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, 2010

or

¨ Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

For the transition period from _________ to _________

Commission File Number: 0-24277

CLARUS CORPORATION

(Exact name of registrant as specified in its charter)

Delaware
 
58-1972600
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
  
Identification Number)

2084 East 3900 South
Salt Lake City, Utah 84124
(Address of principal executive offices)
(Zip code)

(801) 278-5552
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES ¨ NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer  o  Accelerated filer x  Non-accelerated filer o Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES ¨ NO x

As of August 6, 2010, there were outstanding 21,738,484 shares of common stock, par value $0.0001.

 

 

INDEX

CLARUS CORPORATION
       
 
PART I
 
FINANCIAL INFORMATION
 
Page
         
Item 1.
 
Financial Statements
   
         
   
Condensed Consolidated Balance Sheets - June 30, 2010 (unaudited) and 2009 (Predecessor) and December 31, 2009
 
3
         
   
Condensed Consolidated Statements of Operations (unaudited) - Three months ended June 30, 2010 and 2009, two months ended May 28, 2010 (Predecessor) and three months ended June 30, 2009 (Predecessor)
 
4
         
   
Condensed Consolidated Statements of Operations (unaudited) - Six months ended June 30, 2010 and 2009, five months ended May 28, 2010 (Predecessor) and six months ended June 30, 2009 (Predecessor)
 
5
         
   
Condensed Consolidated Statements of Cash Flows (unaudited) -Six months ended June 30, 2010 and 2009, five months ended May 28, 2010 (Predecessor) and six months ended June 30, 2009 (Predecessor)
 
6
         
   
Notes to Unaudited Condensed Consolidated Financial Statements - June 30, 2010
 
7
         
Item 2.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
29
         
Item 3.
 
Quantitative and Qualitative Disclosures about Market Risk
 
38
         
Item 4.
 
Procedures and Controls
 
39
         
PART II
 
OTHER INFORMATION
   
         
Item 1.
 
Legal Proceedings
 
40
         
Item 1A.
 
Risk Factors
 
40
         
Item 5.
 
Other Information
 
51
         
Item 6.
 
Exhibits
 
53
         
SIGNATURE PAGE
 
55
EXHIBIT INDEX
 
56

 
2

 

PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS

CLARUS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2010
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


               
Predecessor
 
               
Company (Note 1)
 
   
June 30, 2010
   
December 31, 2009
   
June 30, 2009
 
   
(Unaudited)
             
Assets
                 
Current Assets
                 
Cash and cash equivalents
  $ 3,292     $ 58,363     $ 1,271  
Marketable securities
    -       24,059       -  
Accounts receivable, less allowance for doubtful accounts of $499, $0, and $474, respectively
    13,874       -       9,727  
Inventories
    31,327       -       25,580  
Prepaid and other current assets
    3,965       673       646  
Deferred income taxes
    -       -       1,810  
Total Current Assets
    52,458       83,095       39,034  
                         
Non-Current Assets
                       
Property and equipment, net
    14,250       696       9,781  
Definite lived intangible assets, net
    18,105       -       32  
Indefinite lived intangible assets
    32,650       -       897  
Goodwill
    35,900       -       1,160  
Deferred income taxes
    51,829       -       -  
Other long-term assets
    325       -       -  
Total Non-Current Assets
    153,059       696       11,870  
TOTAL ASSETS
  $ 205,517     $ 83,791     $ 50,904  
                         
Liabilities and Stockholders' Equity
                       
Current Liabilities
                       
Accounts payable and accrued liabilities
  $ 13,254     $ 1,713     $ 9,884  
Income tax payable
    957       -       -  
Deferred income taxes
    1,174       -       -  
Current portion of debt
    196       -       2,992  
Total Current Liabilities
    15,581       1,713       12,876  
                         
Non-Current Liabilities
                       
Long-term debt
    23,371       -       13,398  
Other long-term liabilities
    1,022       -       797  
Deferred income taxes
    1,795       -       601  
Deferred rent
    -       446       -  
TOTAL LIABILITIES
    41,769       2,159       27,672  
                         
Stockholders' Equity
                       
Preferred stock, $.0001 par value; 5,000,000 shares authorized; none issued
                       
Common stock, $.0001 par value; 100,000,000 shares authorized; 21,732,234 shares issued and 21,657,234 outstanding in 2010
    2       2       -  
Common stock, $0.01 par value; 200,000 shares issued at June 30, 2009 (including 11,128 shares held in treasury at June 30, 2009)
    -       -       1  
Additional paid in capital
    397,660       370,994       2,722  
(Accumulated deficit) retained earnings
    (234,430 )     (289,368 )     22,499  
Treasury stock, at cost
    (2 )     (2 )     (2,678 )
Accumulated other comprehensive income
    518       6       688  
TOTAL STOCKHOLDERS' EQUITY
    163,748       81,632       23,232  
TOTAL LIABILITIES AND EQUITY
  $ 205,517     $ 83,791     $ 50,904  

SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
 
 
3

 

CLARUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

   
THREE MONTHS ENDED
   
PREDECESSOR COMPANY (NOTE 1)
 
