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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-24277
CLARUS CORPORATION
(Exact name of Registrant as specified in its Charter)
Delaware 58-1972600
(State of Incorporation) (R.S. Employer Identification No.)
One Pickwick Plaza
Greenwich, Connecticut 06830
(Address of principal office, including zip code)
(203) 302-2000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock,
par value $.0001
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). [X]
The aggregate market value of the voting stock and non-voting common equity
held by non-affiliates of the Registrant at March 14, 2003 was approximately
$74.2 million based on $5.11 per share, the closing price of the common stock as
quoted on the Nasdaq National Market.
The number of shares of the Registrant's common stock outstanding at March
14, 2003, was 15,770,631 shares.
DOCUMENT INCORPORATED BY REFERENCE
Portions of our Proxy Statement for the 2003 Annual Meeting of Stockholders
to be filed with the Securities and Exchange Commission within 120 days of the
Registrant's 2002 fiscal year end are incorporated by reference into Part III of
this report.
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 7
ITEM 3. LEGAL PROCEEDINGS 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 8
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 8
ITEM 6. SELECTED FINANCIAL DATA 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 49
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 49
ITEM 11. EXECUTIVE COMPENSATION 49
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 49
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 49
ITEM 14. PROCEDURES AND CONTROLS 49
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 50
SIGNATURES 53
EXHIBIT INDEX 57
PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements, including
information about or related to our future results, certain projections and
business trends. Assumptions relating to forward-looking statements involve
judgments with respect to, among other things, future economic, competitive and
market conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control. When
used in this report, the words "estimate," "project," "intend," "believe,"
"expect" and similar expressions are intended to identify forward-looking
statements. Although we believe that our assumptions underlying the forward-
looking statements are reasonable, any or all of the assumptions could prove
inaccurate, and we may not realize the results contemplated by the forward-
looking statements. Management decisions are subjective in many respects and
susceptible to interpretations and periodic revisions based upon actual
experience and business developments, the impact of which may cause us to alter
our business strategy or capital expenditure plans that may, in turn, affect our
results of operations. In light of the significant uncertainties inherent in the
forward-looking information included in this report, you should not regard the
inclusion of such information as our representation that we will achieve any
strategy, objectives or other plans. The forward-looking statements contained in
this report speak only as of the date of this report, and we have no obligation
to update publicly or revise any of these forward-looking statements.
These and other statements, which are not historical facts, are based
largely upon our current expectations and assumptions and are subject to a
number of risks and uncertainties that could cause actual results to differ
materially from those contemplated by such forward-looking statements. These
risks and uncertainties include, among others, our planned effort to redeploy
our assets to enhance stockholder value following the completion of the
transaction with Epicor, and the risks and uncertainties set forth in the
section headed "Factors That May Affect Our Future Results" of Part I of this
Report and described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of Part II of this Report. The Company
cannot guarantee its future performance.
OVERVIEW
Clarus Corporation ("Clarus" or the "Company," which may be referred to as
"we," "us," or "our") was formerly a provider of e-commerce business solutions
until the sale of substantially all of its operating assets in December 2002. We
are currently seeking to redeploy our cash and cash equivalent assets to enhance
stockholder value and are seeking, analyzing and evaluating potential
acquisition and merger candidates. We were incorporated in Delaware in 1991
under the name SQL Financials, Inc. In August 1998, we changed our name to
Clarus Corporation. Our principal corporate office is located at One Pickwick
Plaza, Greenwich, Connecticut 06830 and our telephone number is (203) 302-2000.
PRIOR BUSINESS
Prior to the sale of substantially all of our operating assets in December
2002, we developed, marketed and supported Internet-based business-to-business
("B2B") e-commerce software that automated the procurement, sourcing, and
settlement of goods and services. Our software was designed to help
organizations reduce the costs associated with the purchasing and payment
settlement of goods and services, and help to maximize procurement economies of
scale. Our client services organization provided our customers and strategic
partners with implementation services, training and technical support. This
organization educated our customers and strategic partners on the strategy,
methodology and functionality of our products and implemented our solution, on
average, within three to six months.
