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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, 2000
[_] 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.)
3970 Johns Creek Court
Suite 100
Suwanee, Georgia 30024
(Address of principal office, including zip code)
(770) 291-3900
(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. [_]
The aggregate market value of the voting stock and non-voting common equity
held by nonaffiliates of the Registrant at March 13, 2001 was approximately
$101.8 million based on $6.75 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
13, 2001, was 15,508,333 shares.
DOCUMENT INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2001 Annual Meeting of Stockholders
to be filed with the Securities and Exchange Commission within 120 days of the
Registrant's 2000 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................................................................................................ 15
ITEM 3. LEGAL PROCEEDINGS......................................................................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................................... 15
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................................................. 16
ITEM 6. SELECTED FINANCIAL DATA................................................................................... 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................... 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................................ 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA................................................................ 31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...................... 57
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................................................ 58
ITEM 11. EXECUTIVE COMPENSATION.................................................................................... 58
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................ 58
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................................ 58
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K........................................... 58
SIGNATURES.......................................................................................................... 61
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PART I
ITEM 1. BUSINESS
Overview
We develop, market, and support Internet-based business-to-business (B2B) e-
commerce solutions targeted for large to mid-size enterprises (LME) that
automate the procurement, sourcing, and settlement of goods and services. Our
software helps organizations reduce the costs associated with the purchasing and
payment settlement of goods and services, and helps to maximize procurement
economies of scale. Our digital marketplace solution provides a framework that
allows companies to create trading communities and additional revenue
opportunities. Our solutions also benefit suppliers by reducing sales costs and
providing the opportunity to increase revenues. Our products have been licensed
by customers such as Comcast Corporation, Burlington Northern Santa Fe Railroad,
Gjensidige NOR, Mastercard International, MetLife, Parsons Brinckerhoff,
Sumurfit and Stone, and Wachovia Operational Services Corporation.
Our Internet-based business-to-business e-commerce solutions are
significantly different than the client/server financial software applications
that were the basis of our initial operations. There have been several
milestones in the evolution of our business since our incorporation in Delaware
in 1991. Those milestones include:
. 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.
. 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. ELEKOM developed a software program that provided
electronic corporate procurement capabilities to its clients.
. 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.
. 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.
. 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 of which $1.6 million was paid at the date of acquisition and
$900,000 is due in April 2001. iSold developed a software program that
provided auctioning capabilities to its clients.
. 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"). The SAI/Redeo
Companies specialize in electronic payment settlement software.
In December 2000, we announced our business strategy of targeting large to
mid-size enterprises. In support of this strategy, we also announced an expanded
business model that would support a wider range of software licensing
arrangements. As part of this business model expansion, we intend to move from a
traditional up-front license fee revenue model to a ratable revenue recognition
model, as is required in subscription-based licensing agreements. As a result,
we believe that our future financial results may not be comparable to our
historic financial results.
Our Solution
We are a leading provider of Internet-based business-to-business e-commerce
applications targeted for the large to mid-size enterprise (LME) market that
automate the procurement, sourcing and settlement of goods and services. Our
solution includes frameworks to manage corporate procurement and enable digital
marketplaces. Key elements of our solution include the following:
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. Our Procurement Solution. We offer a procurement solution for our
customers from sourcing to procurement to payment settlement. Our
solutions are designed to address the distinct business needs of
corporate procurement and digital marketplaces. Our solutions also
include critical capabilities such as online analytics, content and
catalog management, supplier enablement, and training and
implementation services. We have also established strategic
partnerships to offer complimentary solutions such as business process
consulting, system integration, content management and hosting
services.
. Rapid Deployment/Speed to Return on Investment (ROI). We have
demonstrated the rapid deployment capabilities of our e-commerce
solutions. We offer added value by quickly getting our solutions in
production and ready to process transactions so that our customers can
quickly begin to realize a payback on their investment in our
solution. Delivering solutions that can be deployed rapidly is a
fundamental tenet of our solution strategy. We also work with our
strategic partners to offer differentiated bundled software and
services solutions to extend the rapid deployment advantage even
further for our customers.
. Flexible Business Model. Our business model provides flexible business
terms for our customers including traditional software license
agreements and subscription-based programs. Our business model is not
based on transaction fees or revenue sharing. Our flexible business
model allows companies to realize a more rapid return on their
investment by decreasing their up-front software expenditures. In
addition, we have developed partnerships with application service
providers who offer our customers a hosted software alternative to an
on-site implementation. By leveraging these partnerships, customers
can more rapidly and cost effectively deploy our solution while
outsourcing the ongoing management and operation of our software.
. Open Architecture. We offer a solution that is based on an open
architecture and leverages leading electronic commerce technologies
and industry standards such as Microsoft's .NET e-commerce platform
and XML. Our open architecture allows for flexibility, open catalog
content management, scalability, ease of administration, lower
infrastructure costs and rapid deployment.
Our Strategy and Products
Our objective is to be a leading global provider of business-to-business e-
commerce applications that automate the sourcing, procurement and payment
settlement of goods and services targeted for the LME market.
The key elements of our strategy are to:
. Focus on the large to mid-size enterprise (LME) market;
. Market and sell three e-commerce platforms: sourcing, procurement and
settlement;
. Execute a multi-channel sales strategy;
. Leverage our business model for market penetration; and
. Expand our international operations.
. Intensive focus on the large to mid-size enterprise market. We define the
LME market to be companies with revenues of $250 million to $5 billion.
While our solution has been successfully implemented in companies outside
this revenue range, we believe that our rapid deployment capabilities,
bundled solution offering, and flexible business model are best suited for
the LME market.
We believe that the LME market will be attracted to packaged "turnkey"
solutions with known, reasonable deployment costs and infrastructure
impact. We believe the LME market also desires a total procurement
solution, which includes sourcing, procurement, and payment settlement.
We believe that the combination of our application suite, optimization of
the Microsoft platform, and rapid deployment architecture is well suited to
meet the needs of the LME market.
. Market and sell three e-commerce platforms.
Procurement: We provide two options for electronic procurement: corporate
------------
e-procurement and a digital marketplace framework. Our corporate e-
procurement product, Clarus eProcurement, is designed to provide Internet-
based
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procurement of goods and services, and includes capabilities such as
requisitioning, workflow, order management, and analytics. Our digital
marketplace framework, Clarus eMarket, allows multiple buyer and supplier
organizations to interact in a personalized trading environment. Clarus
eMarket is designed for both private and public exchanges. Our procurement
platforms accounted for 70.2% and 66.0% of our total license fee revenue in
2000 and 1999, respectively.
Settlement: Clarus Settlement is designed to deliver a number of Internet-
-----------
based settlement capabilities including net "market-maker" fee processing,
buyer settlement, seller settlement, and reconciliation. Our settlement
solution may be deployed either independently or as a component of our
procurement solution.
Sourcing: We provide a sourcing solution that provides commerce
---------
capabilities such as auctions, weight-based request for quotations, and
collaboration.
. Execute a multi-channel sales strategy. We believe that a key to market
penetration in the LME space is a multi-channel sales strategy and
organization. Therefore, we continue to expand both our direct and indirect
sales forces with geographic and industry focus.
. Leverage our business model for market penetration. Our business supports a
multi-channel sales strategy that is designed with the needs of the LME
market. These solutions bundle software, services, support, implementation,
training and integration, and are made available through a range of
flexible purchase options spanning from perpetual licenses to
subscriptions.
Expand our international operations. We believe a market for our solution
exists outside the United States. We expanded our operations internationally in
2000 with the opening of a branch office in the United Kingdom, and through the
acquisition of SAI/Redeo Companies, an organization with operations in Ireland.
In 2000, 79.4% of our business was derived from U.S.-based companies. The
remainder of the Company's 2000 revenue was derived from international markets,
none of which exceeded 10% in any one country. In 1999 and 1998, substantially
all of our revenue was from U.S.-based companies.
Client Services
Our client services organization provides our customers and strategic
partners with implementation services, training and technical support. This
organization educates our customers and strategic partners on the strategy,
methodology and functionality of our products and implements our solution, on
average, within three to six months. We typically offer our implementation
services to customers on a time and materials basis. We also offer several
packaged service offerings designed to provide lower-risk, cost-efficient
implementations for customers. Additionally, we have developed relationships
with systems integrators to augment the implementation efforts provided by our
client services organization.
We have dedicated personnel within our client services organization to
support our solution once implemented. We generally enter into a maintenance
contract with our customers, which are renewable on an annual basis.
Strategic Alliances and Relationships
To ensure that we deliver a comprehensive solution to our customers, we
continue to establish and develop strategic relationships with systems
integrators, resellers, OEMs and other complementary technology partners. These
relationships further our strategy of rapidly deploying our business-to-business
e-commerce solutions to the LME market.