               
TWO MONTHS
   
THREE MONTHS
 
               
ENDED
   
ENDED
 
   
June 30, 2010
   
June 30, 2009
   
May 28, 2010
   
June 30, 2009
 
                         
Revenue
                       
Domestic sales
  $ 4,036     $ -     $ 5,932     $ 7,815  
International sales
    3,708       -       5,354       7,404  
Total revenue
    7,744       -       11,286       15,219  
                                 
Cost of goods sold
    5,936       -       6,628       9,996  
Gross profit
    1,808       -       4,658       5,223  
                                 
Operating expenses
                               
Selling, general and administrative
    7,331       1,118       4,823       5,825  
Restructuring charge
    1,377       -       -       -  
Merger and integration
    780       -       -       -  
Transaction costs
    3,253       -       -       -  
                                 
Total operating expenses
    12,741       1,118       4,823       5,825  
                                 
Operating loss
    (10,933 )     (1,118 )     (165 )     (602 )
                                 
Other income (expense)
                               
Interest expense
    (336 )     -       (59 )     (164 )
Interest income
    17       197       10       -  
Other, net
    112       -       1,511       136  
                                 
Total other income (expense), net
    (207 )     197       1,462       (28 )
                                 
Income (loss) before income tax
    (11,140 )     (921 )     1,297       (630 )
Income tax (benefit) provision
    (68,433 )     -       382       (171 )
Net income (loss)
  $ 57,293     $ (921 )   $ 915     $ (459 )
                                 
Earnings (loss) per share attributable to stockholders:
                               
Basic earnings (loss) per share
  $ 3.08     $ (0.05 )                
                                 
Diluted earnings (loss) per share
  $ 3.03     $ (0.05 )                
                                 
Weighted average common shares outstanding for earnings per share:
                               
Basic
    18,625       16,867                  
                                 
Diluted
    18,927       16,867                  

SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

 
4

 

CLARUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

   
SIX MONTHS ENDED
   
PREDECESSOR COMPANY (NOTE 1)
 
               
FIVE MONTHS
   
SIX MONTHS
 
               
ENDED
   
ENDED
 
   
June 30, 2010
   
June 30, 2009
   
May 28, 2010
   
June 30, 2009
 
                         
Revenue
                       
Domestic sales
  $ 4,036     $ -     $ 15,751     $ 16,338  
International sales
    3,708       -       19,192       19,669  
Total revenue
    7,744       -       34,943       36,007  
                                 
Cost of goods sold
    5,936       -       21,165       23,131  
Gross profit
    1,808       -       13,778       12,876  
                                 
Operating expenses
                               
Selling, general and administrative
    8,199       2,130       12,138       12,450  
Restructuring charge
    1,377       -       -       -  
Merger and integration
    780       -       -       -  
Transaction costs
    4,762       -       -       -  
                                 
Total operating expenses
    15,118       2,130       12,138       12,450  
                                 
Operating (loss) income
    (13,310 )     (2,130 )     1,640       426  
                                 
Other income (expense)
                               
Interest expense
    (336 )     -       (165 )     (626 )
Interest income
    39       608       3       -  
Other, net
    112       -       1,803       225  
                                 
Total other income (expense), net
    (185 )     608       1,641       (401 )
                                 
Income (loss) before income tax
    (13,495 )     (1,522 )     3,281       25  
Income tax (benefit) provision
    (68,433 )     -       966       9  
Net income (loss)
  $ 54,938     $ (1,522 )   $ 2,315     $ 16  
                                 
Earnings (loss) per share attributable to stockholders:
                               
Basic earnings (loss) per share
  $ 3.09     $ (0.09 )                
                                 
Diluted earnings (loss) per share
  $ 3.05     $ (0.09 )                
                                 
Weighted average common shares outstanding for earnings per share:
                               
Basic
    17,751       16,867                  
                                 
Diluted
    18,025       16,867                  

SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

 
5

 

CLARUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

   
SIX MONTHS ENDED
   
PREDECESSOR COMPANY (NOTE 1)
 
               
FIVE MONTHS
   
SIX MONTHS
 
         
ENDED
   
ENDED
 
   
June 30, 2010
   
June 30, 2009
   
May 28, 2010
   
June 30, 2009
 
                         
CASH FLOWS FROM OPERATING ACTIVITIES:
                       
Net income (loss)
  $ 54,938     $ (1,522 )   $ 2,315     $ 16  
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
                               
Depreciation on property and equipment
    353       177       865       938  
Amortization of intangible assets
    111       -       2       2  
Accretion of notes payable
    138       -       17       -  
Loss on disposition of assets
    596       -       1       3  
Amortization of equity and stock based compensation plans
    3,700       343       375       24  
Amortization of discount on securities, net
    -       (436 )     -       -  
Tax benefit related to stock issued as deferred compensation
    -       -       -       53  
Treasury stock issued as director compensation
    -       -       -       13  
Deferred income taxes
    (68,417 )     -       (166 )     454  
Changes in operating assets and liablities, net of acquisitions:
                               
