Back to GetFilings.com
================================================================================
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, 2001
[_] 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) (I.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 14, 2002 was approximately
$61.1 million based on $4.04 per share, the closing price of the common stock
as quoted on the Nasdaq National Market.
The number of shares of the Registrant's common stock outstanding at March
14, 2002, was 15,578,142 shares.
DOCUMENT INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2002 Annual Meeting of Stockholders
to be filed with the Securities and Exchange Commission within 120 days of the
Registrant's 2001 fiscal year end are incorporated by reference into Part III
of this report.
================================================================================
TABLE OF CONTENTS
Page
----
PART I
ITEM 1. BUSINESS....................................................... 1
ITEM 2. PROPERTIES..................................................... 7
ITEM 3. LEGAL PROCEEDINGS.............................................. 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 7
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....... 8
ITEM 6. SELECTED FINANCIAL DATA........................................ 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................... 10
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA..................... 47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE....................................... 79
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 80
ITEM 11. EXECUTIVE COMPENSATION......................................... 80
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..................................................... 80
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 80
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K....................................................... 80
SIGNATURES.............................................................. 83
PART I
ITEM 1. BUSINESS
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 "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Risk Factors".
Overview
We develop, market, and support Internet-based business-to-business ("B2B")
e-commerce solutions 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 BarclaysB2B, the
Burlington Northern and Santa Fe Railway Company, Cox Enterprises, Mastercard
International, Union Pacific Corporation, Parsons Brinckerhoff, Sumurfit-Stone
Container Corporation, and Wachovia 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.
1
. 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
was accrued at the date of acquisition and paid 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") for approximately $63.2
million, consisting of approximately $30.0 million in cash (exclusive of
$350,000 of cash acquired), 1,148,000 shares of the Company's common
stock with a fair value of $30.4 million, assumed options to acquire
163,200 shares of the Company's common stock with an exercise price of
$23.50 (estimated fair value of $1.8 million using the Black-Scholes
option pricing model with the following variables: no expected dividend
yield, volatility of 70%, risk-free interest rate of 6.5%, and an
expected life of 2 years) and acquisition costs of approximately $995,000
The SAI/Redeo Companies specialized in electronic payment settlement
software.
Our Solution
We are a leading provider of Internet-based business-to-business e-commerce
applications 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:
. 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, supplier
enablement, and training and implementation services.
. Rapid Deployment/Speed to Return on Investment (ROI). We have
demonstrated the rapid deployment capabilities of our e-commerce
solutions. We believe that 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 offer bundled
software and services solutions designed 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 includes
options that allow companies to realize a more rapid return on their
investment by decreasing their up-front software expenditures.
. 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.
2
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.
The key elements of our strategy are to:
. Market and sell three e-commerce platforms: sourcing, procurement and
settlement.
Sourcing: We provide a sourcing solution that provides commerce
capabilities such as auctions, weight-based request for quotations, and
collaboration. Our sourcing platforms accounted for 15.4% and 7.4% of our
total license fee revenue in 2001 and 2000, respectively.
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 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 61.6% and 79.8%
of our total license fee revenue in 2001 and 2000, 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. Our settlement platforms accounted
for 23.0% and 12.8% of our total license fee revenue in 2001 and 2000,
respectively.
. Execute a multi-channel sales strategy. We believe that a key to market
penetration is a multi-channel sales strategy and organization.
Therefore, our organization includes both a direct and indirect sales
force.
. Leverage our business model for market penetration. Our solutions include
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 the SAI/Redeo Companies, an
organization with operations in Ireland. In 2001, 73.1% of our business
was derived from U.S.-based companies. The remainder of the Company's
2001 revenue was derived from international markets, of which 12.6% of
total revenue was derived from one customer in Italy. 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 substantially all of our
revenue was from U.S.-based companies. There are certain risks attendant
to our international operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Risk Factors".
. Offer flexible payment options. We believe a key to market adoption of
our products is to offer multiple payment options that are a departure
from the fee-based software licensing strategies that our competitors and
we have traditionally employed.
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.
3
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 application
service providers, systems integrators, resellers, OEMs and other complementary
technology partners. These relationships are focused on the expansion of our
sales reach to markets not covered by our direct sales organization.
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 also have developed relationships with selected resellers such as Compaq,
Microsoft Great Plains' resellers, Manugistics, BCE Emergis, 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. Most recently, in
2002, Microsoft elevated its partnership with Clarus to the select Independent
Software Vendor ("ISV") program level in the managed partner group. This
selection recognizes our commitment to .NET and its importance in a strategic
area of the enterprise software marketplace. It also recognizes us as one of
Microsoft's top 20 ISV partners and will continue to provide us access to
engineering, sales and marketing resources at Microsoft. 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 design 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. Additionally, during 2001 we entered into a reseller agreement with
Microsoft Great Plains that was subsequently restructured to allow us to deal
directly with the Microsoft Great Plains' resellers.
Sales and Marketing
We sell our software and services through our direct sales force and a
number of indirect channels. Our direct sales force, consisting of 41 sales
professionals as of December 31, 2001, is organized geographically into two
regions: the Americas and Europe, Middle East and Africa ("EMEA") regions. 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. 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 and Deloitte & Touche. We participate in industry trade shows
and seminars, use telemarketing campaigns, and conduct direct mail campaigns.
We hosted an executive customer conference, eCLeadership, in May 2001. In
addition, we maintain a web site, www.claruscorp.com, which is integrated with
our sales, marketing, recruiting and fulfillment operations.
4
Competition
The market for our products is highly competitive and subject to rapid
technological change. We believe we are able to differentiate our solutions
from corporate electronic procurement and digital marketplace providers such as
Ariba and Commerce One through the breadth and depth of our solution, our
product quality and performance, our customer service, our product features and
the value of our overall solution . We also encounter competition with respect
to different aspects of our solution from companies such as VerticalNet,
PurchasePro, FreeMarkets, and i2. We also anticipate competition from some of
the large enterprise resource planning software vendors, such as Oracle, SAP
and Peoplesoft.