We have developed relationships with regional, national and international
systems integrators such as Deloitte & Touche and Compaq Solutions. These
systems integrators implement our products and often assist us with sales lead
generation. We continue to certify and train consultants and business
development professionals in these organizations. We expect that these partners
will represent an increased percentage of our implementation services in the
future.
We also have developed relationships with selected resellers such as
Compaq, VerticalNet and Epicor. By acting as a global sales and delivery
channel, we believe these resellers will accelerate the use and deployment of
our solution by distributing our applications to a broad range of organizations.
Microsoft continues to be a key strategic partner for us. We engage with
Microsoft in joint marketing, selling, and product strategy at both a corporate
and a field level. During 2000, Clarus eMarket was named the Microsoft(R) Global
e-Commerce Solution of the Year for its advanced designed and technology
optimization on Microsoft's .Net platform. We continue to design, develop,
deliver, and optimize all of our solutions exclusively for the Microsoft
platform.
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Sales and Marketing
We sell our software and services through our direct sales force and a
growing number of indirect channels. Our direct sales force, consisting of 47
sales professionals as of December 31, 2000, is organized geographically into
two regions: the Americas and Europe, Middle East and Africa (EMEA) regions,
each of which operates under the direction of a general manager. Our sales
professionals receive a base salary and earn commissions based on achieving
quarterly and annual sales goals. We have also developed indirect channels to
accelerate market adoption of our solution. These indirect channels include
partnerships with application service providers, systems integrators, resellers
and other partners. International channel resellers have also been established
to extend our global sales operations in EMEA, Asia Pacific, and Latin America.
The sales cycle for our business-to-business e-commerce products typically
averages four to nine months.
We have designed our marketing strategy to position us as a leading global
provider of Internet-based business-to-business e-commerce applications for
large to mid-size enterprises. In support of our strategy, we engage in a full
range of marketing programs focused on creating awareness and generating
qualified leads. These programs include developing and maintaining alliances
with business partners such as Microsoft, Compaq, Deloitte & Touche, marchFIRST
and VerticalNet. We participate in industry trade shows and seminars, use
telemarketing campaigns, advertise in major periodicals and business
publications, and conduct direct mail campaigns. We hosted an executive
business-to-business e-commerce conference, eC Leadership, in June 2000, and
have a similar event planned for May 2001. In addition, we maintain a web site,
www.claruscorp.com, which is integrated with our sales, marketing, recruiting
and fulfillment operations.
Competition
The market for our products is highly competitive and subject to rapid
technological change. In targeting the large to mid-size enterprise market, we
believe we are able to differentiate our solutions from corporate electronic
procurement and digital marketplace providers such as Ariba and Commerce One. We
also anticipate competition from some of the large enterprise resource planning
software vendors, such as Oracle and SAP.
The principal competitive factors affecting our market include having a
significant base of referenceable, production 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. We believe our solution competes
favorably with respect to these factors.
Research and Development
Our success depends in part on our ability to continue to meet customer and
market requirements with respect to the functionality, performance, technology
and reliability of our products. We invest, and intend to continue to invest, in
our research and development efforts.
Our research effort focuses on identifying new and emerging technologies and
engineering processes, especially with respect to Internet and intranet
transaction processing. Our development effort focuses primarily on the product
delivery cycle and our associated technologies and software life-cycle
processes. Our development teams consist of software engineering, documentation
and quality assurance personnel who have extensive industry experience. Specific
responsibilities of our development teams include:
. enhancing functionality and performance within our product line;
. developing new products and integrating with strategic third-party
products to strengthen our product line;
. updating our product line to remain current and compatible with new
operating systems, databases and tools; and
. managing and continuously improving the overall software development
process.
We proactively seek formal customer feedback through conferences, focus
groups and surveys in order to enhance our products to meet changing business
requirements. We are committed to developing new releases of our products to
provide a highly functional, integrated solution.
Our research and development expenditures were approximately $21.9 million,
$9.0 million and $6.3 million for the years ended December 31, 2000, 1999 and
1998, respectively. In addition, during 2000, we incurred $424,000 of noncash
research and development expenses related to warrants issued to a third party to
develop certain software. Substantially all of our research and development
expenditures in 1998 were related to our enterprise resource planning business
that we sold to Geac Computer
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Systems, Inc. and Geac Canada Limited in October 1999. The majority of our
research and development expenditures in 2000 and 1999 were related to our e-
commerce products.
As of December 31, 2000, we employed 106 research and development personnel.
We have from time to time supplemented, and plan to continue to supplement, our
research and development organization through outside contractors and
consultants when necessary.
Proprietary Rights and Licensing
Our success depends significantly on our internally developed intellectual
property and intellectual property licensed from others. We rely primarily on a
combination of copyright, trademark and trade secret laws, as well as
confidentiality procedures and license arrangements to establish and protect our
proprietary rights in our software products.
Existing patent, trade secret and copyright laws afford only limited
protection of our proprietary rights. We have applied for registration for
certain trademarks and will continue to evaluate the registration of copyrights
and additional trademarks as appropriate. Because of the rapid pace of
technological change in the software industry, we believe that the intellectual
property protection of our products is a less significant factor in our success
than the knowledge, abilities and experience of our employees, the frequency of
our product enhancements, the effectiveness of our marketing activities and the
timeliness and quality of our support services.
We enter into license agreements with each of our customers. Each of our
license agreements provides for the customer's non-exclusive right to use the
object code version of our products. Our license agreements prohibit the
customer from disclosing to third parties or reverse engineering our products
and disclosing our other confidential information.
Employees
Our employees are based in the United States, Canada, the United Kingdom,
and Ireland. As of December 31, 2000, we had a total of 425 employees,
including 121 in client services, 47 in sales, 44 in business development, 41 in
marketing, 106 in research and development and 66 in finance and administration.
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 excellent.
Risk Factors
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 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.
We may not effectively implement our business strategy.
Our future performance will depend in part on successfully developing,
introducing and gaining market acceptance of our products. On October 18, 1999,
we sold substantially all of the assets of our financial and human resources
software business to Geac Computer Systems, Inc. and Geac Canada Limited. Our
financial and human resources software business had historically been our
primary business. We began marketing our Clarus eProcurement solution in the
second quarter of 1998. We added Clarus eMarket and Clarus Auctions to our
product line in the second quarter of 2000, and introduced Clarus Settlement in
the third quarter of 2000. If we do not successfully implement our business-to-
business e-commerce growth strategy, our business will suffer materially and
adversely. Our focus as an organization is on the large to mid-size enterprise
(LME) market. While we anticipate that this market is increasingly more
receptive to purchasing our solutions, we cannot be sure of the adoption rate.
The actual rate may be slower or less than our expectations, which would
materially and adversely affect our business, results of operations and
financial condition.
We may not be able to maintain referenceable accounts.
The implementation of our product suite by buying organizations can be
complex, time consuming and expensive. In many cases, these organizations must
change established business practices and conduct business in new ways. Our
ability to
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attract additional customers for our product suite will depend on using our
existing customers as referenceable accounts. As a result, our operating
resource solutions may not achieve significant market acceptance.
We expect our product line to appeal to early-stage companies, which expose us
to higher than normal credit risk.
Our product line supports Internet-based business-to-business electronic
commerce solutions that automate the procurement and management of operating
resources. As a result of this functionality many early-stage businesses, in
addition to many companies with traditional business models, are interested in
acquiring our products. Many early-stage companies acquire their funding
periodically based upon investor's perception of their progress and likelihood
of success. Typically, they do not have internal operations sufficient to
generate cash, which would guarantee their ongoing viability. While we evaluate
all potential customers' ability to pay, if an increasing number of our
customers fail in their operations and are unable to continue to pay amounts due
under our license agreement, we will experience material and adverse financial
losses related to these sales.
If our subscription-based model is unsuccessful, the market may adopt our
products at a slower rate than anticipated, and our business may suffer
materially.
We offer a subscription-based payment method to our customers. This model
is unproven and represents a significant departure from the fee-based software
licensing strategies that our competitors and we have traditionally employed. If
we do not successfully develop and support our subscription-based model, the
market may adopt our products at a slower rate than anticipated, and our
business may suffer materially. As of December 31, 2000, we have signed several
customers to subscription-based payment arrangements. Revenue associated with
these customers in 2000 was immaterial.
We may not generate the substantial additional revenues necessary to become
profitable and anticipate that we will continue to incur losses.
We have incurred significant net losses in each year since our formation.
In addition, we have incurred significant costs to develop our e-commerce
technology and products, and to recruit and train personnel. We believe our
success is contingent upon increasing our customer base and investing in further
development of our products and services. This will require significant
expenditures in research and development, sales and marketing, services, and
support infrastructure. As a result, we will need to generate significant
revenues to achieve and maintain profitability in the future. We cannot be
certain that we will ever achieve such growth in the future.
