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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _________ to _________
Commission File Number: 0-24277
Clarus Corporation
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(Exact name of registrant as specified in its charter)
Delaware 58-1972600
------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3970 Johns Creek Court
Suwanee, Georgia 30024
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(Address of principal executive offices)
(Zip code)
(770) 291-3900
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(Registrant's telephone number, including area code)
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(Former name, former address and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, ($.0001 Par Value)
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15,623,347 shares outstanding as of August 9, 2002
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INDEX
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CLARUS CORPORATION
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) - June 30, 2002 and
December 31, 2001; 3
Condensed Consolidated Statements of Operations (unaudited) - Three and
six months ended June 30, 2002 and 2001; 4
Condensed Consolidated Statements of Cash Flows (unaudited) - Six
months ended June 30, 2002 and 2001; 5
Notes to Condensed Consolidated Financial Statements (unaudited) -
June 30, 2002 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
PART II OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 32
SIGNATURES 33
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CLARUS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share and per share amounts)
June 30, December 31,
2002 2001
--------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 38,676 $ 55,628
Marketable securities 68,629 65,264
Accounts receivable, less allowance for doubtful accounts
of $787 and $675 in 2002 and 2001, respectively 999 2,566
Deferred marketing expense, current - 391
Prepaids and other current assets 1,596 2,472
--------- --------
Total current assets 109,900 126,321
PROPERTY AND EQUIPMENT, NET 4,183 7,352
OTHER ASSETS:
Deferred marketing expense, net of current portion - 98
Investments - 200
Goodwill - 6,736
Intangible assets, net of accumulated amortization of 1,493 in 2001 - 4,079
Deposits and other long-term assets 592 488
--------- --------
TOTAL ASSETS $ 114,675 $145,274
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 8,155 $ 6,506
Deferred revenue 1,844 5,206
--------- --------
Total current liabilities 9,999 11,712
LONG-TERM LIABILITIES:
Deferred revenue 104 1,969
Long-term debt 5,000 5,000
Other long-term liabilities 258 265
--------- --------
Total liabilities 15,361 18,946
STOCKHOLDERS' EQUITY:
Preferred stock, $0.0001 par value; 5,000,000 shares authorized;
none issued - -
Common stock, $0.0001 par value; 100,000,000 shares authorized;
15,676,501 and 15,638,712 shares issued and 15,601,501 and
15,563,712 outstanding in 2002 and 2001, respectively 2 2
Additional paid-in capital 360,845 360,670
Accumulated deficit (261,651) (234,623)
Treasury stock, at cost (2) (2)
Accumulated other comprehensive income 120 281
--------- --------
Total stockholders' equity 99,314 126,328
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 114,675 $145,274
========= ========
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
3
CLARUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2002 2001 2002 2001
REVENUES:
License fees $ 1,013 $ 3,600 $ 2,486 $ 5,910
Services fees 1,531 2,595 3,999 5,125
--------- --------- --------- ---------
Total revenues 2,544 6,195 6,485 11,035
COST OF REVENUES:
License fees 3 80 17 124
Services fees 1,881 3,341 3,819 7,119
--------- --------- --------- ---------
Total cost of revenues 1,884 3,421 3,836 7,243
OPERATING EXPENSES:
Research and development 2,553 4,570 5,182 10,125
Sales and marketing, exclusive of non-cash expense 2,680 9,329 6,228 17,398
Non-cash sales and marketing 352 1,688 450 3,376
General and administrative, exclusive of non-cash
expense 3,594 2,330 5,099 5,024
Non-cash general and administrative - 112 - 224
Provision for doubtful accounts 1 555 3 2,610
Intangible impairment loss 10,360 - 10,360 -
Depreciation and amortization on property and equipment 1,304 838 2,433 1,683
Amortization of intangible assets 227 2,463 455 4,483
Loss on disposal of assets 795 7 785 7
--------- --------- --------- ---------
Total operating expenses 21,866 21,892 30,995 44,930
OPERATING LOSS (21,206) (19,118) (28,346) (41,138)
OTHER INCOME 6 11 12 10
LOSS ON IMPAIRMENT OF INVESTMENTS - (3,386) - (6,484)
INTEREST INCOME 685 1,762 1,418 4,184
INTEREST EXPENSE (56) (56) (112) (120)
--------- --------- --------- ---------
NET LOSS $(20,571) $(20,787) $(27,028) $(43,548)
========= ========= ========= =========
Loss per common share (Note 2):
Basic $ (1.32) $ (1.34) $ (1.73) $ (2.81)
Diluted $ (1.32) $ (1.34) $ (1.73) $ (2.81)
Weighted average shares outstanding (Note 2):
Basic 15,588 15,507 15,580 15,507
Diluted 15,588 15,507 15,580 15,507
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4
CLARUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands, except share amounts)
Six months ended
June 30,
--------------------
2002 2001
--------- --------
OPERATING ACTIVITIES:
Net loss $ (27,028) $(43,548)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization on property and equipment 2,433 1,683
Amortization of intangible assets 455 4,483
Loss on impairment of investments - 5,506
Impairment of intangible assets 10,360
Loss on impairment of marketable securities - 979
Gain on sale of investments (15) (10)
Noncash sales and marketing expense 450 3,376
Noncash general and administrative expense - 224
Provision for doubtful accounts 3 2,610
Loss on disposal of property and equipment 785 7
Changes in operating assets and liabilities:
Accounts receivable 1,564 (1,082)
Prepaid and other current assets 876 (815)
Deposits and other long-term assets (104) (17)
Accounts payable and accrued liabilities 1,649 (2,189)
Deferred revenue (5,227) 777
Other long-term liabilities (7) 9
--------- --------
NET CASH USED IN OPERATING ACTIVITIES (13,806) (28,007)
INVESTING ACTIVITIES:
Purchase of marketable securities (20,282) (40,794)
Proceeds from sale of marketable securities 2,628 4,664
Proceeds from maturity of marketable securities 14,140 32,189
Proceeds from sale of investments 200 -
Purchase of investments - (2,000)
Proceeds from sale of property and equipment 27 -
Purchases of property and equipment (76) (2,694)
--------- --------
NET CASH USED IN INVESTING ACTIVITIES (3,363) (8,635)
FINANCING ACTIVITIES:
Proceeds from the exercises of stock options 136 70
Proceeds from issuance of common stock related to employee stock
purchase plan 78 96
--------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 214 166
--------- --------
Effect of exchange rate change on cash 3 83
CHANGE IN CASH AND CASH EQUIVALENTS (16,952) (36,393)
CASH AND CASH EQUIVALENTS, beginning of period 55,628 118,303
--------- --------
CASH AND CASH EQUIVALENTS, end of period $ 38,676 $ 81,910
========= ========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 56 $ 64
========= ========
NONCASH TRANSACTIONS:
Retirement of 82,500 shares of common stock pursuant to a terminated
employment agreement with former owners of the SAI/Redeo Companies $ - $ 2,181
========= ========
Retirement of 7,500 shares related to the termination of a sales and
marketing agreement. $ 39 $ -
========= ========
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5
CLARUS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Clarus
Corporation and subsidiaries (the "Company") for the three and six months ended
June 30, 2002, have been prepared in accordance with accounting principles
generally accepted in the United States of America and instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation of the unaudited condensed consolidated financial
statements have been included. The results of the three and six months ended
June 30, 2002 are not necessarily indicative of the results to be obtained for
the year ending December 31, 2002. These interim financial statements should be
read in conjunction with the Company's audited consolidated financial statements
and footnotes thereto included in the Company's Form 10-K for the fiscal year
ended December 31, 2001, filed with the Securities and Exchange Commission.