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 and focus
groups 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 $16.2 million,
$22.4 million and $9.0 million for the years ended December 31, 2001, 2000 and
1999, 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 1999 were related to our enterprise resource planning business
that we sold to Geac Computer Systems, Inc. and Geac Canada Limited in October
1999. The majority of our research and development expenditures in 2001 and
2000 were related to our e-commerce products.
As of December 31, 2001, we employed 70 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.
5
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, 2001, we had a total of 209 employees,
including 53 in client services, 41 in sales, 2 in business development, 11 in
marketing, 70 in research and development and 32 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.
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
Contact: Kevin Acocella
Our fiscal year ends on December 31. We file annual, quarterly, and other
reports, proxy statements and other information with the Securities and
Exchange Commission. You may read and copy any reports, statements, or other
information we file at the SEC's public reference rooms in Washington, D.C.,
New York, New York, and Chicago, Illinois. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms. Our SEC
filings are also available to the public from commercial document retrieval
services and at the Web site maintained by the SEC at http://www.sec.gov.
6
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 Maidenhead, England, where we lease approximately
7,700 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 5,200 square
feet near Toronto, Canada, which was used for the delivery of services as well
as research and development through October, 2001. We also lease executive
suites, primarily for sales offices. We believe our facilities are adequate for
future growth.
We are currently attempting to sub-let our facility near Toronto, Canada and
a portion of the corporate headquarters in Suwanee, Georgia.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to lawsuits in the normal course of its business.
Litigation in general, and securities litigation in particular, can be
expensive and disruptive to normal business operations. Moreover, the results
of complex legal proceedings are difficult to predict. An unfavorable
resolution of the following lawsuit could adversely affect the Company's
business, results of operations, liquidity or financial condition.
Following its public announcement on October 25, 2000, of its financial
results for the third quarter, the Company and certain of its directors and
officers were named as defendants in fourteen putative class action lawsuits
filed in the United States District Court for the Northern District of Georgia
on behalf of all purchasers of common stock of the Company during various
periods beginning as early as October 20, 1999 and ending on October 25, 2000.
The fourteen class action lawsuits filed against the Company were consolidated
into one case, Case No. 1:00-CV-2841, pursuant to an order of the court dated
November 17, 2000. On March 22, 2001, the Court entered an order appointing as
the lead Plaintiffs John Nittolo, Dean Monroe, Ronald Williams, V&S Industries,
Ltd., VIP World Asset Management, Ltd., Atlantic Coast Capital Management,
Ltd., and T.F.M. Investment Group. Pursuant to the previous Consolidation Order
of the Court, a Consolidated Amended Complaint was filed on May 14, 2001. On
June 29, 2001, the Company filed a motion to dismiss the consolidated case. The
plaintiffs responded to the Company's motion to dismiss on August 6, 2001. The
Company replied with a rebuttal to the plaintiffs' response on August 27, 2001.
The class action complaint alleges claims against the Company and other
defendants for violations of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder with
respect to alleged material misrepresentations and omissions in public filings
made with the Securities and Exchange Commission and certain press releases and
other public statements made by the Company and certain of its officers
relating to its business, results of operations, financial condition and future
prospects, as a result of which, it is alleged, the market price of the
Company's common stock was artificially inflated during the class periods. The
class action complaint focuses on statements made concerning an account
receivable from one of the Company's customers. The plaintiffs seek unspecified
compensatory damages and costs (including attorneys' and expert fees), expenses
and other unspecified relief on behalf of the classes. The Company believes
that it has complied with all of its obligations under the Federal securities
laws and the Company intends to defend this lawsuit vigorously. As a result of
consultation with legal representation and current insurance coverage, the
Company does not believe the lawsuit will have a material impact on the
Company's results of operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
7
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 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.......................... $ 9.25 $ 5.09
Second Quarter......................... $ 7.29 $ 5.08
Third Quarter.......................... $ 8.45 $ 3.55
Fourth Quarter......................... $ 6.27 $ 3.30
Calendar Year 2002........................
First Quarter (through March 14, 2002). $ 6.25 $ 3.44
Stockholders
As of March 14, 2002, there were 167 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.
8
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.