As we expand our international sales and marketing activities and international
operations, our business will be more susceptible to numerous risks associated
with international operations.
To be successful, we believe we must expand our international operations
and hire additional international personnel. As a result, we expect to commit
significant resources to expand our international sales and marketing
activities. We are subject to a number of risks associated with international
business activities. These risks generally include:
. currency exchange rate fluctuations;
. seasonal fluctuations in purchasing patterns;
. unexpected changes in regulatory requirements;
. tariffs, export controls and other trade barriers;
. longer accounts receivable payment cycles and difficulties in
collecting accounts receivable;
. difficulties in managing and staffing international operations;
. potentially adverse tax consequences, including restrictions on the
repatriation of earnings;
. increased transactions costs related to sales transactions conducted
outside the U.S.;
. reduced protection of intellectual property rights and increased risk
of piracy;
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. challenges of retaining and maintaining strategic relationships with
customers and business alliances in international markets;
. foreign laws and courts may govern many of the agreements with
customers and resellers;
. difficulties in maintaining knowledgeable sales representatives in
countries outside the U.S.;
. adequacy of local infrastructures outside the U.S.;
. differing technology standards, translations, and localization
standards;
. uncertain demand for electronic commerce;
. linguistic and cultural differences;
. the burdens of complying with a wide variety of foreign laws; and
. political, social, and economic instability.
We have limited experience in marketing, selling and supporting our products and
services in foreign countries. We do not have experience developing foreign
language versions of our products.
We intend to expand the geographic scope of our customer base and
operations. We opened our first international sales office in the United Kingdom
during the first quarter of 2000 and acquired the SAI/Redeo companies, which
have significant operations in Ireland, in the second quarter of 2000. We have
limited experience in managing geographically dispersed operations and in
operating in Ireland and the United Kingdom.
Our quarterly operations are volatile and difficult to predict. If we fail to
meet the expectations of public market analysts or investors, the market price
of our common stock may decrease significantly.
We believe that our quarterly and annual operating results will fluctuate
significantly in the future, and our results of operations may fall below the
expectations of securities analysts and investors. If this occurs or if market
analysts perceive that it will occur, the market price of our common stock could
decrease substantially. Recently, when the market price of a security has been
volatile, holders of that security have often instituted securities class action
lawsuits against the company that issued the security. We have been the subject
of such lawsuits. These lawsuits divert the time and attention of our management
and an adverse judgment could cause our financial condition or operating results
to suffer.
Because the percentage of our revenues represented by maintenance services
is smaller than that of many software companies with a longer history of
operations, we do not have a significant recurring revenue stream that could
lessen the effect of quarterly fluctuations in operating results. Many factors
may cause significant fluctuations in our quarterly and annual operating
results, including:
. changes in the demand for our products;
. the timing, composition and size of orders from our customers;
. customer spending patterns and budgetary resources;
. our success in generating new customers;
. the timing of introductions of or enhancements to our products;
. changes in our pricing policies or those of our competitors;
. our ability to anticipate and adapt effectively to developing markets
and rapidly changing technologies;
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. our ability to attract, retain and motivate qualified personnel,
particularly within our sales and marketing and research and
development organizations;
. the publication of opinions or reports about us, our products, our
competitors or their products;
. unforeseen events affecting business-to-business e-commerce;
. changes in general economic conditions;
. bad debt write-offs;
. impairment of strategic investments;
. actions taken by our competitors, including new product introductions
and enhancements;
. our ability to scale our network and operations to support large
numbers of customers, suppliers and transactions;
. our success in maintaining and enhancing existing relationships and
developing new relationships with strategic partners, including
application service providers, systems integrators, resellers, value-
added trading communities and other partners; and
. our ability to control costs.
Our quarterly revenues are especially subject to fluctuation because they
can depend on the sale of relatively large orders for our products and related
services. As a result, our quarterly operating results may fluctuate
significantly if we are unable to complete one or more substantial sales in a
given quarter.
Recently, we announced our strategy to serve the large and mid-sized
enterprise market that emphasizes license agreements that require the
recognition of revenue over a fixed period of time. In these cases, we recognize
revenues on a ratable basis over the life of the contract, which is typically 12
to 36 months. Therefore, if we do not book a sufficient number of large orders
in a particular quarter, our revenues in future periods could be lower than
expected. As we emphasize license agreements requiring ratable revenue
recognition, the potential for fluctuations in our quarterly results could
decrease but our revenues could be lower than expected. Furthermore, our
quarterly revenues may be affected significantly by other revenue recognition
policies and procedures. These policies and procedures may evolve or change over
time based on applicable accounting standards and how these standards are
interpreted.
We are increasing our investment in many areas, including research and
development, sales and marketing, services, and support infrastructure, based
upon our expectations of future revenue growth. These expenditures are
relatively fixed in the short term. If our revenues fall below expectations and
we are not able to quickly reduce spending in response, our operating results
for that quarter and future periods may be harmed.
We may incur costs and liabilities related to potential or pending litigation.
In a number of lawsuits filed against us in the fourth quarter of 2000, our
company and several of our officers have been named as defendants in a number of
securities class action lawsuits filed in the United States District Court for
the Northern District of Georgia. The plaintiffs purport to represent a class of
all persons who purchased or otherwise acquired our common stock in certain
periods beginning on October 20, 1999 and through October 25, 2000. The
complaints allege, among other things, that violations of Section 10(b) and
(20)a of the Securities Exchange Act of 1934, as amended and Rule 10b-5
promulgated thereunder, with respect to alleged material misrepresentations and
omissions made in public filings made with the Securities and Exchange
Commission and certain press releases and other public statements. The
plaintiffs seek unspecified damages and costs. These lawsuits divert the time
and attention of management and an adverse judgment could cause our financial
condition or operating results to suffer.
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Competition from other electronic procurement providers may reduce demand for
our products and cause us to reduce the price of our products.
The market for Internet-based procurement applications, and e-commerce
technology generally, is rapidly evolving and intensely competitive. The
intensity of competition has increased and is expected to further increase in
the future. We may not compete effectively in our markets. Competitive pressure
may result in our reducing the price of our products, which would negatively
affect our revenues and operating margins. If we are unable to compete
effectively in our markets, our business, results of operations and financial
condition would be materially and adversely affected.
In targeting the e-commerce market, we must compete with electronic
procurement providers such as Ariba and Commerce One. We also encounter
competition with respect to different aspects of our solution from companies
such as Concur Technologies, Extensity, Intelisys, VerticalNet, PurchasePro,
FreeMarkets, and i2. We also anticipate competition from some of the large
enterprise software developers, such as Oracle, PeopleSoft and SAP.
In addition, because there are relatively low barriers to entry in the
business-to-business exchange market, we expect additional competition from
other established and emerging companies, particularly if they acquire one of
our competitors.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition, and a larger installed base
of customers than we do. In addition, many of our competitors have well-
established relationships with our current and potential customers and have
extensive knowledge of our industry. In the past, we have lost potential
customers to competitors for various reasons, including lower prices and
incentives not matched by us. In addition, current and potential competitors
have established or may establish cooperative relationships among themselves or
with third parties to increase the ability of their products to address customer
needs. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. We also
expect that competition will increase as a result of industry consolidations.
We may not be able to compete successfully against our current and future
competitors.
Market adoption of our solutions will be impeded if we do not continue to
establish and maintain strategic relationships.
Our success depends in part on the ability of our strategic partners to
expand market adoption of our solutions. If we are unable to maintain our
existing strategic partnerships or enter into new partnerships, we may need to
devote substantially more resources to direct sales of our products and
services. We would also lose anticipated customer introductions and co-marketing
benefits.
We rely, and expect to continue to rely, on a number of third-party
application service providers to host our solutions. If we are unable to
establish and maintain effective, long-term relationships with our application
service providers, or if these providers do not meet our customers' needs or
expectations, our business would be seriously harmed. In addition, we lose a
significant amount of control over our solution when we engage application
service providers, and we cannot adequately control the level and quality of
their service. By relying on third-party application service providers, we are
wholly reliant on their information technology infrastructure, including the
maintenance of their computers and communication equipment. An unexpected
natural disaster or failure or disruption of an application service provider's
infrastructure would have a material adverse effect on our business.
We rely exclusively on one third-party content services provider to provide
catalog aggregation and management services to our customers, as part of our
procurement solution. If we are unable to maintain an effective, long-term
relationship with our content services provider, or if their services do not
meet our customers' needs or expectations, our business could be seriously
harmed.
If the demand for our solutions continues to increase, we will need to
develop relationships with additional third-party service providers to provide
these types of services. Our competitors have or may develop relationships with
these third parties and, as a result, these third parties may be more likely to
recommend competitors' products and services rather than ours.
