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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
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 of Incorporation) (R.S. Employer Identification No.)
One Pickwick Plaza
Greenwich, Connecticut 06830
(Address of principal office, including zip code)
(203) 302-2000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock,
par value $.0001
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). [X]
The aggregate market value of the voting stock and non-voting common equity
held by non-affiliates of the Registrant at March 14, 2003 was approximately
$74.2 million based on $5.11 per share, the closing price of the common stock as
quoted on the Nasdaq National Market.
The number of shares of the Registrant's common stock outstanding at March
14, 2003, was 15,770,631 shares.
DOCUMENT INCORPORATED BY REFERENCE
Portions of our Proxy Statement for the 2003 Annual Meeting of Stockholders
to be filed with the Securities and Exchange Commission within 120 days of the
Registrant's 2002 fiscal year end are incorporated by reference into Part III of
this report.
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 7
ITEM 3. LEGAL PROCEEDINGS 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 8
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 8
ITEM 6. SELECTED FINANCIAL DATA 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 49
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 49
ITEM 11. EXECUTIVE COMPENSATION 49
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 49
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 49
ITEM 14. PROCEDURES AND CONTROLS 49
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 50
SIGNATURES 53
EXHIBIT INDEX 57
PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements, including
information about or related to our future results, certain projections and
business trends. Assumptions relating to forward-looking statements involve
judgments with respect to, among other things, future economic, competitive and
market conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control. When
used in this report, the words "estimate," "project," "intend," "believe,"
"expect" and similar expressions are intended to identify forward-looking
statements. Although we believe that our assumptions underlying the forward-
looking statements are reasonable, any or all of the assumptions could prove
inaccurate, and we may not realize the results contemplated by the forward-
looking statements. Management decisions are subjective in many respects and
susceptible to interpretations and periodic revisions based upon actual
experience and business developments, the impact of which may cause us to alter
our business strategy or capital expenditure plans that may, in turn, affect our
results of operations. In light of the significant uncertainties inherent in the
forward-looking information included in this report, you should not regard the
inclusion of such information as our representation that we will achieve any
strategy, objectives or other plans. The forward-looking statements contained in
this report speak only as of the date of this report, and we have no obligation
to update publicly or revise any of these forward-looking statements.
These and other statements, which are not historical facts, are based
largely upon our current expectations and assumptions and are subject to a
number of risks and uncertainties that could cause actual results to differ
materially from those contemplated by such forward-looking statements. These
risks and uncertainties include, among others, our planned effort to redeploy
our assets to enhance stockholder value following the completion of the
transaction with Epicor, and the risks and uncertainties set forth in the
section headed "Factors That May Affect Our Future Results" of Part I of this
Report and described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of Part II of this Report. The Company
cannot guarantee its future performance.
OVERVIEW
Clarus Corporation ("Clarus" or the "Company," which may be referred to as
"we," "us," or "our") was formerly a provider of e-commerce business solutions
until the sale of substantially all of its operating assets in December 2002. We
are currently seeking to redeploy our cash and cash equivalent assets to enhance
stockholder value and are seeking, analyzing and evaluating potential
acquisition and merger candidates. We were incorporated in Delaware in 1991
under the name SQL Financials, Inc. In August 1998, we changed our name to
Clarus Corporation. Our principal corporate office is located at One Pickwick
Plaza, Greenwich, Connecticut 06830 and our telephone number is (203) 302-2000.
PRIOR BUSINESS
Prior to the sale of substantially all of our operating assets in December
2002, we developed, marketed and supported Internet-based business-to-business
("B2B") e-commerce software that automated the procurement, sourcing, and
settlement of goods and services. Our software was designed to help
organizations reduce the costs associated with the purchasing and payment
settlement of goods and services, and help to maximize procurement economies of
scale. Our client services organization provided our customers and strategic
partners with implementation services, training and technical support. This
organization educated our customers and strategic partners on the strategy,
methodology and functionality of our products and implemented our solution, on
average, within three to six months.
There were several milestones in the evolution of our business prior to the
sale including:
o Initial Public Offering. On May 26, 1998, we completed an initial
public offering of our common stock in which we sold 2.5 million
shares of common stock at $10.00 per share, resulting in net proceeds
to us of approximately $22.0 million.
o ELEKOM Acquisition. On November 6, 1998, we acquired 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 (valued in the transaction at $5.50 per share). ELEKOM
developed a software program that provided electronic corporate
procurement capabilities to its clients.
o Sale of our Financial and Human Resources Software Business. On
October 18, 1999, we sold substantially all of the assets of our
financial and human resources software ("ERP") business to Geac
Computer Systems, Inc. and Geac Canada Limited. In this sale we
received approximately $13.9 million. Approximately $2.9 million of
the purchase price was placed in escrow and was subsequently settled
during 2000.
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o Follow-on Public Offering. On March 10, 2000, we sold 2,243,000 shares
of common stock in a secondary public offering at $115.00 per share
resulting in net proceeds to us of approximately $244.4 million.
o iSold.com Acquisition. On April 28, 2000, we acquired all the capital
stock of iSold.com, Inc. ("iSold") for approximately $2.5 million in
cash. iSold developed a software program that provided auctioning
capabilities to its clients.
o SAI/Redeo Companies Acquisition. On May 31, 2000, we acquired all the
outstanding stock of SAI (Ireland) Limited, SAI Recruitment Limited
and its subsidiaries and related companies, i2Mobile.com Limited and
SAI America Limited (the "SAI/Redeo Companies") for approximately
$63.2 million, consisting of approximately $30.0 million in cash
(exclusive of $350,000 of cash acquired), 1,148,000 shares of the
Company's common stock with a fair value of $30.4 million, assumed
options to acquire 163,200 shares of the Company's common stock with
an exercise price of $23.50 (estimated fair value of $1.8 million
using the Black-Scholes option pricing model with the following
variables: no expected dividend yield, volatility of 70%, risk-free
interest rate of 6.5%, and an expected life of 2 years) and
acquisition costs of approximately $995,000. The SAI/Redeo Companies
specialized in electronic payment settlement software.
E-Commerce Strategic Alliances and Relationships. To ensure that our prior
business would deliver a comprehensive solution to our customers, we established
and developed strategic relationships with application service providers,
systems integrators, resellers, OEMs and other complementary technology
partners. These relationships were focused on the expansion of our sales reach
to markets not covered by our direct sales organization.
Sales and Marketing. Our prior business sold software and services through our
direct sales force and a number of indirect channels. Our direct sales force was
organized geographically into two regions: (i) the Americas and (ii) Europe,
Middle East and Africa ("EMEA"). The sales cycle for our business-to-business
e-commerce products typically averaged four to nine months. In addition, our web
site, www.claruscorp.com was integrated with our sales, marketing, recruiting
and fulfillment operations.
Competition. The market for the products of our prior business was highly
competitive and subject to rapid technological change. The principal competitive
factors affecting our market included having a significant base of referenceable
customers, breadth and depth of solution, a critical mass of buyers and
suppliers, product quality and performance, customer service, architecture,
product features, the ability to implement, and value of the overall solution.
Research and Development. Our research and development expenditures relating to
our prior business were approximately $7.3 million, $16.2 million and $22.4
million for the years ended December 31, 2002, 2001 and 2000, respectively. The
majority of our research and development expenditures were related to our
e-commerce products.
Proprietary Rights and Licensing. We applied for registration for certain
trademarks and evaluated the registration of copyrights and additional
trademarks as appropriate. We entered into license agreements with each of our
customers. Each of our license agreements provided for the customer's
non-exclusive right to use the object code version of our products, prohibited
the customer from disclosing to third parties or reverse engineering our
products and disclosing our other confidential information.
RECENT DEVELOPMENTS
At the 2002 annual meeting of our stockholders held on May 21, 2002, Warren
B. Kanders, Burtt R. Ehrlich and Nicholas Sokolow were elected by our
stockholders to serve on our Board of Directors. Under the leadership of these
new directors, our Board of Directors adopted 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 that will serve as a
platform company, using our substantial cash, other non-operating assets
(including, to the extent available, our net operating loss carry-forward) and
our publicly-traded stock to enhance future growth. The strategy also sought to
reduce significantly our cash expenditure rate by targeting, to the extent
practicable, our overhead expenses to the amount of our interest income until
the completion of an acquisition or merger. While the Company's expenses have
been significantly reduced, management currently believes that the Company's
interest income will not exceed its operating expenses during 2003.
As part of our strategy to enhance stockholder value, on December 6, 2002,
we consummated the sale of substantially all of the assets of our electronic
commerce business to Epicor Software Corporation ("Epicor"), a Delaware
corporation, for a purchase price of $1.0 million in cash (the "Asset Sale").
Epicor is traded on the Nasdaq National Market under the symbol "EPIC." The sale
included licensing, support and maintenance activities from our eProcurement,
Sourcing, View (for eProcurement), eTour (for eProcurement), ClarusNET, and
Settlement software products, our customer lists, certain contracts and certain
intellectual property rights related to the purchased assets, maintenance
payments that we received between October 17, 2002 and the December 6, 2002
closing date of the Asset Sale for maintenance and services to be performed by
Epicor after the closing date of the Asset Sale, and certain furniture and
equipment. In connection with the sale we entered into a Transition Services
Agreement
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until March 31, 2003, that will allow Epicor to use a portion of our facility in
Suwanee, Georgia to operate the electronic commerce business that Epicor is
purchasing in the Asset Sale.
We did not transfer to Epicor our cash, marketable securities or other
investments or our Cashbook, eMarket, eXpense, View (for eMarket) or eTour (for
eMarket) products or related assets. We also did not transfer the name and
trademark "Clarus," although we granted Epicor a 24-month license to use the
trademark "Clarus" in connection with its operation of the purchased assets and
the right to acquire the trademark for no additional consideration if we cease
using it as our corporate name within two years after the closing of the Asset
Sale. Epicor agreed to assume certain of our liabilities, such as executory
obligations arising under certain contracts, agreements and commitments related
to the transferred assets. We remain responsible for all of our other
liabilities including liabilities under certain contracts, including any
violations of environmental laws and for our obligations related to any of our
indebtedness, employee benefit plans or taxes that are or were due and payable
in connection with the acquired assets on or before the closing date of the
Asset Sale.
Upon the closing of the sale to Epicor, Warren B. Kanders assumed the
position of Executive Chairman of the Board of Directors, Stephen P. Jeffery
ceased to serve as Chief Executive Officer and Chairman of the Board, and James
J. McDevitt ceased to serve as Chief Financial Officer and Corporate Secretary.
Mr. Jeffery has agreed to continue to serve on the Board of Directors and serve
in a consulting capacity for a period of three years. In addition, the Board of
Directors appointed Nigel P. Ekern as Chief Administrative Officer to oversee
the interim operations of Clarus and to assist with our asset redeployment
strategy.
On January 1, 2003, we sold the assets related to our Cashbook product,
which were excluded from the Epicor transaction, to an employee group
headquartered in Limerick, Ireland. Our Cashbook product provides process
improvements such as bill-to-pay in accounts payable and order-to-cash in
accounts receivable. This completed the sale of nearly all of our active
software operations as part of our strategy to limit operating losses and enable
us to reposition our business in order to enhance stockholder value. In
anticipation of the redeployment of our assets, our cash balances are being held
in short term instruments designed to preserve safety and liquidity.
We are currently identifying suitable merger partners or acquisition
opportunities. In connection with the strategy of redeployment of assets, we
retained Morgan Joseph & Co. Inc., a New York based investment banking firm
serving middle market companies, to assist us in implementing this strategy by
identifying suitable merger partners or acquisition opportunities. Although we
are not targeting specific business industries for potential acquisitions, we
plan to seek businesses with substantial cash flow, experienced management
teams, and operations in markets offering substantial growth opportunities. In
addition, we believe that our common stock, which is publicly traded on the
Nasdaq National Market and has a strong institutional stockholder base, offers
us flexibility as acquisition currency and will enhance our attractiveness to
potential merger or acquisition candidates. This strategy is, however, subject
to certain risks. See "Factors That May Affect Our Future Results" below.
EMPLOYEES
All of our employees are based in the United States. As of December 31,
2002, we had a total of 20 employees, including one in client services, one in
sales, six in research and development and 12 in finance and administration. As
of March 31, 2003, we expect to have a total of five employees, all of which are
located in our Greenwich, Connecticut headquarters. We closed our office in
Georgia in March 2003. Our employees were previously based in the United States,
Canada, the United Kingdom and Ireland. As of December 31, 2001, we had a total
of 209 employees.
None of our employees are represented by a labor union or are subject to a
collective bargaining agreement. We have not experienced any work stoppages and
consider our relationship with our employees to be good.
FACTORS THAT MAY AFFECT OUR FUTURE RESULTS
In addition to other information in this annual report on Form 10-K, the
following risk factors should be carefully considered in evaluating our business
because such factors may have a significant impact on our business, operating
results, liquidity and financial condition. As a result of the risk factors set
forth below, actual results could differ materially from those projected in any
forward-looking statements.
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RISKS RELATED TO THE COMPANY
WE CONTINUE TO INCUR OPERATING LOSSES.
As a result of the sale of substantially all of our electronic commerce
business, we will no longer generate revenue previously associated with the
products and contracts comprising our electronic commerce business. We are not
profitable and have incurred an accumulated deficit of $272.4 million from our
inception through December 31, 2002. Our current ability to generate revenues
and to achieve profitability and positive cash flow will depend on the Company's
ability to redeploy our assets and use our substantial cash to reposition our
business whether it is through a merger or acquisitions. Our ability to become
profitable will depend, among other things, (i) on our success in identifying
and acquiring a new operating business, (ii) on our development of new products
relating to our new operating business, and (iii) success in distributing and
marketing our new proposed products.
OUR INDEMNIFICATION OBLIGATIONS TO EPICOR FOR BREACHES OF CERTAIN OF OUR
REPRESENTATIONS IN THE ASSET PURCHASE AGREEMENT MAY SIGNIFICANTLY EXCEED THE
CONSIDERATION WE RECEIVED IN THE ASSET SALE.
We have an obligation to indemnify Epicor for any losses from breaches of
our representations or warranties in the Asset Purchase Agreement that occur
within 24 months after the closing date of the Asset Sale (December 6, 2002) or
within the applicable statute of limitations period for claims relating to
payment of applicable taxes and our compliance with applicable environmental
laws, if longer. Our indemnification obligations with respect to our breach of
representations or warranties are subject to a maximum aggregate limit of $1.0
million, except that: (i) the maximum aggregate limit is $3.0 million with
respect to indemnification for any losses Epicor suffers that are related to our
breach of representations and warranties relating to our ownership of the assets
to be sold to Epicor, our intellectual property or our compliance with
applicable "bulk sales" laws; and (ii) there is no limit on our obligation to
indemnify Epicor for losses resulting from the conduct of our business before
the closing date of the Asset Sale, the assets not purchased or the liabilities
not assumed by Epicor in the Asset Sale or a breach of any representation or
warranty regarding our payment of applicable taxes or our compliance with
applicable environmental laws.
The payment of any such indemnification obligations would materially and
adversely impact our cash resources and our ability to pursue additional
business opportunities.
FOR FIVE YEARS AFTER THE CLOSING OF THE ASSET SALE TO EPICOR, WE WILL BE
PROHIBITED FROM COMPETING WITH SUCH ASSETS SOLD TO EPICOR.
The Noncompetition Agreement we entered into with Epicor at closing will
provide that for a period of five years after the closing of the Asset Sale
(December 6, 2002), neither we nor any of our affiliated entities will, directly
or indirectly, anywhere in the world: (i) engage in any business that competes
with the business of developing, marketing and supporting Internet-based
business-to-business, electronic commerce solutions that automate the
procurement, sourcing and settlement of goods and services including through the
eProcurement, Sourcing, View (for eProcurement), eTour (for eProcurement),
ClarusNET, and Settlement software products and all improvements and variations
of these products; (ii) attempt to persuade any customer or vendor of Epicor to
cease to do business with Epicor or reduce the amount of business being
conducted with Epicor; (iii) solicit the business of any customer or vendor of
Epicor, if the solicitation could cause a reduction in the amount of business
that Epicor does with the customer or vendor; or (iv) hire, solicit for
employment or encourage to leave the employment of Epicor any person who is then
an employee of Epicor or was an employee of Epicor within the previous 90 days
before the closing of the Asset Sale.
The prohibitions contained in our Noncompetition Agreement with Epicor will
restrict the business opportunities available to us and therefore may have a
material adverse effect on our ability to successfully redeploy our remaining
assets.
WE MAY BE UNABLE TO REDEPLOY OUR ASSETS SUCCESSFULLY.
As part of our strategy to limit operating losses and enable the Company to
redeploy its assets and use its substantial cash and cash equivalent assets to
enhance stockholder value, we have sold our electronic commerce business, which
represented substantially all of our revenue-generating operations and related
assets. We are pursuing a strategy of identifying suitable merger partners and
acquisition candidates that will serve as a platform company. Although we are
not targeting specific business industries for potential acquisitions, we plan
to seek businesses with substantial cash flow, experienced management teams, and
operations in markets offering substantial growth opportunities. We may not be
successful in acquiring such a business or in operating any business that we
acquire. Failure to redeploy successfully will result in our inability to become
profitable.
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WE WILL HAVE NO OPERATING HISTORY IN OUR NEW LINE OF BUSINESS, WHICH IS YET TO
BE DETERMINED, AND THEREFORE WE WILL BE SUBJECT TO THE RISKS INHERENT IN
ESTABLISHING A NEW BUSINESS.
The Company has not identified what its new line of business will be;
therefore, we cannot fully describe the specific risks presented by such
business. It is likely that the Company will have had no operating history in
its new line of business and any target company may have a limited operating
history in its business. Accordingly, there can be no assurance that our future
operations will generate operating or net income, and as such our success will
be subject to the risks, expenses, problems and delays inherent in establishing
a new business. Such new business may involve an unproven product, technology or
marketing strategy, the ultimate success of which cannot be assured.
ANY ACQUISITIONS THAT WE ATTEMPT OR COMPLETE COULD PROVE DIFFICULT TO INTEGRATE
OR REQUIRE A SUBSTANTIAL COMMITMENT OF MANAGEMENT TIME AND OTHER RESOURCES.
Acquisitions involve a number of unique risks including: (i) executing
successful due diligence; (ii) exposure to unforeseen liabilities of acquired
companies; and (iii) increased risk of costly and time-consuming litigation,
including stockholder lawsuits.
We may be unable to address these problems successfully. Moreover, our
future operating results will depend to a significant degree on our ability to
integrate acquisitions (if any) successfully and manage operations while also
controlling our expenses. In addition, if we or our investment adviser, Morgan
Joseph & Co. Inc., identify an appropriate acquisition opportunity, we may be
unable to negotiate favorable terms for that acquisition. We may be unable to
select, manage or absorb or integrate any future acquisitions successfully,
particularly acquisitions of large companies. Any acquisition, even if
effectively integrated, may not benefit our stockholders.
WE MAY BE UNABLE TO REALIZE THE BENEFITS OF OUR NET OPERATING LOSS ("NOL")
CARRYFORWARDS.
NOLs may be carried forward to offset federal and state taxable income in
future years and eliminate income taxes otherwise payable on such taxable
income, subject to certain adjustments. Based on current federal corporate
income tax rates, our NOL and other carryforwards could provide a benefit to us,
if fully utilized, of significant future tax savings. However, our ability to
use these tax benefits in future years will depend upon the amount of our
otherwise taxable income. If we do not have sufficient taxable income in future
years to use the tax benefits before they expire, we will lose the benefit of
these NOL carryforwards permanently. Consequently, our ability to use the tax
benefits associated with our substantial NOL will depend significantly on our
success in identifying suitable merger partners and/or acquisition candidates,
and once identified, successfully consummate a merger with and/or acquisition of
these candidates.
Additionally, if we underwent an ownership change, the NOL carryforward
limitations would impose an annual limit on the amount of the taxable income
that may be offset by our NOL generated prior to the ownership change. If an
ownership change were to occur, we would be unable to use a significant portion
of our NOL to offset taxable income. In general, an ownership change occurs
when, as of any testing date, the aggregate of the increase in percentage points
of the total amount of a corporation's stock owned by "5-percent shareholders"
within the meaning of the NOL carryforward limitations whose percentage
ownership of the stock has increased as of such date over the lowest percentage
of the stock owned by each such "5-percent shareholder" at any time during the
three-year period preceding such date is more than 50 percentage points. In
general, persons who own 5% or more of a corporation's stock are "5-percent
shareholders," and all other persons who own less than 5% of a corporation's
stock are treated, together, as a single, public group "5-percent shareholder,"
regardless of whether they own an aggregate of 5% of a corporation's stock.
The amount of NOL carryforwards that we have claimed has not been audited
or otherwise validated by the U.S. Internal Revenue Service. The IRS could
challenge our calculation of the amount of our NOL or our determinations as to
when a prior change in ownership occurred and other provisions of the Internal
Revenue Code, may limit our ability to carry forward our NOL to offset taxable
income in future years. If the IRS was successful with respect to any such
challenge, the potential tax benefit of the NOL carryforwards to us could be
substantially reduced.
ANY TRANSFER RESTRICTIONS IMPLEMENTED BY THE COMPANY TO PRESERVE NOL MAY NOT BE
EFFECTIVE OR MAY HAVE SOME UNINTENDED NEGATIVE EFFECTS.
The Company may seek to preserve its NOL through an amendment of its
certificate of incorporation and/or bylaws, which would impose restrictions on
the transfer of the Company's capital stock. Any transfer restrictions on the
Company's capital stock will be designed to restrict only those transfers that
could result in an impermissible ownership change limiting our ability to
utilize our NOL. Although any transfer restriction imposed on our capital stock
is intended to reduce the likelihood of an impermissible ownership change, there
is no guarantee that such restriction would prevent all transfers that would
result in an impermissible ownership change.
Any transfer restrictions will require any person attempting to acquire a
significant interest in the Company to seek the approval of our Board of
Directors. This may have an "anti-takeover" effect because our Board of
Directors may be able to
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prevent any future takeover. Similarly, any limits on the amount of capital
stock that a stockholder may own could have the effect of making it more
difficult for stockholders to replace current management. Additionally, because
transfer restrictions will have the effect of restricting a stockholder's
ability to dispose of or acquire our common stock, the liquidity and market
value of our common stock might suffer.
WE COULD BE REQUIRED TO REGISTER AS AN INVESTMENT COMPANY UNDER THE INVESTMENT
COMPANY ACT OF 1940, WHICH COULD SIGNIFICANTLY LIMIT OUR ABILITY TO OPERATE AND
ACQUIRE AN ESTABLISHED BUSINESS.