Years Ended December 31,
------------------------------------------------
2001 2000 1999 1998 1997
--------- -------- -------- -------- -------
(in thousands, except per share data)
Statement of Operations Data:
Revenues:
License fees............................................. $ 7,807 $ 24,686 $ 15,101 $ 17,372 $13,506
Services fees............................................ 9,198 9,361 23,041 24,268 12,482
--------- -------- -------- -------- -------
Total revenues....................................... 17,005 34,047 38,142 41,640 25,988
Cost of revenues:
License fees............................................. 211 154 1,351 1,969 1,205
Service fees............................................. 12,253 11,935 14,517 13,952 7,311
--------- -------- -------- -------- -------
Total cost of revenues............................... 12,464 12,089 15,868 15,921 8,516
Operating expenses:
Research and development, exclusive of noncash expense... 16,220 22,390 9,003 6,335 6,690
Noncash research and development......................... -- 424 -- -- --
In-process research and development...................... -- 8,300 -- 10,500 --
Sales and marketing, exclusive of noncash expense........ 27,294 36,230 15,982 11,802 9,515
Noncash sales and marketing.............................. 6,740 7,001 1,930 -- --
General and administrative, exclusive of noncash expense. 9,381 9,897 4,996 4,387 3,036
Provision for doubtful accounts.......................... 5,537 5,824 1,245 739 125
Noncash general and administrative....................... 252 1,098 874 880 58
Loss on impairment of intangible assets.................. 36,756 -- -- -- --
Depreciation and amortization............................ 12,212 8,132 3,399 2,154 1,406
--------- -------- -------- -------- -------
Total operating expenses............................. 114,392 99,296 37,429 36,797 20,830
--------- -------- -------- -------- -------
Operating loss............................................. (109,851) (77,338) (15,155) (11,078) (3,358)
Gain on sale of assets..................................... 20 1,347 9,417 -- --
Gain on foreign currency transactions...................... 107 -- -- -- --
Loss on sale of marketable securities...................... (11) (100) -- -- --
Loss on impairment of investments.......................... (16,461) (4,128) -- -- --
Amortization of debt discount.............................. -- (982) -- -- --
Interest income............................................ 6,570 10,902 442 636 34
Interest expense........................................... (228) (348) (105) (224) (308)
Minority interest.......................................... -- -- -- (36) (478)
--------- -------- -------- -------- -------
Net loss................................................... $(119,854) $(70,647) $ (5,401) $(10,702) $(4,110)
========= ======== ======== ======== =======
Net loss per common share:
Basic.................................................... $ (7.72) $ (4.90) $ (0.49) $ (1.70) $ (2.97)
========= ======== ======== ======== =======
Diluted.................................................. $ (7.72) $ (4.90) $ (0.49) $ (1.70) $ (2.97)
========= ======== ======== ======== =======
Weighted average common shares outstanding:
Basic.................................................... 15,530 14,420 11,097 6,311 1,386
========= ======== ======== ======== =======
Diluted.................................................. 15,530 14,420 11,097 6,311 1,386
========= ======== ======== ======== =======
As of December 31,
------------------------------------------
2001 2000 1999 1998 1997
-------- -------- ------- ------- --------
Balance Sheet Data:
Cash and cash equivalents............. $ 55,628 $118,303 $14,127 $14,799 $ 7,213
Marketable securities................. 65,264 50,209 -- -- --
Working capital (deficit)............. 114,609 171,336 16,751 9,001 (453)
Total assets.......................... 145,274 266,904 48,563 40,082 14,681
Long-term debt, net of current portion 5,000 5,000 -- 245 497
Total stockholders' equity (deficit).. 126,328 246,822 32,615 22,111 (27,910)
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 "Risk Factors".
Overview
The Company develops, markets, and supports Internet-based
business-to-business ("B2B") e-commerce solutions that automate the
procurement, sourcing, and settlement of goods and services. The Company's
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. The Company's digital marketplace solution provides a
framework that allows companies to create trading communities and additional
revenue opportunities. The Company's solutions also benefit suppliers by
reducing sales costs and providing the opportunity to increase revenues. The
Company's products have been licensed by customers such as BarclaysB2B, the
Burlington Northern and Santa Fe Railway Company, Cox Enterprises, Mastercard
International, Union Pacific Corporation, Parsons Brinckerhoff, Sumurfit-Stone
Container Corporation, and Wachovia Corporation.
The Company's 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.
10
. 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 appproximately $2.5 million in
cash of which $1.6 million was paid at the date of acquisition and
$900,000 was accrued at the date of acquisition and paid in April 2001.
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") for approximately $63.2
million, consisting of approximately $30.0 million in cash (exclusive of
$350,000 of cash acquired), 1,148,000 shares of the Company's common
stock with a fair value of $30.4 million, assumed options to acquire
163,200 shares of the Company's common stock with an exercise price of
$23.50 (estimated fair value of $1.8 million using the Black-Scholes
option pricing model with the following variables: no expected dividend
yield, volatility of 70%, risk-free interest rate of 6.5%, and an
expected life of 2 years) and acquisition costs of approximately
$995,000. The SAI/Redeo Companies specialized in electronic payment
settlement software.
Critical Accounting Policies and Use of Estimates
If demand for business-to-business software and related services remain soft
our business, operating results, liquidity and financial condition will be
adversely affected. Our success depends on market acceptance of e-commerce as a
viable method for corporate procurement and other commercial transactions and
market adoption of our current products and future products. We continue to
reposition our products and our company in the markets we serve. This strategy
may not be successful. The competitive landscape we face is continuously
changing. It is difficult to estimate how competition will affect our revenues.
It is also very difficult to predict our quarterly results. We have incurred
significant net losses in each year since our inception. We believe that we
will continue to incur losses in 2002. We may not increase our customer base
sufficient to generate the substantial additional revenues necessary to become
profitable. We have established strategic selling relationships with a number
of outside companies. There is no guarantee that these relationships will
generate the level of revenues currently anticipated.
As we expand our international sales and marketing activities and
international operations our business is more susceptible to the numerous risks
associated with international sales and operations. We may not be successful in
addressing these and other risks and difficulties that we may encounter. Please
refer to the "Risk Factors" sections for additional information regarding the
risks associated with our operations and financial condition.
The Company's discussion of financial condition and results of operations
are based on the consolidated financial statements which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements. Estimates also affect the reported amounts of revenues
and expenses during the reporting periods. The Company continually evaluates
its estimates and assumptions including those related to revenue recognition,
allowance for doubtful accounts, impairment of long-lived assets, impairment of
investments, and contingencies and litigation. The Company bases its estimates
on historical experience and other assumptions that are believed to be
reasonable under the circumstances. Actual results could differ from these
estimates.
The Company believes the following critical accounting policies include the
more significant estimates and assumptions used by management in the
preparation of its consolidated financial statements.
. 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
11
("SOP") 97-2, "Software Revenue Recognition", and SOP 98-9, "Software
Revenue Recognition with Respect to Certain Transactions" and related
interpretations. The Company recognizes software license revenue when:
(1) persuasive evidence of an arrangement exists; (2) delivery has
occurred; (3) the fee is fixed or determinable; and (4) collectibility is
probable.
. The Company maintains allowances for doubtful accounts based on expected
losses resulting from the inability of the Company's customers to make
required payments. As a result, the Company has recorded a provision for
doubtful accounts of $5.5 million, $5.8 million and $1.2 million,
respectively, in the years ended December 31, 2001, 2000 and 1999. If the
financial condition of these customers were to deteriorate additional
allowances may be required.