Many of our strategic partners have multiple strategic relationships, and
they may not regard us as important to their businesses. In addition, our
strategic partners may terminate their relationships with us, pursue other
partnerships or relationships or attempt to develop or acquire products or
services that compete with our solutions. Further, our existing strategic
relationships may interfere with our ability to enter into other desirable
strategic relationships. A significant number of our Clarus eProcurement and
Clarus eMarket customers have been retained through referrals from Microsoft,
but Microsoft is not obligated to refer any
9
potential customers to us, and it has entered into strategic relationships with
other providers of electronic procurement applications.
Our stock price is highly volatile.
Our stock price has fluctuated dramatically. The market price of the common
stock may decrease significantly in the future in response to the following
factors, some of which are beyond our control:
. Variations in our quarterly operating results;
. Announcements that our revenue or income are below analysts'
expectations;
. Changes in analysts' estimates of our performance or industry
performance;
. Changes in market valuations of similar companies;
. Sales of large blocks of our common stock;
. Announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
. Loss of a major customer or failure to complete significant license
transactions;
. Additions or departures of key personnel; and
. Fluctuations in stock market price and volume, which are particularly
common among highly volatile securities of software and Internet-based
companies.
We rely on strategic selling relationships with our partners.
We have established strategic selling relationships with a number of
outside companies. Some of these companies have made significant revenue
commitments to us as part of these relationships. While we do not reflect these
commitments in our financial statements, this information is included in
"backlog" information we share with market analysts and investors. Some of
these strategic selling partners may not have the ability to meet their
financial commitments to us, if they are not able to generate a sufficient level
of sales to meet these commitments.
We expect to depend on our Clarus eProcurement and Clarus eMarket products for a
significant portion of our revenues for the foreseeable future.
We anticipate that revenues from our Clarus eProcurement and Clarus eMarket
products and related services will continue to represent a significant portion
of our revenues for the foreseeable future. As a result, a decline in the price
of, profitability of or demand for our Clarus eProcurement and Clarus eMarket
products would seriously harm our business. Our Clarus eMarket solution was
introduced in the second quarter of 2000.
Our products may perform inadequately in a high volume environment.
Any failure by our principal products to perform adequately in a high
volume environment could materially and adversely affect the market for these
products and our business, results of operations and financial condition. Our
products and the third party software and hardware on which it may depend may
not operate as designed when deployed in high volume environments.
Defects in our products could delay market adoption of our solutions or cause us
to commit significant resources to remedial efforts.
We could lose revenues as a result of software errors or other product
defects. As a result of their complexity, software products may contain
undetected errors or failures when first introduced or as new versions are
released. Despite our testing of our software products and their use by current
customers, errors may appear in new applications after commercial shipping
begins. If we discover errors, we may not be able to correct them.
10
Errors and failures in our products could result in the loss of customers
and market share or delay in market adoption of our applications, and
alleviating these errors and failures could require us to expend significant
capital and other resources. The consequences of these errors and failures could
materially and adversely affect our business, results of operations and
financial condition. Because we do not maintain product liability insurance, a
product liability claim could materially and adversely affect our business,
results of operations and financial condition. Provisions in our license
agreements may not effectively protect us from product liability claims.
Any acquisitions that we attempt or make could prove difficult to integrate or
require a substantial commitment of management time and other resources.
As part of our business strategy, we may seek to acquire or invest in
additional businesses, products or technologies that may complement or expand
our business. If we identify an appropriate acquisition opportunity, we may not
be able to negotiate the terms of that acquisition successfully, finance it, or
integrate it into our existing business and operations. We have completed only
three acquisitions to date. We may not be able to select, manage or absorb any
future acquisitions successfully, particularly acquisitions of large companies.
Further, the negotiation of potential acquisitions, as well as the integration
of an acquired business, would divert management time and other resources. We
may use a substantial portion of our available cash to make an acquisition. On
the other hand, if we make acquisitions through an exchange of our securities,
our stockholders could suffer dilution. In addition, any particular acquisition,
even if successfully completed, may not ultimately benefit our business.
We may not be able to retain the existing employees of acquired companies.
We made two technology acquisitions in 2000: the SAI/Redeo Companies and
iSold.com. In connections with these acquisitions, we acquired products
complementary to our procurement solution. We have no experience in providing
these types of software products or services. We may not have the industry
experience or technical experience to successfully continue development,
marketing and support of these technologies without the continued involvement of
these existing employees. The accounting treatment of our acquisition of the
SAI/Redeo Companies negatively impacted our results of operations.
The accounting treatment for our acquisition of the SAI/Redeo Companies
negatively impacted our results of operations in the second quarter of 2000. We
recognized a write-off of acquired in-process research and development and
amortization expense related to this acquisition. Amortization of this
acquisition will adversely affect our results of operations through 2008. The
amounts allocated under purchase accounting to develop technology and in-process
research and development in the acquisition involved valuation estimations of
future revenues, expenses, operating profit, and cash flows. The actual
revenues, expenses, operating profits, and cash flows from the acquired
technology recognized in the future may vary materially from such estimates. If
the in-process research and development product is not successfully developed,
our sales and profitability may be adversely affected in future periods.
Additionally, the value of other intangible assets acquired may become impaired.
An increase in the length of our sales cycle may contribute to fluctuations in
our operating results.
As our products and competing products become increasingly sophisticated
and complex, the length of our sales cycle is likely to increase. The loss or
delay of orders due to increased sales and evaluation cycles could materially
and adversely affect our business, results of operations and financial condition
and, in particular, could contribute to significant fluctuations in our
quarterly operating results. A customer's decision to license and implement our
solutions may present significant enterprise-wide implications for the customer
and involve a substantial commitment of its management and resources. The period
of time between initial customer contact and the purchase commitment typically
ranges from four to nine months for our applications. Our sales cycle could
extend beyond current levels as a result of lengthy evaluation and approval
processes that typically accompany major initiatives or capital expenditures or
other delays over which we have little or no control.
Our success depends on the continued use of Microsoft technologies or other
technologies that operate with our products.
Our products operate with, or are based on, Microsoft's proprietary
products. If businesses do not continue to adopt these technologies as
anticipated, or if they adopt alternative technologies that we do not support,
we may incur significant costs in redesigning our products or lose market share.
Our customers may be unable to use our products if they experience significant
problems with Microsoft technologies that are not corrected.
The failure to maintain, support or update software licensed from third parties
could materially and adversely affect our products' performance or cause product
shipment delays.
We have entered into license agreements with third-party licensors for
products that enhance our products, are used as tools with our products, are
licensed as products complementary to ours or are integrated with our products.
If these licenses
11
terminate or if any of these licensors fail to adequately maintain, support or
update their products, we could be required to delay the shipment of our
products until we could identify and license software offered by alternative
sources. Product shipment delays could materially and adversely affect our
business, operating results and financial condition, and replacement licenses
could prove costly. We may be unable to obtain additional product licenses on
commercially reasonable terms. Additionally, our inability to maintain
compatibility with new technologies could impact our customers' use of our
products.
If we are unable to manage our internal resources, we may incur increased
administrative costs and be unable to capitalize on revenue opportunities.
The growth of our e-commerce business coupled with the rapid evolution of
our market has strained, and may continue to strain, our administrative,
operational and financial resources and internal systems, procedures and
controls. Our inability to manage our internal resources effectively could
increase administrative costs and distract management. If our management is
distracted, we may not be able to capitalize on opportunities to increase
revenues.
Our success depends on our continuing ability to attract, hire, train and retain
a substantial number of highly skilled managerial, technical, sales, marketing
and customer support personnel.
Competition for qualified personnel is intense, and we may fail to retain
our key employees or to attract or retain other highly qualified personnel. In
particular, there is a shortage of, and significant competition for, research
and development and sales personnel. Even if we are able to attract qualified
personnel, new hires frequently require extensive training before they achieve
desired levels of productivity. If we are unable to hire or fail to retain
competent personnel, our business, results of operations and financial condition
could be materially and adversely affected. We do not maintain key-man life
insurance policies on any of our employees.
Illegal use of our proprietary technology could result in substantial litigation
costs and divert management resources.
Our success will depend significantly on internally developed proprietary
intellectual property and intellectual property licensed from others. We rely on
a combination of patent, copyright, trademark and trade secret laws, as well as
on confidentiality procedures and licensing arrangements, to establish and
protect our proprietary rights in our products. Existing patent, trade secret
and copyright laws provide only limited protection of our proprietary rights. We
have applied for registration of our trademarks. We enter into license
agreements with our customers that give the customer the non-exclusive right to
use the object code version of our products. These license agreements prohibit
the customer from disclosing object code to third parties or reverse-engineering
our products and disclosing our confidential information. Despite our efforts to
protect our products' proprietary rights, unauthorized parties may attempt to
copy aspects of our products or to obtain and use information that we regard as
proprietary. Third parties may also independently develop products similar to
ours.