Decrease in accounts receivable
    1,161       -       4,063       4,864  
Increase in inventory
    (1,261 )     -       (343 )     (2,000 )
(Increase)/decrease in interest receivable, prepaid and other current assets
    (242 )     (69 )     (1,387 )     1,977  
Increase/(decrease) in accounts payable and accrued liabilities
    (34 )     (258 )     1,670       (1,019 )
(Decrease)/increase in deferred rent
    (446 )     11       -       -  
Other
    (5 )     1       -       (519 )
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
    (9,408 )     (1,753 )     7,412       4,806  
                                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                               
Purchase of marketable securities
    (22,065 )     (18,605 )     -       -  
Proceeds from maturity and sales of marketable securities
    46,124       66,698       -       -  
Purchase of businesses, net of cash received
    (82,794 )     -       -       -  
Purchase of intangible assets
    -       -       (10 )     -  
Proceeds from disposition of property and equipment
    -       -       10       11  
Purchase of property and equipment
    (94 )     (6 )     (788 )     (2,238 )
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
    (58,829 )     48,087       (788 )     (2,227 )
                                 
CASH FLOWS FROM FINANCING ACTIVITIES:
                               
Repayment of long-term debt, revolving lines of credit and capital leases
    (4,216 )     -       (6,261 )     (3,333 )
Proceeds from long-term debt, revolving lines of credit and capital leases
    14,094       -       -       363  
Purchase of treasury stock
    -       -       -       (685 )
Proceeds from sales of treasury stock and exercise of stock options
    352       -       -       577  
Proceeds from the sale of stock
    2,903       -       -       -  
Dividends paid
    -       -       -       (225 )
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
    13,133       -       (6,261 )     (3,303 )
                                 
Effect of foreign exchange rates on cash
    33       -       (60 )     (131 )
                                 
CHANGE IN CASH AND CASH EQUIVALENTS
    (55,071 )     46,334       303       (855 )
CASH AND CASH EQUIVALENTS, beginning of period
    58,363       19,342       1,317       2,126  
CASH AND CASH EQUIVALENTS, end of period
  $ 3,292     $ 65,676     $ 1,620     $ 1,271  
                                 
SUPPLEMENTAL DISCLOSURE:
                               
Cash paid for income taxes
  $ 436     $ -     $ 596     $ 859  
Cash paid for interest
  $ -     $ -     $ 183     $ 614  
Note payable to acquire intangible asset
  $ -     $ -     $ -     $ 897  
Stock issued for acquisition
  $ 19,465     $ -     $ -     $ -  
Notes and deferred compensation issued in acquisition
  $ 13,436     $ -     $ -     $ -  

SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

 
6

 

CLARUS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands, except per share amounts)

NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
 
The accompanying unaudited condensed consolidated financial statements of Clarus Corporation and subsidiaries (“Clarus” or the "Company," which may be referred to as "we," "us," or "our") as of and for the three and six months ended June 30, 2010 and 2009, have been prepared in accordance with U.S. 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 U.S. 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, 2010 are not necessarily indicative of the results to be obtained for the year ending December 31, 2010. 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, 2009, filed with the Securities and Exchange Commission.
 
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from these estimates.

Operating History

Since the 2002 sale of our e-commerce solutions business, we have engaged in a strategy of seeking to enhance stockholder value by pursuing opportunities to redeploy our assets through an acquisition of, or merger with, an operating business or businesses that would serve as a platform company. On May 28, 2010, we redeployed our assets through our acquisitions of Black Diamond Equipment, Ltd. (“BDE”) and Gregory Mountain Products, Inc. (“GMP”). Because the Company had no operations at the time of our acquisition of BDE, BDE is considered to be our predecessor company (the “Predecessor” or the “Predecessor Company”) for financial reporting purposes. The Predecessor does not include GMP. Accordingly, relevant historical information has been presented for BDE (See Note 2 for a more detailed explanation of the acquisition).
 
On August 5, 2010, at the Company’s 2010 Annual Meeting of Stockholders, the Company’s Stockholders approved a proposal to amend its Certificate of Incorporation to change the Company’s name from Clarus Corporation to “Black Diamond Equipment, Inc.” to more accurately reflect its current business. The name change will be effective upon the Company filing an amendment to its Certificate of Incorporation with the Secretary of State of Delaware.

Business

Overview
 
The Company is a leading provider of outdoor recreation equipment and lifestyle products. The Company’s principal brands are Black Diamond™ and Gregory Mountain Products®. The Company develops, manufactures and distributes a broad range of products including carabiners, protection devices, belay and rappel equipment, helmets, ropes, ice-climbing gear, backcountry gear, technical backpacks, high-end day packs, tents, trekking poles, gloves, skis, ski bindings and ski boots. Headquartered in Salt Lake City, Utah, the Company has more than 475 employees worldwide, with ISO 9001 manufacturing facilities in Salt Lake City and southeast China, a distribution center in Germany and a sales and marketing office located outside Basel, Switzerland. For more information about us and our brands, please visit www.claruscorp.com, www.blackdiamondequipment.com, and www.gregorypacks.com.
 
Significant Accounting Policies

Principles of Consolidation
 
The consolidated financial statements include the accounts of Clarus and all its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated upon consolidation.
 