. The Company has significant long-lived assets, primarily intangibles, as
a result of acquisitions completed during 2000. The Company has
periodically evaluated the carrying value of its long-lived assets,
including intangibles, according to Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of ". During the fourth
quarter of 2001, the Company's evaluation of the performance of the
SAI/Redeo companies compared to initial projections, negative economic
trends and a decline in industry growth rate projections indicated that
the carrying value of these intangible assets exceeded management's
revised estimates of future undiscounted cash flows. This assessment
resulted in a $36.8 million impairment charge of the intangible assets
based on the amount by which the carrying amount of these assets exceeded
fair value. Subsequent changes in projections may require additional
impairment charges.
. The Company has made equity investments in several privately held
companies. The Company records an impairment charge when it believes an
investment has experienced a decline in value that is other than
temporary. During the years ended December 31, 2001 and 2000, the Company
recorded impairment charges on investments of $15.4 million and $4.1
million, respectively.
. The Company is a party to lawsuits in the normal course of its business.
Litigation in general, and securities litigation in particular, can be
expensive and disruptive to normal business operations. Moreover, the
results of complex legal proceedings are difficult to predict. An
unfavorable resolution of the following lawsuit could adversely affect
the Company's business, results of operations, liquidity or financial
condition.
Following its public announcement on October 25, 2000, of its financial
results for the third quarter, the Company and certain of its directors
and officers were named as defendants in fourteen putative class action
lawsuits filed in the United States District Court for the Northern
District of Georgia on behalf of all purchasers of common stock of the
Company during various periods beginning as early as October 20, 1999 and
ending on October 25, 2000. The fourteen class action lawsuits filed
against the Company were consolidated into one case, Case No.
1:00-CV-2841, pursuant to an order of the court dated November 17, 2000.
On March 22, 2001, the Court entered an order appointing as the lead
Plaintiffs John Nittolo, Dean Monroe, Ronald Williams, V&S Industries,
Ltd., VIP World Asset Management, Ltd., Atlantic Coast Capital
Management, Ltd., and T.F.M. Investment Group. Pursuant to the previous
Consolidation Order of the Court, a Consolidated Amended Complaint was
filed on May 14, 2001. On June 29, 2001, the Company filed a motion to
dismiss the consolidated case. The plaintiffs responded to the Company's
motion to dismiss on August 6, 2001. The Company replied with a rebuttal
to the plaintiffs' response on August 27, 2001.
The class action complaint alleges claims against the Company and other
defendants for violations of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder
with respect to alleged material misrepresentations and omissions in
public filings made with the Securities and Exchange Commission and
certain press releases and other public statements made by the Company
and certain of its officers relating to its business, results of
operations, financial condition and future prospects, as a result of
which, it is alleged, the market price of the Company's common stock was
artificially inflated during the class periods. The class action
complaint focuses on statements made concerning an account receivable
from one of the Company's customers.
12
The plaintiffs seek unspecified compensatory damages and costs (including
attorneys' and expert fees), expenses and other unspecified relief on
behalf of the classes. The Company believes that it has complied with all
of its obligations under the Federal securities laws and the Company
intends to defend this lawsuit vigorously. As a result of consultation
with legal representation and current insurance coverage, the Company
does not believe the lawsuit will have a material impact on the Company's
results of operations or financial position.
Stock Option Exchange Program
On April 9, 2001, the Company announced a voluntary stock option exchange
program for its employees. Under the program, employees were given the
opportunity to cancel outstanding stock options previously granted to them on
or after November 1, 1999 in exchange for an equal number of new options to be
granted at a future date. The exercise price of these new options was equal to
the fair market value of the Company's common stock on the date of grant.
During the first phase of the program 366,174 options with a weighted average
exercise price of $30.55 per share were canceled and new options to purchase
263,920 shares with an exercise price of $3.49 per share were issued on
November 9, 2001. During the second phase of the program 273,188 options with a
weighted average exercise price of $43.87 per share were canceled and new
options to purchase 198,052 shares with an exercise price of $4.10 per share
were issued on February 11, 2002. Employees who participated in the first
exchange were not eligible for the second exchange. The exchange program was
designed to comply with Financial Accounting Standards Board ("FASB")
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation" and did not result in any additional compensation charges or
variable accounting. Members of the Company's Board of Directors and its
executive officers were not eligible to participate in the exchange program.
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" and related interpretations. The Company recognizes
software license revenue when: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred; (3) the fee is fixed or determinable; and
(4) collectibility is probable.
SOP No. 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair values of the elements. The fair value of an element must be
based on evidence that is specific to the vendor. License fee revenue allocated
to software products generally is recognized upon delivery of the products or
deferred and recognized in future periods to the extent that an arrangement
includes one or more elements to be delivered at a future date and for which
fair values have not been established. Revenue allocated to maintenance is
recognized ratably over the maintenance term, which is typically 12 months and
revenue allocated to training and other service elements is recognized as the
services are performed.
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.
13
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 the provision for doubtful accounts. The Company
allocates the total cost of its information technology function and costs
related to the occupancy of its corporate headquarters, to each of the
functional areas. Information technology expenses include personnel related
expenses, communication charges, and software support. Occupancy charges
include rent, utilities, and maintenance services.
The Company has incurred significant costs to develop its
business-to-business e-commerce technology and products and to recruit and
train personnel. The Company believes its success is contingent upon increasing
its customer base and investing in further development of its products and
services. This will require significant expenditures for sales, marketing,
research and development, and to a lesser extent support infrastructure. The
Company therefore expects to continue to incur substantial operating losses
during 2002.
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.
Pro-forma Results
The Company prepares and releases quarterly unaudited financial statements
prepared in accordance with generally accepted accounting principles ("GAAP").
The Company also discloses and discusses certain pro forma financial
information in the related earnings releases and investor conference calls.