Litigation may be necessary to enforce our intellectual property rights, to
protect our trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
resources and could harm our business, operating results and financial
condition.
Claims against us regarding our proprietary technology could require us to pay
licensing or royalty fees or to modify or discontinue our products.
Any claim that our products infringe on the intellectual property rights of
others could materially and adversely affect our business, results of operations
and financial condition. Because knowledge of a third party's patent rights is
not required for a determination of patent infringement and because the United
States Patent and Trademark Office is issuing new patents on an ongoing basis,
infringement claims against us are a continuing risk. Infringement claims
against us could cause product release delays, require us to redesign our
products or require us to enter into royalty or license agreements. These
agreements may be unavailable on acceptable terms. Litigation, regardless of the
outcome, could result in substantial cost, divert management attention and delay
or reduce customer purchases. Claims of infringement are becoming increasingly
common as the software industry matures and as courts apply expanded legal
protections to software products. Third parties may assert infringement claims
against us regarding our proprietary technology and intellectual property
licensed from others. Generally, third-party software licensors indemnify us
from claims of infringement. However, licensors may be unable to indemnify us
fully for such claims, if at all.
If a court determines that one of our products violates a third party's
patent or other intellectual property rights, there is a material risk that the
revenue from the sale of the infringing product will be significantly reduced or
eliminated, as we may have to:
12
. pay licensing fees or royalties to continue selling the product;
. incur substantial expense to modify the product so that the third
party's patent or other intellectual property rights no longer apply
to the product; or
. stop selling the product.
In addition, if a court finds that one of our products infringes a third
party's patent or other intellectual property rights, then we may be liable to
that third party for actual damages and attorneys' fees. If a court finds that
we willfully infringed on a third party's patent, the third party may be able to
recover treble damages, plus attorneys' fees and costs.
A compromise of the encryption technology employed in our solutions could reduce
customer and market confidence in our products or result in claims against us.
A significant barrier to Internet-based commerce is the secure exchange of
valued and confidential information over public networks. Any compromise of our
security technology could result in reduced customer and market confidence in
our products and in customer or third party claims against us. This could
materially and adversely affect our business, financial condition and operating
results. Clarus eProcurement and Clarus eMarket rely on encryption technology to
provide the security and authentication necessary to protect the exchange of
valuable and confidential information. Advances in computer capabilities,
discoveries in the field of cryptography or other events or developments may
result in a compromise of the encryption methods we employ in Clarus
eProcurement and Clarus eMarket to protect transaction data.
Our success depends upon market acceptance of e-commerce as a reliable method
for corporate procurement and other commercial transactions.
Market acceptance of e-commerce, generally, and the Internet specifically,
as a forum for corporate procurement is uncertain and subject to a number of
risks. The success of our suite of business-to-business e-commerce applications,
including Clarus eProcurement and Clarus eMarket, depends upon the development
and expansion of the market for Internet-based software applications, in
particular e-commerce applications. This market is new and rapidly evolving.
Many significant issues relating to commercial use of the Internet, including
security, reliability, cost, ease of use, quality of service and government
regulation, remain unresolved and could delay or prevent Internet growth. If
widespread use of the Internet for commercial transactions does not develop or
if the Internet otherwise does not develop as an effective forum for corporate
procurement, the demand for our product suite and our overall business,
operating results and financial condition will be materially and adversely
affected.
If the market for Internet-based procurement applications fails to develop
or develops more slowly than we anticipate or if our Internet-based products or
new Internet-based products we may develop do not achieve market acceptance, our
business, operating results and financial condition could be materially and
adversely affected. The adoption of the Internet for corporate procurement and
other commercial transactions requires accepting new ways of transacting
business. In particular, enterprises with established patterns of purchasing
goods and services that have already invested substantial resources in other
means of conducting business and exchanging information may be particularly
reluctant to adopt a new strategy that may make some of their existing personnel
and infrastructure obsolete. Also, the security and privacy concerns of existing
and potential users of Internet-based products and services may impede the
growth of online business generally and the market's acceptance of our products
and services in particular. A functioning market for these products may not
emerge or be sustained.
The market for business-to-business e-commerce solutions is characterized by
rapid technological change, and our failure to introduce enhancements to our
products in a timely manner could render our products obsolete and unmarketable.
The market for e-commerce applications is characterized by rapid
technological change, frequent introductions of new and enhanced products and
changes in customer demands. In attempting to satisfy this market's demands, we
may incur substantial costs that may not result in increased revenues due to the
short life cycles for business-to-business e-commerce solutions. Because of the
potentially rapid changes in the e-commerce applications market, the life cycle
of our products is difficult to estimate.
Products, capabilities or technologies others develop may render our
products or technologies obsolete or noncompetitive and shorten the life cycles
of our products. Satisfying the increasingly sophisticated needs of our
customers requires developing and introducing enhancements to our products and
technologies in a timely manner that keeps pace with technological developments,
emerging industry standards and customer requirements while keeping our products
priced competitively. Our
13
failure to develop and introduce new or enhanced e-commerce products that
compete with other available products could materially and adversely affect our
business, results of operations and financial condition.
Losses from our investments in strategic partners could negatively impact our
operating results.
We have made several financial investments in strategic partners. These
companies are primarily early-stage enterprises with limited operated histories.
If these partners are unsuccessful in executing their business plans, we may
experience losses on these investments, which would negatively impact our
operating results.
Failure to expand Internet infrastructure could limit our growth.
Our ability to increase the speed and scope of our services to customers is
limited by and depends on the speed and reliability of both the Internet and our
customers' internal networks. As a result, the emergence and growth of the
market for our services depends on improvements being made to the entire
Internet infrastructure as well as to our individual customers' networking
infrastructures. The recent growth in Internet traffic has caused frequent
periods of decreased performance. If the Internet's infrastructure is unable to
support the rapid growth of Internet usage, its performance and reliability may
decline, and overall Internet usage could grow more slowly or decline. If
Internet reliability and performance declines, or if necessary improvements do
not increase the Internet's capacity for increased traffic, our customers will
be hindered in their use of our solutions, and our business, operating results
and financial condition could suffer.
Future governmental regulations could materially and adversely affect our
business and e-commerce generally.
We are not subject to direct regulation by any government agency, other than
under regulations applicable to businesses generally, and few laws or
regulations specifically address commerce on the Internet. In view of the
increasing use and growth of the Internet, however, the federal government or
state governments may adopt laws and regulations covering issues such as user
privacy, property ownership, libel, pricing and characteristics and quality of
products and services. We could incur substantial costs in complying with these
laws and regulations, and the potential exposure to statutory liability for
information carried on or disseminated through our application systems could
force us to discontinue some, or all of our services. These eventualities could
adversely affect our business operating results and financial condition. The
adoption of any laws or regulations covering these issues also could slow the
growth of e-commerce generally, which would also adversely affect our business,
operating results or financial condition. Additionally, one or more states may
impose sales tax collection obligations on out-of-state companies that engage in
or facilitate e-commerce. The collection of sales tax in connection with e-
commerce could impact the growth of e-commerce and could adversely affect sales
of our e-commerce products.
Legislation limiting further levels of encryption technology may adversely
affect our sales.
As a result of customer demand, it is possible that Clarus eProcurement and
Clarus eMarket will be required to incorporate additional encryption technology.
The United States government regulates the exportation of this technology.
Export regulations, either in their current form or as they may be subsequently
enacted, may further limit the levels of encryption or authentication technology
that we are able to use in our software and our ability to distribute our
products outside the United States. Any revocation or modification of our export
authority, unlawful exportation or use of our software or adoption of new
legislation or regulations relating to exportation or use of software and
encryption technology could materially and adversely affect our sales prospects
and, potentially, our business, financial condition and operating results as a
whole.
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
3970 Johns Creek Court
Suite 100
Suwanee, Georgia 30024
Telephone: (770) 291-3900
Fax: (770) 291-4997
www.claruscorp.com
14
Our fiscal year ends on December 31. We file annual, quarterly, and special
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 Web site
maintained by the SEC at http://www.sec.gov.
ITEM 2. PROPERTIES
Our corporate headquarters is located in Suwanee, Georgia, where we lease
approximately 89,000 square feet. This location houses: client services,
strategy and business development, sales and marketing, research and
development, and finance and administration. Our Europe, Middle East and Africa
("EMEA") headquarters is in Reading, England, where we lease approximately
13,700 square feet. This location houses: client services, business development,
sales and marketing, and finance and administration. We also lease approximately
6,000 square feet in Limerick, Ireland, which is primarily used for development
of our Clarus Settlement product and approximately 5,000 square feet in
Mississauga, Ontario, which is primarily used for development and customization
of our products. We also lease executive suites, primarily for sales offices. We
believe our facilities are adequate for future growth.