Foreign Currency Transactions and Translation
 
The accounts of the Company’s international subsidiaries’ financial statements are translated into U.S. dollars using the exchange rate at the balance sheet dates for assets and liabilities and the weighted average exchange rate for the periods for revenues, expenses, gains and losses. Foreign currency translation adjustments are recorded as a separate component of accumulated other comprehensive income (loss). Foreign currency transaction gains and losses are included in other income (expense) in the consolidated statements of operations.
 
7

 
CLARUS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands, except per share amounts)

Cash Equivalents
 
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Marketable Securities
 
The Company accounts for its marketable securities as available-for-sale. Available-for-sale securities have been recorded at fair value and related unrealized gains and losses have been excluded from earnings and are reported as a separate component of accumulated other comprehensive income (loss) until realized.

At December 31, 2009, marketable securities consisted of government and government agency notes and bonds with a fair market value of $24,100. The amortized cost of marketable securities at December 31, 2009 was $24,100 with an unrealized gain of $6.  The maturities of all securities are less than 12 months at December 31, 2009.

Accounts Receivable and Allowance for Doubtful Accounts
 
The Company records its trade receivables at sales value and establishes a non-specific reserve for estimated doubtful accounts based on a percentage of sales. In addition, specific reserves are established for customer accounts as known collection problems occur due to insolvency, disputes or other collection issues. The amounts of these specific reserves are estimated by management based on the customer’s financial position, the age of the customer’s receivables and the reasons for any disputes. The allowance for doubtful accounts is reduced by any write-off of uncollectible customer accounts. Interest is charged on trade receivables that are outstanding beyond the payment terms and is recognized as it is charged.
 
Inventories
 
Inventories at June 30, 2010 are stated at the lower of cost (using the first-in, first-out method) or market value. Elements of cost in the Company’s manufactured inventories generally include raw materials, direct labor, manufacturing overhead and freight in. Inventories at June 30, 2009, Predecessor, other than Black Diamond Equipment AG (“BDAG) and Black Diamond Sporting Equipment (ZFTZ) Co. Ltd (“BDEA), are stated at the lower of last-in, first out (“LIFO”) cost or market value. The excess of current cost using the first-in, first-out (“FIFO”) cost method over the LIFO value of inventories was approximately $1,062 at June 30, 2009. Inventories at BDAG and BDEA are stated at the lower of FIFO cost or market value. Inventories at BDAG and BDEA totaled approximately $13,974 at June 30, 2009.
 
Goodwill and Other Intangible Assets
 
Goodwill resulted from the acquisitions of BDE and GMP and represents the difference between the purchase price and the fair value of the identifiable tangible and intangible net assets. Goodwill is not amortized, but rather tested for impairment on an annual basis or more often if events or circumstances indicate a potential impairment exists.
 
Property and Equipment
 
Property and equipment is stated at historical cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, ranging from 3 to 20 years, or over the life of the lease, if shorter. Major replacements, which extend the useful lives of equipment, are capitalized and depreciated over the remaining useful life. Normal maintenance and repair items are expensed as incurred.
 
Derivative Financial Instruments
 
The Company uses derivative instruments to hedge currency rate movements on foreign currency denominated assets, liabilities and cash flows. The Company enters into forward contracts, option contracts and non-deliverable forwards to manage the impact of foreign currency fluctuations on a portion of its forecasted foreign currency exposure. These derivatives are carried at fair value on the Company’s condensed consolidated balance sheets in prepaid expenses and accrued liabilities. Changes in fair value of the derivatives not designated as hedge instruments are included in the determination of net income. For derivative contracts designated as hedge instruments, the effective portion of gains and losses resulting from changes in fair value of the instruments are included in accumulated other comprehensive income and reclassified to earnings in the period the underlying hedged item is recognized in earnings. The Company uses operating budgets and cash flow forecasts to estimate future economic exposure and to determine the level and timing of derivative transactions intended to mitigate such exposures in accordance with its risk management polices.

 
8

 

CLARUS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands, except per share amounts)

Stock-Based Compensation
 
The Company records compensation expense for all share-based awards granted based on the fair value of the award at the time of the grant.  The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses assumptions and estimates that the Company believes are reasonable.  The Company recognizes the cost of the share-based awards on a straight-line basis over the requisite service period of the award.
 
Revenue Recognition
 
The Company sells its products pursuant to customer orders or sales contracts entered into with its customers. Revenue is recognized when title and risk of loss pass to the customer and when collectability is reasonably assured. Charges for shipping and handling fees are included in net sales and the corresponding shipping and handling expenses are included in cost of sales in the accompanying condensed consolidated statements of operations.
 
Reporting of Taxes Collected
 
Taxes collected from customers and remitted to government authorities are reported on the net basis and are excluded from sales.
 
Research and Development
 
Research and development costs are charged to expense as incurred, and are included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.
 
Income Taxes
 
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.   The Company is subject to income taxes in certain foreign jurisdictions based on operations. Deferred tax assets and liabilities are created in this process. The Company has netted these deferred tax assets and deferred tax liabilities by jurisdiction. Deferred income tax assets are reviewed for recoverability and valuation allowances are provided when it is more likely than not that a deferred tax asset is not realizable in the future.