This pro forma financial information excludes restructuring costs and expenses
related to reductions in employee workforce and office closure and
consolidation, depreciation and amortization charges, stock-based compensation
expenses, gain realized on the sale of assets, loss on the sale of marketable
securities and loss on impairment of investments, all of which are included in
our financial results for GAAP reporting purposes. Additionally, pro forma
results exclude $36.8 million for a goodwill impairment charge, recognized in
2001, related to the
14
write-down of certain intangible assets associated with the acquisition of the
SAI/Redeo companies. The Company believes the disclosure of the pro forma
financial information helps investors more meaningfully evaluate the results of
the Company's ongoing operations. The pro forma measures are not in accordance
with GAAP and may be different from pro forma measures used by other companies
including our competitors. Therefore, we urge you to carefully review the GAAP
financial information included as part of this Annual Report on Form 10-K,
compare GAAP financial information with the pro forma financial results
disclosed below and read the associated reconciliation.
Pro Forma Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
Years ended
December 31
------------------
2001 2000
-------- --------
Revenues:
License fees......................................... $ 7,807 $ 24,686
Services fees........................................ 9,198 9,361
-------- --------
Total Revenues................................. 17,005 34,047
Cost of Revenues:
License fees......................................... 211 154
Services fees........................................ 11,076 11,935
-------- --------
Total Cost of Revenues......................... 11,287 12,089
Operating Expenses:
Research and development............................. 16,003 22,390
Sales and marketing.................................. 26,076 36,230
General and administrative........................... 7,836 9,897
Bad debt expense..................................... 5,537 5,824
-------- --------
Total Operating Expenses....................... 55,452 74,341
-------- --------
Operating loss........................................ $(49,734) $(52,383)
Gain on foreign currency transactions................. 107 --
Interest income, (net)................................ 6,342 10,554
-------- --------
Pro forma net loss.................................... $(43,285) $(41,829)
======== ========
Weighted average shares outstanding--basic and diluted 15,530 14,420
======== ========
Pro forma net loss per share--basic and diluted....... $ (2.79) $ (2.90)
======== ========
15
Reconciliation of GAAP Net Loss to Pro Forma Net Loss
(in thousands, except per share data)
(unaudited)
Twelve months ended
December 31
-------------------
2001 2000
--------- --------
Net loss.............................................. $(119,854) $(70,647)
Restructuring costs/1/................................ 4,157 --
In-process research and development................... -- 8,300
Goodwill impairment loss.............................. 36,756 --
Depreciation and amortization......................... 12,212 8,132
Stock-based compensation.............................. 6,992 8,523
Gain on sale of assets................................ (20) (1,347)
Realized loss on sale of investments.................. 11 100
Loss on impairment of investments..................... 16,461 4,128
Amortization of debt discount......................... -- 982
--------- --------
Pro forma net loss.................................... $ (43,285) $(41,829)
========= ========
Weighted average shares outstanding--basic and diluted 15,530 14,420
--------- --------
Pro forma net loss per share--basic and diluted....... $ (2.79) $ (2.90)
--------- --------
- --------
(1) Restructuring costs are comprised of employee severance and termination
costs and office closure and consolidation costs. For the year ended
December 31, 2001, these costs were classified in the consolidated
statement of operations as follows:
Year Ended
December 31, 2001
-----------------
(in thousands)
Cost of revenues--services fees $1,177
Research and development....... 217
Sales and marketing............ 1,218
General and administrative..... 1,545
------
Total.......................... $4,157
======
Restructuring and Related Costs
During 2001, the Company's management approved restructuring plans to
reorganize and reduce operating costs. Restructuring and related charges of
$513,000, $498,000 and $3.1 million were expensed in the first, third and
fourth quarters of 2001, respectively, to better align the Company's cost
structure with projected revenue. The first and third quarter charges were
comprised entirely of employee separation and related costs for 23 and 43
employees, respectively. The fourth quarter charge was comprised of $1.9
million for employee separation and related costs for 115 employees and $1.2
million for facility closure and consolidation costs. For the year ended
December 31, 2001, the restructuring and related costs were classified in the
Company's consolidated statement of operations as follows:
Year Ended
December 31, 2001
-----------------
Cost of revenues--services fees.................. $1,177
Research and development......................... 217
Sales and marketing.............................. 1,218
General and administrative....................... 1,545
------
Total accrued for restructuring and related costs $4,157
======
16
The Company completed all employee separation initiatives by December 31, 2001
and expects to complete the facility closure and consolidation during the first
half of 2002. The facility closure and consolidation costs relate to the
abandonment of the Company's leased facility near Toronto, Canada and the
restructuring of the Company's leased facility in Suwanee, Georgia. Total
facility closure and consolidation costs include remaining lease liabilities,
construction costs and brokerage fees to sublet the abandoned space offset by
estimated sublease income. The estimated costs of abandoning these leased
facilities, including estimated costs to sublease, were based on market
information trend analysis provided by a commercial real estate brokerage firm
retained by the Company. The Company anticipates annualized savings of
approximately $18.3 million as a result of these actions.
The following is a reconciliation of the components of the accrual for
restructuring and related costs, the amounts charged against the accrual during
2001 and the balance of the accrual as of December 31, 2001:
Restructuring
and Related
Charges Expenditures December 31, 2001
------------- ------------ -----------------
(in thousands)
Employee separation costs............ $2,939 $2,259 $ 680
Facility closure costs............... 1,218 9 1,209
------ ------ ------
Total restructuring and related costs $4,157 $2,268 $1,889
====== ====== ======
The accrual for restructuring and related costs is included in accounts payable
and accrued liabilities in the accompanying consolidated balance sheet at
December 31, 2001.
Results of GAAP Operations e-commerce and ERP
The following table sets forth certain statement of operations data
reflecting revenues and cost of revenues between our previous human resources
and financial software business and our current e-commerce business for the
years indicated.
