services fees, in the comparable period in 1998. This increase
in the cost of services fees was primarily attributable to an increase in the
personnel and related costs to provide implementation, training, and upgrade
services. The increase in cost of services fees as a percentage of revenue for
the quarter and six months ended June 30, 1999, was primarily due to decreased
utilization of services personnel, and costs involved in developing
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Results of Operations (continued)
Quarter and Six Months Ended June 30, 1999, Compared to Quarter and Six Months
Ended June 30, 1998 (continued)
Cost of Revenues (continued)
Cost of Services Fees (continued)
the new commerce practice.
Cost of Maintenance Fees. Cost of maintenance fees increased 12.5% to $939,000,
or 37.4% of total maintenance fees, in the quarter ended June 30, 1999, compared
to $835,000, or 46.0% of total maintenance fees, in the comparable period in
1998. Cost of maintenance fees increased 29.9% to $2.0 million, or 41.5% of
total maintenance fees, in the six months ended June 30, 1999, compared to $1.5
million, or 44.4% of total maintenance fees, in the comparable period in 1998.
This increase in the cost of maintenance fees was primarily attributable to an
increase in the personnel and related costs required to provide support and
maintenance, as well as an increase in royalties paid for third-party products.
Cost of maintenance fees as a percentage of total maintenance fees decreased
primarily due to more productive use of personnel to support the maintenance
customer base.
Research and Development
Research and development expenses increased 70.1% to $2.4 million, or 20.9% of
total revenues, in the quarter ended June 30, 1999, from $1.4 million, or 13.2%
of total revenues, in the comparable period in 1998. Research and development
expenses increased 80.0% to $4.6 million, or 20.1% of total revenues, in the six
months ended June 30, 1999, from $2.5 million, or 13.5% of total revenues, in
the comparable period in 1998. Research and development expenses increased
during the quarter and six months ended June 30, 1999, primarily due to
increased personnel costs related to continued development of our products,
including our Web-based business-to-business e-commerce products.
Sales and Marketing
Sales and marketing expenses increased 18.6% to $3.4 million, or 30.5% of total
revenues, in the quarter ended June 30, 1999, from $2.9 million, or 27.7% of
total revenues, in the comparable period in 1998. Sales and marketing expenses
increased 26.5% to $6.8 million, or 30.1% of total revenues, in the six months
ended June 30, 1999, from $5.4 million, or 28.7% of total revenues, in the
comparable period in 1998. The increase in sales and marketing expenses was
primarily attributable to the costs associated with additional sales and
marketing personnel and promotional activities related to our Web-based
business-to-business e-commerce products.
General and Administrative
General and administrative expenses increased 34.6% to $1.6 million, or 14.2% of
total revenues, in the quarter ended June 30, 1999, from $1.2 million, or 11.4%
of total revenues, in the comparable period in 1998. General and administrative
expenses increased 26.5% to $3.2 million, or 14.2% of total revenues, in the six
months ended June 30, 1999, from $2.5 million, or 13.6% of total revenues, in
the comparable period in 1998. The increase in general and administrative
expenses was primarily attributable to increases in personnel and related costs.
12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations (continued)
Quarter and Six Months Ended June 30, 1999, Compared to Quarter and Six Months
Ended June 30, 1998 (continued)
Depreciation and Amortization
Depreciation of tangible equipment and amortization of intangible assets
increased 83.4% to $963,000, or 8.5% of total revenues, in the quarter ended
June 30, 1999, from $525,000, or 5.0% of total revenues, in the comparable
period in 1998. Depreciation of tangible equipment and amortization of
intangible assets increased 97.3% to $1.8 million, or 8.1% of total revenues, in
the six months ended June 30, 1999, from $929,000, or 5.0% of total revenues, in
the comparable period in 1998. The increase in depreciation and amortization
expense was due to an increase in goodwill resulting from the acquisition of
ELEKOM Corporation in the fourth quarter of 1998, as well as increases in
capital expenditures.