NOTE 2. EARNINGS PER SHARE
Basic and diluted net loss per share were computed in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share", using
the weighted average number of common shares outstanding. The diluted net loss
per share for the three and six months ended June 30, 2002 and 2001 does not
include the effect of common stock equivalents, calculated using the treasury
stock method, as their impact would be antidilutive. The potentially dilutive
effect of excluded common stock equivalents are as follows (in thousands):
Three months ended Six months ended
June 30, June 30,
------------------ -----------------
2002 2001 2002 2001
------ ------ ------ ------
Effect of shares issuable under stock options 180 196 141 289
Effect of shares issuable pursuant to warrants to purchase
common stock - - - 1
------ ------ ------ ------
Total effect of dilutive common stock equivalents 180 196 141 290
------ ------ ------ ------
NOTE 3. STOCK OPTION EXCHANGE PROGRAM
On April 9, 2001, the Company announced a voluntary stock option exchange
program for its employees. Under the program, employees were given the
opportunity to cancel outstanding stock options previously granted to them on or
after November 1, 1999 in exchange for an equal number of new options to be
granted at a future date. The exercise price of the new options was equal to the
fair market value of the Company's common stock on the date of grant. During the
first phase of the program 366,174 options with a weighted average exercise
price of $30.55 per share were canceled and new options to purchase 263,920
shares with an exercise price of $3.49 per share were 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.
NOTE 4. RESTRUCTURING AND RELATED COSTS
During 2001 and 2002, 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 closures and consolidation costs. During the first quarter of 2002, the
Company determined that amounts previously charged during 2001 of approximately
$202,000 that related to employee separation and related charges were no longer
required and this amount was credited to sales and marketing expense in the
accompanying condensed consolidated statement of operations during the three
months ended March 31, 2002. The Company's management approved further
reductions and reorganizations during the three months ended June 30, 2002,
which resulted in restructuring and related charges of $3.8 million. These
charges were comprised of
6
$2.2 million for employee separation and related costs for 102 employees and
$1.6 million for facility closures and consolidation costs.
The Company expects to complete the facility closures and consolidation during
2002. The facility closures and consolidation costs relate to the abandonment of
the Company's leased facilities in Limerick, Ireland; Maidenhead, England; and
near Toronto, Canada, as well as the restructuring of the Company's leased
facility in Suwanee, Georgia. Total facility closures and consolidation costs
include the write-down of property and equipment and leasehold improvements to
their net realizable value, 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.
In connection with the Company's continuing restructuring program, the Company
implemented a further reduction of its worldwide workforce and incurred a
related restructuring charge of approximately $1.3 million during July 2002. The
July 2002 charge is comprised of employee separation and related costs for 47
employees.
The following is a reconciliation of the components of the accrual for
restructuring and related costs, the amounts charged against the accrual during
2001 and 2002 and the balance of the accrual as of June 30, 2002:
Six Months Ended June 30, 2002
Accruals Expenditures Balance ------------------------------------- Balance
During 2001 During 2001 12/31/01 Accruals Expenditures Credits 06/30/02
----------- ------------ -------- -------- ------------ ------- --------
(in thousands)
Employee separation costs $2,939 $2,259 $ 680 $2,239 $2,388 $202 $ 329
Facility closure costs 1,218 9 1,209 1,568 401 - 2,376
------ ------ ------ ------ ------ ---- ------
Total restructuring and
related costs $4,157 $2,268 $1,889 $3,807 $2,789 $202 $2,705
====== ====== ====== ====== ====== ==== ======
The accrual for restructuring and related costs is included in accounts payable
and accrued liabilities in the accompanying condensed consolidated balance
sheets.
NOTE 5. COMPREHENSIVE INCOME (LOSS)
SFAS No. 130 "Reporting Comprehensive Income (Loss)", establishes standards of
reporting and display of comprehensive income (loss) and its components of net
income (loss) and "Other Comprehensive Income (Loss)". "Other Comprehensive
Income (Loss)" refers to revenues, expenses and gains and losses that are not
included in net income (loss) but rather are recorded directly in stockholders'
equity. The components of comprehensive loss for the three and six months ended
June 30, 2002 and 2001 were as follows (in thousands):
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2002 2001 2002 2001
-------- --------- -------- --------
Net loss $(20,571) $(20,787) $(27,028) $(43,548)
Unrealized gain (loss) on marketable securities 18 812 (164) 709
Foreign currency translation adjustments 87 (7) 3 83
-------- -------- -------- --------
Comprehensive loss $(20,466) $(19,982) $(27,189) $(42,756)
======== ======== ======== ========
NOTE 6. CREDIT AND CUSTOMER CONCENTRATIONS
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. As of June 30, 2002, four
customers accounted for more than 10% each, totaling $1.1 million or 64.2% of
the gross accounts receivable balance on that date. The percentage by customer
was 23.8%, 18.2%, 11.8%, and 10.4% , respectively, at June 30, 2002. As of
December 31, 2001, four customers accounted for more than 10% each, totaling
$1.7 million or 53.2% of the gross accounts receivable balance on that date. The
percentage of total accounts receivable due from each of these four customers
was 15.8%, 13.9%, 12.6% and 10.9%, respectively, at December 31, 2001.
During the quarter ended June 30, 2002, two customers accounted for more than
10% of total revenue, totaling $1.0 million or 40.7% of total revenue. The
percentage by customer was 30.6% and 10.1% respectively, for the quarter ended
June 30, 2002. During the quarter ended June 30, 2001, three customers accounted
for more than 10% each, totaling $4.0 million or 63.8% of total revenue. The
percentage by customer was 25.0%, 23.9% and 14.9%, respectively, for the quarter
ended June 30, 2001. During the
7
six months ended June 30, 2002, one customer accounted for more than 10% of
total revenue, totaling $2.6 million or 39.5% of total revenue. During the six
months ended June 30, 2001, three customers accounted for more than 10% each,
totaling $6.3 million or 57.0% of total revenue. The percentage by customer was
28.2%, 15.3%, and 13.5%, respectively, for the six months ended June 30, 2001.
As a result of BarclaysB2B's recent decision to discontinue its external
operations to focus on internal cost reduction, the Company was notified that
BarclaysB2B will terminate its current software license and service agreements
with the Company effective August 31, 2002. Upon termination the Company will be
required to refund to BarclaysB2B prepaid software license and support fees of
approximately $2.7 million less costs incurred by the Company associated with
terminating the contract. During the six months ended June 30, 2002, revenues
from the Company's agreements with BarclaysB2B represented 39.5% of the
Company's total revenues for this period.
NOTE 7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities include the following (in thousands):
June 30, December 31,
2002 2001
------- ------------
Accounts payable $ 461 $ 588
Accrued compensation, benefits, and commissions 1,237 1,386
Restructuring reserves 2,705 1,889
Payable to BarclaysB2B 2,657 -
Other 1,095 2,643
------ ------
Total $8,155 $6,506
====== ======
NOTE 8. CONTINGENCIES
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.
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.
NOTE 9. NEW ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities". SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee termination Benefits and Other Costs to Exit an
8
Activity (including Certain Costs Incurred in a Restructuring)". The provisions
of SFAS 146 are effective for the Company's 2003 fiscal year. The Company does
not believe that SFAS 146 will have a material impact on its financial
statements
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". SFAS
145 rescinds SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt",
SFAS 44, "Accounting for Intangible Assets of Motor Carriers" and SFAS 64,
"Extinguishments of Debt Made to Satisfy Sinking Fund Requirements". SFAS 145
amends SFAS 13, "Accounting for Leases", eliminating an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications with similar economic effects as
sale-leaseback transactions. This statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under certain conditions. The
provisions related to SFAS 13 are effective for transactions occurring after May
15, 2002. All other provisions of the statement are effective for financial
statements issued on or after May 15, 2002. The adoption of SFAS 145 did not
have a material impact on the Company's financial statements.
At the November 2001 EITF meeting, the FASB released Staff Announcement Topic
D-103, "Income Statement Characterization of Reimbursements Received for
`Out-of-Pocket' Expenses Incurred" stating that the Staff believes that
reimbursements received for out-of-pocket expenses should be characterized as
revenue. The Company adopted this Staff Announcement effective January 1, 2002.