Years Ended December 31,
-------------------------
2001 2000 1999
------- ------- -------
(in thousands)
Revenues: e-commerce
License fees........................... $ 7,807 $24,686 $ 9,969
Services fees.......................... 9,198 9,361 1,515
------- ------- -------
Total revenues................... 17,005 34,047 11,484
Revenues: ERP
License fees........................... -- -- 5,132
Services fees.......................... -- -- 21,526
------- ------- -------
Total revenues................... -- -- 26,658
Cost of revenues: e-commerce
License fees........................... 211 154 400
Services fees.......................... 12,253 11,935 3,130
------- ------- -------
Total cost of revenues........... 12,464 12,089 3,530
Cost of revenues: ERP
License fees........................... -- -- 951
Services fees.......................... -- -- 11,387
------- ------- -------
Total cost of revenues........... -- -- 12,338
Gross margin on e-commerce license fees. 7,596 24,532 9,569
Gross margin on e-commerce services fees (3,055) (2,574) (1,615)
Gross margin on ERP license fees........ -- -- 4,181
Gross margin on ERP services fees....... -- -- 10,139
17
Years Ended December 31,
-----------------------------
2001 2000 1999
--------- -------- --------
(in thousands)
Operating expenses:
Research and development, exclusive of noncash expense.. 16,220 22,390 9,003
Noncash research and development........................ -- 424 --
In-process research and development..................... -- 8,300 --
Sales and marketing, exclusive of noncash expense....... 27,294 36,230 15,982
Noncash sales and marketing............................. 6,740 7,001 1,930
General and administrative, exclusive of noncash expense 9,381 9,897 4,996
Bad debt expense........................................ 5,537 5,824 1,245
Noncash general and administrative...................... 252 1,098 874
Intangible impairment................................... 36,756 -- --
Depreciation and amortization........................... 12,212 8,132 3,399
--------- -------- --------
Total operating expenses.......................... 114,392 99,296 37,429
Operating loss........................................... (109,851) (77,338) (15,155)
Gain on sale of assets................................... 20 1,347 9,417
Gain on foreign currency transactions.................... 107 -- --
Realized loss on sale of investments..................... (11) (100) --
Loss on impairment of investments........................ (16,461) (4,128) --
Amortization of debt discount............................ -- (982) --
Interest income, net..................................... 6,342 10,554 337
--------- -------- --------
Net loss................................................. $(119,854) $(70,647) $ (5,401)
========= ======== ========
Results of Operations
Years Ended December 31, 2001 and 2000
Revenues
Total Revenues. Total revenues decreased 50.1% to $17.0 million in 2001
from $34.0 million in 2000. The decrease in total revenues resulted primarily
from a decrease in license revenue due to the softening demand for
business-to-business software and a decline in the information technology
market generally. For the year ended December 31, 2001, three customers
accounted for more than 10% each, totaling $6.1 million or 35.7% of total
revenue. The percentage of total revenue recognized from these three customers
was 12.6%, 11.6%, and 11.5%. For the year ended December 31, 2000, one customer
accounted for more than 10%, totaling $3.8 million or 11.3% of total revenue.
License Fees. License fees decreased 68.4% to $7.8 million, or 45.9% of
total revenues, in 2001 from $24.7 million, or 72.5% of total revenues, in
2000. The decrease in license fees was the result of a decrease in the amount
of software licensed. This decrease is due to the factors discussed above.
Services Fees. Services fees decreased 1.7% to $9.2 million from $9.4
million in 2001, but increased as a percentage of total revenues to 54.1% in
2001 from 27.5% in 2000. This decrease is primarily attributable to a decrease
in implementation and training services, a direct result of the decrease in the
amount of software licensed, partially offset by an increase in maintenance
fees.
Cost of Revenues
Total Cost of Revenues. Cost of revenues increased 3.1% to $12.5 million,
or 73.3% of total revenues, during the year ended December 31, 2001 from $12.1
million, or 35.5% of total revenues, during the same period in 2000. The
increase in the total cost of revenues and increase in percentage of total
revenues is primarily a result of a change in the mix of revenue to services
fees from license fees, which historically have a higher cost of revenues.
18
Cost of License Fees. Cost of license fees increased to $211,000 in 2001
from $154,000 in 2000. Cost of license fees includes royalties and software
duplication and distribution costs. The cost of license fees may vary from
period to period depending on the product mix licensed, but are expected to
remain a small percentage of license fees.
Cost of Services Fees. Cost of services fees increased 2.7% to $12.3
million, or 133.2% of total services fees, in 2001 compared to $11.9 million,
or 127.5% of total services fees, in 2000. The increase in the cost of services
fees was primarily attributable to restructuring costs and an increase in
personnel related costs partially offset by a decrease in consulting fees. The
Company incurred $1.0 million of expense related to employee separation and
related benefit costs and $0.2 million of facility closure costs incurred as
part of the Company's restructuring initiative. The Company had an average of
21.7% more employees during the year ended December 31, 2001 compared to the
same period during 2000. The consulting fees related to subcontracted services
were approximately $422,000 during the year ended December 31, 2001 compared to
approximately $2.4 million during the year ended December 31, 2000. The Company
has incurred cost of e-commerce service fees in excess of revenues from
e-commerce service fees due primarily to the hiring and training of personnel
in anticipation of future growth. As discussed above, the Company's management
approved plans to reorganize and reduce operating costs during 2001. These
actions have allowed the Company to better align its cost structure with
projected revenue and allowed the Company's services fees revenue to exceed
cost of services fees on a pro forma basis during the fourth quarter of 2001.
Although the Company anticipates continued services fees revenue in excess of
cost of services fees, there can be no assurance that due to fluctuations in
services fees revenue and the relatively fixed nature of the cost of services
fees that costs will not exceed revenue in the future.