Tax positions are recognized in the financial statements when it is more-likely-than-not that the position will be sustained upon examination by the tax authorities. As of June 30, 2010, the Company had no uncertain tax positions that quality for either recognition or disclosure in the financial statements. The Company conducts its business globally, as a result, the Company and its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions, and are subject to examination for the open tax years of 2006-2008

Concentration of Credit Risk
 
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash and accounts receivable. Risks associated with cash within the United States are mitigated by banking with federally insured, creditworthy institutions. To date, the Company has not experienced a loss or lack of access to its cash; however, no assurance can be provided that access to the Company’s cash will not be impacted by adverse conditions in the financial markets. In the normal course of business, the Company provides unsecured credit terms to its customers. Accordingly, the Company performs ongoing credit evaluations of its customers and maintains allowances for possible losses as considered necessary by management.
 
Segment Information
 
The Company has determined that during 2009, 2008 and 2007 the Company operated in one principal business segment.

 
9

 


CLARUS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands, except per share amounts)

NOTE 2. ACQUISITIONS
 
Black Diamond Equipment, Ltd.

On May 28, 2010, Clarus acquired BDE, a Delaware corporation pursuant to the Agreement and Plan of Merger dated May 7, 2010 (the “Black Diamond Merger Agreement”), by and among Clarus, BDE, Everest/Sapphire Acquisition, LLC (“Purchaser”), a Delaware limited liability company and wholly-owned direct subsidiary of Clarus, Sapphire Merger Corp. (“Merger Sub”), a Delaware corporation and a wholly-owned direct subsidiary of Purchaser, and Ed McCall, as Stockholders’ Representative. Under the Black Diamond Merger Agreement, Purchaser acquired BDE and its three subsidiaries through the merger of Merger Sub with and into BDE, with BDE as the surviving corporation of the merger (the “Black Diamond Merger”).

In the Black Diamond Merger Agreement, Clarus acquired all of the outstanding common stock of BDE for an aggregate amount of approximately $85,675 (after closing adjustments of $4,335 relating to working capital), $4,500 of which is being held in escrow for a one year period as security for indemnification claims under the Black Diamond Merger Agreement. Certain BDE shareholders used their cash received from the sale of BDE common stock to purchase 484 shares of Clarus common stock from the Company, for a total value of $2,903.
 
Gregory Mountain Products, Inc.

On May 28, 2010, Clarus acquired GMP, a Delaware corporation in a merger transaction (the “Gregory Merger”) pursuant to the Agreement and Plan of Merger (the “Gregory Merger Agreement”) by and among GMP, Clarus, Purchaser, Everest Merger I Corp., a Delaware corporation and a wholly-owned direct subsidiary of Purchaser (“Merger Sub One”), Everest Merger II, LLC, a Delaware limited liability company and a wholly-owned direct subsidiary of Purchaser (“Merger Sub Two”), and each of Kanders GMP Holdings, LLC and Schiller Gregory Investment Company, LLC, as the stockholders of Gregory (collectively, the “Gregory Stockholders”).
 
In the Gregory Merger, the Company acquired all of the outstanding common stock of GMP for an aggregate amount of approximately $44,111 (after closing adjustments of $889 relating to debt repayments, working capital and equity plan allocation), payable to the Gregory Stockholders in proportion to their respective ownership interests of Gregory as follows: (i) the issuance of 2,419 shares to Kanders GMP Holdings, LLC and 1,256 shares to Schiller Gregory Investment Company, LLC of unregistered Clarus’ common stock, and (ii) the issuance by Clarus of the 5% seven year subordinated promissory notes dated May 26, 2010 (the “Merger Consideration Subordinated Notes) in the aggregate principal amount of $14,517 to Kanders GMP Holdings, LLC and in the aggregate principal amount of $7,539 to Schiller Gregory Investment Company, LLC. The merger consideration payable to the Gregory Stockholders was approved by a special committee comprised of independent directors of Clarus’ Board of Directors.

Clarus’ actual closing stock price was $6.85 on May 28, 2010, the date that each of the Black Diamond Merger and the Gregory Merger (together, the “Mergers”) was completed. Since a two year lock up is in place on all the shares issued to Kanders GMP LLC and to Schiller Gregory Investment Company, LLC, a discount of $1.58 (23%) was applied against the $6.85 closing stock price to yield a fair value of $5.27 per share. The 23% discount was calculated using the Finerty model with a two year term and a volatility of 75.9%.
 
Financial Accounting Standards Board (“FASB”) Accounting Standards Codificaton (“ASC”) 805, Business Combinations, requires that the fair value of replacement awards and cash payments made to settle vested awards attributed to precombination service be included in the consideration transferred. The fair value of GMP share awards, not including stock units, which will immediately vest at the effective date of the Mergers, as applicable, has been attributed to precombination service and included in the consideration transferred in the amounts of $593, consisting of $185 in cash, $316 in notes, and $92 in stock. The amount attributable to post combination service that will be expensed subsequent to the date of acquisition was $682.