Historically the Company has not reflected such reimbursements as revenue in its
consolidated statements of operations. Upon adoption of this FASB Staff
Announcement, comparative financial statements for prior periods were
reclassified to provide consistent presentation. The adoption of this FASB Staff
Announcement did not have any impact on the Company's financial position or
results of operations, however, the Company's services fees revenue and cost of
services fees revenue increased by an equal amount as a result of the gross-up
of revenues and expenses for reimbursable expenses. For the three and six months
ended June 30, 2002, the Company recorded revenue from reimbursement of
out-of-pocket expenses of approximately $62,000 and $150,000, respectively. For
the three and six months ended June 30, 2001, the Company's services fees
revenue and cost of services fees revenue increased by approximately $202,000
and $470,000, respectively, as a result of the reclassification of these
reimbursements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Assets to Be Disposed
Of". The Company adopted SFAS 144 effective January 1, 2002, which did not have
a material impact on the Company's financial statements.
In August 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations". SFAS 143 addresses financial accounting and reporting obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The provisions of SFAS 143 are effective for the
Company's 2003 fiscal year. The Company does not believe that SFAS 143 will have
a material impact on its financial statements.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets". SFAS 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. SFAS 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually. SFAS 142 also requires that intangible assets with
estimable useful lives be amortized over their respective estimated useful lives
to their estimated residual values. The Company adopted SFAS 141 upon issuance
and adopted SFAS 142 effective January 1, 2002. Upon adoption, the Company
tested goodwill for impairment at January 1, 2002 according to the provisions of
SFAS 142, which resulted in no impairment required as a cumulative effect of
accounting change. In the second quarter of 2002, the Company tested goodwill
for impairment according to the provisions of SFAS 142 and intangible assets
with definite lives according to SFAS 144 due to certain changes in business
strategy that effected the Company's business plans, which resulted in an
impairment of $6.7 million of goodwill and $3.6 million of intangible assets
with definite lives. The Company recorded $2.2 million and $4.0 million,
respectively, of amortization expense related to goodwill during the three and
six months ended June 30, 2001. As a result of adopting SFAS 142, the Company
did not recognize any goodwill amortization during the three and six months
ended June 30, 2002.
In September 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement was amended in June 2000 by
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities." The Company adopted these new pronouncements in January of
2001. The new Statements require all derivatives to be recorded on the balance
sheet at fair value and establish accounting treatment for three types of
hedges: hedges of changes in the fair value of assets, liabilities or firm
commitments; hedges of the variable cash flows of forecasted transactions; and
hedges of foreign currency exposures of net investments in foreign operations.
The Company has no derivatives and the adoption of these pronouncements did not
have any impact on the Company's results of operations or financial position.
9
NOTE 10. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current
period presentation.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains certain forward-looking statements 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" herein.
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, Smurfit-Stone Container Corporation, and
Wachovia Corporation.
In May 2002 the Company announced that it had retained an investment banking
firm to assist the Company in exploring all strategic alternatives to enhance
stockholder value. Such alternatives may include a sale of the Company, its
assets or its product lines or the adoption of a plan of liquidation. In
addition, the Company may redeploy its cash to acquire a company or companies
that may or may not be related to the Company's current business.
Critical Accounting Policies and Use of Estimates
As a result of the Company's announcement on exploring strategic alternatives
and the continuing poor market conditions, the Company has experienced a decline
in the demand for its software. While the Company has significantly reduced its
head count, the Company's announced strategy makes the retention of certain
employees critical to the success of this strategy. There is no guarantee that
the Company will be able to successfully execute on its announced strategy to
explore all strategic alternatives to enhance stockholder value.
If demand for business-to-business software and related services remain soft,
the Company's business, operating results, liquidity and financial condition
will be adversely affected. The Company's success depends on market acceptance
of e-commerce as a viable method for corporate procurement and other commercial
transactions and market adoption of the Company's current and future products.
The competitive landscape the Company faces is continuously changing. It is
difficult to estimate how competition will affect the Company's revenues.
It is also very difficult to predict the Company's quarterly results. The
Company has incurred significant net losses in each year since its inception.
The Company may not increase its customer base sufficient to generate the
substantial additional revenues necessary to become profitable. The Company has
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.
10
The Company's international sales and marketing activities cause the Company's
business to be more susceptible to the numerous risks associated with
international sales. The Company may not be successful in addressing these and
other risks and difficulties that it may encounter. Please refer to the "Risk
Factors" sections for additional information regarding the risks associated with
the Company's 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 ("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
recorded a provision for doubtful accounts of $1,000 and $3,000
for the three and six months ended June 30, 2002, respectively.
The Company recorded a provision for doubtful accounts of
$555,000 and $2.6 million for the three and six months ended June
30, 2001, respectively.
- The Company has significant long-lived assets, primarily
intangibles and goodwill, as a result of acquisitions completed
during 2000. The Company currently evaluates the carrying value
of its long-lived assets, including intangibles, according to
Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets".
Prior to 2002, the Company periodically evaluated the carrying
value of its long-lived assets, including intangibles, according
to SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of". 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 during the three months ended
December 31, 2001 to goodwill and intangible assets based on the
amount by which the carrying amount of these assets exceeded fair
value. As a result of a change in the Company's strategic
direction during the second quarter of 2002, the Company
determined that remaining goodwill and intangible assets should
be tested for further impairment. The Company's evaluation of the
present value of future cash flows based on the change in
strategic direction indicated the carrying value of the Company's
assets exceeded fair value. As a result, the Company recorded an
additional impairment charge to goodwill of $6.7 million and an
impairment charge to intangible assets of $3.6 million during the
three months ended June 30, 2002. The Company recorded $227,000
of amortization expense related to intangible assets with
definite lives during the three months ended June 30, 2002 and
2001. The Company recorded $455,000 of amortization expense
related to intangible assets with definite lives during the six
months ended June 30, 2002 and 2001. The Company recorded $2.2
million and $4.0 million of amortization expense related to
goodwill during the three and six months ended June 30, 2001. As
a result of adopting SFAS 142, the Company did not record
amortization expense related to goodwill during 2002.
- 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 three and six months ended June
30, 2001, the Company recorded impairment charges on investments
of $3.4 million and $6.5 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
Company's pending securities
11
lawsuit could adversely affect the Company's business, results of
operations, liquidity or financial condition. See "Risk Factors"
and "Part II Other Information - Item 1. Legal Proceedings"
herein.
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 and 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.
Operating Expenses
Cost of license fees includes royalties and software duplication and
distribution costs. The Company recognizes these costs as software applications
are shipped.
Cost of services fees includes personnel related expenses and third-party
consulting fees incurred to provide implementation, training, maintenance,
content aggregation, and upgrade services to customers and partners. These costs
are recognized as they are incurred for time and material arrangements and are
recognized using the percentage of completion method for fixed price
arrangements.
Research and development expenses consist primarily of personnel related
expenses and third-party consulting fees. The Company accounts for software
development costs under Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed". The Company charges research and development costs related to new
products or enhancements to expense as incurred until technological feasibility
is established, after which the remaining costs are capitalized until the
product or enhancement is available for general release to customers. The
Company defines technological feasibility as the point in time at which a
working model of the related product or enhancement exists. Historically, the
costs incurred during the period between the achievement of technological
feasibility and the point at which the product is available for general release
to customers have not been material.
Sales and marketing expenses consist primarily of personnel related expenses,
including sales commissions and bonuses, expenses related to travel, customer
meetings, trade show participation, public relations, promotional activities,
regional sales offices, and advertising.
General and administrative expenses consist primarily of personnel related
expenses for financial, administrative and management personnel, fees for
professional services, board of director fees, and the provision for doubtful
accounts. The Company allocates the total cost of its information technology
function and costs related to the occupancy of its corporate headquarters to
each of the functional areas. Information technology expenses include personnel
related expenses, communication charges, and software support. Occupancy charges
include rent, utilities, and maintenance services.