The Investment Company Act of 1940 (the "Investment Company Act") requires
registration, as an investment company, for companies that are engaged primarily
in the business of investing, reinvesting, owning, holding or trading
securities. Unless an exclusion applies, a company is an investment company if
it owns "investment securities" with a value exceeding 40% of the value of its
total assets on an unconsolidated basis, excluding government securities and
cash items. An exclusion from the definition of an investment company is
provided under Section 3(b)(1) of the Investment Company Act for companies that
are engaged primarily in a business other than investing, reinvesting, owning,
holding, or trading in securities. Prior to the sale of substantially all of our
operating assets in December 2002 and January 2003, we were an operating company
engaged in the development, marketing and support of Internet-based
business-to-business e-commerce software, and either did not meet the definition
of investment company under the Investment Company Act, or could rely on the
Section 3(b)(1) exclusion from the definition of investment company under the
Investment Company Act. Since December 2002, we have been relying on the
exclusion from the definition of investment company provided by Rule 3a-2 under
the Investment Company Act, which is available for a period not exceeding on e
year to a company that intends to be engaged primarily in a business other than
that of investing, reinvesting, owning, holding or trading in securities. Our
officers and directors are currently actively engaged in pursuing opportunities
to redeploy our assets by seeking to identify an established operating business
for us to acquire or merge with by the end of the one-year period. If they are
not able to identify a business during that time period, we will need to
consider other options, including divesting ourselves of securities that could
be deemed to be "investment securities" under the Investment Company Act and/or
acquiring sufficient non-investment assets so as not to be regarded as an
investment company under the Investment Company Act, either of which options
could be disadvantageous to us and/or our shareholders. If we were deemed to be
an investment company under the Investment Company Act, and were unable to rely
on an exclusion under the Investment Company Act, we would be forced to comply
with substantive requirements of Investment Company Act, including: (i)
limitations on our ability to borrow; (ii) limitations on our capital structure;
(iii) restrictions on acquisitions of interests in associated companies; (iv)
prohibitions on transactions with affiliates; (v) restrictions on specific
investments; (vi) limitations on our ability to issue stock options; and (vii)
compliance with reporting, record keeping, voting, proxy disclosure and other
rules and regulations. Registration as an investment company would subject us to
restrictions that would significantly impair our ability to pursue our
fundamental business strategy of acquiring and operating an established
business. In the event the SEC or a court took the position that we were an
investment company, our failure to register as an investment company would not
only raise the possibility of an enforcement action by the SEC or an adverse
judgment by a court, but also could threaten the validity of corporate actions
and contracts entered into by us during the period we were deemed to be an
unregistered investment company.
RISKS RELATED TO OWNERSHIP OF COMMON STOCK
WE ARE VULNERABLE TO VOLATILE MARKET CONDITIONS.
The market prices of our common stock have been highly volatile. The market
has from time to time experienced significant price and volume fluctuations that
are unrelated to the operating performance of particular companies. Please see
the table contained in Item 5 of this Report which sets forth the range of high
and low bids of our common stock for the calendar quarters indicated.
WE DO NOT EXPECT TO PAY DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE FUTURE.
Although our stockholders may receive dividends if, as and when declared by
our Board of Directors, we do not intend to pay dividends on our common stock in
the foreseeable future. Therefore, you should not purchase our common stock if
you need immediate or future income by way of dividends from your investment.
OUR COMMON STOCK IS CURRENTLY QUOTED ON THE NASDAQ NATIONAL MARKET SYSTEM BUT
COULD BE DELISTED.
To continue to be listed on the Nasdaq National Market System, we must
maintain certain requirements. If we fail to satisfy one or more of the
requirements, our Common Stock may be delisted. If our Common Stock is delisted,
and does not become listed on another stock exchange, then it will be traded, it
at all, in the over-the-counter market commonly referred to as the OTC Bulletin
Board and/or the "pink sheets". If this occurs, it may be more difficult for you
to sell our Common Stock, since there is generally less market-maker interest,
and less liquidity, in Bulletin Board stocks than in Nasdaq listed securities.
Also, if our Common Stock is delisted and its trading price remains below
$5.00 per share, trading could potentially be subject to certain other rules of
the Securities Exchange Act of 1934. Such rules require additional disclosure by
broker-dealers in connection with any trades involving a stock defined as a
"penny stock". "Penny stock" is defined as any non-Nasdaq equity security that
has a market price of less than $5.00 per share, subject to certain exceptions.
Such rules require the delivery of a disclosure schedule explaining the penny
stock market and the risks associated with that market before entering into any
penny stock transaction. Disclosure is also required to be made about
compensation payable to both the broker-dealer and the registered representative
and current quotations for the securities. The rules also impose various sales
practice requirements on broker-dealers who sell penny stocks to persons other
than established customers and accredited investors. For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and must receive the purchaser's written consent to the
transaction prior to the sale. Finally, monthly statements are required to be
sent disclosing recent price information for the
6
penny stocks. The additional burdens imposed upon broker-dealers by such
requirements could discourage broker-dealers from effecting transactions in our
Common Stock. This could severely limit the market liquidity of our Common Stock
and your ability to sell the Common Stock.
OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AUTHORIZES THE ISSUANCE OF
SHARES OF PREFERRED STOCK.
Our amended and restated certificate of incorporation provides that our
Board of Directors will be authorized to issue from time to time, without
further stockholder approval, up to 5,000,000 shares of preferred stock in one
or more series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each series,
including the dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, including sinking fund provisions, redemption price or
prices, liquidation preferences and the number of shares constituting any series
or designations of any series. Such shares of preferred stock could have
preferences over our common stock with respect to dividends and liquidation
rights. We may issue additional preferred stock in ways, which may delay, defer
or prevent a change in control of the Company without further action by our
stockholders. Such shares of preferred stock may be issued with voting rights
that may adversely affect the voting power of the holders of our common stock by
increasing the number of outstanding shares having voting rights, and by the
creation of class or series voting rights.
WHERE YOU CAN FIND MORE INFORMATION
At your request, we will provide you, without charge, a copy of any
exhibits to this annual report on Form 10-K. If you want an exhibit or more
information, call, write or e-mail us at:
Clarus Corporation
One Pickwick Plaza
Greenwich, Connecticut 06830
Telephone: (203) 302-2000
Fax: (203) 302-2020
www.claruscorp.com or [email protected]
Contact: Nigel Ekern, Chief Administrative Officer
Our fiscal year ends on December 31. We file annual, quarterly, and other
reports, proxy statements and other information with the Securities and Exchange
Commission. You may read and copy any reports, statements, or other information
we file at the SEC's public reference rooms in Washington, D.C., New York, New
York, and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also available to
the public from commercial document retrieval services and at the Internet site
maintained by the SEC at http://www.sec.gov.
ITEM 2. PROPERTIES
Our corporate headquarters is located in Greenwich, Connecticut where we
lease approximately 2,700 square feet for $11,312 a month, pursuant to a lease,
which expires on December 15, 2003. We entered into an oral agreement in 2003
with Kanders & Company pursuant to which we sublease approximately 1,989 square
feet in Greenwich, Connecticut for $9,572 a month (subject to increases every
three years). The agreement provides for a one-year term and Clarus has the
option to renew for up to nine additional one-year terms. Under the terms of the
agreement, we are required to pay approximately $325,000 in build-out
construction costs, fixtures, equipment and furnishings related to preparation
of the space. In the event Clarus was to undergo a change in control, our
remaining rent through the tenth anniversary of the commencement of the
agreement would immediately accelerate and the present value of such rent would
be placed in escrow for the benefit of Kanders & Company. We also lease
approximately 5,200 square feet near Toronto, Canada, that was used for the
delivery of services as well as research and development through October 2001.
This facility has been sub-leased for approximately $4,000 a month, pursuant to
a sublease, which expires on January 30, 2006.
In December 2002, the Company executed a lease termination agreement
pursuant to which it agreed to abandon its principal facility in Suwanee,
Georgia on March 31, 2003. Pursuant to the terms of the termination agreement,
the Company paid to the lessor $2.9 million in cash which has been included in
general and administrative expense in the accompanying statement of operations
for 2002. The lease is scheduled to terminate March 31, 2003.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to the following pending judicial and administrative
proceedings. After reviewing the proceedings that are currently pending
(including the probable outcome, reasonably anticipated costs and expenses,
availability and limits of insurance coverage, and our established reserves for
uninsured liabilities) we do not believe that any liabilities that may result
from these proceedings are reasonably likely to have a material adverse effect
on our liquidity, financial condition or results of operations, however, the
results of complex legal proceedings are difficult to predict. An unfavorable
resolution of the following proceedings could materially adversely affect the
Company's business, results of operations, liquidity or financial condition.
Following its public announcement on October 25, 2000, of its
financial results for the third quarter of 2000, the Company and
certain of its directors and officers were named as defendants in
fourteen putative class action lawsuits filed in the United States
District Court for the Northern District of Georgia. The fourteen class
action lawsuits were
7
consolidated into one case, Case No. 1:00-CV-2841, pursuant to an
order of the court dated November 17, 2000. A consolidated amended
complaint was then filed on May 14, 2001 on behalf of all purchasers
of common stock of the Company during the period beginning December 8,
1999 and ending on October 25, 2000.
Generally the amended complaint alleges claims against the Company
and the other defendants for violations of Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934, as amended, and Rule 10b-5
promulgated thereunder. Generally, it is alleged that the defendants
made material misrepresentations and omissions in public filings made
with the Securities and Exchange Commission and in certain press
releases and other public statements. The amended complaint alleges
that the market price of the Company's common stock was artificially
inflated during the class periods. The plaintiffs seek unspecified
compensatory damages and costs (including attorneys' and expert fees),
expenses and other unspecified relief on behalf of the classes. The
Court denied a motion to dismiss brought by the defendants and the case
is currently in discovery.
On December 18, 2002, Peachtree Equity Partners, as the assignee of
a five-year Promissory Note from the Company in the amount of
$5,000,000 due March 14, 2005, brought an action in the Georgia state
court for prepayment of the Note, plus interest and attorneys fees. The
action asserts that certain Change of Control provisions, as defined in
the Note, have been triggered, thus permitting the holder to demand
immediate prepayment in full. The Company has denied the material
allegations of the Complaint and asserted various affirmative defenses.
During 2002, ten former employees of the Company commenced an
action in the United States District Court for the Northern District of
Georgia seeking back pay, employee benefits, interest and attorneys
fees. The Company denies the material allegations set forth by the
plaintiffs and asserted various affirmative defenses.
In addition to the above, in the normal course of business, we are
subjected to claims and litigations in the areas of general liability. We
believe that we have adequate insurance coverage for most claims that are
incurred in the normal course of business. In such cases, the effect on our
financial statements is generally limited to the amount of our insurance
deductibles. At this time, we do not believe any such claims will have a
material impact on the Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
These are the results of voting by stockholders present or represented by
proxy at our special meeting held on December 6, 2002:
Item 1. Sale of Revenue-Generating Operations and Related Assets. Proposal
to consider and vote on the sale of substantially all of the assets of the
Company's electronic commerce business, which represents substantially all of
the Company's revenue-generating operations and related assets, pursuant to an
Asset Purchase Agreement dated October 17, 2002, between the Company and Epicor
Software Corporation for cash consideration. The stockholders approved this
proposal. There were 10,588,519 shares voting for the proposal, 135,724 shares
voting against the proposal, 17,939 shares abstaining, and 4,433,413 broker
non-votes.
Item 2. Elimination of Classified Board. Proposal to consider and vote on
the adoption and approval of our proposed Amended and Restated Certificate of
Incorporation and proposed Amended and Restated Bylaws to eliminate the
classification of the Company's Board of Directors into three separate classes.
The stockholders approved this proposal. There were 10,541,427 shares voting for
the proposal, 177,051 shares voting against the proposal, 23,704 shares
abstaining, and 4,433,413 broker non-votes.
Item 3. Reimbursement of Expenses. To approve the reimbursement of expenses
incurred by Warren B. Kanders on behalf of himself, Burtt R. Ehrlich and
Nicholas Sokolow in connection with their successful solicitation of proxies.
The stockholders approved this proposal. There were 14,088,184 shares voting for
the proposal, 1,049,502 shares voting against the proposal, and 37,909 shares
abstaining.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been listed on the Nasdaq National Market System
("NASDAQ") since May 26, 1998, the effective date of our initial public
offering. On August 28, 1998, we changed our name from SQL Financials
International, Inc. to Clarus Corporation. Effective September 2, 1998, we
changed our NASDAQ symbol from "SQLF" to "CLRS". Prior to May 26, 1998, there
was no established trading market for our common stock. The following table sets
forth, for the indicated periods, the high and low closing sales prices for our
common stock as reported by the NASDAQ.
8
Closing Sales Price
--------------------
High Low
----- ------
Calendar Year 2001
First Quarter $9.25 $5.09
Second Quarter $7.29 $5.08
Third Quarter $8.45 $3.55
Fourth Quarter $6.27 $3.30
Calendar Year 2002
First Quarter $6.25 $3.44
Second Quarter $6.04 $3.73
Third Quarter $5.20 $4.16
Fourth Quarter $6.00 $4.53
Calendar Year 2003
First Quarter (through March 14, 2003) $5.87 $5.01
STOCKHOLDERS
On March 14, 2003, the last reported sales price for our common stock on
the NASDAQ was $5.11 per share. As of March 14, 2003, there were 155 holders of
record of our common stock.
DIVIDENDS
We currently anticipate that we will retain all future earnings for use in
our business and do not anticipate that we will pay any cash dividends in the
foreseeable future. The payment of any future dividends will be at the
discretion of our Board of Directors and will depend upon, among other things,
our results of operations, capital requirements, general business conditions,
contractual restrictions on payment of dividends, if any, legal and regulatory
restrictions on the payment of dividends, and other factors our Board of
Directors deems relevant.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth certain information regarding our equity
plans as at December 31, 2002.
- ----------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
- ----------------------------------------------------------------------------------------------------------------------
PLAN CATEGORY NUMBER OF SECURITIES WEIGHTED AVERAGE EXERCISE NUMBER OF SECURITIES
TO BE ISSUED UPON PRICE OF OUTSTANDING REMAINING AVAILABLE FOR
EXERCISE OF OPTIONS, WARRANTS AND FUTURE ISSUANCE UNDER EQUITY
OUTSTANDING OPTIONS, RIGHTS COMPENSATION PLANS
WARRANTS AND RIGHTS (EXCLUDING SECURITIES
REFLECTED IN COLUMN (a))
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans 2,854,906 $7.76 1,899,110
approved by security
holders (1)(2)
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans 58,334 $55.48 58,334
not approved by security
holders (3)(4)
- ----------------------------------------------------------------------------------------------------------------------
2,913,240 $8.72 1,957,444
Total
- ----------------------------------------------------------------------------------------------------------------------
(1) Includes nonqualified stock options issued and issuable by the Company
under the Stock Incentive Plan of Software Architects International,
Limited (the "SAI Plan") assumed by the Company, pursuant to the Stock
Purchase Agreement, dated May 31, 2000, by and among Clarus, SAI (Ireland)
Limited, SAI Recruitment Limited, i2Mobile.com Limited, SAI America Limited
(collectively, the "SAI/Redeo Companies") and the shareholders of the
SAI/Redeo Companies. Under the SAI Plan, the Company may grant stock
options to eligible participants who must be employees of the Company or
its subsidiaries or consultants, but not directors or officers of the
Company.
(2) Excludes 77,851 shares purchased under our Employee Stock Purchase Plans
for a weighted average price of $5.39 but includes 922,149 shares of our
common stock remaining available for future issuance under such plans.
Under such plans, employees have an opportunity to purchase shares of
the Company's common stock at a discount. Generally, eligible employees, as
defined in the plan documents, may elect to have up to 15 percent of their
annual salary, up to a maximum of $12,500 per six month purchase period,
withheld to purchase the Company's common stock at a price equal to the
lower of 85 percent of the market price of our common stock at either the
beginning or the end of the six month offering period.
(3) Includes 25,000 warrants previously granted by the Company to a strategic
partner in return for completion of predetermined sales and marketing
milestones. The exercise price of these warrants is $53.75 per share and
the warrants expire on October 31, 2003.
(4) Includes 33,334 warrants previously granted by the Company to a third party
software developer in exchange for services. The exercise price of the
33,334 warrants was $56.78 per share and the warrants expire on March 31,
2003.
9
ITEM 6. SELECTED FINANCIAL DATA
Our selected financial information set forth below should be read in
conjunction with our consolidated financial statements, including the notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of Part II of this Report. The following statement of
operations and balance sheet data have been derived from our audited
consolidated financial statements and should be read in conjunction with those
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of Part II of this Report.
Years Ended December 31,
------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(in thousands, except per share data)
Statement of Operations Data:
Revenues:
License fees............................................... $ 2,808 $ 7,807 $24,686 $ 15,101 $ 17,372
Services fees.............................................. 6,226 9,866 -- 25,676 27,744
------- ------- ------- -------- --------
Total revenues........................................... 9,034 17,673 35,013 40,777 45,116
Cost of revenues:..............................................
License fees............................................... 26 211 154 1,351 1,969
Service fees............................................... 5,498 12,921 12,901 17,152 17,428
------- ------- ------- -------- --------
Total cost of revenues................................... 5,524 13,132 13,055 18,503 19,397
Operating expenses:
Research and development, exclusive of noncash expense..... 7,263 16,220 22,390 9,003 6,335
Noncash research and development........................... -- -- 424 -- --
In-process research and development........................ -- -- 8,300 -- 10,500
Sales and marketing, exclusive of noncash expense.......... 7,488 27,294 36,230 15,982 11,802
Noncash sales and marketing................................ 450 6,740 7,001 1,930 --
General and administrative, exclusive of noncash expense... 12,574 9,381 9,897 4,996 4,387
Provision for doubtful accounts............................ (560) 5,537 5,824 1,245 739
Noncash general and administrative......................... -- 252 1,098 874 880
Loss on impairment of goodwill............................. 6,801 36,756 -- -- --
Loss on impairment of intangible assets.................... 3,559 -- -- -- --
Gain on sale of e-commerce assets to Epicor................ (514) -- -- -- --
Gain on sale of ERP assets to Geac......................... -- -- (1,347) (9,417) --
(Gain)/Loss on disposal of property and equipment.......... 2,262 (20) -- -- --
Depreciation and amortization.............................. 4,243 12,212 8,132 3,399 2,154
------- ------- ------- -------- --------
Total operating expenses............................... 43,566 114,372 97,949 28,012 36,797
------- ------- ------- -------- --------
Operating loss................................................. (40,056) (109,831) (75,991) (5,738) (11,078)
Gain on foreign currency transactions.......................... 12 107 -- -- --
Gain/(Loss) on sale of marketable securities................... 15 (11) (100) -- --
Loss on impairment of marketable securities and investments... -- (16,461) (4,128) -- --
Amortization of debt discount.................................. -- -- (982) -- --
Interest income................................................ 2,441 6,570 10,902 442 636
Interest expense............................................... (225) (228) (348) (105) (224)
Minority interest.............................................. -- -- -- -- (36)
-------- ---------- ---------- -------- --------
Net loss.......................................................$(37,813) $ (119,854) $(70,647) $(5,401) $(10,702)
======== ========== ======== ======== ========
Net loss per common share:
Basic and diluted.......................................... $ (2.42) $ (7.72) $ (4.90) $(0.49) $ (1.70)
======= ======= ======= ========= =======
Weighted average common shares outstanding:
Basic and diluted.......................................... 15,615 15,530 14,420 11,097 6,311
======= ======= ======= ======= =======
As of December 31,
----------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Balance Sheet Data:
Cash and cash equivalents............................. $42,225 $55,628 $118,303 $14,127 $14,799
Marketable securities................................. 52,885 65,264 50,209 -- --
Total assets.......................................... 97,764 145,274 266,904 48,563 40,082
Long-term debt, net of current portion................ -- 5,000 5,000 -- 245
Total stockholders' equity............................ 89,360 126,328 246,822 32,615 22,111
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements, including
information about or related to our future results, certain projections and
business trends. Assumptions relating to forward-looking statements involve
judgments with respect to, among other things, future economic, competitive and
market conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control. When
used in this report, the words "estimate," "project," "intend," "believe,"
"expect" and similar expressions are intended to identify forward-looking
statements. Although we believe that our assumptions underlying the
forward-looking statements are reasonable, any or all of the assumptions could
prove inaccurate, and we may not realize the results contemplated by the
forward-looking statements. Management decisions are subjective in many respects
and susceptible to interpretations and periodic revisions based upon actual
experience and business developments, the impact of which may cause us to alter
our business strategy or capital expenditure plans that may, in turn, affect our
results of operations. In light of the significant uncertainties inherent in the
forward-looking information included in this report, you should not regard the
inclusion of such information as our representation that we will achieve any
strategy, objectives or other plans. The forward-looking statements contained in
this report speak only as of the date of this report, and we have no obligation
to update publicly or revise any of these forward-looking statements.
These and other statements, which are not historical facts, are based
largely upon our current expectations and assumptions and are subject to a
number of risks and uncertainties that could cause actual results to differ
materially from those contemplated by such forward-looking statements. These
risks and uncertainties include, among others, our planned effort to redeploy
our assets to enhance stockholder value following the completion of the
transaction with Epicor, and the risks and uncertainties set forth in the
section headed "Factors That May Affect Our Future Results" of Part I of this
Report and described in Part II of this Report. The Company cannot guarantee its
future performance.
OVERVIEW
AS PART OF OUR STRATEGY TO LIMIT OPERATING LOSSES AND ENABLE THE COMPANY TO
REDEPLOY ITS ASSETS AND USE ITS SUBSTANTIAL CASH AND CASH EQUIVALENT ASSETS TO
ENHANCE STOCKHOLDER VALUE, WE HAVE SOLD OUR ELECTRONIC COMMERCE BUSINESS, WHICH
REPRESENTED SUBSTANTIALLY ALL OF OUR REVENUE-GENERATING OPERATIONS AND RELATED
ASSETS, ALL FURTHER DESCRIBED HEREIN. THE INFORMATION APPEARING BELOW, WHICH
RELATES TO PRIOR PERIODS, IS, THEREFOR NOT INDICATIVE OF THE RESULTS WHICH MAY
BE EXPECTED FOR ANY SUBSEQUENT PERIODS. FUTURE PERIODS WILL PRIMARILY REFLECT
GENERAL AND ADMINISTRATIVE EXPENSES ASSOCIATED WITH THE CONTINUING
ADMINISTRATION OF THE COMPANY AND ITS EFFORTS TO REDEPLOY ITS ASSETS THROUGH A
MERGER WITH OR ACQUISITION OF AN ESTABLISHED OPERATING BUSINESS.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
The Company's discussion of financial condition and results of operations
is based on the consolidated financial statements which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these consolidated financial statements require management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
consolidated financial statements. Estimates also affect the reported amounts of
revenues and expenses during the reporting periods. The Company continually
evaluates its estimates and assumptions including those related to revenue
recognition, allowance for doubtful accounts, impairment of long-lived assets,
impairment of investments, and contingencies and litigation. The Company bases
its estimates on historical experience and other assumptions that are believed
to be reasonable under the circumstances. Actual results could differ from these
estimates.
The Company believes the following critical accounting policies include the
more significant estimates and assumptions used by management in the preparation
of its consolidated financial statements. Our accounting policies are more fully
described in Note 1 of our consolidated financial statements.
o The Company has recognized revenue from two primary sources, software
licenses and services. Revenue from software licensing and services
fees is recognized in accordance with Statement of Position ("SOP")
97-2, "Software Revenue Recognition", and SOP 98-9, "Software Revenue
Recognition with Respect to Certain Transactions" and related
interpretations. The Company recognized software license revenue when:
(1) persuasive evidence of an arrangement exists; (2) delivery has
occurred; (3) the fee is fixed or determinable; and (4) collectibility
is probable.
o The Company maintains allowances for doubtful accounts based on
expected losses resulting from the inability of the Company's
customers to make required payments. The Company recorded a reversal
of the provision for
11
doubtful accounts of ($560,000) during the year ended December 31,
2002. The Company has recorded a provision for doubtful accounts of
$5.5 million and $5.8 million, respectively, in the years ended
December 31, 2001 and 2000. If the financial condition of these
customers were to deteriorate additional allowances may be required.
o The Company had significant long-lived assets, primarily intangibles,
as a result of acquisitions completed during 2000. During 2002, the
Company evaluated the carrying value of its long-lived assets,
including intangibles, according to Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" and
SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets". Prior to 2002, the Company periodically evaluated the
carrying value of its long-lived assets, including intangibles,
according to SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The
Company recorded impairment charges on goodwill of $6.8 million and
$36.8 million in 2002 and 2001, respectively, and impairment charges
on intangible assets of $3.5 million in 2002.
o The Company has made equity investments in several privately held
companies. The Company records an impairment charge when it believes
an investment has experienced a decline in value that is other than
temporary. During the years ended December 31, 2001 and 2000, the
Company recorded impairment charges on investments of $15.4 million
and $4.1 million, respectively. The Company did not record an
impairment charge on investments during 2002.
o The Company is a party to the pending judicial and administrative
proceedings described elsewhere herein. An unfavorable resolution of
those proceedings could materially adversely affect the Company's
business, results of operations, liquidity or financial condition.