Research and Development, Exclusive of Noncash Expense
Research and development expenses decreased 27.6% to $16.2 million, or 95.4%
of total revenues, in 2001 from $22.4 million, or 65.8% of total revenues, in
2000. Research and development expenses decreased primarily due to decreased
consulting fees incurred to develop the Company's products partially offset by
an increase in personnel related costs, restructuring costs of $217,000
incurred during 2001 and a $600,000 fee incurred during 2001 as a result of
terminating a services agreement with a development partner. Consulting fees
decreased to approximately $3.6 million during the year ended December 31, 2001
from approximately $12.3 million during the year ended December 31, 2000. The
Company had an average of 6.5% more employees in the research and development
area during 2001 compared to the same period of 2000. The Company intends to
perform most research and development in-house moving forward, but expects to
incur consulting fees for certain specialized development projects.
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 as 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, 2001 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").
19
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 had not yet reached technological feasibility
and the IPR&D had no alternative future use in the event that the proposed
products did not prove to be feasible. These development efforts fall within
the definition of IPR&D contained in Statement of Financial Accounting
Standards ("SFAS") No. 2.
SAI/Redeo IPR&D. Management believes that the SAI/Redeo product under
development is the first settlement product that completes the B2B commerce
procurement 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.
. 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. The initial development and commercial release of the Company's
Settlement product was completed during the third quarter of 2000. The Company
is continuing to invest in further development and enhancements of the
Settlement product. During the year ended December 31, 2001, 23.0% of the
Company's license revenue was derived from licensing the Settlement product.
During the year ended December 31, 2000, 12.8% of the Company's license revenue
was derived from licensing the Company's Settlement product.
20
Valuation of IPR&D: Amounts allocated to IPR&D were calculated using
established valuation techniques in the high technology industry and the
Company expensed such amounts in the quarter that the acquisition was
consummated because technological feasibility had not been achieved and no
alternative future uses had been established. Consistent with the Company's
policy for internally developed technology, the Company concluded that the
IPR&D had no alternative future use after taking into consideration the
potential for usage of the technology in different products, resale of the
software, and internal usage.
Upon consummation of the SAI/Redeo acquisition, the Company immediately
recognized expense of $8.3 million representing the acquired IPR&D that had not
yet reached technological feasibility and had no alternative future use. The
value assigned to acquired IPR&D was determined by identifying products under
research in areas for which technological feasibility had not been established.
The IPR&D technology was then segmented into two classifications: (i)
IPR&D--completed and (ii) IPR&D--to-be-completed, giving explicit consideration
to the value created by research and development efforts of SAI/Redeo prior to
the acquisition and to be created by the Company after the acquisition. These
value creation efforts were estimated by considering the following major
factors: (i) time-based data, (ii) cost-based data, and (iii) complexity-based
data.
The value of the IPR&D was determined using a discounted cash flow model
similar to the income approach, 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.
To date, actual revenues attributable to the IPR&D have been lower than the
original projections. No assurance can be given that future revenues and
operating profit attributable to the purchased IPR&D will not deviate from the
projections used to value such technology. Ongoing operations and financial
results for acquired businesses, and the Company as a whole, are subject to a
variety of factors which may not have been known or estimable at the Valuation
Date. To date, actual costs of completing the project and the timing thereof
have been consistent with the estimates used in developing the valuation of the
purchased IPR&D.
21
Sales and Marketing, Exclusive of Noncash Expense
Sales and marketing expenses decreased 24.7% to $27.3 million, or 160.5% of
total revenues, in 2001 from $36.2 million, or 106.4% of total revenues, in
2000. The decrease was primarily attributable to the reduction of sales and
marketing personnel, a decrease in variable compensation as a result of lower
license revenue during 2001, and a reduction of promotional activities
associated with building market awareness of the Company's e-commerce products.
The Company experienced a significant increase in sales and marketing expenses
in the fourth quarter of 2000 due in large part to advertising commitments
associated with the Company's branding campaign. The Company had an average of
12.6% fewer sales and marketing employees during 2001 compared to the same
period in 2000.
Noncash Sales and Marketing Expense
During the years ended December 31, 2001 and 2000, non-cash sales and
marketing expenses of approximately $6.7 million and $7.0 million,
respectively, were recognized in connection with sales and marketing agreements
signed by the Company during the fourth quarter of 1999 and the first quarter
of 2000. 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 costs, which are being amortized over the
life of the agreements which range from nine months to five years. Included in
the results for 2001 is $1.4 million of expense recorded in the fourth quarter
as a result of terminating the sales and marketing agreement with one customer.
The Company anticipates expenses related to sales and marketing agreements to
be approximately $98,000 per quarter during 2002.
General and Administrative, Exclusive of Noncash Expense
General and administrative expenses, including the provision for doubtful
accounts, decreased 5.1% to $14.9 million in 2001 from $15.7 million in 2000.
As a percentage of total revenues, general and administrative expenses
increased to 87.7% in 2001 from 46.2% in 2000. Included in general and
administrative expenses is a provision for doubtful accounts of $5.5 million
and $5.8 million for the years ended December 31, 2001 and 2000, respectively.
The decrease in general and administrative expenses was primarily attributable
to decreases in personnel related costs and a decrease in the provision for
doubtful accounts. The Company had an average of 8.5% fewer general and
administrative employees during 2001 compared to the same period in 2000.
Noncash General and Administrative Expense
Noncash general and administrative expenses decreased to approximately
$252,000, or 1.5% of total revenues, in 2001 from approximately $1.1 million,
or 3.2% of total revenues, in 2000. The decrease was primarily attributable to
the Company granting 160,000 options to a senior executive during the first
quarter of 2000 at an exercise price below the fair market value at the date of
grant. Fifteen percent of these options vested immediately and the remainder
vested over four years. The Company immediately expensed $814,500 associated
with the intrinsic value of the vested options and recorded the intrinsic value
of the unvested options, $4.6 million, as deferred compensation. This
arrangement was terminated in the fourth quarter of 2000 and all options except
those vesting immediately were forfeited. The Company recognized net
compensation expense related to this arrangement of $814,500 during the year
ended 2000.