Non-Cash Compensation
Non-cash compensation expense decreased to $42,000, or 0.4% of total revenues,
in the quarter ended June 30, 1999, from $749,000, or 7.2% of total revenues, in
the comparable period in 1998. Non-cash compensation expense decreased to
$84,000, or 0.4% of total revenues, in the six months ended June 30, 1999, from
$803,000, or 4.3% of total revenues in the comparable period in 1998. The
decrease in non-cash compensation is largely due to the recognition of a
one-time charge in the second quarter of 1998 of approximately $705,000 when the
Company accelerated the vesting of certain employee stock options issued in the
first quarter of 1998. This charge represented the previously remaining
unamortized deferred compensation recorded on these options.
Other Income
Interest income decreased to $111,000 in the quarter ended June 30, 1999, from
$129,000, in the comparable period in 1998. Interest income increased to
$228,000 in the six months ended June 30, 1999, from $159,000, in the comparable
period in 1998. The decrease in interest income for the quarter ended June 30,
1999, was primarily due to a reduction in the average level of cash available
for investment during the quarter ended June 30, 1999, when compared to the same
quarter in 1998. The increase in the interest income for the six months ended
June 30, 1999 was attributable to an increase in the average level of cash
available for investment in the six months ended June 30, 1999, when compared to
the same period in 1998.
Interest Expense
Interest expense decreased 60.7% to $24,000 in the quarter ended June 30, 1999,
from $61,000 in the comparable period in 1998. Interest expense decreased to
$51,000 in the six months ended June 30, 1999, from $121,000, in the comparable
period in 1998. This decrease was primarily due to lower average levels of debt
in the quarter and six months ended June 30, 1999, as compared to the same
periods in 1998.
Income Taxes
As a result of the operating losses incurred since our inception, we have not
recorded any provision or benefit for income taxes in the quarters and six
months ended June 30, 1999 and 1998, respectively.
Liquidity and Capital Resources
On May 26, 1998, we completed our initial public offering of 2.5 million shares
of our common stock at an offering price of $10.00 per share. The proceeds, net
of expenses, from this public offering of approximately $22.0 million were
placed in investment grade cash equivalents. Our working capital position was
$5.6 million and $9.0 million at June 30, 1999 and December 31, 1998,
respectively.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Results of Operations (continued)
Quarter and Six Months Ended June 30, 1999, Compared to Quarter and Six Months
Ended June 30, 1998 (continued)
Liquidity and Capital Resources (continued)
We believe that current cash balances, cash flows from operations, and
borrowings available under our revolving working capital line of credit and
equipment facility with Silicon Valley Bank will be adequate to provide for our
capital expenditures and working capital requirements for the foreseeable
future. Although operating activities may provide cash in certain periods, to
the extent we experience growth in the future, our operating and investing
activities will use significant cash.
On November 6, 1998, we completed the acquisition of ELEKOM for approximately
$15.7 million, consisting of $8.0 million in cash and approximately 1.4 million
shares of our common stock. ELEKOM was merged with and into Clarus CSA, Inc.,
our wholly owned subsidiary and the separate existence of ELEKOM ceased.
Immediately following consummation of the Merger, the former ELEKOM Shareholders
owned approximately 13% of our outstanding common stock. As additional purchase
price, we recorded i) payments of $500,000 made to fund the operations of ELEKOM
from October 1, 1998, through the closing date, and ii) expenses of
approximately $1.0 million to complete the merger. Approximately $10.5 million
of the purchase price was recorded as purchased in-process research and
development.
Cash used in operating activities was approximately $4.5 million and $507,000
during the six months ended June 30, 1999 and 1998, respectively. Cash used by
operations during the six months ended June 30, 1999, was primarily attributable
to an increase in accounts receivable, and a decrease in accounts payable and
accrued liabilities, and deferred revenue. Cash used by operations during the
six months ended June 30, 1998, was primarily attributable to an increase in
accounts receivable and a decrease in deferred revenue, partially offset by
increases in accounts payable and accrued liabilities.