12
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 closures and consolidation,
depreciation and amortization on property and equipment, amortization of
intangibles, intangible impairment losses, stock-based compensation expenses,
losses realized on the disposal of assets, gains on sales of marketable
securities, and losses on impairment of investments, all of which are included
in our financial results for GAAP reporting purposes. 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 the Company's competitors.
Therefore, we urge you to carefully review the GAAP financial information
included as part of this Form 10-Q, 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)
Three months ended Six months ended
June 30 June 30
------------------------ -------------------------
2002 2001 2002 2001
REVENUES:
License fees $ 1,013 $ 3,600 $ 2,486 $ 5,910
Services fees 1,531 2,595 3,999 5,125
------- -------- -------- --------
TOTAL REVENUES 2,544 6,195 6,485 11,035
COST OF REVENUES:
License fees 3 80 17 124
Services fees 1,336 3,341 3,274 6,958
------- -------- -------- --------
TOTAL COST OF REVENUES 1,339 3,421 3,291 7,082
OPERATING EXPENSES:
Research and development 1,806 4,570 4,435 10,125
Sales and marketing 2,046 9,329 5,796 17,264
General and administrative 1,714 2,885 3,221 7,416
-------- -------- -------- --------
TOTAL OPERATING EXPENSES 5,566 16,784 13,452 34,805
-------- -------- -------- --------
Operating loss $(4,361) $(14,010) $(10,258) $(30,852)
Loss on foreign currency transactions (9) - (3) -
Interest income, (net) 629 1,706 1,306 4,064
-------- -------- -------- --------
Pro forma net loss $(3,741) $(12,304) $ (8,955) $(26,788)
======== ======== ======== ========
Weighted average shares outstanding - basic and diluted 15,588 15,507 15,580 15,507
======== ======== ======== ========
Pro forma net loss per share - basic and diluted $ (0.24) $ (0.79) $ (0.57) $ (1.73)
======== ======== ======== ========
13
Reconciliation of GAAP Net Loss to Pro Forma Net Loss
(in thousands, except per share data)
(unaudited)
Three months ended Six months ended
June 30 June 30
2002 2001 2002 2001
------------------------- ------------------------
Net loss $(20,571) $(20,787) $(27,028) $(43,548)
Restructuring costs/1/ 3,807 - 3,605 513
Depreciation and amortization on property and equipment 1,304 838 2,433 1,683
Amortization of intangibles 227 2,463 455 4,483
Intangible impairment loss 10,360 - 10,360 -
Stock-based compensation 352 1,800 450 3,600
Loss on disposal of assets 795 7 785 7
Gain on sale of marketable securities (15) (11) (15) (10)
Loss on impairment of investments - 3,386 - 6,484
-------- -------- -------- --------
Pro forma net loss $ (3,741) $(12,304) $ (8,955) $(26,788)
======== ======== ======== ========
Weighted average shares outstanding - basic and diluted 15,588 15,507 15,580 15,507
-------- -------- -------- --------
Pro forma net loss per share - basic and diluted $ (0.24) $ (0.79) $ (0.57) $ (1.73)
-------- -------- -------- --------
- ----------
/1/ Restructuring costs are comprised of employee severance and termination
costs and office closures and consolidation costs. For the three and six months
ended June 30, 2002 and 2001, these costs consist of the following:
(in thousands) Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
Cost of services fees revenue $ 545 $ - $ 545 $ 161
Research and development 747 - 747 -
Sales and marketing 634 - 432 134
General and administrative 1,881 - 1,881 218
------- ----- ------- ------
Total $ 3,807 $ - $ 3,605 $ 513
======= ===== ======= ======
Restructuring and Related Costs
During 2001 and 2002, 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 closures and consolidation costs. During the first quarter of 2002, the
Company determined that amounts previously charged during 2001 of approximately
$202,000 that related to employee separation and related charges were no longer
required and this amount was credited to sales and marketing expense in the
accompanying condensed consolidated statement of operations during the three
months ended March 31, 2002. The Company's management approved further
reductions and reorganizations during the three months ended June 30, 2002,
which resulted in restructuring and related charges of $3.8 million. These
charges were comprised of $2.2 million for employee separation and related costs
for 102 employees and $1.6 million for facility closures and consolidation
costs.
The Company expects to complete the facility closures and consolidation during
2002. The facility closures and consolidation costs relate to the abandonment of
the Company's leased facilities in Limerick, Ireland; Maidenhead, England; and
near Toronto, Canada, as well as the restructuring of the Company's leased
facility in Suwanee, Georgia. Total facility closures and consolidation costs
include the write-down of property and equipment and leasehold improvements to
their net realizable value, 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.
In connection with the Company's continuing restructuring program, the Company
implemented a further reduction of its worldwide workforce and incurred a
related restructuring charge of approximately $1.3 million during July, 2002.
The July 2002 charge is comprised of employee separation and related costs for
47 employees.
The following is a reconciliation of the components of the accrual for
restructuring and related costs, the amounts charged against the accrual during
2001 and 2002 and the balance of the accrual as of June 30, 2002:
14
Six Months Ended June 30, 2002
Accruals Expenditures Balance ----------------------------------- Balance
During 2001 During 2001 12/31/01 Accruals Expenditures Credits 06/30/02
----------- ------------ -------- -------- ------------ ------- --------
(in thousands)
Employee separation costs $2,939 $2,259 $ 680 $ 2,239 $ 2,388 $ 202 $ 329
Facility closure costs 1,218 9 1,209 1,568 401 - 2,376
------ ------ ------- ------- --------- ----- ------
Total restructuring and
related costs $4,157 $2,268 $ 1,889 $ 3,807 $ 2,789 $ 202 $2,705
====== ====== ======= ======= ========= ===== ======
The accrual for restructuring and related costs is included in accounts payable
and accrued liabilities in the accompanying condensed consolidated balance
sheets.
Results of Operations
Revenues
Total Revenues. Total revenues for the quarter ended June 30, 2002 decreased
58.9% to $2.5 million from $6.2 million during the same period in 2001. Total
revenues for the six months ended June 30, 2002 decreased 41.2% to $6.5 million
from $11.0 million during the same period in 2001. The decrease in total
revenues in both periods resulted primarily from a decrease in license revenue
due to reduced demand for the Company's software products as a result of reduced
information technology spending and the announcement by the Company to explore
all strategic alternatives during the quarter ended June 30, 2002. During the
quarter ended June 30, 2002, two customers accounted for more than 10% of total
revenue, totaling $1.0 million or 40.7% of total revenue. The percentage by
customer was 30.6% and 10.1% respectively, for the quarter ended June 30, 2002.
During the quarter ended June 30, 2001, three customers accounted for more than
10% each, totaling $4.0 million or 63.8% of total revenue. The percentage by
customer was 25.0%, 23.9%, and 14.9%, respectively, for the quarter ended June
30, 2001. During the six months ended June 30, 2002, one customer accounted for
more than 10% of total revenue, totaling $2.6 million or 39.5% of total revenue.
During the six months ended June 30, 2001, three customers accounted for more
than 10% each, totaling $6.3 million or 57.0% of total revenue. The percentage
by customer was 28.2%, 15.3% and 13.5%, respectively, for the six months ended
June 30, 2001.
As a result of BarclaysB2B's recent decision to discontinue its external
operations to focus on internal cost reduction, the Company was notified that
BarclaysB2B will terminate its current software license and service agreements
with the Company effective August 31, 2002. Upon termination the Company will be
required to refund to BarclaysB2B prepaid software license and support fees of
approximately $2.7 million less costs incurred by the Company associated with
terminating the contract. During the six months ended June 30, 2002, revenues
from the Company's agreements with BarclaysB2B represented 39.5% of the
Company's total revenues for this period.