STOCK OPTION EXCHANGE PROGRAM
On April 9, 2001, the Company announced a voluntary stock option exchange
program for its employees. Under the program, employees were given the
opportunity to cancel outstanding stock options previously granted to them on or
after November 1, 1999, in exchange for an equal number of new options to be
granted at a future date. The exercise price of the new options was equal to the
fair market value of the Company's common stock on the date of grant. During the
first phase of the program 366,174 options with a weighted average exercise
price of $30.55 per share were canceled and new options to purchase 263,920
shares with an exercise price of $3.49 per share were granted on November 9,
2001. During the second phase of the program 273,188 options with a weighted
average exercise price of $43.87 per share were canceled and new options to
purchase 198,052 shares with an exercise price of $4.10 per share were granted
on February 11, 2002. Employees who participated in the first exchange were not
eligible for the second exchange. The exchange program was designed to comply
with Financial Accounting Standards Board ("FASB") Interpretation No. 44
"Accounting for Certain Transactions Involving Stock Compensation" and did not
result in any additional compensation charges or variable accounting with
respect to the new grants. Members of the Company's Board of Directors and its
executive officers were not eligible to participate in the exchange program.
SOURCES OF REVENUE
Prior to December 6, 2002, the Company's revenue consisted of license fees
and services fees. License fees were generated from the licensing of the
Company's suite of products. Services fees were generated from consulting,
implementation, training, content aggregation and maintenance support services.
Following the sale of the Company's remaining operating assets, the Company's
revenue consists of interest, dividend and other investment income from
short-term investments. Future revenues from operation is dependent on the
Company's ability to redeploy its assets through a merger with or acquisition of
an established business.
REVENUE RECOGNITION
The Company historically recognized revenue from two primary sources,
software licenses and services. Revenue from software licensing and services
fees was recognized in accordance with SOP 97-2, "Software Revenue Recognition",
and SOP 98-
12
9, "Software Revenue Recognition with Respect to Certain Transactions" and
related interpretations. The Company recognizes software license revenue when:
(1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3)
the fee is fixed or determinable; and (4) collectibility is probable.
SOP No. 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair values of the elements. The fair value of an element must be based
on evidence that is specific to the vendor. License fee revenue allocated to
software products generally was recognized by the Company upon delivery of the
products or deferred and recognized in future periods to the extent that an
arrangement includes one or more elements to be delivered at a future date and
for which fair values have not been established. Revenue allocated to
maintenance was recognized ratably over the maintenance term, which is typically
12 months and revenue allocated to training and other service elements is
recognized as the services are performed.
Under SOP No. 98-9, if evidence of fair value does not exist for all
elements of a license agreement and post-contract customer support was the only
undelivered element, then all revenue for the license arrangement was recognized
ratably over the term of the agreement as license revenue. If evidence of fair
value of all undelivered elements exists but evidence does not exist for one or
more delivered elements, then revenue was recognized using the residual method.
Under the residual method, the fair value of the undelivered elements was
deferred and the remaining portion of the arrangement fee was recognized as
revenue. The Company uses the residual method since it does not have fair value
of the license fees. Revenue from hosted software agreements are recognized
ratably over the term of the hosting arrangements.
COST OF REVENUES AND OPERATING EXPENSES
Cost of license fees includes royalties and software duplication and
distribution costs. The Company recognized these costs as the applications were
shipped.
Cost of services fees includes personnel related expenses and third-party
consulting fees incurred to provide implementation, training, maintenance,
content aggregation, and upgrade services to customers and partners. These costs
were recognized as they are incurred for time and material arrangements and are
recognized using the percentage of completion method for fixed price
arrangements.
Research and development expenses consisted primarily of personnel related
expenses and third-party consulting fees. The Company accounts for software
development costs under Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed". The Company charges research and development costs related to new
products or enhancements to expense as incurred until technological feasibility
is established, after which the remaining costs are capitalized until the
product or enhancement is available for general release to customers. The
Company defines technological feasibility as the point in time at which a
working model of the related product or enhancement exists. Historically, the
costs incurred during the period between the achievement of technological
feasibility and the point at which the product is available for general release
to customers have not been material.
Sales and marketing expenses consisted primarily of personnel related
expenses, including sales commissions and bonuses, expenses related to travel,
customer meetings, trade show participation, public relations, promotional
activities, regional sales offices, and advertising.
General and administrative expenses consist primarily of personnel related
expenses for financial, administrative and management personnel, fees for
professional services, board of director fees and the provision for doubtful
accounts. The Company allocates the total cost of its information technology
function and costs related to the occupancy of its corporate headquarters, to
each of the functional areas. Information technology expenses include personnel
related expenses, communication charges, and software support. Occupancy charges
include rent, utilities, and maintenance services.
RESTRUCTURING AND RELATED COSTS
During 2002 and 2001, the Company's management approved restructuring plans
to reorganize and reduce operating costs. Restructuring and related charges of
$4.2 million were expensed in 2001 to better align the Company's cost structure
with projected revenue. The charges were comprised of $3.0 million for employee
separation and related costs for 181 employees and $1.2 million for facility
closure and consolidation costs.
During the first quarter of 2002, the Company determined that amounts
previously charged during 2001 of approximately $202,000 that related to
employee separation and related charges were no longer required and this amount
was credited to sales and marketing expense in the accompanying consolidated
statement of operations during 2002. Restructuring and related charges of $8.6
million were expensed during 2002. The charges for 2002 were comprised of $4.6
million for employee separation and related costs for 183 employees and $4.0
million for facility closures and consolidation costs.
13
The facility closures and consolidation costs for 2001 and 2002 relate to
the abandonment of the Company's leased facilities in Suwanee, Georgia;
Limerick, Ireland; Maidenhead, England; and near Toronto, Canada. Total
facilities closure and consolidation costs include remaining lease liabilities,
construction costs and brokerage fees to sublet the abandoned space, net of
estimated sublease income. The estimated costs of abandoning these leased
facilities, including estimated costs to sublease, were based on market
information trend analysis provided by a commercial real estate brokerage firm
retained by the Company. The Company incurred a charge in the fourth quarter
2002 of $2.1 million for facility closure and consolidation costs as a result of
the termination of its lease for the facility in Suwanee, Georgia.
The following is a reconciliation of the components of the accrual for
restructuring and related costs, the amounts charged against the accrual during
2001 and 2002 and the balance of the accrual as of December 31, 2002:
2001 2002
----------------------------------------------- --------------------------------------------------------
Accruals Expenditures Balance Accruals Expenditures Balance December
During 2001 During 2001 December 31, 2001 During 2002 During 2002 Credits 31, 2002
------------ ------------- ----------------- ----------- ------------ -------- ----------------
(in thousands)
Employee separation costs $2,939 $2,259 $ 680 $4,645 $4,196 $ 202 $ 927
Facility closure costs 1,218 9 1,209 3,905 4,977 - 137
------ ------ ----- ------ ------ ----- ------
Total restructuring
and related costs $4,157 $2,268 $1,889 $8,550 $9,173 $ 202 $ 1,064
====== ====== ===== ====== ====== ===== =======
COMPARISON OF RESULTS OF OPERATIONS BETWEEN THE YEARS ENDED DECEMBER 31, 2002
AND 2001
The following discussion covers historical results of operations for the
periods indicated for the Company's prior businesses. On December 6, 2002, the
Company completed the disposition of substantially all its operating assets, and
the Company is now evaluating alternative ways to redeploy its assets into new
businesses. The discussion below is therefore not material to an understanding
of future revenue, earnings, operations, business or prospects of the Company.
REVENUES
Total Revenues. Total revenues decreased 48.9% to $9.0 million in 2002 from
$17.7 million in 2001. The decrease in total revenues resulted primarily from a
decrease in information technology spending and the announcement by the Company
during the quarter ended June 30, 2002 to explore all strategic alternatives as
part of its strategy to limit operating losses and enable it to reposition its
business in order to enhance stockholder value. For the year ended December 31,
2002, one customer accounted for more than 10%, totaling $2.7 million or 29.9%
of total revenue. For the year ended December 31, 2001, three customers
accounted for more than 10% each, totaling $6.2 million or 35.3% of total
revenue. The percentage of total revenue recognized from these three customers
was 12.2%, 11.9%, and 11.2%.
License Fees. License fees decreased 64.0% to $2.8 million, or 31.1% of
total revenues, in 2002 from $7.8 million, or 44.2% of total revenues, in 2001.
The decrease in license fees was the result of a decrease in the amount of
software licensed. This decrease is due to the factors discussed above.
Services Fees. Services fees decreased 36.9% to $6.2 million from $9.9
million in 2002, but increased as a percentage of total revenues to 68.9% in
2002 from 55.8% in 2001. This decrease is primarily attributable to a decrease
in implementation and training services and maintenance fees, a direct result of
the decrease in the amount of software licensed.
COST OF REVENUES
Total Cost of Revenues. Cost of revenues decreased 57.9% to $5.5 million,
or 61.1% of total revenues, during the year ended December 31, 2002 from $13.1
million, or 74.3% of total revenues, during the same period in 2001. The
decrease in the total cost of revenues is primarily attributable to a decrease
in personnel related costs.
Cost of License Fees. Cost of license fees decreased to $26,000 in 2002
from $211,000 in 2001. Cost of license fees includes royalties and software
duplication and distribution costs. The decrease in cost of license fees is
primarily attributable to a decrease in royalty fees paid by the Company
pursuant to equipment manufacturer agreements for certain of its applications..
The cost of license fees may vary from period to period depending on the product
mix licensed, but remain a small percentage of license fees.
Cost of Services Fees. Cost of services fees decreased 57.4% to $5.5
million, or 88.3% of total services fees, in 2002 compared to $12.9 million, or
131.0% of total services fees, in 2001. The decrease in the cost of services
fees was primarily attributable to a decrease in personnel related costs, a
decrease in consulting fees and a decrease in expenses related to employee
separation and facility closure costs. The Company had an average of 73.9% fewer
employees during the year ended December 31, 2002 compared to the same period
during 2001. Consulting fees related to subcontracted services during the year
ended December 31, 2002 were approximately $289,000 compared to approximately
$422,000 during the year ended December 31,
14
2001. The Company incurred $858,000 of expense related to employee separation
and related benefit costs incurred as part of the Company's restructuring
initiative during the twelve months ended December 31, 2002 compared to $1.0
million during the twelve months ended December 31, 2001.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased 55.2% to $7.3 million, or 80.4%
of total revenues, in 2002 from $16.2 million, or 91.8% of total revenues, in
2001. Research and development expenses decreased primarily due to decreased
consulting fees incurred to develop the Company's products and a decrease in
personnel related costs partially offset by increased employee separation and
related benefit costs. Consulting fees decreased to approximately $798,000
during the year ended December 31, 2002 from approximately $3.6 million during
the year ended December 31, 2001. The Company had an average of 64.0% fewer
employees in the research and development area during 2002 compared to the same
period of 2001. The Company incurred $1.3 million of expense related to employee
separation and related benefit costs incurred as part of the Company's
restructuring initiative during the twelve months ended December 31, 2002
compared to $217,000 during the twelve months ended December 31, 2001.
SALES AND MARKETING, EXCLUSIVE OF NONCASH EXPENSE
Sales and marketing expenses decreased 72.6% to $7.5 million, or 82.9% of
total revenues, in 2002 from $27.3 million, or 154.4% of total revenues, in
2001. The decrease was primarily attributable to the reduction of sales and
marketing personnel, a decrease in variable compensation as a result of lower
license revenue during 2002, and a reduction of promotional activities
associated with building market awareness of the Company's e-commerce products.
The Company had an average of 80.4% fewer sales and marketing employees during
2002 compared to the same period in 2001. The Company incurred $1.2 million of
expense related to employee separation and related benefit costs incurred as
part of the Company's restructuring initiative during the twelve months ended
December 31, 2002 compared to $1.1 million during the twelve months ended
December 31, 2001.
NONCASH SALES AND MARKETING EXPENSE
During the years ended December 31, 2002 and 2001, non-cash sales and
marketing expenses of approximately $450,000 and $6.7 million, respectively,
were recognized in connection with sales and marketing agreements signed by the
Company during the fourth quarter of 1999 and the first quarter of 2000. In
connection with these agreements, the Company issued warrants and shares of
common stock to certain strategic partners, all of whom were also customers, in
exchange for their participation in the Company's sales and marketing efforts.
The Company recorded the value of these warrants and common stock as deferred
sales and marketing costs, which were being amortized over the life of the
agreements which ranged from nine months to five years. Included in the results
for 2001 is $1.4 million of expense recorded in the fourth quarter as a result
of terminating the sales and marketing agreement with one customer.
GENERAL AND ADMINISTRATIVE, EXCLUSIVE OF NONCASH EXPENSE
General and administrative expenses, including the provision for doubtful
accounts, decreased 19.5% to $12.0 million in 2002 from $14.9 million in 2001.
As a percentage of total revenues, general and administrative expenses increased
to 133.0% in 2002 from 84.4% in 2001. During 2002 the Company recorded a
reversal of the provision for doubtful accounts of $560,000 compared to a
provision for doubtful accounts of approximately $5.5 million for the year ended
December 31, 2001. The decrease in general and administrative expenses was
primarily attributable to decreases in personnel related costs and a decrease in
the provision for doubtful accounts partially offset by employee separation and
related benefit costs and facility closure and consolidation costs. The Company
had an average of 54.9% fewer general and administrative employees during 2002
compared to the same period in 2001. The Company incurred $1.1 million of
expense related to employee separation and related benefit costs incurred as
part of the Company's restructuring initiative during the twelve months ended
December 31, 2002 compared to $526,000 during the twelve months ended December
31, 2001. The Company incurred $3.9 million of expense related to facility
closure and consolidation costs during the twelve months ended December 31, 2002
compared to $1.2 million for the twelve months ended December 31, 2001.
NONCASH GENERAL AND ADMINISTRATIVE EXPENSE
The Company did not incur any noncash general and administrative expenses
during 2002. The Company incurred noncash general and administrative expenses of
approximately $252,000, or 1.4% of total revenues, during 2001. In the third
quarter of 2000, the Company granted 18,750 options to a new board member at a
price below the fair market value at the date of grant. The amount expensed
during 2001 relates primarily to these options.
LOSS ON IMPAIRMENT OF INTANGIBLE ASSETS
As a result of a change in the Company's strategic direction during the
second quarter of 2002, the Company determined that remaining goodwill and
intangible assets should be tested for further impairment. The Company's
evaluation of the present value
15
of future cash flows based on the change in strategic direction indicated the
carrying value of the Company's assets exceeded fair value. As a result, the
Company recorded an additional impairment charge to goodwill of $6.8 million and
an impairment charge to intangible assets of $3.5 million during the three
months ended June 30, 2002. The Company evaluates the carrying value of its
long-lived assets, including intangibles, according to SFAS No. 142, "Goodwill
and Other Intangible Assets" and SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". Prior to 2002, the Company evaluated the
carrying value of its long-lived assets, including intangibles, according to
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". During the fourth quarter of 2001, the
Company's evaluation of the performance of the SAI/Redeo companies compared to
initial projections, negative economic trends and a decline in industry growth
rate projections indicated that the carrying value of goodwill exceeded expected
cash flows. The $36.8 million write-down was based on the amount by which the
carrying amount of goodwill exceeded fair value.
GAIN ON SALE OF E-COMMERCE ASSETS
On December 6, 2002, the Company sold its e-commerce software business to
Epicor Software Corporation for approximately $1.0 million, of which $200,000
was placed in escrow. The Company recorded a gain during the fourth quarter of
2002 on the sale of this business of approximately $514,000.
(GAIN)/LOSS ON SALE OF PROPERTY AND EQUIPMENT
During the years ended December 31, 2002 and 2001, the Company recorded a
loss on the disposal of property and equipment of $2.3 million and a gain on the
disposal of property and equipment of $20,000, respectively. The loss on the
disposal of assets during the year ended December 31, 2002 is primarily
attributable to the write down of assets located in the Suwanee, Limerick, and
Maidenhead offices.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization decreased 65.3% to $4.2 million, or 47.0% of
total revenues, in 2002, from $12.2 million, or 69.1% of total revenues, in
2001. The decrease is primarily the result of adopting SFAS 142, effective
January 1, 2002, which requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized. The amortization during 2002
relates to intangible assets with definite lives. The Company recorded $455,000
and $909,000 of amortization expense related to intangible assets with definite
lives during the twelve months ended December 31, 2002 and 2001, respectively.
The Company recorded $7.6 million of amortization expense related to goodwill
during the twelve months ended December 31, 2001. As a result of adopting SFAS
142, the Company did not record amortization expense related to goodwill during
2002.
LOSS ON IMPAIRMENT OF INVESTMENTS
During the year ended December 31, 2001, the Company recorded a loss on
impairment of investments of approximately $16.5 million. These losses were
necessitated by other than temporary losses to the value of investments the
Company had made in privately held companies and marketable securities of one
publicly traded company. The privately held companies are primarily early-stage
companies and are subject to significant risk due to their limited operating
history and volatile industry-based economic conditions. As of December 31,
2001, all investments but one had been written off. The remaining balance,
representing a single investment and valued at $200,000 in the accompanying
December 31, 2001 balance sheet, was sold and cash of $200,000 was received
during the first quarter of 2002.
INTEREST INCOME
Interest income decreased 62.8% to $2.4 million in 2002, or 27.0% of total
revenues, from $6.6 million, or 37.2% of total revenues, in 2001. The decrease
in interest income was due to lower levels of cash available for investment and
lower interest rates.
INTEREST EXPENSE
Interest expense decreased 1.3% to $225,000 in 2002 from $228,000 in 2001.
In March of 2000, the Company entered into a $5.0 million borrowing arrangement
with an interest rate of 4.5% with Wachovia Capital Investments, Inc. The
interest expense in 2002 and 2001 is primarily related to this borrowing
arrangement.
INCOME TAXES
As a result of the operating losses incurred since the Company's inception,
no provision or benefit for income taxes was recorded in 2002 or in 2001.
16
COMPARISON OF RESULTS OF OPERATIONS BETWEEN THE YEARS ENDED DECEMBER 31, 2001
AND 2000
REVENUES
Total Revenues. Total revenues decreased 49.5% to $17.7 million in 2001
from $35.0 million in 2000. The decrease in total revenues resulted primarily
from a decrease in license revenue due to the softening demand for
business-to-business software and a decline in the information technology market
generally. For the year ended December 31, 2001, three customers accounted for
more than 10% each, totaling $6.2 million or 35.3% of total revenue. The
percentage of total revenue recognized from these three customers was 12.2%,
11.9%, and 11.2%. For the year ended December 31, 2000, one customer accounted
for more than 10%, totaling $4.0 million or 11.6% of total revenue.
License Fees. License fees decreased 68.4% to $7.8 million, or 44.2% of
total revenues, in 2001 from $24.7 million, or 70.5% of total revenues, in 2000.
The decrease in license fees was the result of a decrease in the amount of
software licensed. This decrease is due to the factors discussed above.
Services Fees. Services fees decreased 4.5% to $9.9 million from $10.3
million in 2001, but increased as a percentage of total revenues to 55.8% in
2001 from 29.5% in 2000. This decrease is primarily attributable to a decrease
in implementation and training services, a direct result of the decrease in the
amount of software licensed, partially offset by an increase in maintenance
fees.
COST OF REVENUES
Total Cost of Revenues. Cost of revenues increased 0.6% to $13.1 million,
or 74.3% of total revenues, during the year ended December 31, 2001 compared to
$13.1 million, or 37.3% of total revenues, during the same period in 2000. The
increase in the total cost of revenues and increase in percentage of total
revenues is primarily a result of a change in the mix of revenue to services
fees from license fees, which historically have a higher cost of revenues.
Cost of License Fees. Cost of license fees increased to $211,000 in 2001
from $154,000 in 2000. Cost of license fees includes royalties and software
duplication and distribution costs. The increase in cost of license fees is
primarily attributable to an increase in royalty fees paid by the Company
pursuant to equipment manufacturer agreements for certain of its applications.
The cost of license fees may vary from period to period depending on the product
mix licensed, but remain a small percentage of license fees.
Cost of Services Fees. Cost of services fees increased 0.2% to $12.9
million, or 131.0% of total services fees, in 2001 compared to $12.9 million, or
124.9% of total services fees, in 2000. The increase in the cost of services
fees was primarily attributable to restructuring costs and an increase in
personnel related costs partially offset by a decrease in consulting fees. The
Company incurred $1.0 million of expense related to employee separation and
related benefit costs and $0.2 million of facility closure costs incurred as
part of the Company's restructuring initiative. The Company had an average of
21.7% more employees during the year ended December 31, 2001 compared to the
same period during 2000. The consulting fees related to subcontracted services
were approximately $422,000 during the year ended December 31, 2001 compared to
approximately $2.4 million during the year ended December 31, 2000.
RESEARCH AND DEVELOPMENT, EXCLUSIVE OF NONCASH EXPENSE
Research and development expenses decreased 27.6% to $16.2 million, or
91.8% of total revenues, in 2001 from $22.4 million, or 63.9% of total revenues,
in 2000. Research and development expenses decreased primarily due to decreased
consulting fees incurred to develop the Company's products partially offset by
an increase in personnel related costs, restructuring costs of $217,000 incurred
during 2001 and a $600,000 fee incurred during 2001 as a result of terminating a
services agreement with a development partner. Consulting fees decreased to
approximately $3.6 million during the year ended December 31, 2001 from
approximately $12.3 million during the year ended December 31, 2000. The Company
had an average of 6.5% more employees in the research and development area
during 2001 compared to the same period of 2000.
NONCASH RESEARCH AND DEVELOPMENT EXPENSE
Noncash research and development expenses of approximately $424,000 were
recognized during 2000.
IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSE
In-Process Research and Development ("IPR&D") expense was approximately
$8.3 million for the year ended December 31, 2000. The Company recorded this
expense in the second quarter of 2000 related to its acquisition of the
SAI/Redeo Companies on May 31, 2000 (the "Valuation Date").
17
At the Valuation Date, the SAI/Redeo Companies had technology under
development that had not demonstrated technological or commercial feasibility.
As of the Valuation Date, the projects associated with the IPR&D efforts had not
yet reached technological feasibility and the IPR&D had no alternative future
use in the event that the proposed products did not prove to be feasible. These
development efforts fall within the definition of IPR&D contained in Statement
of Financial Accounting Standards ("SFAS") No. 2.
At the Valuation Date, the technologies were approximately 70.5% complete.
The acquired in-process technologies were originally anticipated to become
commercially viable in years 2000, 2001, and 2002. Expenditures to complete the
acquired in-process technologies were expected to total approximately $3.5
million. The initial development and commercial release of the Company's
Settlement product was completed during the third quarter of 2000. During the
year ended December 31, 2001, 23.0% of the Company's license revenue was derived
from licensing the Settlement product. During the year ended December 31, 2000,
12.8% of the Company's license revenue was derived from licensing the Company's
Settlement product.
Valuation of IPR&D: Amounts allocated to IPR&D were calculated using
established valuation techniques in the high technology industry and the Company
expensed such amounts in the quarter that the acquisition was consummated
because technological feasibility had not been achieved and no alternative
future uses had been established. Consistent with the Company's policy for
internally developed technology, the Company concluded that the IPR&D had no
alternative future use after taking into consideration the potential for usage
of the technology in different products, resale of the software, and internal
usage.
Upon consummation of the SAI/Redeo acquisition, the Company immediately
recognized expense of $8.3 million representing the acquired IPR&D that had not
yet reached technological feasibility and had no alternative future use. The
value assigned to acquired IPR&D was determined by identifying products under
research in areas for which technological feasibility had not been established.