Cash used in investing activities was approximately $2.0 million and $1.6
million during the six months ended June 30, 1999 and 1998, respectively. The
cash used in investing activities during the six months ended June 30, 1999 and
1998, was primarily attributable to the purchases of computer equipment and
software.
Cash used by financing activities was approximately $197,000 during the
six-month period ended June 30, 1999, and the cash provided by financing
activities was approximately $20.9 million for the six-month period ended June
30, 1998. The cash used by financing activities during the six months ended June
30, 1999, was primarily attributable to the repayment of long-term borrowings.
The cash provided by financing activities during the six months ended June 30,
1998, was primarily attributable to the Company's initial public offering
effective May 26, 1998, for net proceeds of approximately $22.0 million.
In March 1997, we entered into a loan agreement and a master leasing agreement
for an equipment line of credit in the amount of $1.0 million (the "Equipment
Line") with a leasing company. The Equipment Line bears interest at rates
negotiated with each loan or lease schedule (generally 22.0% to 22.5%) and is
collateralized by all of the equipment purchased with the proceeds thereof. As
of June 30, 1999, the principal balance on the Equipment Line payable was
$350,000.
We have a revolving working capital line of credit and equipment facility with
Silicon Valley Bank. Borrowings outstanding under the line are limited to the
lesser of $8.0 million or 80% of accounts receivable. Borrowings outstanding
under the equipment facility are limited to $1.0 million. Interest on the
revolving credit facility is at prime rate and on the equipment facility at
prime plus 1.0% and is collateralized by all of our assets. The line of credit
and equipment term facility with Silicon Valley Bank was renewed in May of 1999
and will expire in June of 2000. As of June 30, 1999, we had no outstanding
balance and had $8.7 million
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Results of Operations (continued)
Quarter and Six Months Ended June 30, 1999, Compared to Quarter and Six Months
Ended June 30, 1998 (continued)
Liquidity and Capital Resources (continued)
available for future borrowings under this agreement.
We had net operating loss carryforwards ("NOL's") of approximately $29.3 million
at June 30, 1999, which begin expiring in 2007. We established a valuation
allowance equal to the NOL's and all other deferred tax assets. The benefits
from these deferred tax assets will be recorded when realized, which will reduce
our effective tax rate for future taxable income, if any. Our ability to benefit
from certain NOL carryforwards is limited under Section 382 of the Internal
Revenue Code, as we are deemed to have had an ownership change of more than 50%,
as defined. Accordingly, certain NOL's may not be realizable in future years due
to the limitation.
Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act
This quarterly report on Form 10-Q contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act. When used in this
report, the words "believes," "expects," "anticipates," "estimates" and similar
words and expressions are generally intended to identify forward-looking
statements. Statements that describe our future strategic plans, goals, or
objectives are also forward-looking statements. Readers of this report are
cautioned that any forward-looking statements, including those regarding our
intent, belief or current expectations, are not guarantees of future
performance, results or events and involve risks and uncertainties, and that
actual results and events may differ materially from those in the
forward-looking statements as a result of various factors including, but not
limited to, (i) general economic conditions in the markets in which we operate,
(ii) competitive pressures in the markets in which we operate, (iii) the effect
of future legislation or regulatory changes on our operations and (iv) other
factors described from time to time in our filings with the Securities and
Exchange Commission. The forward-looking statements included in this report are
made only as of the date hereof. We undertake no obligation to update such
forward-looking statements to reflect subsequent events or circumstances.