There were several milestones in the evolution of our business prior to the
sale including:
o Initial Public Offering. On May 26, 1998, we completed an initial
public offering of our common stock in which we sold 2.5 million
shares of common stock at $10.00 per share, resulting in net proceeds
to us of approximately $22.0 million.
o ELEKOM Acquisition. On November 6, 1998, we acquired ELEKOM
Corporation ("ELEKOM") for approximately $15.7 million, consisting of
$8.0 million in cash and approximately 1.4 million shares of our
common stock (valued in the transaction at $5.50 per share). ELEKOM
developed a software program that provided electronic corporate
procurement capabilities to its clients.
o Sale of our Financial and Human Resources Software Business. On
October 18, 1999, we sold substantially all of the assets of our
financial and human resources software ("ERP") business to Geac
Computer Systems, Inc. and Geac Canada Limited. In this sale we
received approximately $13.9 million. Approximately $2.9 million of
the purchase price was placed in escrow and was subsequently settled
during 2000.
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o Follow-on Public Offering. On March 10, 2000, we sold 2,243,000 shares
of common stock in a secondary public offering at $115.00 per share
resulting in net proceeds to us of approximately $244.4 million.
o iSold.com Acquisition. On April 28, 2000, we acquired all the capital
stock of iSold.com, Inc. ("iSold") for approximately $2.5 million in
cash. iSold developed a software program that provided auctioning
capabilities to its clients.
o SAI/Redeo Companies Acquisition. On May 31, 2000, we acquired all the
outstanding stock of SAI (Ireland) Limited, SAI Recruitment Limited
and its subsidiaries and related companies, i2Mobile.com Limited and
SAI America Limited (the "SAI/Redeo Companies") for approximately
$63.2 million, consisting of approximately $30.0 million in cash
(exclusive of $350,000 of cash acquired), 1,148,000 shares of the
Company's common stock with a fair value of $30.4 million, assumed
options to acquire 163,200 shares of the Company's common stock with
an exercise price of $23.50 (estimated fair value of $1.8 million
using the Black-Scholes option pricing model with the following
variables: no expected dividend yield, volatility of 70%, risk-free
interest rate of 6.5%, and an expected life of 2 years) and
acquisition costs of approximately $995,000. The SAI/Redeo Companies
specialized in electronic payment settlement software.
E-Commerce Strategic Alliances and Relationships. To ensure that our prior
business would deliver a comprehensive solution to our customers, we established
and developed strategic relationships with application service providers,
systems integrators, resellers, OEMs and other complementary technology
partners. These relationships were focused on the expansion of our sales reach
to markets not covered by our direct sales organization.
Sales and Marketing. Our prior business sold software and services through our
direct sales force and a number of indirect channels. Our direct sales force was
organized geographically into two regions: (i) the Americas and (ii) Europe,
Middle East and Africa ("EMEA"). The sales cycle for our business-to-business
e-commerce products typically averaged four to nine months. In addition, our web
site, www.claruscorp.com was integrated with our sales, marketing, recruiting
and fulfillment operations.
Competition. The market for the products of our prior business was highly
competitive and subject to rapid technological change. The principal competitive
factors affecting our market included having a significant base of referenceable
customers, breadth and depth of solution, a critical mass of buyers and
suppliers, product quality and performance, customer service, architecture,
product features, the ability to implement, and value of the overall solution.
Research and Development. Our research and development expenditures relating to
our prior business were approximately $7.3 million, $16.2 million and $22.4
million for the years ended December 31, 2002, 2001 and 2000, respectively. The
majority of our research and development expenditures were related to our
e-commerce products.
Proprietary Rights and Licensing. We applied for registration for certain
trademarks and evaluated the registration of copyrights and additional
trademarks as appropriate. We entered into license agreements with each of our
customers. Each of our license agreements provided for the customer's
non-exclusive right to use the object code version of our products, prohibited
the customer from disclosing to third parties or reverse engineering our
products and disclosing our other confidential information.