The Company believes the merger of Clarus, BDE and GMP will produce the following significant benefits:
 
 
·
Create a unique platform to build a large, global and diversified outdoor equipment and lifestyle company is strengthened from both organic and acquisition growth;
 
·
Access to ample liquidity to fuel brand penetration and expansion;
 
·
Utilization of a significant portion of its deferred tax asset;
 
·
Preservation of an organization and culture with a strong foundation with greater resources and opportunities;
 
·
Ability to better utilize existing supply chain and distribution channels;
 
·
Greater combined global revenue balance; and
 
·
Improved efficiencies by combining certain operational functions.
 
The Company’s fair value estimates for the purchase price allocation are preliminary and may change during the allowable allocation period, which is up to one year from the date of acquisition, as we continue to obtain information that existed as of the date of acquisition so that we may finalize the assets acquired and liabilities assumed and determine the associated fair values. The following table is a reconciliation to the fair value of the purchase consideration and how the purchase consideration is preliminarily allocated to assets acquired and liabilities assumed which have been estimated at their fair values. The excess of purchase consideration over the assets acquired and liabilities assumed is recorded as goodwill.

 
10

 

CLARUS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands, except per share amounts)

   
BDE
   
GMP
       
   
Estimated
Fair Value
   
Number of
Shares
   
Estimated
Fair Value
   
Estimated
Fair Value
 
                         
Cash paid to BDE and GMP
  $ 85,675             $ 185     $ 85,860  
                                 
Issuance to GMP of shares of Clarus
    -       3,676       19,373       19,373  
                                 
Issuance to GMP of 5% subordinated notes
    -       -       13,120       13,120  
                                 
Issuance of additional shares of Clarus
    -       31       92       92  
                                 
Payment of deferred compensation (5% notes)
    -       -       316       316  
                                 
Total estimated purchase consideration
  $ 85,675       3,707     $ 33,086     $ 118,761  
                                 
Assets Acquired and Liabilities Assumed
                               
Assets
                               
Cash and cash equivalents
  $ 1,620             $ 1,446     $ 3,066  
Accounts receivable, net
    11,558               3,053       14,611  
Inventories
    25,340               4,390       29,730  
Prepaid and other current assets
    3,011               148       3,159  
Property and equipment
    13,687               693       14,380  
Amortizable definite lived intangible assets
    12,733               5,483       18,216  
Identifiable indefinite lived intangible assets
    19,600               13,050       32,650  
Goodwill
    23,297               12,603       35,900  
Deferred income taxes
    513               -       513  
Other long-term assets
    -               133       133  
Total Assets
    111,359               40,999       152,358  
                                 
Liabilities
                               
Accounts payable and accrued liabilities
    9,202               3,045       12,247  
Current portion of debt
    350               -       350  
Long-term debt
    245               -       245  
Other long-term liabilities
    685               -       685  
Deferred income taxes
    15,202               4,868       20,070  
Total Liabilities
    25,684               7,913       33,597  
                                 
Net book value acquired
  $ 85,675             $ 33,086     $ 118,761  

The estimated fair value of inventory was recorded at expected sales price less cost to sell plus a reasonable profit margin for selling efforts. The fair value of BDE’s and GMP’s property and equipment was estimated using the replacement cost method. Under the replacement cost method, fair value is estimated to be the amount a market participant would pay to replace the asset. The fair value of BDE’s and GMP’s assembled workforce and buyer-specific synergies has been included in goodwill.

 
11

 

CLARUS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands, except per share amounts)

PRO FORMA RESULTS

The following pro forma results are based on the individual historical results of Clarus, BDE and GMP, with adjustments to give effect to the combined operations as if the Mergers had been consummated at the beginning of the periods presented. The pro forma results are intended for information purposes only and do not purport to represent what the combined companies’ results of operations would actually have been had the transaction in fact occurred at the beginning of the periods presented.

   
PRO FORMA
 
   
THREE MONTHS ENDED
   
SIX MONTHS ENDED
 
   
June 30, 2010
   
June 30, 2009
   
June 30, 2010
   
June 30, 2009
 
                         
Revenues
  $ 23,735     $ 22,827     $ 56,848     $ 52,443  
Net (loss)/income
  $ 57,851     $ (975 )   $ 57,826     $ 195  
Net (loss)/income per share - basic
  $ 3.11     $ (0.06 )   $ 3.26     $ 0.01  
Net (loss)/income per share - diluted
  $ 3.06     $ (0.06 )   $ 3.21     $ 0.01  

NOTE 3. INVENTORIES

Inventories, as of June 30, 2010, December 31, 2009 and for the Predecessor, as of June 30, 2009, were as follows:

               
Predecessor
 
               
Company
 
   
June 30, 2010
   
December 31, 2009
   
June 30, 2009
 
                   
Finished goods
  $ 25,950     $ -     $ 20,404  
Work-in-process
    567       -       465  
Raw materials and supplies
    4,810       -       4,711  
                         
Total Inventory
  $ 31,327     $ -     $ 25,580  

Inventories as of June 30, 2010, reflect an increase of $3,850 and $1,147 to record BDE and GMP’s inventory, respectively, at its estimated fair value. The estimated fair value of inventory was recorded at expected sales price less cost to sell plus a reasonable profit margin for selling efforts. As the Company sells the acquired inventory, the cost of sales will reflect the non-cash increased valuation of BDE’s and GMP’s inventory, which will temporarily reduce the Company’s gross margin through the end of fiscal year 2010. During the three and six-month periods ending June 30, 2010, $1,163 of the fair value adjustment was recognized in cost of goods sold, and $3,834 of the fair value adjustment remains in inventory to be recognized in cost of goods sold by the end of the fiscal year.