The IPR&D technology was then segmented into two classifications: (i) IPR&D -
completed and (ii) IPR&D - to-be-completed, giving explicit consideration to the
value created by research and development efforts of SAI/Redeo prior to the
acquisition and to be created by the Company after the acquisition. These value
creation efforts were estimated by considering the following major factors: (i)
time-based data, (ii) cost-based data, and (iii) complexity-based data. The
value of the IPR&D was determined using a discounted cash flow model similar to
the income approach.
From the revenue estimates, operating expense estimates, including cost of
sales, general and administrative, selling and marketing, income taxes and a use
charge for contributory assets, were deducted to arrive at operating income.
Revenue growth rates were estimated by management for each product and gave
consideration to relevant market sizes and growth factors, expected industry
trends, the anticipated nature and timing of new product introductions by us and
our competitors, individual product sales cycles, and the estimated life of each
product's underlying technology. Operating expense estimates reflect the
Company's historical expense ratios. The resulting operating income stream was
discounted to reflect its present value at the date of the acquisition. The rate
used to discount the net cash flows from the purchased IPR&D was 28%, which is
equal to the weighted average cost of capital of the Company. To date, actual
revenues attributable to the IPR&D have been lower than the original
projections.
SALES AND MARKETING, EXCLUSIVE OF NONCASH EXPENSE
Sales and marketing expenses decreased 24.7% to $27.3 million, or 154.4% of
total revenues, in 2001 from $36.2 million, or 103.5% of total revenues, in
2000. The decrease was primarily attributable to the reduction of sales and
marketing personnel, a decrease in variable compensation as a result of lower
license revenue during 2001, and a reduction of promotional activities
associated with building market awareness of the Company's e-commerce products.
The Company experienced a significant increase in sales and marketing expenses
in the fourth quarter of 2000 due in large part to advertising commitments
associated with the Company's branding campaign. The Company had an average of
12.6% fewer sales and marketing employees during 2001 compared to the same
period in 2000.
NONCASH SALES AND MARKETING EXPENSE
During the years ended December 31, 2001 and 2000, non-cash sales and
marketing expenses of approximately $6.7 million and $7.0 million, respectively,
were recognized in connection with sales and marketing agreements signed by the
Company during the fourth quarter of 1999 and the first quarter of 2000.
GENERAL AND ADMINISTRATIVE, EXCLUSIVE OF NONCASH EXPENSE
General and administrative expenses, including the provision for doubtful
accounts, decreased 5.1% to $14.9 million in 2001 from $15.7 million in 2000. As
a percentage of total revenues, general and administrative expenses increased to
84.4% in 2001 from 44.9% in 2000. Included in general and administrative
expenses is a provision for doubtful accounts of $5.5 million and $5.8 million
for the years ended December 31, 2001 and 2000, respectively. The decrease in
general and administrative expenses was primarily attributable to decreases in
personnel related costs and a decrease in the provision for doubtful accounts.
The Company had an average of 8.5% fewer general and administrative employees
during 2001 compared to the same period in 2000.
18
NONCASH GENERAL AND ADMINISTRATIVE EXPENSE
Noncash general and administrative expenses decreased to approximately
$252,000, or 1.4% of total revenues, in 2001 from approximately $1.1 million, or
3.1% of total revenues, in 2000. The decrease was primarily attributable to the
Company granting 160,000 options to a senior executive during the first quarter
of 2000 at an exercise price below the fair market value at the date of grant.
Fifteen percent of these options vested immediately and the remainder vested
over four years. The Company immediately expensed $814,500 associated with the
intrinsic value of the vested options and recorded the intrinsic value of the
unvested options, $4.6 million, as deferred compensation. This arrangement was
terminated in the fourth quarter of 2000 and all options except those vesting
immediately were forfeited. The Company recognized net compensation expense
related to this arrangement of $814,500 during the year ended 2000.
LOSS ON IMPAIRMENT OF INTANGIBLE ASSETS
In the fourth quarter of 2001, the Company recognized an intangible asset
impairment loss of $36.8 million related to the write-down of goodwill
associated with the acquisition of the SAI/Redeo companies. The Company
periodically evaluates the carrying value of its long-lived assets, including
intangibles, according to SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". During the
fourth quarter of 2001, the Company's evaluation of the performance of the
SAI/Redeo companies compared to initial projections, negative economic trends
and a decline in industry growth rate projections indicated that the carrying
value of the goodwill exceeded expected cash flows. The $36.8 million write-down
was based on the amount by which the carrying amount of goodwill exceeded fair
value.
GAIN ON SALE OF ERP ASSETS
On October 18, 1999, the Company sold its human resources and financial
software business to Geac Computer Systems, Inc. and Geac Canada Limited. The
Company received approximately $13.9 million in proceeds. A gain of $9.4 million
was recorded in 1999, with an additional gain of approximately $1.3 million
recorded during 2000, following an escrow settlement.
GAIN ON SALE OF PROPERTY AND EQUIPMENT
During the year ended December 31, 2001, the Company recorded a gain on the
sale of property and equipment of $20,000. The gain on the disposal of assets
during the year ended December 31, 2001 is primarily attributable to the sale of
property and equipment to exiting employees.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization increased 50.2% to $12.2 million, or 69.1% of
total revenues, in 2001, from $8.1 million, or 23.2% of total revenues, in 2000.
This increase is primarily the result of the Company's amortization of its
intangible assets associated with acquisitions completed in the second quarter
of 2000.
LOSS ON IMPAIRMENT OF INVESTMENTS
During the years ended December 31, 2001 and 2000, the Company recorded a
loss on impairment of investments of approximately $16.5 million and $4.1
million, respectively. These losses were necessitated by other than temporary
losses to the value of investments the Company had made in privately held
companies and marketable securities of one publicly traded company. The
privately held companies are primarily early-stage companies and are subject to
significant risk due to their limited operating history and volatile
industry-based economic conditions. As of December 31, 2001, all investments but
one have been written off. The remaining balance representing a single
investment and valued at $200,000 in the accompanying December 31, 2001 balance
sheet, was sold and cash of $200,000 was received during the first quarter of
2002.
INTEREST INCOME
Interest income decreased 39.7% to $6.6 million in 2001, or 37.2% of total
revenues, from $10.9 million, or 31.1% of total revenues, in 2000. The decrease
in interest income was due to lower levels of cash available for investment and
lower interest rates.
INTEREST EXPENSE AND AMORTIZATION OF DEBT DISCOUNT
Interest expense decreased 34.5% to $228,000 in 2001 from $348,000 in
2000. This decrease in interest expense is primarily due to higher levels of
debt in the first quarter of 2000 as compared to 2001. In March of 2000, the
Company entered into a $5.0 million borrowing arrangement with an interest rate
of 4.5% with Wachovia Capital Investments, Inc. The interest expense in 2001 is
primarily related to this borrowing arrangement.
19
In 1999, the Company entered into financing agreements for $7.0 million. In
connection with the financing, the Company issued warrants valued at
approximately $982,000 using the Black-Scholes option pricing model as debt
discount to be amortized over the life of the financing agreement. The entire
$7.0 million plus interest was paid prior to the end of the first quarter of
2000. As a result, the entire value of the warrants was amortized as a debt
discount in the quarter ended March 31, 2000.
INCOME TAXES
As a result of the operating losses incurred since the Company's inception,
no provision or benefit for income taxes was recorded in 2001 or in 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased to $42.2 million at
December 31, 2002 from $55.6 million at December 31, 2001. Marketable securities
decreased to $52.9 million at December 31, 2002 from $65.3 million at December
31, 2001. The overall decrease in cash and cash equivalents and marketable
securities is due primarily to cash used in operating activities partially
offset by cash provided from investing activities and financing activities.
Cash used in operating activities was approximately $27.3 million during
2002. The cash used was primarily attributable to the Company's net loss and to
decreases in accounts payable and accrued liabilities, deferred revenue,
accounts receivable and prepaid and other current assets. Cash used in operating
activities was approximately $42.4 million during 2001. The cash used was
primarily attributable to the Company's net loss and to decreases in accounts
payable and accrued liabilities partially offset by an increase in deferred
revenue.
Cash provided by investing activities was approximately $13.4 million
during 2002. The cash provided by investing activities during 2002 was primarily
attributable to the sale and maturity of marketable securities and proceeds
related to the sale of the e-commerce assets partially offset by purchases of
marketable securities and property and equipment. Cash used for investing
activities was approximately $20.8 million during 2001. The cash was used for
purchases of investments, marketable securities, and property and equipment
partially offset by the sale and maturity of marketable securities.
Cash provided by financing activities was approximately $519,000 during
2002 and approximately $458,000 during 2001. The cash provided by financing
activities during 2002 and 2001 was primarily attributable to proceeds from
shares issued under the employee stock purchase plan and stock option exercises.
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. As of December 31, 2002, four
customers accounted for more than 10% each, totaling $814,000 or 77.3% of the
gross accounts receivable balance on that date. The percentage of total accounts
receivable due from these four customers was 42.3%, 12.4%, 11.5% and 11.1%,
respectively, at December 31, 2002. As of December 31, 2001, four customers
accounted for more than 10% each, totaling $1.7 million or 58.1% of the gross
accounts receivable balance on that date. The percentage of total accounts
receivable due from these four customers was 17.2%, 15.2%, 13.8% and 11.9%,
respectively, at December 31, 2001.
During the year ended December 31, 2002, one customer accounted for more
than 10%, totaling $2.7 million, or 29.9% of total revenue. During the year
ended December 31, 2001, three customers accounted for more than 10% each,
totaling $6.2 million, or 35.3% of total revenue. The percentage of total
revenue recognized from these three customers was 12.2%, 11.9% and 11.2%,
respectively.
During the second quarter of 2001, the Company made an equity investment of
$2.0 million in a privately held strategic partner. Prior to 2001, the Company
made equity investments of $17.7 million in eleven privately held companies. The
Company's equity interest in these entities ranged from 2.5% to 12.5% and the
Company is accounting for these investments using the cost method of accounting.
During 2001 and 2000 the Company recorded charges of $15.4 million and $4.1
million, respectively, for other than temporary losses on these investments.
These companies are primarily early-stage companies and are subject to
significant risk due to their limited operating history and current economic and
capital market conditions. The Company has not recognized any material revenue
from these companies during 2002 or 2001. During the year ended December 31,
2000 the Company recognized $16.0 million in total revenue from these companies.
On December 6, 2002, the Company granted options to purchase 1,250,000
shares of common stock to three senior executives. 450,000 of these options were
issued with an exercise price of $5.35 per share, 400,000 were issued with an
exercise price of $7.50 per share and 400,000 were issued with an exercise price
of $10.00 per share. The options issued at $5.35 per share were issued at less
than the fair market value on that date of $5.45 and will result in compensation
charges of $45,000 recognized over the vesting period. Twenty percent of the
options vest annually over five years on the anniversary of the date of grant.
At December 31, 2002, the Company has net operating loss, capital loss,
research and experimentation credit and alternative minimum tax credit
carryforwards for U.S. federal income tax purposes of approximately $114.1
million, $13.6 million, $1.3 million and $53,000, respectively, which expire in
varying amounts beginning in the year 2009. The Company also has incurred
20
foreign losses in the amount of approximately U.S.$23.2 million that are
available to offset future taxable income in foreign jurisdictions. The
Company's ability to benefit from certain net operating loss carryforwards will
be limited under section 382 of the Internal Revenue Code if the Company is
deemed to have had an ownership change of greater than 50%. Accordingly, certain
net operating losses may not be realizable in future years due to this
limitation.
During the first six months of 2000, the Company issued 25,000 warrants and
approximately 39,000 shares of the Company's common stock to certain strategic
partners, all of whom are also customers, in exchange for their participation in
the Company's sales and marketing efforts. The sales and marketing agreement
signed with one strategic partner also included an obligation to make cash
payments of $300,000 in each of the last two years of the related agreement. The
Company recorded the fair value of these warrants, common stock, and cash
payments as deferred sales and marketing costs of approximately $454,000, $3.8
million, and $600,000, respectively. Deferred sales and marketing costs were
amortized over the term of the sales and marketing agreements, which range from
nine months to five years.
During the fourth quarter of 2001, the sales and marketing agreement with
one customer was terminated requiring a charge of $1.4 million to write-off the
remaining balance in deferred sales and marketing costs. Also, as a result of
the termination, the Company is no longer obligated to make cash payments of
$300,000 for each of the last two years of the related agreement.
At the 2002 annual meeting of our stockholders held on May 21, 2002, Warren
B. Kanders, Burtt R. Ehrlich and Nicholas Sokolow were elected by our
stockholders to serve on our Board of Directors. Under the leadership of these
new directors, our Board of Directors adopted 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 that will serve as a
platform company, using our substantial cash, other non-operating assets
(including, to the extent available, our net operating loss carry-forward) and
our publicly-traded stock to enhance future growth. The strategy also sought to
reduce significantly our cash expenditure rate by targeting, to the extent
practicable, our overhead expenses to the amount of our interest income until
the completion of an acquisition or merger. While the Company's expenses have
been significantly reduced, management currently believes that the Company's
interest income will not exceed its operating expenses during 2003.
The following summarizes the Company's contractual obligations and
commercial commitments at December 31, 2002, and the effect such obligations are
expected to have on our liquidity and cash flow in future periods:
Total 2003 2004 2005 2006 Thereafter
----- ---- ---- ---- ---- ----------
(in thousands)
Long-term debt $ 5,000 $ - $ - $ 5,000 $ - $ -
Operating leases 456 252 96 96 12 -
-------- ------ ------ ------- ------- ------
Total $ 5,456 $ 252 $ 96 $ 5,096 $ 12 $ -
======== ===== ====== ======= ======= ======
In addition to the above commitments, we entered into an oral agreement in
2003 with Kanders & Company pursuant to which we sublease approximately 1,989
square feet in Greenwich, Connecticut for $9,572 a month (subject to increases
every three years). The agreement provides for a one-year term and Clarus has
the option to renew for up to nine additional one-year terms. Under the terms of
the agreement, we are required to pay approximately $325,000 in build-out
construction costs, fixtures, equipment and furnishings related to preparation
of the space. In the event Clarus was to undergo a change in control, our
remaining rent through the tenth anniversary of the commencement of the
agreement would immediately accelerate and the present value of such rent would
be placed in escrow for the benefit of Kanders & Company. In January 2003, the
Company obtained a standby letter of credit in the amount of $118,345 to secure
lease obligations for the Greenwich, Connecticut facility that is being
constructed. Kanders & Company reimburses Clarus a pro rata portion of the
$3,000 annual cost of the letter of credit.
The Company has sub-leased its facility near Toronto, Canada that will
provide sub-lease income of approximately $4,000 per month through January, 2006
that will offset some of the above obligations.
In December 2002, the Company executed a lease termination agreement
pursuant to which it agreed to abandon its principal facility in Suwanee,
Georgia on March 31, 2003. Pursuant to the terms of the termination agreement,
the Company paid to the lessor $2.9 million in cash, which has been included
in general and administrative expense in the accompanying statement of
operations for 2002. The lease is scheduled to terminate March 31, 2003.
The Company does not have commercial commitments under capital leases,
lines of credit, standby lines of credit, guaranties, standby repurchase
obligations or other such arrangements, other than the standby letter of credit
described above.
The Company does not engage in any transactions or have relationships or
other arrangements with an unconsolidated entity, nor any special purpose or
similar entities or other off-balance sheet arrangements.
RELATED-PARTY TRANSACTIONS
In 2003, we entered into an oral agreement with Kanders & Company pursuant
to which we sublease approximately 1,989 square feet in Greenwich, Connecticut
for $9,572 a month (subject to increases every three years). The agreement
provides for a one-year term and Clarus has the option to renew for up to nine
additional one-year terms. Under the terms of the agreement, we are required to
pay approximately $325,000 in build-out construction costs, fixtures, equipment
and furnishings related to preparation of the space. In the event Clarus was to
undergo a change in control, our remaining rent through the tenth anniversary of
the commencement of the agreement would immediately accelerate and the present
value such rent would be placed in escrow for the benefit of Kanders & Company.
In January 2003, the Company obtained a standby letter of credit in the amount
of $118,345 to secure lease obligations for the Greenwich, Connecticut facility
that is being constructed. Kanders & Company reimburses Clarus a pro rata
portion of the $3,000 annual cost of the letter of credit. Kanders & Company is
owned and controlled by the Company's Executive Chairman, Warren B. Kanders.
21
After the closing of the sale of the e-commerce software business, Steven
Jeffery, resigned as the Company's Chief Executive Officer and Chairman of the
Board of Directors. Under Mr. Jeffery's employment agreement, he is entitled to
receive a severance payment equal to one year's salary of $250,000, payable over
one year. In addition, Mr. Jeffery entered into a three-year consulting
agreement with the Company and will receive total consideration of $250,000
payable over the three-year term.
During December 2002, the Company reimbursed legal fees and other expenses
in the amount of $531,343 incurred by Warren B. Kanders, Burtt R. Ehrlich, and
Nicholas Sokolow, all of whom are members of the Company's Board of Directors,
in connection with their successful solicitation of proxies for the May 21, 2002
Annual Meeting of Stockholders. The Company recorded this amount in the fourth
quarter of 2002 as a general and administrative expense in the accompanying
consolidated statement of operations.
On November 1, 2001, the Company engaged E.Com Consulting to perform market
research and provide recommendations concerning the needs and opportunities
associated with the Company's settlement product. E.Com Consulting subcontracted
with e-RM International, Inc. ("e-RMI") to assist with a portion of this
project. e-RMI is a Delaware corporation whose sole shareholder is Chrismark
Enterprises LLC. Chrismark Enterprises LLC is owned by Mark Johnson, a former
director of the Company and his wife. The contract period of the engagement was
November 1, 2001 through January 31, 2002 for which the Company agreed to pay
total professional fees of $50,000 plus out-of-pocket expenses. Of this amount,
$7,805 was paid to e-RMI. The Company expensed a total of $42,164 in connection
with the engagement during 2001 and had a balance due E.Com of $34,359 at
December 31, 2001 that is included in accounts payable and accrued liabilities
in the accompanying consolidated balance sheet. The contract was terminated by
the Company during January 2002. No expense was incurred during 2002 and all
amounts due E.Com were paid in January, 2002. At the May 21, 2002 Annual Meeting
of Stockholders, Mr. Johnson was not re-elected a director of the Company.
On February 7, 2002 Todd Hewlin joined the Company's Board of Directors.
Mr. Hewlin is a managing director of The Chasm Group, LLC, a consultancy
organization focusing on helping technology companies develop and implement
strategies that create and sustain market leadership positions for their core
products while building shareholder value and a sustainable competitive
advantage. During 2001, the Company engaged The Chasm Group to assist the
Company on various strategic and organizational issues. The contract period of
the engagement was November 15, 2001 through February 15, 2002 for which the
company agreed to professional fees of $225,000 plus out-of-pocket expenses. The
Company expensed a total of $145,000 during 2002 that is included in general and
administrative in the accompanying consolidated statement of operations and
expensed $131,000 during 2001. The Company expensed an additional $54,000,
outside the original engagement, during 2002 related to further services
performed by The Chasm Group that is included in general and administrative in
the accompanying consolidated statement of operations. At the May 21, 2002
Annual Meeting of Stockholders, Mr. Hewlin was not elected a director of the
Company.
In the opinion of management, the rates, terms and considerations of the
transactions with the related parties described above approximate those that the
Company would have received in transactions with unaffiliated parties.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51." This
interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The application of this Interpretation is not
expected to have a material effect on the Company's financial statements.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation, Transition and Disclosure, an amendment of FASB Statement No.
123". SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation. In addition,
this Statement amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements. Certain
of the disclosure modifications are required for fiscal years ending after
December 15, 2002 and are included in the notes to the consolidated financial
statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34". This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. Interpretation No. 45 also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002 and are not expected to have a material effect on the Company's
financial statements. The disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
Company does not currently have any guarantees requiring disclosure in the notes
to these consolidated financial statements.
22
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". The provisions of SFAS
146 are effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The Company does not
believe that SFAS 146 will have a material impact on its financial statements.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS 145 rescinds SFAS 4, "Reporting Gains and Losses from Extinguishment of
Debt", SFAS 44, "Accounting for Intangible Assets of Motor Carriers" and SFAS
64, "Extinguishments of Debt Made to Satisfy Sinking Fund Requirements". SFAS
145 amends SFAS 13, "Accounting for Leases", eliminating an inconsistency
between the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications with similar economic effects as
sale-leaseback transactions. This statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under certain conditions. The
provisions related to SFAS 13 are effective for transactions occurring after May
15, 2002. All other provisions of the statement are effective for financial
statements issued on or after May 15, 2002. The adoption of SFAS 145 did not
have a material impact on the Company's financial statements.
In August 2001, the FASB issued SFAS 143 "Accounting for Asset Retirement
Obligations." SFAS 143 addresses financial accounting and reporting obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The provisions of SFAS 143 are effective for the
Company's 2003 fiscal year. The Company does not believe that SFAS 143 will have
a material impact on its financial statements.
QUARTERLY DATA
The following table sets forth selected quarterly data for the years ended
December 31, 2002 and 2001 (in thousands, except per share data). The operating
results are not indicative of results for any future period.
2002
----
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenues........................................ $3,941 $2,544 $1,516 $1,033
Operating loss.................................. (7,139) (21,206) (4,515) (7,196)
Net loss........................................ (6,457) (20,571) (3,989) (6,796)
Net loss per share:.............................
Basic....................................... (0.41) (1.32) (0.26) (0.43)
Diluted..................................... (0.41) (1.32) (0.26) (0.43)
2001
----
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenues........................................ $4,840 $6,195 $3,124 $3,514
Operating loss.................................. (22,021) (19,116) (15,629) (53,065)
Net loss........................................ (22,761) (20,787) (16,897) (59,408)
Net loss per share:.............................
Basic...................................... (1.47) (1.34) (1.09) (3.82)
Diluted.................................... (1.47) (1.34) (1.09) (3.82)
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion concerning the Company's market risk involves
forward-looking statements that are subject to risks and uncertainties. Actual
results could differ materially from those discussed in the forward-looking
statements. The Company is exposed to market risk related to foreign currency
exchange rates, interest rates and investment values. The Company currently does
not use derivative financial instruments to hedge these risks or for trading
purposes.
FOREIGN CURRENCY RISK
Substantially all of the revenue recognized to date by the Company has been
denominated in U.S. dollars, including sales made internationally. As a result,
a strengthening of the U.S. dollar could make the Company's products less
competitive in foreign markets. In addition, the Company has foreign
subsidiaries which subject the Company to risks associated with foreign
23
currency exchange rates and weak economic conditions in these foreign markets.
An increase or decrease in foreign currency exchange rates of 10% would not have
a material effect on the Company's financial position or results of operations.
INTEREST RATE RISK
The Company is exposed to market risk from changes in interest rates
primarily through its investing activities. The primary objective of the
Company's investment activities is to manage interest rate exposure by investing
in short-term, highly liquid investments. As a result of this strategy, the
Company believes that there is very little exposure. The Company's investments
are carried at market value, which approximates cost. An increase or decrease in
interest rates of 10% would not have a material effect on the Company's
financial position or results of operations.
INVESTMENTS
During the second quarter of 2001, the Company made an equity investment of
$2.0 million in a privately held strategic partner. Prior to 2001, the Company
made equity investments of $17.7 million in eleven privately held companies. The
Company's equity interest in these entities ranged from 2.5% to 12.5% and the
Company is accounting for these investments using the cost method of accounting.