Impact of Year 2000
We have designed and tested the most current versions of our products to be Year
2000 compliant. Our current products may contain undetected errors or defects
associated with Year 2000 date functions that may result in material costs to
us. Some commentators have stated that a significant amount of litigation will
arise out of Year 2000 compliance issues, and we are aware of a growing number
of lawsuits against other software vendors. Because of the unprecedented nature
of such litigation, it is uncertain whether or to what extent we may be affected
by it.
Additionally, in the event relational database management systems used with our
software are not Year 2000 compliant, our customers may not be able to continue
to use our products. We do not currently believe that the effects of any Year
2000 non-compliance in our installed base of software will result in a material
adverse impact on our business or financial condition. However, we may be
exposed to potential claims resulting from system problems associated with the
century change. Such claims would not have a material adverse effect on our
business, financial condition, or results of operations.
15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations (continued)
Quarter and Six Months Ended June 30, 1999, Compared to Quarter and Six Months
Ended June 30, 1998 (continued)
Impact of Year 2000 (continued)
With respect to our internal systems, we are taking steps to prepare our systems
for the Year 2000 date change. We have completed our inventory efforts and we
expect remediation and testing efforts to continue through the third quarter of
1999. We estimate that costs for Year 2000 compliance efforts will be
approximately $300,000. We do not believe that we will incur any material costs
or experience material disruptions in our business associated with preparing our
internal systems for the Year 2000. However, unanticipated negative consequences
and/or material costs caused by undetected errors or defects in the technology
used in our internal systems could be experienced. We are currently unable to
estimate the most reasonably likely worst-case effects of the Year 2000. We are
currently preparing contingency plans for any such unanticipated negative
effects. We expect these plans to be completed by the end of the third quarter
of 1999.
We have contacted all third parties with which we have material relationships.
We do not believe that we will incur any material costs or experience
significant business interruptions as result of Year 2000 non-compliance by
third parties. However, unanticipated negative consequences and/or material
costs caused by undetected errors or defects in the technology used by our
material third parties could be experienced. We are currently preparing
contingency plans for any such unanticipated negative effects. These contingency
plans will be completed by the third quarter of 1999.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The following proposals were submitted to our stockholders at our annual
stockholders meeting on May 27, 1999.
1. The proposal to elect Norman N. Behar as a Class I Director to serve until
the 2002 annual stockholders' meeting. This proposal was approved with
8,760,380 shares or 79.90% voting for the proposal, zero shares or 0.0%
withholding authority, and 14,820 shares or 0.14% abstaining from the
proposal.
2. The proposal to elect Mark A. Johnson as a Class I Director to serve until
the 2002 annual stockholders' meeting. This proposal was approved with
8,760,600 shares or 79.90% voting for the proposal, zero shares or 0.0%
withholding authority, and 14,600 shares or 0.13% abstaining from the
proposal.
3. The proposal to elect William S. Kaiser as a Class I Director to serve
until the 2002 annual stockholders' meeting. This proposal was approved
with 8,691,175 shares or 79.27% voting for the proposal, zero shares or
0.0% withholding authority, and 84,025 shares or 0.77% abstaining from the
proposal.
4. The proposal to ratify the selection of Arthur Andersen, L.L.P. as our
independent public accountants for the year ending December 31, 1999. This
proposal was approved with 8,686,152 shares or 79.22% voting for the
proposal, 84,838 shares or 0.77% voting against the proposal, and 4,210
shares or 0.04% abstaining from the proposal.
5. The proposal to amend our 1998 Stock Incentive Plan to increase the number
of shares of common stock available for grant thereunder from 1,000,000 to
1,500,000 shares. This proposal was approved with 8,673,977 shares or
79.11% voting for the proposal, 98,623 shares or 0.90% voting against the
proposal, and 2,600 shares or 0.02% abstaining from the proposal.
16
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K - None
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CLARUS CORPORATION
(Registrant)
Date: August 13, 1999 By: /s/William A. Fielder, III
--------------- ---------------------------------------
William A. Fielder, III
Chief Financial Officer and Treasurer
18