RECENT DEVELOPMENTS
At the 2002 annual meeting of our stockholders held on May 21, 2002, Warren
B. Kanders, Burtt R. Ehrlich and Nicholas Sokolow were elected by our
stockholders to serve on our Board of Directors. Under the leadership of these
new directors, our Board of Directors adopted a strategy of seeking to enhance
stockholder value. By pursuing opportunities to redeploy our assets through an
acquisition of, or merger with, an operating business that will serve as a
platform company, using our substantial cash, other non-operating assets
(including, to the extent available, our net operating loss carry-forward) and
our publicly-traded stock to enhance future growth. The strategy also sought to
reduce significantly our cash expenditure rate by targeting, to the extent
practicable, our overhead expenses to the amount of our interest income until
the completion of an acquisition or merger. While the Company's expenses have
been significantly reduced, management currently believes that the Company's
interest income will not exceed its operating expenses during 2003.
As part of our strategy to enhance stockholder value, on December 6, 2002,
we consummated the sale of substantially all of the assets of our electronic
commerce business to Epicor Software Corporation ("Epicor"), a Delaware
corporation, for a purchase price of $1.0 million in cash (the "Asset Sale").
Epicor is traded on the Nasdaq National Market under the symbol "EPIC." The sale
included licensing, support and maintenance activities from our eProcurement,
Sourcing, View (for eProcurement), eTour (for eProcurement), ClarusNET, and
Settlement software products, our customer lists, certain contracts and certain
intellectual property rights related to the purchased assets, maintenance
payments that we received between October 17, 2002 and the December 6, 2002
closing date of the Asset Sale for maintenance and services to be performed by
Epicor after the closing date of the Asset Sale, and certain furniture and
equipment. In connection with the sale we entered into a Transition Services
Agreement
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until March 31, 2003, that will allow Epicor to use a portion of our facility in
Suwanee, Georgia to operate the electronic commerce business that Epicor is
purchasing in the Asset Sale.
We did not transfer to Epicor our cash, marketable securities or other
investments or our Cashbook, eMarket, eXpense, View (for eMarket) or eTour (for
eMarket) products or related assets. We also did not transfer the name and
trademark "Clarus," although we granted Epicor a 24-month license to use the
trademark "Clarus" in connection with its operation of the purchased assets and
the right to acquire the trademark for no additional consideration if we cease
using it as our corporate name within two years after the closing of the Asset
Sale. Epicor agreed to assume certain of our liabilities, such as executory
obligations arising under certain contracts, agreements and commitments related
to the transferred assets. We remain responsible for all of our other
liabilities including liabilities under certain contracts, including any
violations of environmental laws and for our obligations related to any of our
indebtedness, employee benefit plans or taxes that are or were due and payable
in connection with the acquired assets on or before the closing date of the
Asset Sale.
Upon the closing of the sale to Epicor, Warren B. Kanders assumed the
position of Executive Chairman of the Board of Directors, Stephen P. Jeffery
ceased to serve as Chief Executive Officer and Chairman of the Board, and James
J. McDevitt ceased to serve as Chief Financial Officer and Corporate Secretary.
Mr. Jeffery has agreed to continue to serve on the Board of Directors and serve
in a consulting capacity for a period of three years. In addition, the Board of
Directors appointed Nigel P. Ekern as Chief Administrative Officer to oversee
the interim operations of Clarus and to assist with our asset redeployment
strategy.
On January 1, 2003, we sold the assets related to our Cashbook product,
which were excluded from the Epicor transaction, to an employee group
headquartered in Limerick, Ireland. Our Cashbook product provides process
improvements such as bill-to-pay in accounts payable and order-to-cash in
accounts receivable. This completed the sale of nearly all of our active
software operations as part of our strategy to limit operating losses and enable
us to reposition our business in order to enhance stockholder value. In
anticipation of the redeployment of our assets, our cash balances are being held
in short term instruments designed to preserve safety and liquidity.
We are currently identifying suitable merger partners or acquisition
opportunities. In connection with the strategy of redeployment of assets, we
retained Morgan Joseph & Co. Inc., a New York based investment banking firm
serving middle market companies, to assist us in implementing this strategy by
identifying suitable merger partners or acquisition opportunities. Although we
are not targeting specific business industries for potential acquisitions, we
plan to seek businesses with substantial cash flow, experienced management
teams, and operations in markets offering substantial growth opportunities. In
addition, we believe that our common stock, which is publicly traded on the
Nasdaq National Market and has a strong institutional stockholder base, offers
us flexibility as acquisition currency and will enhance our attractiveness to
potential merger or acquisition candidates. This strategy is, however, subject
to certain risks. See "Factors That May Affect Our Future Results" below.