The Company has not recognized any material revenue from these companies during
2002 and 2001. During the year ended December 31, 2000 the Company recognized
$16.0 million in total revenue from these companies. During 2001 and 2000 the
Company recorded charges of $15.4 million and $4.1 million, respectively, for
other than temporary losses on these investments. These companies are primarily
early-stage companies and are subject to significant risk due to their limited
operating history and current economic and capital market conditions. The
remaining balance, representing a single investment and valued at $200,000 in
the accompanying December 31, 2001 balance sheet, was sold and cash of $200,000
was received during the first quarter of 2002. The Company continues to retain
an ownership interest in several of these companies although they have been
written down to a zero cost basis in the Company's consolidated balance sheet as
of December 31, 2002.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
CLARUS CORPORATION AND SUBSIDIARIES
Index to Financial Statements
Page
Independent Auditors' Report......................................................................................... 25
Consolidated Balance Sheets--December 31, 2002 and 2001.............................................................. 26
Consolidated Statements of Operations--Years Ended December 31, 2002, 2001 and 2000.................................. 27
Consolidated Statements of Stockholders' Equity and Comprehensive Loss--Years Ended December 31, 2002, 2001
and 2000 ............................................................................................................ 28
Consolidated Statements of Cash Flows--Years Ended December 31, 2002, 2001 and 2000.................................. 29
Notes to Consolidated Financial Statements........................................................................... 31
24
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Clarus Corporation:
We have audited the consolidated balance sheets of Clarus Corporation and
subsidiaries (the "Company") as of December 31, 2002 and 2001, and the related
consolidated statements of operations, stockholders' equity and comprehensive
loss, and cash flows for each of the years in the three-year period ended
December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Clarus
Corporation and subsidiaries as of December 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
As discussed in note 1 to the consolidated financial statements, the
Company (i) sold substantially all of its operating assets on December 6, 2002,
and (ii) changed its method of accounting for goodwill and other intangible
assets in 2002.
/s/ KPMG LLP
Atlanta, Georgia
February 28, 2003
25
CLARUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
(In Thousands, Except Share and Per Share Amounts)
ASSETS
2002 2001
---- ----
CURRENT ASSETS:
Cash and cash equivalents................................................................... $ 42,225 $ 55,628
Marketable securities....................................................................... 52,885 65,264
Accounts receivable, less allowance for doubtful accounts of $586 and $636 in
2002 and 2001, respectively.............................................................. 467 2,329
Deferred marketing costs, current........................................................... -- 391
Prepaids and other current assets........................................................... 1,262 2,467
Assets held for sale........................................................................ 48 396
--------- ---------
Total current assets..................................................................... 96,887 126,475
--------- ---------
PROPERTY AND EQUIPMENT, NET 809 7,198
--------- ---------
OTHER ASSETS:
Deferred marketing costs, net of current portion ........................................... -- 98
Investments................................................................................. -- 200
Goodwill, net of accumulated amortization of $12,932 in 2001 ............................... -- 6,801
Intangible assets, net of accumulated amortization of $1,676 in 2001 -- 4,014
Deposits and other long-term assets ........................................................ 68 488
--------- ---------
Total assets............................................................................. $ 97,764 $ 145,274
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.................................................... $ 1,936 $ 6,370
Deferred revenue............................................................................ 1,248 4,850
Current portion of long-term debt........................................................... 5,000 --
Liabilities to be assumed related to assets held for sale................................... 220 620
--------- ---------
Total current liabilities................................................................ 8,404 11,840
LONG-TERM LIABILITIES:
Deferred revenue............................................................................ -- 1,841
Long-term debt.............................................................................. -- 5,000
Other long-term liabilities................................................................. -- 265
--------- ---------
Total liabilities........................................................................ 8,404 18,946
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value; 5,000,000 shares authorized; none issued................. -- --
Common stock, $.0001 par value; 100,000,000 shares authorized;
15,762,707 and 15,638,712 shares issued and 15,687,707 and 15,563,712 shares
outstanding in 2002 and 2001, respectively............................................. 2 2
Additional paid-in capital.................................................................. 361,715 360,670
Accumulated deficit......................................................................... (272,436) (234,623)
Less treasury stock, 75,000 shares at cost.................................................. (2) (2)
Accumulated other comprehensive income ..................................................... 146 281
Deferred compensation....................................................................... (65) --
--------- ---------
Total stockholders' equity............................................................... 89,360 126,328
--------- ---------
Total liabilities and stockholders' equity............................................... $ 97,764 $145,274
========= =========
See accompanying notes to consolidated financial statements.
26
CLARUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2002, 2001, and 2000
(In Thousands, Except Per Share Amounts)
2002 2001 2000
---- ---- ----
REVENUES:
License fees.................................................................. $ 2,808 $ 7,807 $ 24,686
Services fees................................................................. 6,226 9,866 10,327
--------- --------- ---------
Total revenues............................................................. 9,034 17,673 35,013
COST OF REVENUES:
License fees.................................................................. 26 211 154
Services fees................................................................. 5,498 12,921 12,901
--------- --------- ---------
Total cost of revenues..................................................... 5,524 13,132 13,055
OPERATING EXPENSES:
Research and development, exclusive of noncash expense........................ 7,263 16,220 22,390
Noncash research and development.............................................. -- -- 424
In-process research and development........................................... -- -- 8,300
Sales and marketing, exclusive of noncash expense............................. 7,488 27,294 36,230
Noncash sales and marketing................................................... 450 6,740 7,001
General and administrative, exclusive of noncash expense...................... 12,574 9,381 9,897
Provision for doubtful accounts............................................... (560) 5,537 5,824
Noncash general and administrative............................................ -- 252 1,098
Loss on impairment of goodwill ............................................... 6,801 36,756 --
Loss on impairment of intangible assets....................................... 3,559 -- --
Gain on sale of e-commerce assets to Epicor................................... (514) -- --
Gain on sale of ERP assets to Geac............................................ -- -- (1,347)
(Gain)/loss on disposal of property and equipment............................. 2,262 (20) --
Depreciation and amortization................................................. 4,243 12,212 8,132
Total operating expenses................................................... 43,566 114,372 97,949
--------- --------- ---------
OPERATING LOSS.................................................................... (40,056) (109,831) (75,991)
GAIN ON FOREIGN CURRENCY TRANSACTIONS............................................. 12 107 --
GAIN/(LOSS) ON SALE OF MARKETABLE SECURITIES...................................... 15 (11) (100)
LOSS ON IMPAIRMENT OF MARKETABLE SECURITIES AND INVESTMENTS -- (16,461) (4,128)
AMORTIZATION OF DEBT DISCOUNT..................................................... -- -- (982)
INTEREST INCOME................................................................... 2,441 6,570 10,902
INTEREST EXPENSE.................................................................. (225) (228) (348)
--------- ---------- ---------
NET LOSS.......................................................................... $ (37,813) $ (119,854) $ (70,647)
========= ========== =========
NET LOSS PER SHARE--BASIC AND DILUTED............................................. $ (2.42) $ (7.72) $ (4.90)
========= ========== =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--BASIC AND
DILUTED.................................................................... 15,615 15,530 14,420
========= ========== =========
See accompanying notes to consolidated financial statements
27
CLARUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE LOSS
Years Ended December 31, 2002, 2001, and 2000
(In Thousands)
Treasury Accumulated
Common Stock Additional Stock Other
----------------- Paid-In Accumulated --------------- Comprehensive
Shares Amount Capital Deficit Shares Amount Income (loss)
------- ------- ---------- ------------ ------ ------- -------------
BALANCES, December 31, 1999......... 11,601 $1 $77,008 ($44,122) (75) $(2) $--
Exercise of warrants............. 32 -- -- -- -- -- --
Issuance of warrants in
connection with marketing
and research and development
agreements .................... -- -- 878 -- -- -- --
Exercise of stock options........ 542 1 3,074 -- -- -- --
Issuance of shares under
employee stock purchase plans. 4 -- 34 -- -- -- --
Issuance of stock options with
exercise prices below fair
market value ................. -- -- 5,696 -- -- -- --
Amortization of deferred
compensation.................. -- -- -- -- -- -- --
Cancellation of stock options ... -- -- (4,616) -- -- -- --
Issuance of stock and
stock options in
acquisition of SAI............ 1,148 -- 32,153 -- -- -- --
Issuance of stock in secondary
offering ..................... 2,243 -- 244,427 -- -- -- --
Issuance of stock in connection
connection with marketing
agreements.................... 39 -- 3,761 -- -- -- --
Net loss......................... -- -- -- (70,647) -- -- --
Foreign currency translation
adjustment ................... -- -- -- -- -- -- (19)
Unrealized loss on marketable
securities ................... -- -- -- -- -- -- (553)
Total comprehensive loss.........
------------------------------------------------------------------------------------
BALANCES, December 31, 2000......... 15,609 2 362,415 (114,769) (75) (2) (572)
Amortization of deferred
compensation.................. -- -- -- -- -- -- --
Exercise of stock options ....... 63 -- 198 -- -- -- --
Issuance of shares under
Employee stock purchase
purchase plans................ 55 -- 260 -- -- -- --
Retirement of shares
related to the
SAI acquisition............... (88) -- (2,203) -- -- -- --
Net loss......................... -- -- -- (119,854) -- -- --
Increase in foreign currency
translation adjustment ....... -- -- -- -- -- -- 87
Increase in unrealized gain on
marketable securities......... -- -- -- -- -- -- 766
Total comprehensive loss
------------------------------------------------------------------------------------
BALANCES, December 31,
2001 ............................ 15,639 2 360,670 (234,623) (75) (2) 281
Exercise of stock options ....... 113 -- 400 -- -- -- --
Issuance of shares under
employee stock purchase plans. 19 -- 119 -- -- -- --
Retirement of shares related
to the termination of
marketing agreement .......... (8) -- (39) -- -- -- --
Modification to stock options ... -- -- 500 -- -- -- --
Net loss......................... -- -- -- (37,813) -- -- --
Issuance of stock options with
exercise prices below fair
market value ................. -- -- 65 -- -- -- --
Increase in foreign currency
translation adjustment ....... -- -- -- -- -- -- 10
Decrease in unrealized gain on
marketable securities ........ -- -- -- -- -- -- (145)
Total comprehensive loss ........
- --------------------------------------------------------------------------------------------------------------------------
BALANCES, December 31, 2002 15,763 $2 $361,715 $(272,436) (75) $(2) $146
==========================================================================================================================
Total
Deferred Stockholders' Comprehensive
Compensation Equity Loss
------------ ------------ --------------
BALANCES, December 31, 1999......... $(270) $32,615
Exercise of warrants............. -- --
Issuance of warrants in
connection with marketing
and research and development
agreements .................... -- 878
Exercise of stock options........ -- 3,075
Issuance of shares under
employee stock purchase plans. -- 34
Issuance of stock options with
exercise prices below fair
market value ................. (5,696) --
Amortization of deferred
compensation.................. 1,098 1,098
Cancellation of stock options ... 4,616 --
Issuance of stock and
stock options in
acquisition of SAI............ -- 32,153
Issuance of stock in secondary
offering ..................... -- 244,427
Issuance of stock in connection
connection with marketing
agreements.................... -- 3,761
Net loss......................... -- (70,647) $(70,647)
Foreign currency translation
adjustment ................... -- (19) (19)
Unrealized loss on marketable
securities ................... -- (553) (553)
---------------
Total comprehensive loss......... $(71,219)
---------------------------------------- ===============
BALANCES, December 31, 2000......... (252) 246,822
Amortization of deferred
compensation.................. 252 252
Exercise of stock options ....... -- 198 --
Issuance of shares under
Employee stock purchase
purchase plans................ -- 260 --
Retirement of shares
related to the
SAI acquisition............... -- (2,203) --
Net loss......................... -- (119,854) $(119,854)
Increase in foreign currency
translation adjustment ....... -- 87 87
Increase in unrealized gain on
marketable securities......... -- 766 766
---------------
Total comprehensive loss $(119,001)
---------------------------------------- ===============
BALANCES, December 31,
2001 ............................ -- 126,328
Exercise of stock options ....... -- 400 --
Issuance of shares under
employee stock purchase plans. -- 119 --
Retirement of shares related
to the termination of
marketing agreement .......... -- (39) --
Modification to stock options ... -- 500 --
Net loss......................... -- (37,813) (37,813)
Issuance of stock options with
exercise prices below fair (65) -- --
market value .................
Increase in foreign currency -- 10 10
translation adjustment .......
Decrease in unrealized gain on -- (145) (145)
marketable securities ........
---------------
Total comprehensive loss ........ $(37,948)
- ------------------------------------ ---------------------------------------- ===============
BALANCES, December 31, 2002 $ (65) $89,360
==================================== ========================================
See accompanying notes to consolidated financial statements.
28
CLARUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002, 2001, and 2000
(In Thousands)
2002 2001 2000
---- ---- ----
OPERATING ACTIVITIES:
Net loss.............................................................................$ (37,813) $(119,854) $ (70,647)
Adjustments to reconcile net loss to net cash used in operating activities:..........
Depreciation and amortization of property and equipment............................ 3,788 3,750 2,770
Amortization of intangible assets.................................................. 455 8,462 5,362
Loss on impairment of investments.................................................. -- 15,419 4,128
Loss on impairment of intangible assets............................................ 10,360 36,756 --
Loss on impairment of marketable securities........................................ -- 1,042 --
(Gain)/loss on sale of marketable securities and other............................ (15) (11) 100
Noncash interest expense associated with original issue discount on debt........... -- -- 982
In-process research and development................................................ -- -- 8,300
Provision for doubtful accounts.................................................... (560) 5,537 5,824
Noncash research and development expense........................................... -- -- 424
Noncash sales and marketing expense................................................ 450 6,740 7,001
Noncash general and administrative expense......................................... -- 252 1,098
Noncash charge due to modification of stock options................................ 500 -- --
Exchange of software for cost-method investments................................... -- -- (12,868)
Gain on sale of e-commerce assets to Epicor........................................ (514) -- --
(Gain)/loss on sale of property and equipment...................................... 2,262 (20) (1,347)
Changes in operating assets and liabilities:
Accounts receivable.............................................................. 2,618 23 (4,567)
Prepaids and other current assets................................................ 1,203 259 (855)
Deposits and other long-term assets.............................................. 420 (234) (127)
Accounts payable and accrued liabilities......................................... (4,539) (4,553) 4,934
Deferred revenue................................................................. (5,738) 3,999 (1,407)
Other long-term liabilities...................................................... (265) 18 46
--------- ---------- ---------
Net cash used in operating activities........................................... (27,388) (42,415) (50,849)
--------- ---------- ---------
INVESTING ACTIVITIES:
Purchase of marketable securities.................................................. (123,611) (95,527) (55,648)
Proceeds from the sale and maturity of marketable securities....................... 135,860 80,185 6,000
Purchase of SAI/Redeo companies, net of cash acquired.............................. -- -- (30,645)
Purchase of iSold.................................................................. -- -- (2,453)
Purchase of property and equipment................................................. (182) (3,463) (5,871)
Purchase of investments............................................................ -- (2,000) (3,711)
Proceeds from sale of investment................................................... 200 -- --
Proceeds from sale of assets....................................................... 1,000 -- 1,864
Proceeds from sale of property and equipment....................................... 189 -- --
--------- ----------- ---------
Net cash provided by (used in) investing activities............................ 13,456 (20,805) (90,464)
--------- ----------- ---------
29
CLARUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
Years Ended December 31, 2002, 2001, and 2000
(In Thousands, except share amounts)
2002 2001 2000
---- ---- ----
FINANCING ACTIVITIES:
Proceeds from issuance of common stock related to secondary
offering..................................................................... -- -- 244,427
Proceeds from the exercise of stock options.................................... 400 198 3,075
Proceeds from issuance of common stock related to employee stock
purchase plans............................................................... 119 260 34
Proceeds from long-term debt................................................... -- -- 5,000
Repayments of long term debt and capital lease obligations..................... -- (7,028)
--------- -------- ---------
Net cash provided by financing activities...................................... 519 458 245,508
--------- -------- ---------
Effect of exchange rate change on cash......................................... 10 87 (19)
CHANGE IN CASH AND CASH EQUIVALENTS............................................ (13,403) (62,675) 104,176
CASH AND CASH EQUIVALENTS, beginning of year................................... 55,628 118,303 14,127
--------- -------- ---------
CASH AND CASH EQUIVALENTS, end of year......................................... $ 42,225 $ 55,628 $118,303
========= ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest......................................................... $ 225 $ 228 $ 348
========= ======== ========
NONCASH TRANSACTIONS:
Retirement of 7,500 shares related to the termination of a sales and
marketing agreement.......................................................... $ 39 $ -- $ --
Issuance of warrants to purchase 25,000 shares of common stock in
connection with marketing agreements......................................... $ -- $ -- $ 454
Issuance of warrants to purchase 33,334 shares of common stock in
connection with research & development arrangement........................... $ -- $ -- $ 424
Issuance of 39,118 shares of common stock in connection with marketing
agreements................................................................... $ -- $ -- $ 3,761
Issuance of 1,148,000 shares of common stock and 163,200 common
stock options in connection with SAI acquisition............................. $ -- $ -- $ 32,153
Retirement of 82,500 shares related to SAI acquisition......................... $ -- $ (2,181) $ --
Receipt of marketable securities in satisfaction of trade accounts
receivable................................................................... $ -- $ -- $ 1,214
See accompanying notes to consolidated financial statements.
30
CLARUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Clarus Corporation, a Delaware corporation, and its subsidiaries, (the
"Company") prior to the sale of substantially all of its operating assets in
December 2002, developed, marketed, and supported Internet-based
business-to-business electronic commerce solutions that automated the
procurement and management of operating resources.
During 2002, the Company adopted a strategic plan to sell or abandon all
active software operations and redeploy company capital to enhance stockholder
value. On December 6, 2002, the Company sold the majority of its software
operations (comprised of the eProcurement, Sourcing and Settlement product
lines) to Epicor Software Corporation for $1.0 million in cash. Separately, on
January 1, 2003, the Company sold the assets related to the Cashbook product,
which were excluded from the Epicor transaction, to an employee group
headquartered in Limerick, Ireland. Therefore, as of December 31, 2002, the
Company has discontinued or abandoned substantially all software operations.
All of the revenues, cost of revenues and a substantial amount of the
operating expenses in the accompanying consolidated statements of operations,
relate to the divested products discussed above as well as other discontinued
products. The Company is not expected to recognize any significant amounts of
revenue, costs of revenue or incur operating expenses related to the Company's
software operations in the future.
Management now consists of four senior executive officers and a support
staff of one, all of whom are located in Greenwich, Connecticut. Management is
now engaged in analyzing and evaluating potential acquisition and merger
candidates as part of its strategy to redeploy its cash and cash equivalent
assets to enhance stockholder value.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany transactions and balances
have been eliminated. The Company's subsidiaries include Clarus International,
Inc., Clarus eMEA Ltd., Clarus CSA, Inc., SAI (Ireland) Limited, SAI Recruitment
Limited, i2Mobile.com Limited and SAI America Limited.
USE OF ESTIMATES
The preparation of these financial statements require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements. Estimates also affect the reported amounts of revenues and
expenses during the reporting periods. The Company continually evaluates its
estimates and assumptions including those related to revenue recognition,
allowance for doubtful accounts, impairment of long-lived assets, impairment of
investments, and contingencies and litigation. The Company bases its estimates
on historical experience and other assumptions that are believed to be
reasonable under the circumstances. Actual results could differ from these
estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
had approximately $42.2 million and $55.6 million in cash and cash equivalents
included in the accompanying consolidated balance sheets for the years ended
December 31, 2002 and 2001, respectively.
MARKETABLE SECURITIES
Marketable securities at December 31, 2002 and 2001 consist of government
notes and bonds, commercial paper, corporate debt and equity securities. The
Company accounts for its marketable securities under the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Pursuant to the provisions of SFAS
No. 115, the Company has classified its marketable securities as
available-for-sale. Available-for-sale securities have been recorded at fair
value and related unrealized gains and losses have been excluded from earnings
and are reported as a separate component of accumulated other comprehensive
income (loss) until realized.
CREDIT AND CUSTOMER CONCENTRATIONS
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. As of December 31, 2002, four
customers accounted for more than 10% each, totaling $814,000 or 77.3% of the
gross accounts receivable balance on that date. The percentage of total accounts
receivable due from these four customers was 42.3%, 12.4%, 11.5% and 11.1%,
respectively, at December 31, 2002. As of December 31, 2001, four customers
accounted for more than 10% each, totaling $1.7 million or 58.1% of the gross
accounts receivable balance on that date. The percentage of total accounts
receivable due from these four customers was 17.2%, 15.2%, 13.8% and 11.9%,
respectively, at December 31, 2001.
During the year ended December 31, 2002, one customer accounted for more
than 10%, totaling $2.7 million, or 29.9% of total revenue. During the year
ended December 31, 2001, three customers accounted for more than 10% each,
totaling $6.2 million, or 35.3% of total revenue. The percentage of total
revenue recognized from these three customers was 12.2%, 11.9% and
31
11.2%, respectively. During the year ended December 31, 2000, one customer
accounted for more than 10%, totaling $4.0 million, or 11.6% of total revenue.
A significant customer terminated its software license and service
agreements with the Company effective August 31, 2002. The Company refunded $2.5
million to this customer, during the fourth quarter of 2002, for prepaid
software license and support fees less costs incurred by the Company associated
with terminating the contract. During the year ended December 31, 2002 revenues
recognized from the Company's agreements with this customer represented 29.9% of
the Company's total revenues.
During 2002, 45.2% of the Company's revenue was derived from international
markets, and 29.9% was derived from one customer in the United Kingdom. During
2001, 32.2% of the Company's revenue was derived from international markets, and
12.2% was derived from one customer in Italy. During 2000, 18.6% of the
Company's revenue was derived from international markets, none of which exceeded
10% in any one country.
PROPERTY AND EQUIPMENT
Property and equipment consists of furniture and fixtures, computers and
other equipment, purchased software and leasehold improvements. These assets are
depreciated on a straight-line basis over periods ranging from one to seven
years. Leasehold improvements are amortized over the shorter of the useful life
or the term of the lease. During 2002, the Company abandoned certain assets
located at its principal facilities in Suwanee, GA and its offices in
Maidenhead, England and Limerick, Ireland. These fixed asset amounts and the
related accumulated depreciation were written off, resulting in an impairment
charge of $2.1 million that is included in the loss on disposal of property and
equipment in the accompanying statement of operations for the year ended
December 31, 2002.
Property and equipment are summarized as follows (in thousands):
December 31, Useful Life
----------------- -----------
2002 2001 (in years)
------ ------ -----------
Computers and equipment.......................................... $ 1,364 $ 6,590 1 - 5
Purchased software............................................... 1,005 4,730 1 - 5
Furniture and fixtures........................................... 35 1,249 1 - 7
Leasehold improvements........................................... - 1,330 2 - 7
------- -------
2,404 13,899
Less accumulated depreciation and amortization................... (1,595) (6,701)
------- -------
Property and equipment, net.................................. $ 809 $ 7,198
======= =======
Depreciation and amortization expense related to property and equipment
totaled $3.8 million, $3.8 million, and $2.8 million for the years ended
December 31, 2002, 2001 and 2000, respectively.
The Company has included purchased software in property and equipment,
which represents the cost of purchased integration software tools. It also
includes the cost of licenses to use, embed and sell software tools developed by
others. These costs are being amortized ratably based on the projected revenue
associated with these purchased or licensed tools and products or the
straight-line method over two years, whichever method results in a higher level
of annual amortization. Amortization expense related to purchased software
amounted to approximately $2.2 million, $1.3 million, and $766,000 in 2002,
2001, and 2000, respectively. Accumulated amortization related to purchased
software totaled approximately $698,000 and $2.1 million at December 31, 2002
and 2001, respectively.
INVESTMENTS
Prior to 2002, the Company invested $19.7 million in twelve privately held
companies, primarily early stage companies with a limited operating history. The
Company's equity interest in these entities ranged from 2.5% to 12.5% and the
Company is accounting for these investments using the cost method of accounting.