ITEM 3. LEGAL PROCEEDINGS
We are a party to lawsuits in the normal course of our business. Litigation
in general, and securities litigation in particular, can be expensive and
disruptive to normal business operations. Moreover, the results of complex legal
proceedings are difficult to predict. An unfavorable resolution of one or more
of the following lawsuits could adversely affect our business, results of
operations, or financial condition.
Following our public announcement on October 25, 2000, of our financial
results for the third quarter, we and certain of our directors and officers were
named as defendants in fourteen putative class action lawsuits filed in the
United States District Court for the Northern District of Georgia on behalf of
all purchasers of common stock of the Company during various periods beginning
as early as October 20, 1999 and ending on October 25, 2000. The fourteen class
action lawsuits filed against the company were consolidated into one case, Case
No. 1:00-CV-2841, pursuant to an order of the court dated November 17, 2000.
The class action complaints allege claims against us and other defendants
for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, as amended, and Rule 10b-5 promulgated thereunder with respect to alleged
material misrepresentations and omissions in public filings made with the
Securities and Exchange Commission and certain press releases and other public
statements made by us and certain of our officers relating to our business,
results of operations, financial condition and future prospects, as a result of
which, it is alleged, the market price of our common stock was artificially
inflated during the class periods. The class action complaints focus on
statements made concerning an account receivable from one of our customers. The
plaintiffs seek unspecified compensatory damages and costs (including attorneys'
and expert fees), expenses and other unspecified relief on behalf of the
classes. We believe that we have complied with our obligations under the Federal
securities laws and we intend to defend these lawsuits vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been listed on the Nasdaq National Market 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 National Market 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 National Market.
Closing Sales Price
------------------------
High Low
------------ ----------
Calendar Year 1999
First Quarter..................................................................................... $ 6.13 $ 3.31
Second Quarter.................................................................................... $ 5.91 $ 4.50
Third Quarter..................................................................................... $ 15.44 $ 5.06
Fourth Quarter.................................................................................... $ 71.00 $ 9.38
Calendar Year 2000
First Quarter..................................................................................... $136.00 $54.50
Second Quarter.................................................................................... $ 68.38 $21.31
Third Quarter..................................................................................... $ 63.25 $22.81
Fourth Quarter.................................................................................... $ 23.75 $ 6.06
Calendar Year 2001
First Quarter (through March 13, 2001)............................................................ $ 9.25 $ 5.09
Stockholders
As of March 13, 2001, 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.
16
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. 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, which are included in this report.
Year Ended December 31,
-----------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(in thousands, except per share data)
Statement of Operations Data:
- -----------------------------
Revenues:
License fees..................................................... $ 24,686 $ 15,101 $ 17,372 $13,506 $ 6,425
Services fees.................................................... 9,361 23,041 24,268 12,482 6,631
-------- -------- -------- ------- -------
Total revenues.................................................. 34,047 38,142 41,640 25,988 13,056
Cost of revenues:...................................................
License fees..................................................... 154 1,351 1,969 1,205 416
Service fees..................................................... 12,776 14,517 13,952 7,311 4,254
-------- -------- -------- ------- -------
Total cost of revenues.......................................... 12,930 15,868 15,921 8,516 4,670
Operating expenses:
Research and development, exclusive of noncash expense........... 21,891 9,003 6,335 6,690 5,360
Noncash research and development................................. 424 - - - -
In-process research and development.............................. 8,300 - 10,500 - -
Sales and marketing, exclusive of noncash expense................ 35,888 15,982 11,802 9,515 7,191
Noncash sales and marketing ..................................... 7,001 1,930 - - -
General and administrative, exclusive of noncash expense... 15,721 6,241 5,126 3,161 2,368
Noncash general and administrative.............................. 1,098 874 880 58 -
Depreciation and amortization.................................... 8,132 3,399 2,154 1,406 1,125
-------- -------- -------- ------- -------
Total operating expenses........................................... 98,455 37,429 36,797 20,830 16,044
-------- -------- -------- ------- -------
Operating loss...................................................... (77,338) (15,155) (11,078) (3,358) (7,658)
Gain on sale of assets.............................................. 1,347 9,417 - - -
Realized loss on sale of
investments........................................................ (100) - - - -
Loss on impairment of
investments........................................................ (4,128) - - - -
Amortization of debt
discount........................................................... (982) - - - -
Interest income, net................................................ 10,554 337 412 (274) (6)
Minority interest................................................... - - (36) (478) (215)
-------- -------- -------- ------- -------
Net loss............................................................ $(70,647) $ (5,401) $(10,702) $(4,110) $(7,879)
======== ======== ======== ======= =======
Net loss per common share:
Basic............................................................ $(4.90) $(0.49) $(1.70) $(2.97) $(5.74)
======== ======== ======== ======= =======
Diluted.......................................................... $(4.90) $(0.49) $(1.70) $(2.97) $(5.74)
======== ======== ======== ======= =======
Weighted average common shares outstanding:
Basic............................................................ 14,420 11,097 6,311 1,386 1,373
======== ======== ======== ======= =======
Diluted.......................................................... 14,420 11,097 6,311 1,386 1,373
======== ======== ======== ======= =======
Year Ended December 31,
-----------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Balance Sheet Data:
- -------------------
Cash and cash equivalents........................................... $118,303 $14,127 $14,799 $ 7,213 $ 3,279
Working capital (deficit)........................................... 171,336 16,751 9,001 (453) (3,422)
Total assets........................................................ 266,904 48,563 40,082 14,681 8,525
Long-term debt, net of current portion.............................. 5,000 - 245 497 1,093
Total stockholders' equity (deficit)................................ 246,822 32,615 22,111 (27,910) (23,837)
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company develops, markets and supports Internet-based business-to-
business electronic commerce solutions that automate the procurement and
management of operating resources. The Company's multiple solutions provide a
framework to enable Internet-based digital marketplaces, allowing companies to
create trading communities and additional revenue opportunities. The Company's
multiple solutions, based on a free trade model, provide a direct Internet-based
connection between buyer and supplier without requiring transactions to be
executed through a centralized portal. The Company's product line includes
solutions that serve "market makers" (businesses utilizing the Internet for the
purpose of facilitating and increasing the efficiency of the distribution
channels of chosen vertical markets) as well as other solutions that best serve
the purchasing processes of business enterprises. The Company also provides
implementation and ongoing customer support services as part of its complete
procurement solutions. To achieve broad market adoption of the Company's
solutions and services, the Company has developed a multi-channel distribution
strategy that includes both a direct sales force and a growing number of
indirect channels, including application service providers, system integrators
and resellers.
Forward-Looking Statements
This report contains certain forward-looking statements, including or
related to our future results, including certain projections and business
trends. Assumptions relating to forward-looking statements involve judgments
with respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control. When
used in this report, the words "estimate," "project," "intend," "believe" and
"expect" and similar expressions are intended to identify forward-looking
statements. Although we believe that assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate, and we
may not realize the results contemplated by the forward-looking statement.
Management decisions are subjective in many respects and susceptible to
interpretations and periodic revisions based upon actual experience and business
developments, the impact of which may cause us to alter our business strategy or
capital expenditure plans that may, in turn, affect our results of operations.
In light of the significant uncertainties inherent in the forward-looking
information included in this report, you should not regard the inclusion of such
information as our representation that we will achieve any strategy, objectives
or other plans. The forward-looking statements contained in this report speak
only as of the date of this report, and we have no obligation to update publicly
or revise any of these forward-looking statements.
These and other statements, which are not historical facts, are based
largely upon our current expectations and assumptions and are subject to a
number of risks and uncertainties that could cause actual results to differ
materially from those contemplated by such forward-looking statements. These
risks and uncertainties include, among others, the risks and uncertainties
described in "Business - Risk Factors."
Sources of Revenue
The Company's revenue consists of license fees and services fees. License
fees are generated from the licensing of the Company's suite of products.
Services fees are generated from consulting, implementation, training, content
aggregation and maintenance support services.
Revenue Recognition
The Company recognizes revenue from two primary sources, software licenses
and services. Revenue from software licensing and services fees is recognized in
accordance with Statement of Position ("SOP") 97-2, "Software Revenue
Recognition", and SOP 98-9, "Software Revenue Recognition with Respect to
Certain Transactions". Accordingly, the Company recognizes software license
revenue when: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred; (3) the fee is fixed or determinable; and (4) collectibility is
probable.
SOP No. 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair values of the elements. The fair value of an element must be based
on evidence that is specific to the vendor. License fee revenue allocated to
software products generally is recognized upon delivery of the products or
deferred and recognized in future periods to the extent that an arrangement
includes one or more elements to be delivered at a future date and for which
fair values have not been established. 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.