EMPLOYEES
All of our employees are based in the United States. As of December 31,
2002, we had a total of 20 employees, including one in client services, one in
sales, six in research and development and 12 in finance and administration. As
of March 31, 2003, we expect to have a total of five employees, all of which are
located in our Greenwich, Connecticut headquarters. We closed our office in
Georgia in March 2003. Our employees were previously based in the United States,
Canada, the United Kingdom and Ireland. As of December 31, 2001, we had a total
of 209 employees.
None of our employees are represented by a labor union or are subject to a
collective bargaining agreement. We have not experienced any work stoppages and
consider our relationship with our employees to be good.
FACTORS THAT MAY AFFECT OUR FUTURE RESULTS
In addition to other information in this annual report on Form 10-K, the
following risk factors should be carefully considered in evaluating our business
because such factors may have a significant impact on our business, operating
results, liquidity and financial condition. As a result of the risk factors set
forth below, actual results could differ materially from those projected in any
forward-looking statements.
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RISKS RELATED TO THE COMPANY
WE CONTINUE TO INCUR OPERATING LOSSES.
As a result of the sale of substantially all of our electronic commerce
business, we will no longer generate revenue previously associated with the
products and contracts comprising our electronic commerce business. We are not
profitable and have incurred an accumulated deficit of $272.4 million from our
inception through December 31, 2002. Our current ability to generate revenues
and to achieve profitability and positive cash flow will depend on the Company's
ability to redeploy our assets and use our substantial cash to reposition our
business whether it is through a merger or acquisitions. Our ability to become
profitable will depend, among other things, (i) on our success in identifying
and acquiring a new operating business, (ii) on our development of new products
relating to our new operating business, and (iii) success in distributing and
marketing our new proposed products.
OUR INDEMNIFICATION OBLIGATIONS TO EPICOR FOR BREACHES OF CERTAIN OF OUR
REPRESENTATIONS IN THE ASSET PURCHASE AGREEMENT MAY SIGNIFICANTLY EXCEED THE
CONSIDERATION WE RECEIVED IN THE ASSET SALE.
We have an obligation to indemnify Epicor for any losses from breaches of
our representations or warranties in the Asset Purchase Agreement that occur
within 24 months after the closing date of the Asset Sale (December 6, 2002) or
within the applicable statute of limitations period for claims relating to
payment of applicable taxes and our compliance with applicable environmental
laws, if longer. Our indemnification obligations with respect to our breach of
representations or warranties are subject to a maximum aggregate limit of $1.0
million, except that: (i) the maximum aggregate limit is $3.0 million with
respect to indemnification for any losses Epicor suffers that are related to our
breach of representations and warranties relating to our ownership of the assets
to be sold to Epicor, our intellectual property or our compliance with
applicable "bulk sales" laws; and (ii) there is no limit on our obligation to
indemnify Epicor for losses resulting from the conduct of our business before
the closing date of the Asset Sale, the assets not purchased or the liabilities
not assumed by Epicor in the Asset Sale or a breach of any representation or
warranty regarding our payment of applicable taxes or our compliance with
applicable environmental laws.
The payment of any such indemnification obligations would materially and
adversely impact our cash resources and our ability to pursue additional
business opportunities.
FOR FIVE YEARS AFTER THE CLOSING OF THE ASSET SALE TO EPICOR, WE WILL BE
PROHIBITED FROM COMPETING WITH SUCH ASSETS SOLD TO EPICOR.
The Noncompetition Agreement we entered into with Epicor at closing will
provide that for a period of five years after the closing of the Asset Sale
(December 6, 2002), neither we nor any of our affiliated entities will, directly
or indirectly, anywhere in the world: (i) engage in any business that competes
with the business of developing, marketing and supporting Internet-based
business-to-business, electronic commerce solutions that automate the
procurement, sourcing and settlement of goods and services including through the
eProcurement, Sourcing, View (for eProcurement), eTour (for eProcurement),
ClarusNET, and Settlement software products and all improvements and variations
of these products; (ii) attempt to persuade any customer or vendor of Epicor to
cease to do business with Epicor or reduce the amount of business being
conducted with Epicor; (iii) solicit the business of any customer or vendor of
Epicor, if the solicitation could cause a reduction in the amount of business
that Epicor does with the customer or vendor; or (iv) hire, solicit for
employment or encourage to leave the employment of Epicor any person who is then
an employee of Epicor or was an employee of Epicor within the previous 90 days
before the closing of the Asset Sale.