License Fees. License fees decreased 71.9% to $1.0 million or 39.8% of total
revenues, for the quarter ended June 30, 2002 from $3.6 million, or 58.1% of
total revenues, for the same period in 2001. License fees decreased 57.9% to
$2.5 million or 38.3% of total revenues, for the six months ended June 30, 2002
from $5.9 million, or 53.6% of total revenues, for the same period in 2001. The
decrease in license fees was primarily attributable to the decision by the
Company to explore strategic alternatives during the quarter ended June 30,
2002, the softening demand for business-to-business software and the information
technology market generally.
Services Fees. Services fees decreased 41.0% to $1.5 million for the quarter
ended June 30, 2002, from $2.6 million for the same period in 2001. Services
fees decreased 22.0% to $4.0 million, for the six months ended June 30, 2002,
from $5.1 million for the same period in 2001. Services fees, however, increased
as a percentage of total revenues to 60.2%, for the quarter ended June 30, 2002,
from 41.9% during the same period in 2001, and to 61.7% for the six months ended
June 30, 2002, from 46.4% during the same period in 2001. The decrease in
services fees revenue for the three and six months ended June 30, 2002 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. As a result of the decision by the
Company to explore strategic alternatives during the quarter ended June 30,
2002, the Company anticipates certain customers may terminate their
relationships with the Company which would result in a decrease in maintenance
fees in future periods.
Cost of Revenues
Total Cost of Revenues. Cost of revenues decreased 44.9% to $1.9 million, or
74.1% of total revenue, during the quarter ended June 30, 2002 from $3.4
million, or 55.2% of total revenue, during the same period in 2001. Cost of
revenues decreased 47.0% to $3.8 million, or 59.2% of total revenue, during the
six months ended June 30, 2002 from $7.2 million, or 65.6% of total revenue,
during the same period in 2001. The decreases in cost of revenues are primarily
a result of a decrease in the cost of services fees
15
due to lower personnel related costs, partially offset by costs associated with
restructuring costs incurred during the three months ended June 30, 2002. During
the three months ended June 30, 2002, the Company had an average of 64.5% fewer
employees in services compared to the same period in 2001. During the six months
ended June 30, 2002, the Company had an average of 61.5% fewer employees in
services compared to the same period in 2001. The reduced personnel related
costs are a result of Company instituted cost control measures that began during
2001 and the Company's announced strategy in May 2002 to pursue strategic
alternatives such as a sale of the Company, its assets or its product lines.
Cost of License Fees. Cost of license fees decreased 96.3% to $3,000 in the
second quarter of 2002 from $80,000 in the second quarter of 2001. Cost of
license fees decreased 86.3% to $17,000 in the first six months of 2002 from
$124,000 in the first six months of 2001. 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 decreased 43.7% to $1.9 million, or
122.9% of total services fees revenues, during the quarter ended June 30, 2002
compared to $3.3 million, or 128.7% of total services fees revenues, during the
same period in 2001. Cost of services fees decreased 46.4% to $3.8 million, or
95.5% of total services fees revenues, during the six months ended June 30, 2002
compared to $7.1 million, or 138.9% of total services fees revenues, during the
same period in 2001. As discussed above, the decrease in the cost of services
fees was primarily attributable to lower personnel related costs in both the
services implementation and customer support areas, partially offset by costs
associated with restructuring costs incurred during the three months ended June
30, 2002. The Company incurred costs related to employee severance and related
costs of $545,000 during the three months ended June 30, 2002 and costs of
$161,000 during the three months ended March 31, 2001.
Research and Development Expense
Research and development expenses decreased 44.1% to approximately $2.6 million,
or 100.4% of total revenues, during the quarter ended June 30, 2002 from $4.6
million, or 73.8% of total revenues, during the same period in 2001. During the
six months ended June 30, 2002, research and development expenses decreased
48.8% to approximately $5.2 million, or 79.9% of total revenues from $10.1
million, or 91.8% of total revenues, during the same period in 2001. Research
and development expenses decreased primarily as a result of a reduction in
personnel related costs and consulting fees incurred to develop the Company's
products, partially offset by costs associated with restructuring costs incurred
during the three months ended June 30, 2002. Consulting fees were $196,000 in
the second quarter of 2002 compared to $1.6 million in the second quarter of
2001. During the three months ended June 30, 2002, the Company had an average of
52.5% fewer employees in the research and development area compared to the same
period of 2001. Consulting fees were $706,000 in the first six months of 2002
compared to $3.7 million in the first six months of 2001. During the six months
ended June 30, 2002, the Company had an average of 46.5% fewer employees in the
research and development area compared to the same period of 2001. The Company
incurred costs related to employee severance and related costs of $747,000
during the three months ended June 30, 2002. The Company did not incur any
severance or related costs during the three or six month periods ended June 30,
2001.
Sales and Marketing Expense, exclusive of non-cash expense
Sales and marketing expenses decreased 71.3% to $2.7 million, or 105.3% of total
revenues, during the quarter ended June 30, 2002 from $9.3 million, or 150.6% of
total revenues, during the same period in 2001. Sales and marketing expenses
decreased 64.2% to $6.2 million, or 96.0% of total revenues, during the six
months ended June 30, 2002 from $17.4 million, or 157.7% of total revenues,
during the same period in 2001. The decrease was primarily attributable to a
decrease in variable compensation as a result of lower license revenue during
the period and a decrease in sales and marketing personnel, partially offset by
costs associated with restructuring costs incurred during the three months ended
June 30, 2002. The Company had an average of 72.1% fewer employees during the
second quarter of 2002 in the sales, marketing and business development areas
compared to the second quarter of 2001. The Company had an average of 67.5%
fewer employees during the first six months of 2002 in the sales, marketing and
business development areas compared to the first six months of 2001. The Company
incurred severance and related costs of $634,000 and $432,000, respectively,
during the three and six months ended June 30, 2002. The company incurred no
costs during the three months ended June 30, 2001 and $134,000 during the six
months ended June 30, 2001.
Noncash Sales and Marketing Expense
During the three months ended June 30, 2002 and 2001, noncash sales and
marketing expenses of approximately $352,000 and $1.7 million, respectively,
were recognized in connection with sales and marketing agreements signed by the
Company during the fourth quarter of 1999 and the first quarter of 2000. The
Company recognized $450,000 and $3.4 million, respectively, associated with
these agreements during the six months ended June 30, 2002 and 2001. In
connection with these agreements, the Company issued warrants and shares of
common stock to certain strategic partners, all of whom were also customers, in
exchange for their participation in the Company's sales and marketing efforts.
The decrease in noncash sales and marketing expense during 2002 is
16
due to the termination of the sales and marketing agreement with one customer
during the fourth quarter of 2001. As of June 30, 2002 all deferred sales and
marketing costs, previously capitalized, have been expensed.
General and Administrative, Exclusive of Noncash Expense
General and administrative expenses, including the provision for doubtful
accounts, increased 24.6% to $3.6 million during the quarter ended June 30,
2002, or 141.3% of total revenue from $2.9 million, or 46.6% of total revenues,
during the same period in 2001. General and administrative expenses, including
the provision for doubtful accounts, decreased 33.2% to $5.1 million during the
six months ended June 30, 2002, or 78.7% of total revenue from $7.6 million, or
69.2% of total revenues, during the same period in 2001. The increase in general
and administrative expense for the three months ended June 30, 2002 was
primarily attributable to severance related costs and facility restructuring
costs partially offset by a decrease in the provision for doubtful accounts and
reduced headcount. The Company had approximately $313,000 of severance related
costs and approximately $1.6 million in facility restructuring expenses during
the three months ended June 20, 2002. The Company had an average of 50.5% fewer
employees during the three months ended June 30, 2002 in the general and
administrative areas compared to the same period of 2001. The Company recorded a
provision for doubtful accounts of $1,000 during the three months ended June 30,
2002 compared to a provision of $555,000 for the three months ended June 30,
2001. The decrease in general and administrative expense for the six months
ended June 30, 2002 was primarily attributable to a decrease in the provision
for doubtful accounts and reduced headcount, partially offset by severance and
related costs and facility restructuring costs. The Company had an average of
50.9% fewer employees during the six months ended June 30, 2002 in the general
and administrative areas compared to the same period of 2001. The Company
recorded a provision for doubtful accounts of $3,000 during the six months ended
June 30, 2002 compared to a provision of $2.6 million for the six months ended
June 30, 2001.