The Company did not recognize any material revenue from sales to these companies
during 2002 and 2001 and recognized $16.0 million in total revenue from these
companies during the year ended December 31, 2000.
During 2001 and 2000, the Company recorded impairment charges of $15.4
million and $4.1 million, respectively, for other than temporary losses on these
investments. The remaining balance, representing a single investment valued at
$200,000 in the accompanying December 31, 2001 balance sheet, was sold and cash
of $200,000 was received during the first quarter of 2002. The Company continues
to retain an ownership interest in several of these companies although they are
carried at a zero cost basis in the accompanying consolidated balance sheet as
of December 31, 2002.
32
GOODWILL AND OTHER INTANGIBLE ASSETS
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually. SFAS 142 also requires that intangible assets with
estimable useful lives be amortized over their respective estimated useful lives
to their estimated residual values and reviewed for impairment in accordance
with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets."
The Company adopted SFAS 142 effective January 1, 2002. Upon adoption,
the Company tested goodwill for impairment at January 1, 2002 according to the
provisions of SFAS 142, which resulted in no impairment required as a cumulative
effect of accounting change. As a result a change in the Company's strategic
direction during the second quarter of 2002, the Company tested goodwill and
intangible assets with definite lives for impairment according to the provisions
of SFAS 142 and SFAS 144, respectively which resulted in an impairment of $6.8
million of goodwill and $3.5 million of intangible assets with definite lives.
No balances for goodwill or intangible assets remained as of December 31, 2002.
Prior to the adoption of SFAS 142, the Company recorded $7.6 million and
$4.7 million of amortization expense related to goodwill during the years ended
December 31, 2001 and 2000, respectively. As a result of adopting SFAS 142, the
Company did not recognize any goodwill amortization during the year ended
December 31, 2002.
The following table reconciles previously reported net income as if the
provisions of SFAS 142 were in effect in 2001 and 2000:
2002 2001 2000
---- ---- ----
Reported net loss..................... $ (37,813) $ (119,854) $ (70,647)
Add back goodwill amortization........ -- 7,600 4,700
---------- ---------- ---------
Adjusted net loss..................... $ (37,813) $ (112,254) $ (65,947)
========== ========== =========
As part of the acquisition of the SAI/Redeo companies, two former
executives of the SAI/Redeo companies signed employment agreements. As a result
of the voluntary terminations of the agreements, the executives were required to
return to the Company for cancellation a total of 82,500 shares of common stock
issued in connection with the agreements. During 2001, the Company recorded the
fair value of these shares as of the acquisition date, approximately $2.2
million, as a reduction to the intangible assets associated with the SAI/Redeo
acquisition. Also during 2001, based on a revision to the Company's future cash
flow estimates, the Company recognized an impairment charge of $36.8 million
related to goodwill associated with the acquisition of the SAI/Redeo companies.
Prior to their impairment, intangible assets were being amortized on a
straight-line basis over periods ranging from three to ten years. Amortization
expense related to these intangible assets amounted to $455,000, $8.5 million,
and $5.4 million in 2002, 2001, and 2000, respectively.
Intangible assets as of December 31, 2002 and 2001 are summarized as follows (in
thousands):
Useful
Life
2002 2001 (in years)
---- ---- ----------
GOODWILL
Goodwill-ELEKOM.................................................. $ - $6,987 10
Goodwill-SAI/Rodeo............................................... - 10,798 8
Goodwill-iSold.com............................................... - 1,948 4
----- --------
Total goodwill................................................... - 19,733
Less accumulated amortization of goodwill........................ - (12,932)
----- --------
Goodwill, net $ - $6,801
------ --------
INTANGIBLE ASSETS
Acquired technologies - SAI/Rodeo................................ - 4,100 8
Acquired technologies - iSold.com................................ - 506 3
Assembled workforce.............................................. - 450 7
Customer base.................................................... - 100 4
Other............................................................ - 534 3
------ --------
Total intangible assets ........................................ - 5,690
Less accumulated amortization of intangible assets............... - (1,676)
------ --------
Intangible assets, net....................................... $ - $4,014
====== ========
33
LONG-LIVED ASSETS
On January 1, 2002 the Company adopted the provisions of SFAS 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144
provides a single accounting model for the impairment or disposal of long-lived
assets. SFAS No. 144 also changes the criteria for classifying an asset as held
for sale; and broadens the scope of businesses to be disposed of that qualify
for reporting as discontinued operations and changes the timing of recognizing
losses on such operations. The adoption of SFAS No. 144 did not have a
significant impact on the Company's consolidated financial statements.
In accordance with SFAS No. 144, long-lived assets, such as property, plant,
and equipment, and purchased intangibles subject to amortization, are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to estimated undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed
of are separately presented in the balance sheet and reported at the lower of
the carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposed group classified as held
for sale are presented separately in the appropriate asset and liability
sections of the balance sheet.
Prior to the adoption of SFAS No. 144, the Company accounted for long-lived
assets in accordance with SFAS No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of".
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities include the following as of
December 31, 2002 and 2001 (in thousands):
2002 2001
---- ----
Accounts payable................................. $ 412 $ 532
Accrued compensation, benefits, and commissions.. 31 1,314
Restructuring accruals........................... 1,064 1,889
Other............................................ 429 2,635
------ ------
$1,936 $6,370
====== ======
PRODUCT RETURNS AND WARRANTIES
The Company provided warranties for its products after the software is
purchased for an agreed-upon period. The Company generally supports only current
releases and the immediately prior releases of its products. The Company's
license agreements did not permit product returns by its customers. The Company
has not experienced significant warranty claims to date. Accordingly, the
Company has not provided a reserve for warranty costs at December 31, 2002,
2001, and 2000.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company uses financial instruments in the normal course of its
business. The carrying values of cash and cash equivalents, marketable
securities, accounts receivable, accounts payable and long-term debt approximate
fair value. The fair value of the Company's investments in privately held
companies is not readily available. The Company believes the fair values of
these investments approximated their respective carrying values at December 31,
2002 and 2001.
REVENUE
The Company historically recognized revenue from two primary sources,
software licenses and services. Revenue from software licensing and services
fees is recognized in accordance with Statement of Position ("SOP") 97-2,
"Software Revenue Recognition", and SOP 98-9, "Software Revenue Recognition with
Respect to Certain Transactions" and related interpretations. The Company
recognizes software license revenue when: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred; (3) the fee is fixed or
determinable; and (4) collectibility is probable.
SOP No. 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair values of the elements. The fair value of an element must be based
on evidence that is specific to the vendor. License fee revenue allocated to
software products generally is recognized upon delivery of the products or
deferred and recognized in future periods to the extent that an arrangement
includes one or more elements to be delivered at a future date and for which
fair values have not been established. Revenue allocated to maintenance is
recognized ratably over the maintenance term, which is typically 12 months and
revenue allocated to training and other service elements is recognized as the
services are performed.
34
Under SOP No. 98-9, if evidence of fair value does not exist for all
elements of a license agreement and post-contract customer support is the only
undelivered element, then all revenue for the license arrangement is recognized
ratably over the term of the agreement as license revenue. If evidence of fair
value of all undelivered elements exists but evidence does not exist for one or
more delivered elements, then revenue is recognized using the residual method.
Under the residual method, the fair value of the undelivered elements is
deferred and the remaining portion of the arrangement fee is recognized as
revenue. The Company uses the residual method since it does not have fair value
of license fees. Revenue from hosted software agreements are recognized ratably
over the term of the hosting arrangements. Revenue from sales to resellers is
recognized on a sell-through basis.
Amounts that have been received in cash or billed but that do not yet
qualify for revenue recognition are reflected as deferred revenues. Deferred
revenues at December 31, 2002 and 2001, were as follows (in thousands):
2002 2001
---- ----
Deferred revenues:
Deferred license fees......................... $ 1,106 $ 4,903
Deferred services and training fees........... - 281
Deferred maintenance fees..................... 142 1,507
------- -------
Total deferred revenues....................... 1,248 6,691
Less current portion.......................... 1,248 4,850
------- -------
Noncurrent deferred revenues.................. $ - $ 1,841
======= =======
Deferred license fees include amounts collected under subscription,
reseller arrangements, milestone based and other ratable contracts for which
revenue has not been recognized. Deferred services, training fees and
maintenance fees consist of prepaid fees for the performance of these services
in the future.
In November 2001, the Emerging Issues Task Force ("EITF") issued EITF
01-14, "Income Statement Characterization of Reimbursements Received for
`Out-of-Pocket' Expenses Incurred", stating that reimbursements received for
out-of-pocket expenses should be characterized as revenue. The Company adopted
this consensus effective January 1, 2002. Historically the Company has not
reflected such reimbursements as revenue in its consolidated statements of
operations. Upon adoption of this consensus, comparative financial statements
for prior periods were reclassified to provide consistent presentation. The
adoption of this consensus did not have any impact on the Company's financial
position or results of operations, however, the Company's services fees revenue
and cost of services fees revenue increased by an equal amount as a result of
the gross-up of revenues and expenses for reimbursable expenses. For the fiscal
year ended December 31, 2002 the Company recorded services fees revenue and cost
of services fees revenue from out-of-pocket expenses of approximately $206,000.
For the fiscal years ended December 31, 2001 and 2000, the Company's services
fees revenue and cost of services fees revenue increased by approximately
$668,000 and $966,000 respectively, as a result of the reclassification of these
reimbursements.
NONMONETARY TRANSACTIONS
The Company accounts for nonmonetary transactions based on the fair value
of the elements to the arrangement. Prior to 2001, the Company made equity
investments of $17.7 million in eleven privately held companies. The Company's
equity interest in these entities ranged from 2.5% to 12.5% and the Company is
accounting for these investments using the cost method of accounting. During
2000 the Company recognized $16.0 million in total revenue from software sales
to these privately held companies.
Accordingly, the Company recorded the fair value of the license revenue
based on evidence of past sales that are specific to the Company and recorded
the fair value of the investment in customers based on similar prices paid in
cash by outside financial investors or valuations performed by third parties.
As discussed in note 11, during 2000 and 1999, the Company issued shares of
common stock and warrants to purchase the Company's common stock in exchange for
sales and marketing and software development services. The Company recorded the
noncash sales and marketing and research and development costs based upon the
terms of the agreements using the fair value of the common stock or warrants
issued.
RESEARCH AND DEVELOPMENT
Research and development expenses are charged to expense as incurred.
Computer software development costs are charged to research and development
expense until technological feasibility is established, after which remaining
software production costs are capitalized in accordance with SFAS No. 86,
"Accounting for Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed". The Company has defined technological feasibility as the point in
time at which the Company has a working model of the related product.
Historically, the development 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. Therefore,
the
35
Company has charged all software development costs to research and development
expense for the three years ended December 31, 2002.
ADVERTISING EXPENSES
Advertising costs are expensed as incurred and totaled $5,000, $319,000,
and $4.4 million for the years ended December 31, 2002, 2001, and 2000,
respectively.
STOCK-BASED COMPENSATION PLAN
The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. As such,
compensation expense is measured on the date of grant only if the current market
price of the underlying stock exceeds the exercise price. Such compensation
expense is recorded on a straight-line basis over the related vesting period.
SFAS 123, "Accounting for Stock-Based Compensation", permits entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS 123 allows entities to continue
to apply the provisions of APB Opinion No. 25 and provide pro forma net income
(loss) and pro forma net income (loss) per share disclosures for employee stock
option grants as if the fair-value-based method defined in SFAS 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosures required by SFAS 123.
Had compensation cost been determined consistent with the provisions of
SFAS No. 123, the Company's pro forma net loss and net loss per share in
accordance with SFAS No. 123 for each of the years in the three-year period
ended December 31, 2002, would have been as follows (in thousands, except per
share amounts):
2002 2001 2000
---- ---- ----
Net loss, as reported................................................. $(37,813) $(119,854) $(70,647)
Add stock-based employee compensation expense included in reported
net loss, net of tax................................................ 500 252 1,098
Deduct total stock-based employee compensation expense determined
under fair-value based method for all awards, net of tax............
(1,913) (4,211) (8,673)
-------- --------- --------
Pro forma net loss $(39,226) $(123,813) $(78,222)
========= ========== ========
Basic and diluted net loss per share:
As reported........................................................... $ (2.42) $ (7.72) $ (4.90)
Add stock-based employee compensation expense included in reported
net loss, net of tax................................................ $ 0.03 $ 0.02 $ 0.08
Deduct total stock-based employee compensation expense determined
under fair-value based method for all awards, net of tax............
$ (0.12) $ (0.27) $ (0.60)
-------- --------- --------
Pro forma basic and diluted net loss per share...................... $ (2.51) $ (7.97) $ (5.42)
======== ========= ========
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.
NET LOSS PER SHARE
Basic and diluted net loss per share was computed in accordance with SFAS
No. 128, "Earnings Per Share," using the weighted average number of common
shares outstanding. The diluted net loss per share for the years ended December
31, 2002, 2001 and 2000 does not include the effect of potentially dilutive
common stock equivalents, calculated using the treasury stock method, as their
impact would be antidilutive. The potentially dilutive effects of excluded
common stock equivalents are as follows (in thousands):
36
2002 2001 2000
---- ---- ----
Effect of shares issuable under stock options 107 194 1,116
Effect of shares issuable pursuant to warrants to
purchase common stock - - 167
--- --- -----
Total effect of potentially dilutive common stock equivalents 107 194 1,283
=== === =====
COMPREHENSIVE INCOME (LOSS)
The Company utilizes SFAS No. 130, "Reporting Comprehensive Income". SFAS
No. 130 establishes standards for reporting and presentation of comprehensive
income (loss) and its components in a full set of financial statements.
Comprehensive income (loss) primarily consists of net income (loss), foreign
currency translation adjustments, and unrealized gains and losses from
available-for-sale marketable securities and is presented in the consolidated
statements of stockholders' equity as comprehensive income (loss).
SEGMENT AND GEOGRAPHIC INFORMATION
In accordance with the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", the Company has determined
that during 2002, 2001 and 2000 the Company operated in one principal business
segment, e-commerce software solutions, across domestic and international
markets.
Geographic revenue and the carrying value of property and equipment as of
and for the years ended December 31, 2002, 2001 and 2000 were as follows:
(in thousands) 2002 2001 2000
---- ---- ----
Revenue:
United States $4,954 $11,980 $28,495
England 2,702 571 -
Italy 319 2,503 -
Other international 1,059 2,619 6,518
------ ------- -------
Total 9,034 $17,673 $35,013
====== ======= =======
Property and equipment:
United States $809 $6,661 $7,098
International - 537 236
---- ------ ------
Total $809 $7,198 $7,334
==== ====== ======
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51." This
interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The application of this Interpretation is not
expected to have a material effect on the Company's financial statements.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation, Transition and Disclosure, an amendment of FASB Statement No.
123". SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation. In addition,
this Statement amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements. Certain
of the disclosure modifications are required for fiscal years ending after
December 15, 2002 and are included in the notes to these consolidated financial
statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34". This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. Interpretation No. 45 also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002 and are not expected to have a material effect on the Company's
financial statements. The disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
Company does not currently have any guarantees requiring disclosure in the notes
to these consolidated financial statements.
37
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". The provisions of SFAS
146 are effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The Company does not
believe that SFAS 146 will have a material impact on its financial statements.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS 145 rescinds SFAS 4, "Reporting Gains and Losses from Extinguishment of
Debt", SFAS 44, "Accounting for Intangible Assets of Motor Carriers" and SFAS
64, "Extinguishments of Debt Made to Satisfy Sinking Fund Requirements". SFAS
145 amends SFAS 13, "Accounting for Leases", eliminating an inconsistency
between the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications with similar economic effects as
sale-leaseback transactions. This statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under certain conditions. The
provisions related to SFAS 13 are effective for transactions occurring after May
15, 2002. All other provisions of the statement are effective for financial
statements issued on or after May 15, 2002. The adoption of SFAS 145 did not
have a material impact on the Company's financial statements.
In August 2001, the FASB issued SFAS 143 "Accounting for Asset Retirement
Obligations". SFAS 143 addresses financial accounting and reporting obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The provisions of SFAS 143 are effective for the
Company's 2003 fiscal year. The Company does not believe that SFAS 143 will have
a material impact on its financial statements.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
2. MARKETABLE SECURITIES
As of December 31, 2002, and 2001, those investments with an original
maturity of three months or less are classified as cash equivalents and those
investments with original maturities beyond three months are classified as
marketable securities. Pursuant to the provisions of SFAS No. 115, the Company
has classified all of its marketable securities as available-for-sale.
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses and fair value of these available-for-sale marketable securities
by major security type and class of security at December 31, 2002 were as
follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Holding Gains Holding Losses Value
------ ------------- -------------- -----
Commercial paper.................................. $ 16,595 $-- $ -- $ 16,595
Corporate notes and bonds......................... 15,115 22 (2) 15,135
Government notes and bonds........................ 19,106 48 -- 19,154
Certificates of deposit........................... 2,001 -- -- 2,001
------- ---- -- --------
Total...................................... $52,817 $70 $(2) $ 52,885
======= === ==== ========
The maturities of all securities are less than one year from December 31,
2002.
The Company had $15,000 of realized gains and no realized losses from sales
of marketable securities included in the accompanying consolidated statements of
operations for the year ended December 31, 2002. The Company received
approximately $15.0 million in proceeds from these sales.
38
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses and fair value of these available-for- sale marketable securities
by major security type and class of security at December 31, 2001 were as
follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Holding Gains Holding Losses Value
---- ------------- -------------- -----
Commercial paper............................... $ 9,915 $ 21 $-- $ 9,936
Corporate notes and bonds...................... 26,401 105 (13) 26,493
Government notes and bonds..................... 24,758 72 (6) 24,824
Equity securities.............................. 3,999 12 -- 4,011
------- ---- ----- -------
Total................................... $65,073 $210 $(19) $65,264
======= ==== ===== =======
The maturities of all securities except for equity securities are less than one
year from December 31, 2001.
The Company had no realized gains and had approximately $11,000 in realized
losses from sales of marketable securities included in the accompanying
consolidated statements of operations for the year ended December 31, 2001. The
Company received approximately $2.9 million in proceeds from these sales.
The Company had no realized gains and had approximately $100,000 in
realized losses from sales of marketable securities included in the accompanying
consolidated statements of operations for the year ended December 31, 2000. The
Company received approximately $2.9 million in proceeds from these sales.
3. ACQUISITIONS AND DISPOSITIONS
SALE OF OPERATING ASSETS
On December 6, 2002, the Company sold its e-commerce software business
to Epicor Software Corporation for $1.0 million. Approximately $200,000 of the
purchase price was placed in escrow and is included in prepaids and other
current assets in the accompanying consolidated balance sheet at December 31,
2002. The Company recorded a gain in 2002 on the sale of the business of
approximately $514,000. License revenue from e-commerce software business for
the year ended December 31, 2002 was approximately $2.8 million. Services
revenue from e-commerce software business for the year ended December 31, 2002
was approximately $5.4 million.
On January 1, 2003, the Company sold its Cashbook product to an employee
group in Limerick, Ireland. Assets held for sale and liabilities to be assumed
related to the sale of the Cashbook product as of December 31, 2002 and 2002
were as follows (in thousands):
DECEMBER 31, DECEMBER 31,
ASSETS HELD FOR SALE 2002 2001
-------------------- ---- ----
Accounts receivable, net $ 41 $ 237
Prepaids and other current assets 7 5
Property and equipment, net - 154
---- -----
Total assets held for sale $ 48 $ 396
==== =====
LIABILITIES TO BE ASSUMED
-------------------------
Deferred revenue $ 220 $ 620
----- -----
Total liabilities to be assumed $ 220 $ 620
==== =====
The Company recognized a gain of approximately $108,000 related to the
sale of Cashbook during the first quarter of 2003.
SALE OF FINANCIAL AND HUMAN RESOURCES SOFTWARE BUSINESS
On October 18, 1999, the Company sold its financial and human resources
software business to Geac Computer Systems, Inc. and Geac Canada Limited for a
total of approximately $13.9 million. Approximately $2.9 million of the purchase
price was
39
placed in escrow and subsequently settled during 2000. The Company recorded a
gain in 1999 on the sale of the business of approximately $9.4 million and an
additional gain of $1.3 million in 2000 upon settlement of the escrow and
release of indemnifications.
ACQUISITION OF ISOLD.COM
On April 28, 2000, the Company acquired all of the capital stock of
iSold.com, Inc., a Delaware corporation ("iSold"). iSold has developed a
software program that provides auctioning capabilities to its clients. The
purchase consideration was approximately $2.5 million in cash of which $1.6
million was paid at the date of acquisition and $900,000 was accrued at the date
of acquisition and paid in April 2001. The acquisition was treated as a purchase
for accounting purposes with approximately $500,000 of the purchase
consideration allocated to developed technologies and approximately $2.0 million
to goodwill. The developed technologies were being amortized over 3 years and
the goodwill was being amortized over 4 years. As a result of impairment charges
recorded during 2002, no balance for goodwill or developed technologies remained
as of December 31, 2002.
ACQUISITION OF THE SAI/REDEO COMPANIES
On May 31, 2000, the Company acquired all of the outstanding capital stock
of SAI (Ireland) Limited, SAI Recruitment Limited, i2Mobile.com Limited and SAI
America Limited (the "SAI/Redeo Companies"). The SAI/Redeo Companies specialize
in electronic payment settlement. The purchase consideration was approximately
$63.2 million, consisting of approximately $30.0 million in cash (exclusive of
$350,000 of cash acquired), 1,148,000 shares of the Company's common stock with
a fair value of $30.4 million, assumed options to acquire 163,200 shares of the
Company's common stock with an exercise price of $23.50 (estimated fair value of
$1.8 million using the Black-Scholes option pricing model with the following
assumptions: no expected dividend yield, volatility of 70%, risk-free interest
rate of 6.5%, and an expected life of 2 years) and acquisition costs of
approximately $995,000. The acquisition was treated as a purchase for accounting
purposes, and accordingly, the assets and liabilities were recorded based on
their fair value at the date of acquisition, with approximately $49.8 million of
the purchase consideration allocated to goodwill and approximately $4.7 million
allocated to developed technologies and other intangible assets. The Company
evaluated the developed technologies and in-process research and development to
determine their stage of development, their expected income generating ability,
as well as risk factors associated with achieving technological feasibility. The
Company expensed approximately $8.3 million as in-process research and
development in the second quarter of 2000. As a result of impairment charges
recorded during 2002 and 2001, no balance for goodwill or developed technologies
and other intangible assets remained as of December 31, 2002.
4. RELATED-PARTY TRANSACTIONS
In 2003, we entered into an oral agreement with Kanders & Company pursuant
to which we sublease approximately 1,989 square feet in Greenwich, Connecticut
for $9,572 a month (subject to increases every three years). The agreement
provides for a one-year term and Clarus has the option to renew for up to nine
additional one-year terms. Under the terms of the agreement, we are required to
pay approximately $325,000 in build-out construction costs, fixtures, equipment
and furnishings related to preparation of the space. In the event Clarus was to
undergo a change in control, our remaining rent through the tenth anniversary of
the commencement of the agreement would immediately accelerate and the present
value such rent would be placed in escrow for the benefit of Kanders & Company.
In January 2003, the Company obtained a standby letter of credit in the amount
of $118,345 to secure lease obligations for the Greenwich, Connecticut facility
that is being constructed. Kanders & Company reimburses Clarus a pro rata
portion of the $3,000 annual cost of the letter of credit. Kanders & Company is
owned and controlled by the Company's Executive Chairman, Warren B. Kanders.
After the closing of the sale of the e-commerce software business, Steven
Jeffery, resigned as the Company's Chief Executive Officer and Chairman of the
Board of Directors. Under Mr. Jeffery's employment agreement, he is entitled to
receive a severance payment equal to one year's salary of $250,000, payable over
one year. In addition, Mr. Jeffery continued to be a member of our Board of
Directors and entered into a three-year consulting agreement with the Company
and will receive total consideration of $250,000 payable over the three-year
term. The $250,000 was recorded as severance expense during 2002 and is included
in accounts payable and accrued liabilities caption in the accompanying balance
sheet as of December 31, 2002.