The prohibitions contained in our Noncompetition Agreement with Epicor will
restrict the business opportunities available to us and therefore may have a
material adverse effect on our ability to successfully redeploy our remaining
assets.
WE MAY BE UNABLE TO REDEPLOY OUR ASSETS SUCCESSFULLY.
As part of our strategy to limit operating losses and enable the Company to
redeploy its assets and use its substantial cash and cash equivalent assets to
enhance stockholder value, we have sold our electronic commerce business, which
represented substantially all of our revenue-generating operations and related
assets. We are pursuing a strategy of identifying suitable merger partners and
acquisition candidates that will serve as a platform company. Although we are
not targeting specific business industries for potential acquisitions, we plan
to seek businesses with substantial cash flow, experienced management teams, and
operations in markets offering substantial growth opportunities. We may not be
successful in acquiring such a business or in operating any business that we
acquire. Failure to redeploy successfully will result in our inability to become
profitable.
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WE WILL HAVE NO OPERATING HISTORY IN OUR NEW LINE OF BUSINESS, WHICH IS YET TO
BE DETERMINED, AND THEREFORE WE WILL BE SUBJECT TO THE RISKS INHERENT IN
ESTABLISHING A NEW BUSINESS.
The Company has not identified what its new line of business will be;
therefore, we cannot fully describe the specific risks presented by such
business. It is likely that the Company will have had no operating history in
its new line of business and any target company may have a limited operating
history in its business. Accordingly, there can be no assurance that our future
operations will generate operating or net income, and as such our success will
be subject to the risks, expenses, problems and delays inherent in establishing
a new business. Such new business may involve an unproven product, technology or
marketing strategy, the ultimate success of which cannot be assured.
ANY ACQUISITIONS THAT WE ATTEMPT OR COMPLETE COULD PROVE DIFFICULT TO INTEGRATE
OR REQUIRE A SUBSTANTIAL COMMITMENT OF MANAGEMENT TIME AND OTHER RESOURCES.
Acquisitions involve a number of unique risks including: (i) executing
successful due diligence; (ii) exposure to unforeseen liabilities of acquired
companies; and (iii) increased risk of costly and time-consuming litigation,
including stockholder lawsuits.
We may be unable to address these problems successfully. Moreover, our
future operating results will depend to a significant degree on our ability to
integrate acquisitions (if any) successfully and manage operations while also
controlling our expenses. In addition, if we or our investment adviser, Morgan
Joseph & Co. Inc., identify an appropriate acquisition opportunity, we may be
unable to negotiate favorable terms for that acquisition. We may be unable to
select, manage or absorb or integrate any future acquisitions successfully,
particularly acquisitions of large companies. Any acquisition, even if
effectively integrated, may not benefit our stockholders.
WE MAY BE UNABLE TO REALIZE THE BENEFITS OF OUR NET OPERATING LOSS ("NOL")
CARRYFORWARDS.
NOLs may be carried forward to offset federal and state taxable income in
future years and eliminate income taxes otherwise payable on such taxable
income, subject to certain adjustments. Based on current federal corporate
income tax rates, our NOL and other carryforwards could provide a benefit to us,
if fully utilized, of significant future tax savings. However, our ability to
use these tax benefits in future years will depend upon the amount of our
otherwise taxable income. If we do not have sufficient taxable income in future
years to use the tax benefits before they expire, we will lose the benefit of
these NOL carryforwards permanently. Consequently, our ability to use the tax
benefits associated with our substantial NOL will depend significantly on our
success in identifying suitable merger partners and/or acquisition candidates,
and once identified, successfully consummate a merger with and/or acquisition of
these candidates.