Noncash General and Administrative Expense
For the three months ended March 31, 2001, noncash general and administrative
expenses were $112,000, or 1.8% of total revenues. For the six months ended June
30, 2001, noncash general and administrative expenses were $224,000, or 2.0% of
total revenues. In the third quarter of 2000, the Company granted 18,750 options
to a new board member at a price below the fair market value at the date of
grant. The amount expensed during 2001 relates primarily to these options.
Loss on Impairment of Intangible Assets
In the second quarter of 2002, the Company recognized a goodwill impairment loss
of $6.7 million and an intangible asset impairment loss of $3.6 million as a
result of a change in the Company's strategic direction. The Company
periodically evaluates the carrying value of its long-lived assets, including
intangibles, according to Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets" and SFAS 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets". As a result of a change in the
Company's strategic direction during the second quarter of 2002, the Company
determined that remaining goodwill and intangible assets should be tested for
further impairment. The Company's evaluation of the present value of future cash
flows based on the change in strategic direction indicated the carrying value of
the Company's assets exceeded fair value. As a result the Company recorded an
additional impairment charge to goodwill and intangible assets of $10.4 million
during the three months ended June 30, 2002.
Depreciation and Amortization on Property and Equipment
Depreciation and amortization on property and equipment increased to $1.3
million in the quarter ended June 30, 2002 from $838,000 in the same period of
2001. Depreciation and amortization on property and equipment increased to $2.4
million in the six months ended June 30, 2002 from $1.7 million in the same
period of 2001. The increase in depreciation and amortization on property and
equipment during 2002 is primarily due to financial, professional services
management and customer relationship software implemented during 2001.
Amortization of Intangible Assets
Amortization of intangible assets decreased to $227,000 during the three months
ended June 30, 2002 from $2.5 million during the same period of 2001.
Amortization of intangible assets decreased to $455,000 during the six months
ended June 30, 2002 from $4.5 million during the same period of 2001. The
decrease is primarily the result of adopting SFAS 142, effective January 1,
2002, which requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized. The amortization during 2002 relates to intangible
assets with definite lives. As a result of adopting SFAS 142, the Company did
not recognize any amortization related to goodwill during 2002. The Company
recorded $2.2 million of amortization expense related to goodwill during the
three months ended June 30, 2001 and $4.0 million during the six months ended
June 30, 2001. The Company recorded $227,000 of amortization related to
intangible assets with definite lives during the three months ended June 30,
2001 and $455,000 during the six months ended June 30, 2001.
17
Loss on Disposal of Assets
For the three and six month periods ended June 30, 2002, the Company recorded a
loss on the disposal of assets of $795,000 and $785,000, respectively. For the
three and six month periods ended June 30, 2001, the Company recorded a loss on
the disposal of assets of $7,000. The increase in the loss on the disposal of
assets in the second quarter of 2002 is primarily attributable to the write down
of assets located in the Maidenhead and Limerick offices to their net realizable
value.
Other Income
For the three months ended June 30, 2002 and 2001, the Company recorded other
income of $6,000 and $11,000, respectively. For the six months ended June 30,
2002, and 2001 the Company recorded other income of $12,000 and $10,000
respectively. These amounts are comprised of losses on foreign currency and
realized gains and losses on marketable securities.
Loss on Impairment of Investments
During the three and six months ended June 30, 2001, the Company recorded a loss
on impairment of investments of approximately $3.4 million and $6.5 million,
respectively. These losses were necessitated by other than temporary losses to
the value of investments the Company has made in privately held companies. These
companies are primarily early-stage companies and are subject to significant
risk due to their limited operating history and current economic and capital
market conditions.
Interest Income
Interest income decreased to $685,000 in the second quarter of 2002, or 26.9% of
total revenues from $1.8 million, or 28.4% of total revenues, in the same period
of 2001. Interest income decreased to $1.4 million in the first six months of
2002, or 21.9% of total revenues from $4.2 million, or 37.9% of total revenues,
in the same period of 2001. 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 quarters.
Interest Expense
Interest expense for the three months ended June 30, 2002 and 2001 was $56,000.
Interest expense for the six months ended June 30, 2002 was $112,000 compared to
$120,000 during the same period of 2001. In March of 2000, the Company entered
into a $5.0 million borrowing arrangement with an interest rate of 4.5% with
Wachovia Capital Investments, Inc. The interest expense in 2002 and 2001 is
primarily related to this agreement. The $5.0 million is due on March 15, 2005.
Income Taxes
As a result of the operating losses incurred since the Company's inception, no
provision or benefit for income taxes was recorded during the three and six
months ended June 30, 2002 and 2001, respectively.
Liquidity and Capital Resources
The Company's cash and cash equivalents decreased to $38.7 million at June 30,
2002 from $55.6 million at December 31, 2001. Marketable securities increased to
$68.6 million at June 30, 2002 from $65.3 million at December 31, 2001. The
overall decrease in cash and cash equivalents and marketable securities is due
primarily to cash used to fund operating losses.
Cash used in operating activities was approximately $13.8 million during the six
months ended June 30, 2002. The cash used was primarily attributable to the
Company's net loss and to a decrease in deferred revenue partially offset by
noncash items, an increase in accounts payable and a decrease in accounts
receivable and prepaid and other assets. Cash used in operating activities was
approximately $28.0 million during the six months ended June 30, 2001. The cash
used was primarily attributable to the Company's net loss, an increase in
accounts receivable and prepaid and other current assets, and a decrease in
accounts payable and accrued liabilities partially offset by noncash items and
an increase in deferred revenue.
Cash used for investing activities was approximately $3.4 million during the six
months ended June 30, 2002. The cash was used primarily for purchases of
marketable securities partially offset by the sale of investments and the sale
and maturity of marketable securities. Cash used by investing activities was
approximately $8.6 million during the six months ended June 30, 2001. The cash
used by investing activities was primarily attributable to the purchase of
marketable securities, the purchase of property and equipment and an investment
in a private company partially offset by proceeds received from the sale and
maturity of marketable securities.
18
Cash provided by financing activities was approximately $214,000 during the six
months ended June 30, 2002, and approximately $166,000 during the six months
ended June 30, 2001. The cash provided by financing activities during the six
months ended June 30, 2002 and 2001 was primarily attributable to proceeds from
shares issued under the employee stock purchase plan and stock option exercises.
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. As of June 30, 2002, four
customers accounted for more than 10% each, totaling $1.1 million or 64.2% of
the gross accounts receivable balance on that date. The percentage by customer
was 23.8%, 18.2%, 11.8%, and 10.4%, respectively, at June 30, 2002. As of
December 31, 2001, four customers accounted for more than 10% each, totaling
$1.7 million or 53.2% of the gross accounts receivable balance on that date. The
percentage of total accounts receivable due from each of these four customers
was 15.8%, 13.9%, 12.6% and 10.9%, respectively, at December 31, 2001.
During the quarter ended June 30, 2002, two customers accounted for more than
10% of total revenue, totaling $1.0 million or 40.7% of total revenue. The
percentage by customer was 30.6% and 10.1% respectively, for the quarter ended
June 30, 2002. During the quarter ended June 30, 2001, three customers accounted
for more than 10% each, totaling $4.0 million or 63.8% of total revenue. The
percentage by customer was 25.0%, 23.9%, and 14.9%, respectively, for the
quarter ended June 30, 2001. During the six months ended June 30, 2002, one
customer accounted for more than 10% of total revenue, totaling $2.6 million or
39.5% of total revenue. During the six months ended June 30, 2001, three
customers accounted for more than 10% each, totaling $6.3 million or 57.0% of
total revenue. The percentage by customer was 28.2%, 15.3%, and 13.5%,
respectively, for the six months ended June 30, 2001.