During December 2002, the Company reimbursed legal fees and other expenses
in the amount of $531,343 incurred by Warren B. Kanders, Burtt R. Ehrlich, and
Nicholas Sokolow, all of whom are members of the Company's Board of Directors,
in connection with their successful solicitation of proxies for the May 21, 2002
Annual Meeting of Stockholders. The Company recorded this amount in the fourth
quarter of 2002 as a general and administrative expense in the accompanying
consolidated statement of operations.
On November 1, 2001, the Company engaged E.Com Consulting to perform market
research and provide recommendations concerning the needs and opportunities
associated with the Company's settlement product. E.Com Consulting subcontracted
with e-RM International, Inc. ("e-RMI") to assist with a portion of this
project. e-RMI is a Delaware corporation whose sole shareholder is Chrismark
Enterprises LLC. Chrismark Enterprises LLC is owned by Mark Johnson, a former
director of the Company and his wife. The contract period of the engagement was
November 1, 2001 through January 31, 2002 for which the Company agreed to pay
total professional fees of $50,000 plus out-of-pocket expenses. Of this amount,
$7,805 was paid to e-RMI. The Company expensed a total of $42,164 in connection
with the engagement during 2001 and had a balance due E.Com of $34,359 at
December 31, 2001 that is included in accounts payable and accrued liabilities
in the accompanying consolidated
40
balance sheet. The contract was terminated by the Company during January 2002.
No expense was incurred during 2002 and all amounts due E.Com were paid in
January, 2002. At the May 21, 2002 Annual Meeting of Stockholders, Mr. Johnson
was not re-elected a director of the Company.
On February 7, 2002 Todd Hewlin joined the Company's Board of Directors.
Mr. Hewlin is a managing director of The Chasm Group, LLC, a consultancy
organization focusing on helping technology companies develop and implement
strategies that create and sustain market leadership positions for their core
products while building shareholder value and a sustainable competitive
advantage. During 2001, the Company engaged The Chasm Group to assist the
Company on various strategic and organizational issues. The contract period of
the engagement was November 15, 2001 through February 15, 2002 for which the
company agreed to professional fees of $225,000 plus out-of-pocket expenses. The
Company expensed a total of $145,000 during 2002 that is included in general and
administrative in the accompanying consolidated statement of operations and
expensed $131,000 during 2001. The Company expensed an additional $54,000,
outside the original engagement, during 2002 related to further services
performed by The Chasm Group that is included in general and administrative in
the accompanying consolidated statement of operations. At the May 21, 2002
Annual Meeting of Stockholders, Mr. Hewlin was not elected a director of the
Company.
In the opinion of management, the rates, terms and considerations of the
transactions with the related parties described above approximate those that the
Company would have received in transactions with unaffiliated parties.
5. RESTRUCTURING AND RELATED COSTS
During 2002 and 2001, the Company's management approved restructuring plans
to reorganize and reduce operating costs. Restructuring and related charges of
$4.2 million were expensed in 2001 to better align the Company's cost structure
with projected revenue. The charges were comprised of $3.0 million for employee
separation and related costs for 181 employees and $1.2 million for facility
closure and consolidation costs.
During the first quarter of 2002, the Company determined that amounts
previously charged during 2001 of approximately $202,000 that related to
employee separation and related charges were no longer required and this amount
was credited to sales and marketing expense in the accompanying condensed
consolidated statement of operations during 2002.
Additional restructuring and related charges of $8.6 million were
expensed during 2002. The charges for 2002 were comprised of $4.6 million for
employee separation and related costs for 183 employees and $4.0 million for
facility closures and consolidation costs.
The facility closures and consolidation costs for 2001 and 2002 relate to
the abandonment of the Company's leased facilities in Suwanee, Georgia;
Limerick, Ireland; Maidenhead, England; and near Toronto, Canada. Total facility
closures and consolidation costs include remaining lease liabilities,
construction costs and brokerage fees to sublet the abandoned space offset by
estimated sublease income. The estimated costs of abandoning these leased
facilities, including estimated costs to sublease, were based on market
information trend analysis provided by a commercial real estate brokerage firm
retained by the Company. The Company incurred a charge in the fourth quarter
2002 of $2.1 million for facility closures and consolidation costs as a result
of the termination of its lease for its principal facility in Suwanee, Georgia.
The following is a reconciliation of the components of the accrual for
restructuring and related costs, the amounts charged against the accrual during
2001 and 2002 and the balance of the accrual as of December 31, 2002:
2001 2002
-------------------------------------- ---------------------------------------------------
Accruals Expenditures Balance Accruals Expenditures Credits Balance
December December
31, 2001 31, 2002
--------- --------
(in thousands)
Employee separation costs $2,939 $2,259 $ 680 $4,645 $4,196 $ 202 $ 927
Facility closure costs 1,218 9 1,209 3,905 4,977 - 137
----- ------ ----- ------ ------ ----- ------
Total restructuring and
related costs $4,157 $2,268 $1,889 $8,550 $9,173 $ 202 $1,064
====== ====== ====== ====== ====== ===== =======
41
For the years ended December 31, 2002 and 2001, the restructuring and
related costs were classified in the Company's consolidated statements of
operations as follows (in thousands):
YEAR ENDED YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- -----------------
Cost of revenues - services fees $ 858 $1,177
Research and development 1,291 217
Sales and marketing 1.242 1,218
General and administrative 5,159 1,545
------- ------
Total $ 8,550 $4,157
======= ======
6. INCOME TAXES
For financial reporting purposes, losses from continuing operations before
income taxes includes the following components (in thousands):
YEAR ENDED
DECEMBER 31,
-----------------------------------------------
2002 2001 2000
------------- --------------- ------------
Pre-tax loss:
United States $ (25,770) $ (66,995) $ (51,805)
Foreign (12,043) (52,859) (18,842)
------------ ------------ -----------
$ (37,813) $ (119,854) $ (70,647)
============ ============ ===========
The Company files a consolidated income tax return with its
wholly-owned subsidiaries. The components of the income tax expense
(benefit) for each of the years in the three-year period ended December
31, 2002 are as follows (in thousands):
YEAR ENDED
DECEMBER 31,
-----------------------------------------------
2002 2001 2000
------------- --------------- ------------
Current:
Federal $ -- $ -- $ --
State -- -- --
Foreign -- -- --
------------ ------------- ------------
------------ ------------- ------------
-- -- --
------------ ------------- ------------
------------ ------------- ------------
Deferred:
Federal 579 (19,950) (16,216)
State 164 (4,809) (2,700)
Foreign (2,026) (2,513) (1,863)
------------ ------------- ------------
(1,283) (27,272) (20,779)
Increase in valuation allowance for deferred income taxes 1,283 27,272 20,779
------------ ------------- ------------
$ -- $ -- $ --
============ ============= ============
The following is a summary of the items that caused recorded income taxes
to differ from income taxes computed using the statutory federal income tax rate
of 34% for each of the years in the three-year period ended December 31, 2002:
YEAR ENDED
DECEMBER 31,
-----------------------------------------------
2002 2001 2000
------------- --------------- ------------
Computed "expected" income tax expense (benefit) (34.0)% (34.0)% (34.0)%
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal income taxes 0.3 (2.6) (3.7)
Other, net 1.3 0.1 0.7
Nondeductible goodwill 9.6 12.8 2.5
Nondeductible acquired research & development 0.0 0.0 4.0
Income tax effect attributable to foreign operations 2.6 0.9 1.1
Nondeductible expired/cancelled warrants and options 16.8 0.0 0.0
Increase in valuation allowance 3.4 22.8 29.4
----------- ---------- ---------
Income tax expense (benefit) $ -- $ -- $ --
=========== =========== =========
42
Deferred income tax assets and liabilities are determined based on the
difference between the financial reporting carrying amounts and tax bases of
existing assets and liabilities and operating loss and tax credit carryforwards.
Significant components of the Company's deferred existing income tax assets and
liabilities as of December 31, 2002 and 2001 are as follows:
YEAR ENDED
DECEMBER 31,
-------------------------------
2002 2001
------------- ---------------
Deferred income tax assets:
Net operating loss, capital loss and research & $ 57,616 $ 43,985
experimentation credit carryforwards
Allowance for doubtful accounts 55 131
Depreciation and amortization 615 856
Noncash compensation 321 7,444
Accrued liabilities 339 392
Reserves for investments 2,352 7,207
------------- -------------
Net deferred income tax assets before valuation allowance 61,298 60,015
Valuation allowance for deferred income tax assets (61,298) (60,015)
------------- -------------
Net deferred income tax assets $ - $ -
============= =============
The net increase in the valuation allowance for deferred income tax assets
for 2002, 2001 and 2000 was $1.3 million, $27.3 million, and $20.8 million,
respectively. In assessing the realizability of deferred income tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred income tax assets will not be realized. The ultimate realization
of deferred income tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred income tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Management has provided a valuation allowance against
deferred income tax assets at December 31, 2002 because the ultimate realization
of those benefits and assets does not meet the more likely than not criteria.
At December 31, 2002, the Company has net operating loss, capital loss,
research and experimentation credit and alternative minimum tax credit
carryforwards for U.S. federal income tax purposes of approximately $114.1
million, $13.6 million, $1.3 million and $53,000, respectively, which expire in
varying amounts beginning in the year 2009. The Company also has incurred
foreign losses in the amount of approximately U.S.$23.2 million that are
available to offset future taxable income in foreign jurisdictions.
The Company's ability to benefit from certain net operating loss and other
carryforwards is limited under section 382 of the Internal Revenue Code as the
Company is deemed to have had an ownership change of greater than 50%.
Accordingly, certain U.S. net operating losses may not be realizable in future
years due to this limitation.
7. DEBT
The Company's debt consists of the following as of December 31, 2002 and
2001 (in thousands):
2002 2001
---- ----
Convertible subordinated promissory note with a commercial bank,
due March 15, 2005, interest payable quarterly at 4.5%.................. $5,000 $5,000
------ ------
Less current portion of long-term debt........................................ 5,000 -
------ ------
$ - $5,000
====== ======
The Company has a $5.0 million convertible subordinated promissory note
(the "Note") with a commercial bank which is due March 15, 2005. The note
provides for the ability of the holder to convert, at its option, all or any
portion of the principal of the Note into common stock of the Company at the
price of $147.20 per share. If the quoted price per share of the Company's
common stock exceeds 200% of the conversion price then in effect for at least 20
trading days in any period of 30 consecutive trading days, the Company has the
right to require that the holder of the Note convert all of the principal of the
Note into common stock of the Company at the price of $147.20 per share.
Upon the occurrence of a change of control, as defined in the Note, the
Company would be required to prepay the entire outstanding principal amount of
the Note, together with all accrued interest within five business days. On
December 18, 2002, Peachtree Equity Partners, as the assignee of the Note,
brought an action in the Georgia state court for prepayment of the Note,
43
plus interest and attorneys fees. The action asserts that certain Change of
Control provisions, as defined in the Note, have been triggered, thus permitting
the holder to demand immediate prepayment in full. The Company has denied the
material allegations of the Complaint and asserted various affirmative defenses.
Although the Company does not believe a change of control has occurred, it has
classified the debt as a current liability in the accompany consolidated balance
sheet as of December 31, 2002 pending outcome of the lawsuit.
8. ROYALTY AGREEMENTS
The Company was previously a party to royalty and other original equipment
manufacturer agreements for certain of its applications. The Company incurred a
total of approximately $24,000, $169,000, and $139,000 in royalty expense for
the years ended December 31, 2002, 2001, and 2000, respectively, pursuant to
these agreements. The royalty fees paid are included in cost of revenues-license
fees in the accompanying consolidated statements of operations. All royalty
agreements were assumed by Epicor Corporation in connection with the sale of
the Company's e-commerce software business on December 6, 2002.
9. EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) Plan (the "Plan"), a defined contribution
plan covering substantially all employees of the Company. Under the Plan's
deferred compensation arrangement, eligible employees who elect to participate
in the Plan may contribute between 2% and 20% of eligible compensation, as
defined, to the Plan. The Company, at its discretion, may elect to provide for
either a matching contribution or discretionary profit-sharing contribution or
both. The Company made matching contributions of approximately $55,000,
$147,000, and $93,000 in 2002, 2001 and 2000, respectively.
On June 13, 2000, the Company adopted the Clarus Corporation Employee Stock
Purchase Plan (the "U.S. Plan") and the Global Employee Stock Purchase Plan (the
"Global Plan") (collectively, the "Plans"), which offers employees the right to
purchase shares of the Company's common stock at 85% of the market price, as
defined. Under the Plans, full-time employees, except persons owning 5% or more
of the Company's common stock, are eligible to participate after 90 days of
employment. Employees may contribute up to 15% of their annual salary toward the
Purchase Plan. A maximum of 1,000,000 shares of common stock may be purchased
under the Plans. Common stock is purchased directly from the Company on behalf
of the participants. During the years ended December 31, 2002, 2001 and 2000,
18,548, 55,420, and 3,883 shares were purchased for the benefit of the
participants under the Plans, respectively. As of December 31, 2002, there were
3 participants in the U.S. Plan and no participants in the Global Plan.
10. STOCK OPTION PLANS
The Company applies the principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees," in accounting for its stock option plans.
Accordingly, the Company recognizes deferred compensation when the exercise
price of the options granted is less than the fair market value of the stock at
the date of grant. The deferred compensation is presented as a component of
shareholders' equity in the accompanying consolidated balance sheets and is
amortized over the periods expected to be benefited, generally the vesting
period of the options.
The Company has a stock option plan for employees, consultants, and other
individual contributors to the Company, which enables the Company to grant up to
approximately 1.6 million qualified and nonqualified incentive stock options
(the "1992 Plan"). The qualified options are to be granted at an exercise price
not less than the fair market value at the date of grant. The nonqualified
options are to be granted at an exercise price of not less than 85% of the fair
market value at the date of grant. The compensation committee determines the
period within which options may be exercised, which cannot exceed ten years from
the date of grant. The compensation committee also determines the period over
which the options vest. Options are generally exercisable for seven years from
the grant date and generally vest over a four-year period from the date of
grant. The 1992 Plan also provides for stock purchase authorizations and stock
bonus awards. As of December 31, 2002, no such awards have been granted under
the 1992 Plan.
The Company adopted the 1998 Stock Incentive Plan (the "1998 Plan") in
1998. Under the 1998 Plan, the Board of Directors has the flexibility to
determine the type and amount of awards to be granted to eligible participants,
who must be employees of the Company or its subsidiaries or consultants to the
Company. The 1998 Plan provides for grants of incentive stock options,
nonqualified stock options, restricted stock awards, stock appreciation rights,
and restricted units. During 2000, the Board of Directors and stockholders
adopted an amendment, which increased the number of shares authorized and
reserved for issuance from 1.5 million shares to 3.0 million shares. The
aggregate number of shares of common stock that may be granted through awards
under the 1998 Plan to any employee in any calendar year may not exceed 200,000
shares. The 1998 Plan will continue in effect until February 2008 unless
terminated sooner.
Upon the acquisition of the SAI/Redeo Companies on May 31, 2000, the
Company assumed the Stock Incentive Plan of Software Architects International,
Limited (the "SAI Plan"), and the options outstanding. The SAI Plan enables the
Company to grant up to 750,000 nonqualified stock options. The Company may grant
options to eligible participants who must be employees of the Company or its
subsidiaries or consultants, but not directors or officers of the Company.
44
On April 9, 2001, the Company announced a voluntary stock option exchange
program for its employees. Under the program, employees were given the
opportunity to cancel outstanding stock options previously granted to them on or
after November 1, 1999 in exchange for an equal number of new options to be
granted at a future date. The exercise price of the new options was equal to the
fair market value of the Company's common stock on the date of grant. During the
first phase of the program, 366,174 options with a weighted average exercise
price of $30.55 per share were canceled and new options to purchase 263,920
shares with an exercise price of $3.49 per share were issued on November 9,
2001. During the second phase of the program, 273,188 options with a weighted
average exercise price of $43.87 per share were canceled and new options to
purchase 198,052 shares with an exercise price of $4.10 per share were issued on
February 11, 2002. Employees who participated in the first exchange were not
eligible for the second exchange. The exchange program was designed to comply
with Financial Accounting Standards Board ("FASB") Interpretation No. 44
"Accounting for Certain Transactions Involving Stock Compensation" and did not
result in any additional compensation charges or variable accounting. Members of
the Company's Board of Directors and its executive officers were not eligible to
participate in the exchange program.
On December 6, and December 20, 2002, the Company granted options to
purchase a total of 1,250,000 shares of common stock to three senior executives.
450,000 of these options were issued with an exercise price of $5.35 per share,
400,000 were issued with an exercise price of $7.50 per share and 400,000 were
issued with an exercise price of $10.00 per share. A portion of the options
issued at $5.35 per share were issued at less than the fair market value on the
date of grant and the Company recorded deferred compensation of $65,000 to be
recognized over the vesting period of five years.
In 2000, the Company granted 18,750 options from the 1998 Plan to a new
member of the Company's Board of Directors at a price below the fair market
value at the date of grant. Deferred compensation of approximately $266,000 was
recorded related to this grant and compensation expense of approximately
$150,000 and $116,000 was recognized during 2001 and 2000, respectively.
During 2000, the Board of Directors approved and the Company issued 176,687
nonqualified stock options that were independent of the 1992 Plan and the 1998
Plan to certain employees of the Company. These options were issued at fair
market value and vested over a four-year period in accordance with the Company's
standard vesting schedule. During 2001, 160,020 of these options were canceled.
The remaining 16,667 options were canceled during 2002.
During 2000, the Board of Directors approved and the Company issued 160,000
nonqualified stock options to a senior executive at an exercise price below the
fair market value at the date of grant. These options were independent of the
1992 Plan and the 1998 Plan. Fifteen percent of these options vested immediately
and the remainder vested over a four-year period in accordance with the
Company's standard vesting schedule. The Company immediately expensed $814,500
associated with the intrinsic value of the vested options and recorded the
intrinsic value of the unvested options, $4.6 million, as deferred compensation.
This arrangement was terminated in the fourth quarter of 2000 and all options
except those already vested were forfeited. As a result of the options
forfeited, the Company reversed approximately $1.1 million of compensation
expense in the fourth quarter of 2000 that had previously been recognized during
2000. The vested options expired during 2002.
During 1998, the Company granted options with exercise prices below the
fair market value at the date of grant. Accordingly, the Company recorded
deferred compensation of approximately $1.1 million. The Company amortized
deferred compensation of $102,000 and $168,000 during the years ended December
31, 2001 and 2000, respectively.
The Company made an election to accelerate vesting of substantially all
of the Company's outstanding stock options in connection with the acquisition by
Epicor Software Corporation of the e-commerce assets of the Company. This
resulted in a non-cash stock compensation charge of approximately $500,000
during 2002.
The Company recorded total noncash stock compensation expense of
approximately $500,000, $252,000 and $1,098,000 for the years ended December 31,
2002, 2001 and 2000, respectively.
Total options available for grant under all plans as of December 31, 2002
were 976,170.
45
A summary of changes in outstanding options during the three years ended
December 31, 2002 is as follows:
Weighted
Range of Average
Exercise Exercise
Shares Prices Price
------ -------- --------
December 31, 1999.................................................... 2,145,014 $0.67-$ 62.00 $12.05
Granted.......................................................... 2,104,732 $6.13-$136.00 $31.06
Canceled......................................................... (440,631) $0.67-$128.13 $25.53
Exercised........................................................ (541,993) $0.67-$ 59.00 $ 5.67
-----------
December 31, 2000.................................................... 3,267,122 $0.67-$136.00 $23.51
Granted.......................................................... 1,923,240 $3.43-$ 9.25 $ 5.80
Canceled......................................................... (1,886,791) $1.00-$136.00 $25.80
Exercised........................................................ (62,445) $0.67-$ 5.75 $ 3.17
-----------
December 31, 2001.................................................... 3,241,126 $1.00-$128.13 $12.06
Granted.......................................................... 2,238,882 $3.76-$ 10.00 $ 6.40
Canceled......................................................... (2,512,447) $1.00-$128.13 $12.13
Exercised........................................................ (112,655) $1.00-$ 5.17 $ 3.51
-----------
December 31, 2002.................................................... 2,854,906 $1.00-$ 82.56 $ 7.76
===========
Vested and exercisable at December 31, 2002.......................... 1,158,508 $ 8.56
===========
Vested and exercisable at December 31, 2001.......................... 1,122,296 $15.40
===========
Vested and exercisable at December 31, 2000.......................... 564,081 $16.86
===========
For SFAS No. 123 purposes, the fair value of each option grant has been
estimated as of the date of grant using the Black-Scholes option pricing model
with the following assumptions:
2002 2001 2000
---- ---- ----
Dividend yield................. 0% 0% 0%
Expected volatility............ 76% 90% 90%
Risk-free interest rate........ 2.63%-4.43% 3.56%-4.98% 3.44%-6.60%
Expected life.................. Four years Four years Four years
Using these assumptions, the fair values of the stock options granted
during the years ended December 31, 2002, 2001, and 2000, were approximately
$6.4 million, $7.4 million, and $49.0 million, respectively, which would be
amortized over the vesting period of the options. The weighted-average
grant-date fair values of the stock options granted during the years ended
December 31, 2002, 2001, and 2000, were $2.86, $3.84, and $23.28, respectively.
The following table summarizes the exercise price range, weighted average
exercise price, and remaining contractual lives by significant ranges for
options outstanding and exercisable as of December 31, 2002:
Outstanding Exercisable
------------------------------------------------------- -------------------------------------------
Weighted
Number Weighted Average Number Weighted
Exercise of Shares Average Remaining of Shares Average
Price Outstanding at Exercise Contractual Exercisable at Exercise
Range December 31, 2002 Price Life (Years) December 31, 2002 Price
------ ----------------- -------- ------------- ----------------- -------
$ 1.00 - $ 5.17 362,352 $3.73 2.1 337,893 $3.70
$ 5.35 - $ 8.00 1,886,426 $6.08 7.7 623,177 $6.02
$ 8.50 - $12.06 509,334 $10.04 8.0 109,334 $10.19
$18.88 - $82.56 96,794 $43.36 2.8 88,104 $39.26
--------- ---------
2,854,906 $7.76 6.9 1,158,508 $8.56
========= =========
46
11. STOCKHOLDERS' EQUITY
COMMON STOCK
During 2000, the Company entered into agreements with three strategic
partners, who were also customers, to provide various sales and marketing
efforts on behalf of the Company in exchange for 39,118 shares of the Company's
common stock. The total value of these common stock grants was approximately
$3.8 million based upon the value of the Company's common stock at the date of
grant. The Company recognized $611,000, $1.6 million and $8.6 million of total
revenues from these customers during the years ended December 31, 2002, 2001 and
2000, respectively.
The sales and marketing agreement signed with one strategic partner also
required cash payments of $300,000 in each of the last two years of the related
agreement. The Company recorded the fair value of the common stock and the
expected cash payments as deferred sales and marketing costs during 2000. During
2001, the Company terminated the sales and marketing agreement with this
strategic partner resulting in a write-off of the remaining deferred sales and
marketing costs of $1.4 million. Also, as a result of the termination, the
Company is no longer required to make cash payments of $300,000 for the last two
years of the agreement
The Company recorded noncash sales and marketing expense, including the
write-off discussed above, of approximately $450,000, $2.5 million and $825,000
during 2002, 2001 and 2000, respectively related to these agreements.