 
12

 

CLARUS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands, except per share amounts)

NOTE 4. PROPERTY AND EQUIPMENT

Property and Equipment, net as of June 30, 2010, and December 31, 2009 and for the Predecessor, as of June 30, 2009 was as follows:

               
Predecessor
 
               
Company
 
   
June 30, 2010
   
December 31, 2009
   
June 30, 2009
 
                   
Construction in progress
  $ 1,382     $ -     $ 725  
Land
    2,850       -       336  
Building and improvements
    2,685       1,894       4,279  
Furniture and fixtures
    1,415       453       2,177  
Computer hardware and software
    1,738       120       3,620  
Machinery and equipment
    4,463       144       8,662  
                         
Total Property & Equipment
  $ 14,533     $ 2,611     $ 19,799  
                         
Less accumulated depreciation
    (283 )     (1,915 )     (10,018 )
                         
Property and equipment, net
  $ 14,250     $ 696     $ 9,781  

Property and equipment reflects an increase of approximately $4,262 and $150 to record BDE’s and GMP’s property and equipment, respectively, at their respective estimated fair values. The Company believes these amounts represent the best current estimates of fair value. The fair value of BDE’s and GMP’s property and equipment was estimated using the replacement cost method. Under the replacement cost method, fair value is estimated to be the amount a market participant would pay to replace the asset.
 
NOTE 5. INTANGIBLES

Indefinite lived intangible assets

In connection with the Mergers, the Company acquired certain tradenames and trademarks which provide BDE and GMP with the exclusive and perpetual rights to manufacture and sell their respective products. A preliminary fair value estimate pertaining to tradenames and trademarks is noted in the tables below. Tradenames and trademarks will not be amortized, but reviewed annually for impairment or upon the existence of a triggering event.

The fair value of BDE’s and GMP’s assembled workforce and buyer-specific synergies has been included in goodwill.

Definite lived intangible assets, net

Intangible assets such as certain customer relationships, core technologies and product technologies are amortizable over their estimated useful lives. Preliminary fair value estimates for amortizable intangible assets acquired, primarily consisting of customer relationships, core technologies and product technologies are below. Intangible assets, net of amortization as of June 30, 2010 and December 31, 2010 and for the Predecessor as of June 30, 2009 were as follows:

 
13

 

CLARUS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands, except per share amounts)

   
June 30, 2010
 
         
Accumulated
       
Weighted Average
 
   
Gross
   
Amortization
   
Net
 
Useful Life
 
                       
Intangibles subject to amortization
                     
Customer relationships
  $ 16,376     $ (91 )   $ 16,285  
15.1 years
 
Core technologies
    1,505       (14 )     1,491  
9.3 years
 
Product technologies
    335       (6 )     329  
4.6 years
 
Intangibles not subject to amortization
                           
Tradenames and trademarks
    32,650       -       32,650  
N/A
 
Intangibles, net
  $ 50,866     $ (111 )   $ 50,755  
14.4 years
 

There were no intangible assets as of December 31, 2009.

   
Predecessor Company
 
   
June 30, 2009
 
         
Accumulated
       
Weighted Average
 
   
Gross
   
Amortization
   
Net
 
Useful Life
 
                       
Intangibles subject to amortization
                     
Product technologies
  $ 68     $ (36 )   $ 32  
14.1 years
 
Intangibles not subject to amortization
                       
 
 
Tradenames and trademarks
    897       -       897  
N/A
 
Intangibles, net
  $ 965     $ (36 )   $ 929  
14.1 years
 

 
14

 

CLARUS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands, except per share amounts)

NOTE 6. LONG-TERM DEBT

Long-term debt, net as of June 30, 2010, December 31, 2009 and for the Predecessor, as of June 30, 2009, were as follows:

               
Predecessor
 
               
Company
 
   
June 30, 2010
   
December 31, 2009
   
June 30, 2009
 
                   
Revolving credit facility (a)
  $ 9,894     $ -     $ 12,669  
5% Senior Subordinated Notes due 2017 (b)
    13,244       -       -  
Revolving line of credit (c )
    -       -       2,763  
Note payable to government agency (d)
    -       -       345  
Capital leases (e)
    429       -       613  
Total
    23,567       -       16,390  
Less current portion
    (196 )             (2,992 )
Total long term debt obligations
  $ 23,371     $ -     $ 13,398  

(a) 
In connection with the closing of the acquisition of BDE, the Company entered into a loan agreement effective May 28, 2010 among Zions First National Bank, a national banking association (“Lender”) and the Company and its direct and indirect subsidiaries, BDE, Black Diamond Retail, Inc. (“BD-Retail”), and Purchaser, as co-borrowers (the “Borrowers”) (the “Loan Agreement”). Concurrently with the closing of the acquisition of BDE, Gregory Mountain Products, LLC, as the surviving company of the Gregory Merger, entered into an assumption agreement and became an additional Borrower under the Loan Agreement.