As a result of BarclaysB2B's recent decision to discontinue its external
operations to focus on internal cost reduction, the Company was notified that
BarclaysB2B will terminate its current software license and service agreements
with the Company effective August 31, 2002. Upon termination the Company will be
required to refund to BarclaysB2B prepaid software license and support fees of
approximately $2.7 million less costs incurred by the Company associated with
terminating the contract. During the six months ended June 30, 2002, revenues
from the Company's agreements with BarclaysB2B represented 39.5% of the
Company's total revenues for this period.
At the July 15, 2002 meeting of the Company's Board of Directors, the Board
resolved to recommend to the stockholders of the Company for approval at the
next meeting called for any purpose, that costs incurred by Warren B. Kanders,
Burtt R. Erlich and Nicholas Sokolow in connection with the solicitation of
proxies for the 2002 annual meeting, be reimbursed by the Company. These costs
are approximately $500,000.
On March 14, 2000, the Company entered into a securities purchase agreement with
Wachovia Capital Investments, Inc. Wachovia purchased a 4.5% convertible
subordinated promissory note (the "Note") in the original principal amount of
$5.0 million. The Note is due March 15, 2005 and the $5.0 million principal
amount was placed in investment grade cash equivalents. Upon the occurrence of a
change of control, as defined in the Note, the Company would be required to
prepay the outstanding principal amount of the Note, together with any unpaid
interest, within five business days after the occurrence of a change of control.
As part of the Company's announced strategic alternatives process, many
strategic options could constitute a change of control, as defined in the Note,
and require a prepayment of the Note, together with any unpaid interest.
At June 30, 2002, the Company had net operating loss carryforwards, research and
experimentation credit, and alternative minimum tax credit carryforwards for
U.S. federal income tax purposes, which expire in varying amounts beginning in
the year 2009. The Company's ability to benefit from certain net operating loss
carryforwards is limited under section 382 of the Internal Revenue Code as the
Company is deemed to have had an ownership change of greater than 50%.
Accordingly, certain net operating losses may not be realizable in future years
due to this limitation.
Although operating activities may provide cash in certain periods, to the extent
the Company incurs continuing operating losses or experiences growth in the
future, the Company's operating and investing activities will continue to use
cash. The Company currently estimates uses of cash to fund operating losses and
for purchases of property and equipment. The actual use of cash in operations
during 2002 will be impacted dramatically by any fluctuations in projected
revenue as the Company's operating expenses are relatively fixed in the short
term. The Company currently believes that existing cash and cash equivalents and
marketable securities will be sufficient to meet operating and investing needs
for the foreseeable future.
The following summarizes the Company's contractual obligations and commercial
commitments at June 30, 2002, and the effect such obligations are expected to
have on our liquidity and cash flow in future periods:
Total 2002 2003 2004 2005 2006 Thereafter
----- ---- ---- ---- ---- ---- ----------
(in thousands)
Long-term debt $ 5,000 $ - $ - $ - $ 5,000 $ - $ -
Operating leases 6,990 914 1,774 1,803 1,802 644 53
-------- ------ ------- ------- ------- ------- ------
Total $ 11,990 $ 914 $ 1,774 $ 1,803 $ 6,802 $ 644 $ 53
======== ====== ======= ======= ======= ======= ======
The Company does not have commercial commitments under capital leases, lines of
credit, standby lines of credit, guaranties, standby repurchase obligations or
other such arrangements.
19
The Company does not engage in any transactions or have relationships or other
arrangements with an unconsolidated entity. These include special purpose and
similar entities or other off-balance sheet arrangements. The Company also does
not trade in energy, weather or other commodity based contracts.
Related Party Transactions
On November 1, 2001, the Company engaged E.Com Consulting to perform market
research and provide recommendations concerning the needs and opportunities
associated with the Company's settlement product. E.Com Consulting subcontracted
with e-RM International, Inc. ("e-RMI") to assist with a portion of this
project. e-RMI is a Delaware corporation whose sole shareholder is Chrismark
Enterprises LLC. Chrismark Enterprises LLC is owned by Mark Johnson, a former
director of the Company and his wife. The contract period of the engagement was
November 1, 2001 through January 31, 2002 for which the Company agreed to pay
total professional fees of $50,000 plus out-of-pocket expenses. Of this amount,
$7,805 was paid to e-RMI. The Company expensed a total of $42,164 in connection
with the engagement during the fourth quarter of 2001 and had a balance due
E.Com of $34,359 at December 31, 2001 that is included in accounts payable and
accrued liabilities in the accompanying consolidated balance sheet. The contract
was terminated by the Company during January 2002. No expense was incurred
during 2002 and all amounts due E.Com were paid in January, 2002. At the May 21,
2002 Annual Meeting of stockholders, Mr. Johnson was not re-elected a director
of the Company.
On February 7, 2002 Todd Hewlin joined the Company's board of directors. Mr.
Hewlin is a managing director of The Chasm Group, LLC, a consultancy
organization focusing on helping technology companies develop and implement
strategies that create and sustain market leadership positions for their core
products while building shareholder value and a sustainable competitive
advantage. During 2001, the Company engaged The Chasm Group to assist the
Company on various strategic and organizational issues. The contract period of
the engagement was November 15, 2001 through February 15, 2002 for which the
company agreed to professional fees of $225,000 plus out-of-pocket expenses. The
Company expensed a total of $145,000 during the three months ended March 31,
2002 that is included in general and administrative in the accompanying
consolidated statement of operations and expensed $131,000 during the fourth
quarter of 2001. The Company expensed an additional $54,000 during the three
months ended March 31, 2002 related to further services performed by The Chasm
Group that is included in general and administrative in the accompanying
consolidated statement of operations. At the May 21, 2002 Annual Meeting of
stockholders, Mr. Hewlin was not re-elected a director of the Company.
In the opinion of management, the rates, terms and considerations of the
transactions with the related parties described above approximate those that the
Company would have received in transactions with unaffiliated parties.
New Accounting Pronouncements
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities". SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". The provisions of SFAS
146 are effective for the Company's 2003 fiscal year. The Company does not
believe that SFAS 146 will have a material impact on its financial statements
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". SFAS
145 rescinds SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt",
SFAS 44, "Accounting for Intangible Assets of Motor Carriers" and SFAS 64,
"Extinguishments of Debt Made to Satisfy Sinking Fund Requirements". SFAS 145
amends SFAS 13, "Accounting for Leases", eliminating an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications with similar economic effects as
sale-leaseback transactions. This statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under certain conditions. The
provisions related to SFAS 13 are effective for transactions occurring after May
15, 2002. All other provisions of the statement are effective for financial
statements issued on or after May 15, 2002. The adoption of SFAS 145 did not
have a material impact on the Company's financial statements.
At the November 2001 EITF meeting, the FASB released Staff Announcement Topic
D-103, "Income Statement Characterization of Reimbursements Received for
`Out-of-Pocket' Expenses Incurred" stating that the Staff believes that
reimbursements received for out-of-pocket expenses should be characterized as
revenue. The Company adopted this Staff Announcement effective January 1, 2002.
Historically the Company has not reflected such reimbursements as revenue in its
consolidated statements of operations. Upon adoption of this FASB Staff
Announcement, comparative financial statements for prior periods were
reclassified to provide consistent presentation. The adoption of this FASB Staff
Announcement did not have any impact on the Company's financial position or
results of operations, however, the Company's services fees revenue and cost of
services fees revenue increased by an
20
equal amount as a result of the gross-up of revenues and expenses for
reimbursable expenses. For the three and six months ended June 30, 2002, the
Company recorded revenue from reimbursement of out-of-pocket expenses of
approximately $62,000 and $150,000, respectively. For the three and six months
ended June 30, 2001, the Company's services fees revenue and cost of services
fees revenue increased by approximately $202,000 and $470,000, respectively, as
a result of the reclassification of these reimbursements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Assets to Be Disposed
Of". The Company adopted SFAS 144 effective January 1, 2002, which did not have
a material impact on the Company's financial statements.