18
Under SOP No. 98-9, if evidence of fair value does not exist for all
elements of a license agreement and post-contract customer support is the only
undelivered element, then all revenue for the license arrangement is recognized
ratably over the term of the agreement as license revenue. If evidence of fair
value of all undelivered elements exists but evidence does not exist for one or
more delivered elements, then revenue is recognized using the residual method.
Under the residual method, the fair value of the undelivered elements is
deferred and the remaining portion of the arrangement fee is recognized as
revenue. Revenue from hosted software agreements are recognized ratably over the
term of the hosting arrangements.
Cost of Revenues and Operating Expenses
Cost of license fees includes royalties and software duplication and
distribution costs. The Company recognizes these costs as the applications are
shipped.
Cost of services fees includes personnel related expenses and consulting
fees incurred to provide implementation, training, maintenance, content
aggregation, and upgrade services to customers and partners. These costs are
recognized as they are incurred.
Research and development expenses consist primarily of personnel related
expenses and consulting fees. The Company accounts for software development
costs under Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." The
Company charges research and development costs related to new products or
enhancements to expense as incurred until technological feasibility is
established, after which the remaining costs are capitalized until the product
or enhancement is available for general release to customers. The Company
defines technological feasibility as the point in time at which a working model
of the related product or enhancement exists. Historically, the costs incurred
during the period between the achievement of technological feasibility and the
point at which the product is available for general release to customers have
not been material.
Sales and marketing expenses consist primarily of personnel related
expenses, including sales commissions and bonuses, expenses related to travel,
trade show participation, public relations, promotional activities, regional
sales offices, and advertising.
General and administrative expenses consist primarily of personnel related
expenses for financial, administrative and management personnel, fees for
professional services, and bad debt expense. The Company allocates the total
cost of its information technology function and costs related to the occupancy
of its corporate headquarters, to each of the functional areas. Information
technology expenses include personnel related expenses, communication charges,
and software support. Occupancy charges include rent, utilities, and maintenance
services.
The Company has incurred significant costs to develop its business-to-
business e-commerce technology and products and to recruit and train personnel.
The Company believes its success is contingent upon increasing its customer base
and investing in further development of its products and services. This will
require significant expenditures for sales, marketing, research and development,
and to a lesser extent support infrastructure. The Company therefore expects to
continue to incur substantial operating losses for the foreseeable future.
Limited Operating History
The Company has a limited operating history as an e-commerce business that
makes it difficult to forecast its future operating results. Prior period
results should not be relied on to predict the Company's future performance.
19
Results of Operations
The following table sets forth certain statement of operations data dividing
revenues between our previous human resources and financial software business
and our current e-commerce business for the years indicated.
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
(in thousands)
Revenues: e-commerce
License fees................................................................ $ 24,686 $ 9,969 $ 211
Services fees............................................................... 9,361 1,515 59
--------- --------- ---------
Total revenues............................................................ 34,047 11,484 270
Revenues: ERP
License fees................................................................ - 5,132 17,161
Services fees............................................................... - 21,526 24,209
--------- --------- ---------
Total revenues............................................................ - 26,658 41,370
Cost of revenues: e-commerce
License fees................................................................ 154 400 125
Services fees............................................................... 12,776 3,130 60
--------- --------- ---------
Total cost of revenues.................................................... 12,930 3,530 185
Cost of revenues: ERP
License fees................................................................ - 951 1,844
Services fees............................................................... - 11,387 13,892
--------- --------- ---------
Total cost of revenues.................................................... - 12,338 15,736
Gross margin on e-commerce license fees.......................................... 24,532 9,569 86
Gross margin on e-commerce services fees......................................... (3,415) (1,615) (1)
Gross margin on ERP license fees................................................. - 4,181 15,317
Gross margin on ERP services fees................................................ - 10,139 10,317
Operating expenses:
Research and development, exclusive of noncash expense...................... 21,891 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........................... 35,888 15,982 11,802
Noncash sales and marketing................................................. 7,001 1,930 -
General and administrative, exclusive of noncash expense.................... 15,721 6,241 5,126
Noncash general and administrative.......................................... 1,098 874 880
Depreciation and amortization............................................... 8,132 3,399 2,154
--------- --------- ---------
Total operating expenses.................................................. 98,455 37,429 36,797
Operating loss................................................................... (77,338) (15,155) (11,078)
Gain on sale of assets........................................................... 1,347 9,417 -
Realized loss on sale of investments............................................. (100) - -
Loss on impairment of investments................................................ (4,128) - -
Amortization of debt discount.................................................... (982) - -
Interest income, net............................................................. 10,554 337 412
Minority interest................................................................ - - (36)
--------- --------- ---------
Net loss......................................................................... $ (70,647) $ (5,401) $ (10,702)
========= ========= =========
20
Years Ended December 31, 2000 and 1999
Revenues
In the second half of 2000, the Company expanded its business model to
include ratable revenue recognition. Total revenues and e-commerce license fees
in 2000 were impacted by the use of subscription programs and traditional,
perpetual license contracts with extended payment terms that result in revenues
taken ratably. The impact in 2000 from subscription programs was $643,000 and
$75,000 in the third and fourth quarters, respectively. The impact in 2000 from
the traditional, perpetual license contracts with extended payment terms was
$3.3 million, in the fourth quarter. Although lowering reported total revenue
and e-commerce license fees in 2000, the benefits achieved over time of the
ratable model are a more linear revenue pattern as well as increased visibility
and predictability of financial results.
Total Revenues. Total revenues decreased 10.7% to $34.0 million in 2000
from $38.1 million in 1999. This decrease is primarily attributable to the
expansion of the Company's business model, discussed above, and decreased
services fees, as a result of the sale of the Company's ERP business in October
1999, partially offset by increased e-commerce license fees. For the year ended
December 31, 2000, one customer accounted for more than 10%, totaling $3.8
million, of total revenue.
E-commerce License Fees. License fees increased 147.6% to $24.7 million, or
72.5% of total e-commerce revenues, in 2000 from $10.0 million, or 86.8% of
total e-commerce revenues, in 1999. The increase in e-commerce license fees was
the result of an increase in the amount of software licensed partially offset by
the expansion of the Company's business model, discussed above. The majority of
the Company's e-commerce license revenue for the year ended December 31, 2000
was derived from the licensing of products that became generally available since
June 1, 2000.
E-commerce Services Fees. Services fees increased 517.9% to $9.4 million
from $1.5 million in 1999, and increased as a percentage of total e-commerce
revenues to 27.5% in 2000 from 13.2% in 1999. This increase is primarily
attributable to increased demand for the Company's services as a result of the
growth in e-commerce license fees.
ERP License Fees. The Company sold its ERP business in October 1999, and as
a result, had no ERP license fees during the year ended December 31, 2000. ERP
license fees represented $5.1 million, or 34.0% of total license revenues,
during the year ended December 31, 1999.
ERP Services Fees. The Company sold its ERP business in October 1999, and as
a result, had no ERP services fees during the year ended December 31, 2000. ERP
services fees represented $21.5 million, or 93.4% of total services revenues,
during the year ended December 31, 1999.
Cost of Revenues
Total Cost of Revenues. Cost of revenues decreased 18.5% to $12.9 million,
or 38.0% of total revenues, during the year ended December 31, 2000 from $15.9
million, or 41.6% of total revenues, during the same period in 1999. The
decrease both in total and as a percentage of total revenues is primarily a
result of the change in mix in revenue from services fees, which historically
had a higher cost of revenues, to license fees.
E-commerce Cost of License Fees. Cost of e-commerce license fees decreased
to $154,000 in 2000 from $400,000 in 1999. The cost of license fees may vary
from period to period depending on the product mix licensed, but are expected to
remain a small percentage of license fees.
E-commerce Cost of Services Fees. Cost of e-commerce services fees increased
308.2% to $12.8 million, or 136.5% of total e-commerce services fees, in 2000
compared to $3.1 million, or 206.6% of total e-commerce services fees, in 1999.
The increase in the cost of e-commerce services fees was primarily attributable
to personnel related costs and consulting fees. The consulting fees related to
sub-contracted services was approximately $2.4 million during the year ended
December 31, 2000 compared to approximately $127,000 during the year ended
December 31, 1999. Although the Company intends to increase the number of
services employees, it will continue sub-contracting some consulting and
implementation engagements to its system integrator partners. The Company has
incurred cost of e-commerce service fees in excess of e-commerce service fees
due primarily to the hiring and training of personnel in anticipation of future
growth. While the Company believes these costs will continue to be greater than
e-commerce service fees in the near term, the Company plans for e-commerce
service fees to exceed costs by late 2001 or early 2002.