Pursuant to the terms of the Loan Agreement, the Lender has made available to the Borrowers a thirty-five million dollar ($35,000) unsecured revolving credit facility (the “Loan”), of which $25,000 was made available at the time of the closing of the acquisition of BDE and an additional $10,000 was made available to the Company upon the closing of the acquisition of GMP. The Loan matures on July 2, 2013. The Loan may be prepaid or terminated at the Company's option at anytime without penalty. No amortization is required. Any outstanding principal balance together with any accrued but unpaid interest or fees will be due in full at maturity. The Loan bears interest at the 90-day London Interbank Offered Rate (“LIBOR”) plus an applicable margin as determined by the ratio of Senior Net Debt (as calculated in the Loan Agreement) to Trailing Twelve Month EBITDA (as calculated in the Loan Agreement) as follows: (i) 90-day LIBOR Rate plus 3.5% per annum at all times that Senior Net Debt to Trailing Twelve Month EBITDA ratio is greater than or equal to 2.5; (ii) 90-day LIBOR Rate plus 2.75% per annum at all times that Senior Net Debt to Trailing Twelve Month EBITDA ratio is less than 2.5. The Loan requires the payment of an unused commitment fee of (i) 0.6% per annum at all times that the ratio of Senior Net Debt to Trailing Twelve Month EBITDA is greater than or equal to 2.5, and (ii) 0.45% per annum at all times that the ratio of Senior Net Debt to Trailing Twelve Month EBITDA is less than 2.5.

The Loan Agreement contains certain restrictive debt covenants that require the Company and its subsidiaries to maintain an EBITDA based minimum Trailing Twelve Month EBITDA, a minimum tangible net worth, and a positive amount of asset coverage, all as calculated in the Loan Agreement. In addition, the Loan Agreement contains covenants restricting the Company and its subsidiaries from pledging or encumbering their assets, with certain exceptions, and from engaging in acquisitions other than acquisitions permitted by the Loan Agreement. The Loan Agreement contains customary events of default (with grace periods where customary), including, among other things, failure to pay any principal or interest when due; any materially false or misleading representation, warranty, or financial statement; failure to comply with or to perform any provision of the Loan Agreement; and default on any debt or agreement in excess of certain amounts.

(b)
In connection with the Gregory Merger, $22,056 in subordinated notes were issued. The notes have a seven year term, 5% stated interest rate payable quarterly, and are prepayable at any time. Given the below market interest rate for comparably secured notes and the relative illiquidity of the notes, we have discounted it to $13,127 at date of acquisition.
 
15

 
CLARUS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands, except per share amounts)

(c)
Unsecured revolving line of credit with a bank with a maximum availability of $3,685, interest at 2.0%. This revolving line of credit was paid off on May 28, 2010.
 
(d)
Note payable to a government agency which bears interest at 6.345%, requires monthly installments of $5,409, and secured by real property and certain equipment. This note was guaranteed by an executive officer and was paid in full in December 2009.

(e)
Various capital leases payable to banks: interest rates ranging from 4.63% to 7.75%; monthly installments ranging from $1 to $5; ending between October 2010 and April 2014; secured by certain equipment.
 
The aggregate maturities of long-term debt and revolving lines of credit for the years subsequent to June 30, 2010, excluding the debt discount of $8,812 associated with the 5% Senior Subordinated Notes due 2017, are as follows:

Maturities of long term debt are as follows:

2011
  $ -  
2012
    -  
2013
    9,894  
2014
    -  
2015
    -  
Thereafter
    13,244  
    $ 23,138  
 
Property held under capital leases as of June 30, 2010, December 31, 2009 and for the Predecessor Company as of June 30, 2009 was approximately $552, $0, and $848, respectively, and accumulated amortization was approximately $6, $0 and $192, respectively.

Capital lease future minimum lease payments and the present value of net minimum lease payments for the years subsequent to June 30, 2010, are as follows:

2011
  $ 218  
2012
    151  
2013
    58  
2014
    39  
2015
    -  
Thereafter
    -  
Total Future minimum lease payments
    466  
Less amount representing interest
    (37 )
Present value of net minimum lease payments
    429  
Less current portion
    (196 )
Long-term capial lease obligations
  $ 233  

 
16

 

CLARUS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands, except per share amounts)

NOTE 7. OTHER LONG-TERM LIABILITIES

In June 2009, the Company entered into a contract to purchase the exclusive rights to the Black Diamond trademark for clothing. The face amount of the non-interest bearing note was $1,000. The unamortized discount, based upon an imputed interest rate of 5%, was $103 at inception.

Future payments under this agreement (including imputed interest) for the years subsequent to June 30, 2010 are approximately:
 
2010
  $ 150  
2011
    150  
2012
    600