In August 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations". SFAS 143 addresses financial accounting and reporting obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The provisions of SFAS 143 are effective for the
Company's 2003 fiscal year. The Company does not believe that SFAS 143 will have
a material impact on its financial statements.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets". SFAS 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. SFAS 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually. SFAS 142 also requires that intangible assets with
estimable useful lives be amortized over their respective estimated useful lives
to their estimated residual values. The Company adopted SFAS 141 upon issuance
and adopted SFAS 142 effective January 1, 2002. Upon adoption, the Company
tested goodwill for impairment at January 1, 2002 according to the provisions of
SFAS 142, which resulted in no impairment required as a cumulative effect of
accounting change. In the second quarter of 2002, the Company tested goodwill
for impairment according to the provisions of SFAS 142 and intangible assets
with definite lives according to SFAS 144 due to certain changes in business
strategy that effected the Company's business plans, which resulted in an
impairment of $6.7 million of goodwill and $3.6 million of intangible assets
with definite lives. The Company recorded $2.2 million and $4.0 million,
respectively, of amortization expense related to goodwill during the three and
six months ended June 30, 2001. As a result of adopting SFAS 142, the Company
did not recognize any goodwill amortization during the three and six months
ended June 30, 2002.
In September 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement was amended in June 2000 by
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities." The Company adopted these new pronouncements in January of
2001. The new Statements require all derivatives to be recorded on the balance
sheet at fair value and establish accounting treatment for three types of
hedges: hedges of changes in the fair value of assets, liabilities or firm
commitments; hedges of the variable cash flows of forecasted transactions; and
hedges of foreign currency exposures of net investments in foreign operations.
The Company has no derivatives and the adoption of these pronouncements did not
have any impact on the Company's results of operations or financial position.
Risk Factors
In addition to other information in this quarterly report on Form 10-Q, the
following risk factors should be carefully considered in evaluating the Company
and its business because such factors currently may have a significant impact on
the Company's business, operating results, liquidity and financial condition. As
a result of the risk factors set forth below, actual results could differ
materially from those projected in any forward-looking statements.
The Company's announced plans to pursue all strategic alternatives to enhance
stockholder value have, and are likely to continue to, reduce the demand for the
Company's software.
In May 2002 the Company announced that it had retained an investment banking
firm to assist the Company in exploring all strategic alternatives to enhance
stockholder value. As a result of this announced strategy and steps taken by the
Company to reduce its operating expenses, the Company has experienced a decline
in the demand for its software and its ability to acquire new customers. The
Company has significantly reduced the number of its sales and marketing
personnel from approximately 46 in April, 2002 to approximately 3 in August,
2002. Management believes that demand for the Company's software will continue
to decline as a result of the Company's announced strategy. Continued decline in
demand for the Company's products and services will negatively affect the
Company's business, results of operations, liquidity and financial condition.
The Company's announced plans to pursue strategic alternatives has caused, and
is likely to continue to cause, the Company to lose its customers.
21
The uncertainty surrounding the Company's announced strategy to pursue strategic
alternatives has caused the Company's customers to question the Company's
long-term commitment to its software and electronic commerce products and
services. As a result, certain customers have indicated that they may terminate
their relationships with the Company. If this uncertainty continues, the Company
expects to lose existing software customers.
The Company's ability to execute on its announced strategy to pursue strategic
alternatives has been adversely effected by market conditions and the Company's
declining business.
Market conditions and the Company's public announcement to seek alternatives
such as the sale of the Company, its assets, product lines or adopt a plan of
liquidation has made it more difficult for the Company to negotiate the terms of
any such transaction. As a result, the Company may not be able to sell the
Company, its assets or product lines on terms that are acceptable to the Company
or at all. If the Company does not successfully negotiate the sale of the
Company, its assets or product lines, the Company may cease operating its
software and electronic commerce business.
As the Company pursues its announced strategy of pursuing strategic
alternatives, the Company is dependent on certain key executives and employees.
To execute on the Company's announced strategy to reduce its operating expenses
and pursue a sale of the Company, its assets, product lines, or plan of
liquidation, the Company must retain critical executives and certain employees
that work in the support and services and development areas. The familiarity of
these individuals with the Company's current products and services makes them
especially critical to the Company's success in executing on any of its
announced strategies. The loss of any such key executives or employees could
make it more difficult for the Company to pursue and execute on its announced
strategies.
There is no guarantee that the Company will continue to operate its software and
electronic commerce business.
The Company may use a substantial portion of its cash to acquire a business or
businesses that are not related or complementary to the Company's current
software and electronic commerce business. The Company may determine not to
continue any operations and it may adopt a plan of liquidation. The Company may
not be successful in any business it may acquire.
Any acquisitions that the Company attempts or makes could prove difficult to
integrate or require a substantial commitment of management time and other
resources.
As part of the Company's announced strategy, the Company may seek to acquire or
invest in additional businesses, products or technologies that may or may not
complement or expand its current business. The Company's management may not have
experience in operating the types of business that may be acquired by the
Company. In addition, acquisitions, particularly acquisitions of unrelated
businesses, involve a number of special problems including:
. executing successful due diligence;
. difficulty integrating acquired technologies, operations and personnel
with the existing businesses;
. diversion of management attention in connection with both negotiating
the acquisitions and integrating the assets;
. strain on managerial and operational resources as management tries to
oversee larger operations;
. the funding requirements for acquired companies may be significant;
. exposure to unforeseen liabilities of acquired companies;
. increased risk of costly and time-consuming litigation, including
stockholder lawsuits; and
. the requirement to record potentially significant additional future
operating costs for the amortization of intangible assets.
The Company may not be able to successfully address these problems. Moreover,
the Company's future operating results will depend to a significant degree on
its ability to successfully integrate acquisitions (if any) and manage
operations while also controlling expenses.
22
In addition, if the Company identifies an appropriate acquisition opportunity,
the Company may not be able to negotiate the terms of that acquisition
successfully. The Company may not be able to select, manage or absorb or
integrate any future acquisitions successfully, particularly acquisitions of
large companies. Any acquisition, even if successfully integrated, may not
benefit the stockholders.
The softening demand for business-to-business software and related services has
and is likely to continue to negatively affect the Company's software business,
operating results, liquidity and financial condition.
The Company's revenue growth and operating results depend significantly on the
overall demand for technological goods and services, and in particular, demand
for business-to-business software and services. Softening demand for these
products and services caused by ongoing economic uncertainty and recently, the
Company's announced strategy to pursue strategic alternatives has contributed to
and will continue to contribute to lower revenues.
The success of the Company's software business depends upon market acceptance of
e-commerce as a reliable method for corporate procurement and other commercial
transactions.
Market acceptance of e-commerce, generally, and the Internet specifically, as a
forum for corporate procurement is subject to a number of risks. The success of
the Company's suite of business-to-business e-commerce applications, including
Clarus eProcurement and Clarus eMarket, depends upon the development and
expansion of the market for Internet-based software applications, in particular
e-commerce applications. This market is rapidly evolving. Many significant
issues relating to commercial use of the Internet, including security,
reliability, cost, ease of use, quality of service and government regulation,
remain unresolved and could delay or prevent Internet growth. If widespread use
of the Internet for commercial transactions does not develop or if the Internet
otherwise does not develop as an effective forum for corporate procurement, the
demand for the Company's product suite and our overall business, operating
results, liquidity and financial condition will be materially and adversely
affected.
The Company's settlement platform is a new technology product in an evolving
market.
The Company's settlement product is a technology that is currently being
marketed to early-adopting customers. The Company has limited experience in
marketing this product. If the market for the settlement product fails to
completely develop or develops more slowly than the Company anticipates or if
the Company fails to develop and gain market acceptance of this product, the
Company's software business, operating results, liquidity and financial
condition could be materially and adversely affected.
The Company's quarterly operations are v