WARRANTS
During 1999, the Company issued warrants to purchase 225,000 shares of the
Company's common stock at exercise prices ranging from $10.00 to $53.75 per
share, which expired in December of 2002. These warrants were issued to certain
strategic partners, who were also customers, in exchange for the agreement to be
party to a sales and marketing agreement between the Company and the strategic
partner to provide various sales and marketing efforts on behalf of the Company.
The total fair market value of the warrants was approximately $11.9 million,
which was recorded as additional paid-in capital and deferred sales and
marketing costs at the date of issuance. The Company recorded noncash sales and
marketing expense of approximately $4.3 million and $5.7 million related to
these agreements during the years ended December 31, 2001 and 2000,
respectively. These warrants were fully amortized as of December 31, 2001 and
expired in December 2002. The Company recognized $1.1 million of total revenues
from these customers during the year ended December 31, 2000. The Company did
not recognize any revenue from these customers during 2002 or 2001.
During 1999, the Company issued 5,000 warrants to a customer, with a fair
market value of $101,000, as a sales incentive to enter into a software license
agreement. The warrants have an exercise price of $53.21 per share and allow the
holder to purchase the Company's common stock at any time prior to December 31,
2002. This amount was recorded as additional paid-in capital and deferred
license revenue during 1999. In June 2000, the customer earned the 5,000
warrants as a result of entering into a software license agreement and the
$101,000 was recorded as a charge to software license revenue in the 2000
statement of operations.
The Company previously granted 25,000 warrants to a strategic partner in
return for completion of predetermined sales and marketing milestones. The
exercise price of these warrants is $53.75 per share and the warrants expire on
October 31, 2003.
During 2000, the Company awarded 33,334 warrants to a third party software
developer in exchange for services. The exercise price of the 33,334 warrants
was $56.78 per share and the warrants expire on March 31, 2003. The fair market
value of the warrants on the date of grant was $424,000 and was recorded as
additional paid-in capital and noncash research and development expense during
2000.
12. COMMITMENTS AND CONTINGENCIES
LEASES
The Company rents certain office space, copiers, telephone and computer
equipment under noncancelable operating leases. Rents charged to expense were
approximately $1.2 million, $2.1 million, and $1.9 million for the years ended
December 31, 2002, 2001, and 2000, respectively. Future minimum lease payments
for the next five years and thereafter under noncancelable operating leases with
remaining terms greater than one year as of December 31, 2002, are as follows
(in thousands):
47
Year ending December 31,
2003 $ 252
2004 96
2005 96
2006 12
Thereafter -
-----
Total $ 456
=====
In addition to the above commitments, we entered into an oral agreement in
2003 with Kanders & Company pursuant to which we sublease approximately 1,989
square feet in Greenwich, Connecticut for $9,572 a month (subject to increases
every three years). The agreement provides for a one-year term and Clarus has
the option to renew for up to nine additional one-year terms. Under the terms of
the agreement, we are required to pay approximately $325,000 in build-out
construction costs, fixtures, equipment and furnishings related to preparation
of the space. In the event Clarus was to undergo a change in control, our
remaining rent through the tenth anniversary of the commencement of the
agreement would immediately accelerate and the present value of such rent would
be placed in escrow for the benefit of Kanders & Company. In January 2003, the
Company obtained a standby letter of credit in the amount of $118,345 to secure
lease obligations for the Greenwich, Connecticut facility that is being
constructed. Kanders & Company reimburses Clarus a pro rata portion of the
$3,000 annual cost of the letter of credit.
The Company has sub-leased its facility near Toronto, Canada that will
provide sub-lease income of approximately $4,000 per month through January, 2006
that will offset some of the above obligations.
In December 2002, the Company executed a lease termination agreement
pursuant to which it agreed to abandon its principal facility in Suwanee,
Georgia on March 31, 2003. Pursuant to the terms of the termination agreement,
the Company paid to the lessor $2.9 million in cash, which has been included
in general and administrative expense in the accompanying statement of
operations for 2002. The lease is scheduled to terminate March 31, 2003.
INDEMNIFICATION
The Company more often than not indemnified its customers against damages
and costs resulting from claims of patent, copyright, or trademark infringement
associated with use of the software in its software licensing agreements. The
Company has not made any payments under such indemnifications. However, the
Company continues to monitor the conditions that are subject to the
indemnifications to identify whether it is probable that a loss has occurred,
and would recognize any such losses under the indemnifications when those losses
are reasonably estimable.
In addition to the above, the Company has agreed to indemnify Epicor
Software Corporation, as part of the sale of the Company's e-commerce business,
for the conduct of this business prior to December 6, 2002.
LITIGATION
The Company is a party to the following pending judicial and administrative
proceedings. After reviewing the proceedings that are currently pending
(including the probable outcome, reasonably anticipated costs and expenses,
availability and limits of insurance coverage, and our established reserves for
uninsured liabilities) we do not believe that any liabilities that may result
from these proceedings are reasonably likely to have a material adverse effect
on our liquidity, financial condition or results of operations, however, the
results of complex legal proceedings are difficult to predict. An unfavorable
resolution of the following proceedings could materially adversely affect the
Company's business, results of operations, liquidity or financial condition.
Following its public announcement on October 25, 2000, of its
financial results for the third quarter of 2000, the Company and
certain of its directors and officers were named as defendants in
fourteen putative class action lawsuits filed in the United States
District Court for the Northern District of Georgia. The fourteen class
action lawsuits were consolidated into one case, Case No. 1:00-CV-2841,
pursuant to an order of the court dated November 17, 2000. A
consolidated amended complaint was then filed on May 14, 2001 on behalf
of all purchasers of common stock of the Company during the period
beginning December 8, 1999 and ending on October 25, 2000.
Generally the amended complaint alleges claims against the Company
and the other defendants for violations of Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934, as amended, and Rule 10b-5
promulgated thereunder. Generally, it is alleged that the defendants
made material misrepresentations and omissions in public filings made
with the Securities and Exchange Commission and in certain press
releases and other public statements. The amended complaint alleges
that the market price of the Company's common stock was artificially
inflated during the class periods. The plaintiffs seek unspecified
compensatory damages and costs (including attorneys' and expert fees),
expenses and other unspecified relief on behalf of the classes. The
Court denied a motion to dismiss brought by the defendants and the case
is currently in discovery.
On December 18, 2002, Peachtree Equity Partners, as the assignee of
a five-year Promissory Note from the Company in the amount of
$5,000,000 due March 14, 2005, brought an action in the Georgia state
court for prepayment of the Note, plus interest and attorneys fees. The
action asserts that certain Change of Control provisions, as defined in
the
48
Note, have been triggered, thus permitting the holder to demand
immediate prepayment in full. The Company has denied the material
allegations of the Complaint and asserted various affirmative
defenses.
During 2002, ten former employees of the Company commenced an
action in the United States District Court for the Northern District of
Georgia seeking back pay, employee benefits, interest and attorneys
fees. The Company denies the material allegations set forth by the
plaintiffs and asserted various affirmative defenses.
In addition to the above, in the normal course of business, we are
subjected to claims and litigations in the areas of product and general
liability. We believe that we have adequate insurance coverage for most claims
that are incurred in the normal course of business. In such cases, the effect on
our financial statements is generally limited to the amount of our insurance
deductibles. At this time, we do not believe any such claims will have a
material impact on the Company's financial position, results of operations, or
cash flows.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption "Election of Directors" in our
Proxy Statement used in connection with our 2003 Annual Meeting of Stockholders,
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" in our
Proxy Statement used in connection with our 2003 Annual Meeting of Stockholders,
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Principal Stockholders" in our
Proxy Statement used in connection with our 2003 Annual Meeting of Stockholders,
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and
Related Transactions" in our Proxy Statement used in connection with our 2003
Annual Meeting of Stockholders, is incorporated herein by reference.
ITEM 14. PROCEDURES AND CONTROLS
Within 90 days prior to the date of filing of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's officers performing the function of principal executive officer
(the "Principal Executive Officer") and the principal financial officer (the
"Principal Financial Officer"), of the design and operation of the Company's
disclosure controls and procedures pursuant to Rule 13a-14 under the Securities
Exchange Act of 1934. Based on this evaluation, the Principal Executive Officer
and Principal Financial Officer concluded that the Company's disclosure controls
and procedures are effective for gathering, analyzing and disclosing the
information the Company is required to disclose in the reports it files under
the Securities Exchange Act of 1934, within the time periods specified in the
SEC's rules and forms. The Principal Executive Officer and Principal Financial
Officer also concluded that the Company's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company required to be included in the Company's periodic SEC filings. In
connection with the new rules, the Company is in the process of further
reviewing and documenting its disclosure controls and procedures, including its
internal controls and procedures for financial reporting, and may from time to
time make changes designed to enhance their effectiveness and to ensure that the
Company's systems evolve with its business.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of this evaluation.
49
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements, Financial Statement Schedules and Exhibits
(a) Financial Statement Schedule
(1) Index to Financial Statements
Page
Independent Auditors' Report................................................................................ 25
Consolidated Balance Sheets--December 31, 2002 and 2001......................................................26
Consolidated Statements of Operations--Years Ended December 31, 2002, 2001 and 2000..........................27
Consolidated Statements of Stockholders' Equity and Comprehensive Loss--Years Ended December 31, 2002,
2001 and 2000................................................................................................28
Consolidated Statements of Cash Flows--Years Ended December 31, 2002, 2001 and 2000..........................29
Notes to Consolidated Financial Statements...................................................................31
(2) Schedule II Valuation and Qualifying Accounts
(b) Reports on Form 8-K.
We filed a Form 8-K on December 23, 2002, announcing that we consummated
the sale of substantially all of the assets of our electronic commerce business
to Epicor Software Corporation. On October 18, 2002, we filed a Form 8-K
announcing the sale of the electronic commerce business to Epicor.
(c) Exhibits.
Exhibit
Number Exhibit
------- -------
3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated
by reference from Exhibit 3.1 to Company's Registration Statement on Form S-4
(File No. 333-63535)).
3.2 Amendment to Amended and Restated Certificate of Incorporation (incorporated by
reference from Exhibit 9.1 to the Company's 10-Q filed on August 14, 2000).
3.3 Amended and Restated Bylaws of the Company (incorporated by reference from Exhibit 3.2 to
the Company's Registration Statement on Form S-4 (File No. 333-63535)).
3.4 Amendment No. 1 to the Amended and Restated Bylaws of the Company.
4.1 See Exhibits 3.1,3.2, 3.3, and 3.4 for provisions of the Amended and Restated
Certificate of Incorporation and Amended and Restated Bylaws of the Company
defining rights of the holders of Common Stock of the Company.
4.2 Specimen Stock Certificate (incorporated by reference from Exhibit 9.1 to
Company's Registration Statement on Form S-1 (File No. 333-46685)).
10.1 Lease Agreement between the Company and Technology Park/Atlanta, Inc. dated July
24, 1998 (incorporated by reference from Exhibit 10.18 to the Company's Form S-4
Registration Statement (File No. 333-63535)).
10.2 Assignment and Assumption of Leases between Technology Park/Atlanta, Inc. and
Metropolitan Life Insurance Company dated July 24, 1998 (incorporated by
reference from Exhibit 10.18 to the Company's Form S-4 Registration Statement
(File No. 333-63535)).
10.3 Asset Purchase Agreement, dated as of October 17, 2002, between Epicor Software
Corporation and the Company (incorporated by reference from Exhibit 2.1 to the
Company's Form 8-K filed on October 18, 2002).
50
Exhibit
Number Exhibit
------- -------
10.4 Bill of Sale and Assumption Agreement, dated as of December 6, 2002, between
Epicor Software Corporation and the Company (incorporated by reference from
Exhibit 2.2 to the Company's Form 8-K filed on October 18, 2002).
10.5 Trademark Assignment dated as of December 6, 2002, by the Company in favor of
Epicor Software Corporation, (incorporated by reference from Exhibit 2.3 to the
Company's Form 8-K filed on October 18, 2002).
10.6 Patent Assignment, dated as of December 6, 2002, between Epicor Software
Corporation and the Company (incorporated by reference from Exhibit 2.4 to the
Company's Form 8-K filed on October 18, 2002).
10.7 Noncompetition Agreement, dated as of December 6, 2002, between Epicor Software
Corporation and the Company (incorporated by reference from Exhibit 2.5 to the
Company's Form 8-K filed on October 18, 2002).
10.8 Transition Services Agreement, dated as of December 6, 2002, between Epicor
Software Corporation and the Company (incorporated by reference from Exhibit 2.7
to the Company's Form 8-K filed on October 18, 2002).
10.9 Escrow Agreement, dated as of December 6, 2002, between Epicor Software
Corporation, the Company and Branch Bank & Trust Company, Inc. (incorporated by
reference from Exhibit 2.8 to the Company's Form 8-K filed on October 18, 2002).
10.10 Form of Indemnification Agreement for Directors and Executive Officers of the
Company, (incorporated by reference as Exhibit 10.1 of the Company's Form 8-K
filed on December 23, 2002).
10.11 Employment Agreement, dated as of December 6, 2002, between the Company and
Warren B. Kanders (incorporated by reference from Exhibit 10.2 to the Company's
Form 8-K filed on December 23, 2002).*
10.12 Employment Agreement, dated as of December 6, 2002, between the Company and
Nigel P. Ekern. (incorporated by reference from Exhibit 10.3 to the Company's
Form 8-K filed on December 23, 2002).*
10.13 Consulting Agreement, dated as of December 6, 2002, between the Company and
Stephen P. Jeffery (incorporated by reference from Exhibit 10.4 to the Company's
Form 8-K filed on December 23, 2002).*
10.14 Amended and Restated Stock Incentive Plan (incorporated by reference from
Exhibit 10.2 to the Company's Form 10-Q filed on August 14, 2000). *
10.15 Employee Stock Purchase Plan (incorporated by reference from Exhibit 10.3 to the
Company's Form 10-Q filed on August 14, 2000). *
10.16 Global Employee Stock Purchase Plan (incorporated by reference from Exhibit 10.4
to the Company's Form 10-Q filed on August 14, 2000). *
10.17 Form of Nonqualified Stock Option Agreement (incorporated by reference from
Exhibit 10.5 to the Company's Form 10-Q filed on August 14, 2000). *
10.18 Stock Incentive Plan of Software Architects International, Limited (incorporated by
reference from Exhibit 2.2 to the Company's Form 8-K filed on June 13, 2000). *
51
Exhibit
Number Exhibit
------- -------
10.19 2000 Declaration of Amendment to Software Architects International Limited Stock
Incentive Plan (incorporated by reference from Exhibit 2.3 to the Company's Form 8-K
filed on June 13, 2000). *
10.20 1992 Stock Option Plan, effective November 22, 1992 (incorporated by reference from
Exhibit 10.2 to Company's Registration on Form S-1 (File No. 333-46685)). *
10.21 Amendment to 1992 Stock Option Plan. (incorporated by reference from Exhibit 10.2 to the
Company's Form 10-K filed on March 30, 2000). *
21.1 List of Subsidiaries.
23.1 Independent Auditors' Consent.
99.1 Independent Auditors' Report on Financial Statement Schedule.
99.2 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of
the Sarbanes-Oxley Act of 2002.
* Management contract or compensatory plan or arrangement.
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CLARUS CORPORATION
Date: March 31, 2003
By: /s/ Nigel P. Ekern
------------------------------------
Nigel P. Ekern
Chief Administrative Officer
Signature Title Date
--------- ----- ----
/s/ Nigel P. Ekern Chief Administrative Officer March 31, 2003
- -------------------------------- (principal executive officer) ------------------------------
Nigel P. Ekern
/s/ Gregory D. Fletcher Chief Accounting Officer March 31, 2003
- -------------------------------- (principal financial officer) ------------------------------
Gregory D. Fletcher
/s/ Warren B. Kanders Director March 31, 2003
- -------------------------------- ------------------------------
Warren B. Kanders
/s/ Stephen P. Jeffery Director March 31, 2003
- -------------------------------- ------------------------------
Stephen P. Jeffery
/s/ Donald L. House Director March 31, 2003
- -------------------------------- ------------------------------
Donald L. House
/s/ Tench Coxe Director March 31, 2003
- -------------------------------- ------------------------------
Tench Coxe
/s/ Burtt R. Ehrlich Director March 31, 2003
- -------------------------------- ------------------------------
Burtt R. Ehrlich
/s/ Nicholas Sokolow Director March 31, 2003
- -------------------------------- ------------------------------
Nicholas Sokolow
53
CERTIFICATION
I, Nigel P. Ekern, certify that:
I have reviewed this annual report on Form 10-K of Clarus Corporation;
Based on my knowledge, this annual report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
Based on my knowledge, the financial statements, and other financial information
included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this annual report;
The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses
in internal controls; and
any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
The registrant's other certifying officers and I have indicated in this annual
report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: March 31, 2003 /s/ Nigel P. Ekern
Principal Executive Officer
54
CERTIFICATION
I, Gregory D. Fletcher, certify that:
I have reviewed this annual report on Form 10-K of Clarus Corporation;
Based on my knowledge, this annual report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
Based on my knowledge, the financial statements, and other financial information
included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this annual report;
The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses
in internal controls; and
any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
The registrant's other certifying officers and I have indicated in this annual
report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: March 31, 2003 /s/ Gregory D. Fletcher
Principal Financial Officer
55
Schedule II
Valuation and Qualifying Accounts
Clarus Corporation and Subsidiaries
For the years ended December 31, 2002, 2001 and 2000
Allowance for Doubtful Accounts, Valuation Allowance for Deferred
Income Tax Assets and Restructuring and Related Charges
Charged
Balance at (Credited) to Balance at
Beginning of Costs and End of
Period Expenses Deductions (a) Period
------ -------- ----------- ------
Allowance for Doubtful Accounts
2000 $ 271,000 $ 5,824,000 $2,225,000 $ 3,870,000
2001 3,870,000 5,537,000 8,771,000 636,000
2002 636,000 (560,000) (510,000) 586,000
Valuation Allowance for Deferred Income Tax Assets
2000 $11,964,000 $20,779,000 $ 0 $32,743,000
2001 32,743,000 27,272,000 0 60,015,000
2002 60,015,000 1,283,000 0 61,298,000
Restructuring Accruals
2001 $ 0 $ 4,157,000 $2,268,000 $ 1,889,000
2002 1,889,000 8,550,000 9,375,000 1,064,000
(a) Deductions related to the allowance for doubtful accounts represent the
write-off of uncollectible accounts receivable balances against the
allowance for doubtful accounts, net of recoveries. Deductions related to
restructuring and related accruals represent cash payments.
56
EXHIBIT INDEX
Exhibit
Number Exhibit
------- -------
3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated
by reference from Exhibit 3.1 to Company's Registration Statement on Form S-4
(File No. 333-63535)).
3.2 Amendment to Amended and Restated Certificate of Incorporation (incorporated by
reference from Exhibit 9.1 to the Company's 10-Q filed on August 14, 2000).
3.3 Amended and Restated Bylaws of the Company (incorporated by reference from Exhibit 3.2 to
the Company's Registration Statement on Form S-4 (File No. 333-63535)).
3.4 Amendment No. 1 to the Amended and Restated Bylaws of the Company.
4.1 See Exhibits 3.1,3.2, 3.3, and 3.4 for provisions of the Amended and Restated
Certificate of Incorporation and Amended and Restated Bylaws of the Company
defining rights of the holders of Common Stock of the Company.
4.2 Specimen Stock Certificate (incorporated by reference from Exhibit 9.1 to
Company's Registration Statement on Form S-1 (File No. 333-46685)).
10.1 Lease Agreement between the Company and Technology Park/Atlanta, Inc. dated July
24, 1998 (incorporated by reference from Exhibit 10.18 to the Company's Form S-4
Registration Statement (File No. 333-63535)).
10.2 Assignment and Assumption of Leases between Technology Park/Atlanta, Inc. and
Metropolitan Life Insurance Company dated July 24, 1998 (incorporated by
reference from Exhibit 10.18 to the Company's Form S-4 Registration Statement
(File No. 333-63535)).
10.3 Asset Purchase Agreement, dated as of October 17, 2002, between Epicor Software
Corporation and the Company (incorporated by reference from Exhibit 2.1 to the
Company's Form 8-K filed on October 18, 2002).
10.4 Bill of Sale and Assumption Agreement, dated as of December 6, 2002, between
Epicor Software Corporation and the Company (incorporated by reference from
Exhibit 2.2 to the Company's Form 8-K filed on October 18, 2002).
10.5 Trademark Assignment dated as of December 6, 2002, by the Company in favor of
Epicor Software Corporation, (incorporated by reference from Exhibit 2.3 to the
Company's Form 8-K filed on October 18, 2002).
10.6 Patent Assignment, dated as of December 6, 2002, between Epicor Software
Corporation and the Company (incorporated by reference from Exhibit 2.4 to the
Company's Form 8-K filed on October 18, 2002).
10.7 Noncompetition Agreement, dated as of December 6, 2002, between Epicor Software
Corporation and the Company (incorporated by reference from Exhibit 2.5 to the
Company's Form 8-K filed on October 18, 2002).
10.8 Transition Services Agreement, dated as of December 6, 2002, between Epicor
Software Corporation and the Company (incorporated by reference from Exhibit 2.7
to the Company's Form 8-K filed on October 18, 2002).
10.9 Escrow Agreement, dated as of December 6, 2002, between Epicor Software
Corporation, the Company and Branch Bank & Trust Company, Inc. (incorporated by
reference from Exhibit 2.8 to the Company's Form 8-K filed on October 18, 2002).
57
Exhibit
Number Exhibit
------- -------
10.10 Form of Indemnification Agreement for Directors and Executive Officers of the
Company, (incorporated by reference as Exhibit 10.1 of the Company's Form 8-K
filed on December 23, 2002).
10.11 Employment Agreement, dated as of December 6, 2002, between the Company and
Warren B. Kanders (incorporated by reference from Exhibit 10.2 to the Company's
Form 8-K filed on December 23, 2002).*
10.12 Employment Agreement, dated as of December 6, 2002, between the Company and
Nigel P. Ekern. (incorporated by reference from Exhibit 10.3 to the Company's
Form 8-K filed on December 23, 2002).*
10.13 Consulting Agreement, dated as of December 6, 2002, between the Company and
Stephen P. Jeffery (incorporated by reference from Exhibit 10.4 to the Company's
Form 8-K filed on December 23, 2002).*
10.14 Amended and Restated Stock Incentive Plan (incorporated by reference from
Exhibit 10.2 to the Company's Form 10-Q filed on August 14, 2000). *
10.15 Employee Stock Purchase Plan (incorporated by reference from Exhibit 10.3 to the
Company's Form 10-Q filed on August 14, 2000). *
10.16 Global Employee Stock Purchase Plan (incorporated by reference from Exhibit 10.4
to the Company's Form 10-Q filed on August 14, 2000). *
10.17 Form of Nonqualified Stock Option Agreement (incorporated by reference from
Exhibit 10.5 to the Company's Form 10-Q filed on August 14, 2000). *
10.18 Stock Incentive Plan of Software Architects International, Limited (incorporated by
reference from Exhibit 2.2 to the Company's Form 8-K filed on June 13, 2000). *
10.19 2000 Declaration of Amendment to Software Architects International Limited Stock
Incentive Plan (incorporated by reference from Exhibit 2.3 to the Company's Form 8-K
filed on June 13, 2000). *
10.20 1992 Stock Option Plan, effective November 22, 1992 (incorporated by reference from
Exhibit 10.2 to Company's Registration on Form S-1 (File No. 333-46685)). *
10.21 Amendment to 1992 Stock Option Plan. (incorporated by reference from Exhibit 10.2 to the
Company's Form 10-K filed on March 30, 2000). *
58
Exhibit
Number Exhibit
------ -------
21.1 List of Subsidiaries.
23.1 Independent Auditors' Consent.
99.1 Independent Auditors' Report on Financial Statement Schedule.
99.2 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of
the Sarbanes-Oxley Act of 2002.
* Management contract or compensatory plan or arrangement.
59