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 during
2000. The remaining balance of $150,000 was recognized as compensation expense
during 2001. The amount expensed during 2001 relates primarily to these options.
22
Loss on Impairment of Intangible Assets
In the fourth quarter of 2001, the Company recognized an intangible asset
impairment loss of $36.8 million related to the write-down of certain
intangible assets associated with the acquisition of the SAI/Redeo companies.
The Company periodically evaluates the carrying value of its long-lived assets,
including intangibles, according to Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". During the fourth quarter of 2001, the
Company's evaluation of the performance of the SAI/Redeo companies compared to
initial projections, negative economic trends and a decline in industry growth
rate projections indicated that the carrying value of the intangible exceeded
expected cash flows. The $36.8 million write-down was based on the amount by
which the carrying amount of these assets exceeded fair value.
Depreciation and Amortization Expense
Depreciation and amortization increased 50.2% to $12.2 million, or 71.8% of
total revenues, in 2001, from $8.1 million, or 23.9% of total revenues, in
2000. This increase is primarily the result of the Company's amortization of
its intangible assets associated with acquisitions completed in the second
quarter of 2000.
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 years ended December 31, 2001 and 2000, the Company recorded a
loss on impairment of investments of approximately $16.5 million and $4.1
million, respectively. These losses were necessitated by other than temporary
losses to the value of investments the Company had made in privately held
companies and marketable securities of one publicly traded company. The
privately held companies are primarily early-stage companies and are subject to
significant risk due to their limited operating history and volatile
industry-based economic conditions. As of December 31, 2001, all investments
but one have been written off. The remaining investment, valued at $200,000 in
the accompanying December 31, 2001 balance sheet, was sold and cash of $200,000
was received during the first quarter of 2002.
Interest Income
Interest income decreased 39.7% to $6.6 million in 2001, or 38.6% of total
revenues, from $10.9 million, or 32.0% of total revenues, in 2000. The decrease
in interest income was due to lower levels of cash available for investment and
lower interest rates. The Company expects to continue to use cash to fund
operating losses and, as a result, interest income on available cash is
expected to decline in future periods.
Interest Expense and Amortization of Debt Discount
Interest expense decreased 34.5% to $228,000 in 2001 from $348,000 in 2000.
This decrease in interest expense is primarily due to higher levels of debt in
the first quarter of 2000 as compared to 2001. In March of 2000, the Company
entered into a $5.0 million borrowing arrangement with an interest rate of 4.5%
with Wachovia Capital Investments, Inc. The interest expense in 2001 is
primarily related to this agreement.
In 1999, the Company entered into financing agreements for $7.0 million. In
connection with the financing, the Company issued warrants valued at
approximately $982,000 using the Black-Scholes option pricing model as debt
discount to be amortized over the life of the financing agreement. The entire
$7.0 million plus interest was paid prior to the end of the first quarter of
2000. As a result, the entire value of the warrants was amortized as a debt
discount in the quarter ended March 31, 2000.
23
Income Taxes
As a result of the operating losses incurred since the Company's inception,
no provision or benefit for income taxes was recorded in 2001 or in 2000.
Years Ended December 31, 2000 and 1999
Revenues
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
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. 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 23.8% to $12.1 million,
or 35.5% 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. Cost of license fees includes
royalties and software duplication and distribution costs. 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 281.3% to $11.9 million, or 127.5% 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.
24
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% 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 148.7% to $22.4 million, or
65.8% 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 as 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, 2001 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 Statement of Financial Accounting
Standards ("SFAS") No. 2.
SAI/Redeo IPR&D. Management believes that the SAI/Redeo product under
development is the first settlement product that completes the B2B commerce
procurement 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.
25
. 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.
. 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. The initial development and commercial release of the Company's
Settlement product was completed during the third quarter of 2000. The Company
is continuing to invest in further development and enhancements of the
Settlement product. During the year ended December 31, 2000, 12.8% of the
Company's license revenue was derived from licensing the Company's Settlement
product.
Valuation of IPR&D: Amounts allocated to IPR&D were calculated using
established valuation techniques in the high technology industry and the
Company expensed such amounts in the quarter that the acquisition was
consummated because technological feasibility had not been achieved and no
alternative future uses had been established. Consistent with the Company's
policy for internally developed technology, the Company concluded that the
IPR&D had no alternative future use after taking into consideration the
potential for usage of the technology in different products, resale of the
software, and internal usage.
Upon consummation of the SAI/Redeo acquisition, the Company immediately
recognized expense of $8.3 million representing the acquired IPR&D that had not
yet reached technological feasibility and had no alternative future use. The
value assigned to acquired IPR&D was determined by identifying products under
research in areas for which technological feasibility had not been established.
The IPR&D technology was then segmented into two classifications: (i)
IPR&D--completed and (ii) IPR&D--to-be-completed, giving explicit consideration
to the value created by research and development efforts of SAI/Redeo prior to
the acquisition and to be created by the Company after the acquisition. These
value creation efforts were estimated by considering the following major
factors: (i) time-based data, (ii) cost-based data, and (iii) complexity-based
data.
The value of the IPR&D was determined using a discounted cash flow model
similar to the income approach, 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
26
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.
To date, actual revenues attributable to the IPR&D have been lower than the
original projections. No assurance can be given that future revenues and
operating profit attributable to the purchased IPR&D will not deviate from the
projections used to value such technology. Ongoing operations and financial
results for acquired businesses, and the Company as a whole, are subject to a
variety of factors which may not have been known or estimable at the Valuation
Date. To date, actual costs of completing the project and the timing thereof
have been consistent with the estimates used in developing the valuation of the
purchased IPR&D.
Sales and Marketing, Exclusive of Noncash Expense
Sales and marketing expenses increased 126.7% to $36.2 million, or 106.4% 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