ERP Cost of License Fees. The Company sold its ERP business in October 1999,
and as a result, had no ERP license fees or cost of ERP license fees during the
year ended December 31, 2000. ERP cost of license fees represented $951,000, or
18.5%
21
of ERP license revenues, during the year ended December 31, 1999.
ERP Cost of Services Fees. The Company sold its ERP business in October
1999, and as a result, had no ERP services fees or cost of ERP services fees
during the year ended December 31, 2000. ERP cost of services fees represented
$11.4 million, or 52.9% of ERP services revenues, during the year ended December
31, 1999.
Research and Development, Exclusive of Noncash Expense
Research and development expenses increased 143.2% to $21.9 million, or
64.3% of total revenues, in 2000 from $9.0 million, or 23.6% of total revenues,
in 1999. Research and development expenses increased primarily due to increased
personnel related expenses and increased consulting fees incurred to develop the
Company's products. Consulting fees increased to approximately $12.3 million
during the year ended December 31, 2000 from approximately $605,000 during the
year ended December 31, 1999. The Company intends to hire in-house research and
development personnel moving forward, but expects increases in personnel related
costs to be offset by a decrease in consulting fees.
Noncash Research and Development Expense
Noncash research and development expenses of approximately $424,000 were
recognized during 2000. The expense resulted from the Company's agreement with
a third party to develop certain software that the Company intends to sell in
the future. The agreement required the third party to reach certain milestones
related to the software development in order to receive warrants to purchase
50,000 shares of the Company's common stock with an exercise price of $56.78.
The third party completed two of the three scheduled milestones in the first
quarter of 2000 and they were granted warrants to purchase 33,334 shares of
common stock. The value of the warrants earned approximated $424,000 and was
computed using the Black-Scholes option pricing model. The third milestone was
not reached by the scheduled due date, and a result, the warrants to purchase
the remaining 16,666 shares of common stock were forfeited. Warrants to
purchase 33,334 shares remain outstanding at December 31, 2000 and expire in the
first quarter of 2003.
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").
At the Valuation Date, the SAI/Redeo Companies had technology under
development that had not demonstrated technological or commercial feasibility.
This technology is described below. As of the Valuation Date, the projects
associated with the IPR&D efforts have not yet reached technological feasibility
and the IPR&D has no alternative future use in the event that the proposed
products do not prove to be feasible. These development efforts fall within the
definition of IPR&D contained in the Statement of Financial Accounting Standards
("SFAS") No. 2.
SAI/Redeo IPR&D SAI/Redeo management believes that the SAI/Redeo product
under development as the first settlement portal that completes the B2B commerce
chain cycle for the buy side, sell side, and net marketmakers ("NMMs"). The
Company's goal is to complete the e-procurement cycle from order fulfillment to
settlement automatically and at the lowest possible cost. Planned functional
capabilities of the SAI/Redeo product include:
. Payment Type Independence - Multiple payment types are fully
supported, including credit card, purchasing card, EFT, direct debit,
direct deposit, and traditional check. The process is flexible,
allowing trading partners and NMMs to negotiate solutions.
. Deferred/Scheduled Settlement - Transactions may be scheduled for
settlement to assure traditional payment terms are retained. Control
over settlement may be pre-negotiated or retained by either the
customer or the vendor.
. Least Cost Pricing - The portal determines the lowest cost alternative
for settlement based on business rules configured between trading
partners and the NMMs.
. Multi-currency - Trading partners may settle in any currency with
exchange gains, losses and settlement charges recorded in the trading
partners respective ERP system.
. Global Coverage - Any bank or service provider around the world may be
used for settlement and is not tied to the country where the
transaction originated. Settlement integration is performed using EDI
or XML standards.
. Financial Institution Integration and Independence - Redeo currently
offers integration with over 60 banks around the world, and trading
partners and NMMs can change banking and service provider
relationships. Also, trading partners can select the settlement
institution or service provider at the time of the settlement.
22
. ERP Integration - Settlement may be integrated with the leading ERP
providers, allowing trading partners to have disparate ERP systems
within their enterprise and between enterprises.
. Aggregation & Consolidation - Trading partners in the net market may
aggregate and net transactions in order to reduce the number of
settlement transactions.
. Reconciliation - Transactions and balances may be automatically
reconciled between trading partners and NMM's disparate systems.
Charge backs and disputes may be automatically recorded and processed.
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.
Valuation of IPR&D: Amounts allocated to IPR&D were calculated using
------------------
established valuation techniques in the high technology industry and 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, focusing on the income-producing capabilities of
the in-process technologies and taking into consideration (i) the analysis of
the stage of completion of each project and (ii) the exclusion of value related
to research and development yet-to-be completed as part of the on-going IPR&D
projects. Under this approach, the value is determined by estimating the
revenue contribution generated by each of the identified products classified
within the classification segments. Revenue estimates were based on (i)
individual product revenues, (ii) anticipated growth rates, (iii) anticipated
product development and introduction schedules, (iv) product sales cycles, and
(v) the estimated life of a product's underlying technology.
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. Additionally, these projects will require
continued research and development after they have reached a state of
technological and commercial feasibility. The resulting operating income stream
was discounted to reflect its present value at the date of the acquisition.
These estimates are subject to change, given the uncertainties of the
development process, and no assurance can be given that deviations from these
estimates will not occur or that the Company will realize any anticipated
benefits 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,
taking into account required rates of return from investments in various areas
of the enterprise, and reflecting the inherent uncertainties in future revenue
estimates from technology investments including the uncertainty surrounding the
successful development of the acquired IPR&D, the useful life of such
technology, the profitability levels of such technology, if any, and the
uncertainty of technological advances, all of which are unknown at this time.
Certain risks and uncertainties are associated with the completion of the
development within a reasonable projected period of time. Each of the acquired
IPR&D projects have not demonstrated its technological or commercial feasibility
as of the acquisition date. Significant risks exist because of uncertainties
the Company may face in the form of time and costs necessary to produce
technologically feasible products. If the proposed products fail to become
viable, there is uncertainty that the Company would be able to realize any value
from the sale of the technology to another party.
23
Sales and Marketing, Exclusive of Noncash Expense
Sales and marketing expenses increased 124.6% to $35.9 million, or 105.4%
of total revenues, in 2000 from $16.0 million, or 41.9% of total revenues, in
1999. The increase was primarily attributable to the additional sales and
marketing personnel and 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.
Noncash Sales and Marketing Expense
During the years ended December 31, 2000 and 1999, noncash sales and
marketing expenses of approximately $7.0 million and $1.9 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 are also customers, in
exchange for their participation in the Company's sales and marketing efforts.
The Company recorded the value of these warrants and common stock as deferred
sales and marketing expenses, which are being amortized over the life of the
agreements which range from nine months to five years.
General and Administrative, Exclusive of Noncash Expense
General and administrative expenses increased 151.9% to $15.7 million in
2000 from $6.2 million in 1999. As a percentage of total revenues, general and
administrative expenses increased to 46.2% in 2000 from 16.4% in 1999. The
increase in general and administrative expenses was primarily attributable to
increases in personnel related costs and bad debt expense of $5.8 million in the
year ended December 31, 2000. The increase in bad debt expense in 2000 relates
primarily to a reserve for a single customer of $2.3 million as well as a
reserve related to management's concerns for receivables from early-stage
companies due to the volatile industry-based economic conditions, especially
during the fourth quarter of 2000. The deferred revenue balance at December 31,
2000 related to these early-stage companies was approximately $373,000.
Noncash General and Administrative Expense
Noncash general and administrative expenses increased to approximately $1.1
million, or 3.2% of total revenues, in 2000 from $874,000, or 2.3% of total
revenues, in 1999. The increase 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. In the
third quarter of 2000, the Company granted 18,750 options to a new board member
at a price below the fair market value at the date of grant. Deferred
compensation of approximately $266,000 was recorded related to this grant and
compensation expense of approximately $116,000 was recognized. Forty percent of
these options will be fully vested on June 13, 2001 and the remainder will vest
quarterly through July 30, 2001.
Depreciation and Amortization Expense
Depreciation and amortization increased 139.2% to $8.1 million, or 23.9% of
total revenues, in 2000, from $3.4 million, or 8.9% of total revenues, in 1999.
This increase in this expense is primarily the result of the Company's
amortization of its intangible assets associated with acquisitions completed in
the second quarter of 2000.
Gain on Sale of 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.
Loss on Impairment of Investments
During the fourth quarter of 2000, the Company recorded a loss on impairment
of investments of approximately $4.1 million. The loss was necessitated by
other than temporary losses to the value of investments the Company has made in
privately held companies. These companies are primarily early-stage companies
and are subject to significant risk due to their limited operating history and
volatile industry-based economic conditions.
24