Additionally, if we underwent an ownership change, the NOL carryforward
limitations would impose an annual limit on the amount of the taxable income
that may be offset by our NOL generated prior to the ownership change. If an
ownership change were to occur, we would be unable to use a significant portion
of our NOL to offset taxable income. In general, an ownership change occurs
when, as of any testing date, the aggregate of the increase in percentage points
of the total amount of a corporation's stock owned by "5-percent shareholders"
within the meaning of the NOL carryforward limitations whose percentage
ownership of the stock has increased as of such date over the lowest percentage
of the stock owned by each such "5-percent shareholder" at any time during the
three-year period preceding such date is more than 50 percentage points. In
general, persons who own 5% or more of a corporation's stock are "5-percent
shareholders," and all other persons who own less than 5% of a corporation's
stock are treated, together, as a single, public group "5-percent shareholder,"
regardless of whether they own an aggregate of 5% of a corporation's stock.
The amount of NOL carryforwards that we have claimed has not been audited
or otherwise validated by the U.S. Internal Revenue Service. The IRS could
challenge our calculation of the amount of our NOL or our determinations as to
when a prior change in ownership occurred and other provisions of the Internal
Revenue Code, may limit our ability to carry forward our NOL to offset taxable
income in future years. If the IRS was successful with respect to any such
challenge, the potential tax benefit of the NOL carryforwards to us could be
substantially reduced.
ANY TRANSFER RESTRICTIONS IMPLEMENTED BY THE COMPANY TO PRESERVE NOL MAY NOT BE
EFFECTIVE OR MAY HAVE SOME UNINTENDED NEGATIVE EFFECTS.
The Company may seek to preserve its NOL through an amendment of its
certificate of incorporation and/or bylaws, which would impose restrictions on
the transfer of the Company's capital stock. Any transfer restrictions on the
Company's capital stock will be designed to restrict only those transfers that
could result in an impermissible ownership change limiting our ability to
utilize our NOL. Although any transfer restriction imposed on our capital stock
is intended to reduce the likelihood of an impermissible ownership change, there
is no guarantee that such restriction would prevent all transfers that would
result in an impermissible ownership change.
Any transfer restrictions will require any person attempting to acquire a
significant interest in the Company to seek the approval of our Board of
Directors. This may have an "anti-takeover" effect because our Board of
Directors may be able to
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prevent any future takeover. Similarly, any limits on the amount of capital
stock that a stockholder may own could have the effect of making it more
difficult for stockholders to replace current management. Additionally, because
transfer restrictions will have the effect of restricting a stockholder's
ability to dispose of or acquire our common stock, the liquidity and market
value of our common stock might suffer.
WE COULD BE REQUIRED TO REGISTER AS AN INVESTMENT COMPANY UNDER THE INVESTMENT
COMPANY ACT OF 1940, WHICH COULD SIGNIFICANTLY LIMIT OUR ABILITY TO OPERATE AND
ACQUIRE AN ESTABLISHED BUSINESS.
The Investment Company Act of 1940 (the "Investment Company Act") requires
registration, as an investment company, for companies that are engaged primarily
in the business of investing, reinvesting, owning, holding or trading
securities. Unless an exclusion applies, a company is an investment company if
it owns "investment securities" with a value exceeding 40% of the value of its
total assets on an unconsolidated basis, excluding government securities and
cash items. An exclusion from the definition of an investment company is
provided under Section 3(b)(1) of the Investment Company Act for companies that
are engaged primarily in a business other than investing, reinvesting, owning,
holding, or trading in securities. Prior to the sale of substantially all of our
operating assets in December 2002 and January 2003, we were an operating company
engaged in the development, marketing and support of Internet-based
business-to-business e-commerce software, and either did not meet the definition
of investment company under the Investment Company Act, or could rely on the
Section 3(b)(1) exclusion from the definition of investment company under the
Investment Company Act. Since December 2002, we have been relying on the
exclusion from the definition of investment company provided by Rule 3a-2 under
the Investment Company Act, which is available for a period not exceeding on e
year to a company that intends to be engaged primarily in a business other than
that of investing, reinvesting, owning, holding or trading in securities. Our
officers and directors are currently actively engaged in pursuing opportunities
to redeploy our assets by seeking to identify an established operating business
for us to acquire or merge with by the end of the one-year period. If they are
not able to identify a business during that time period, we will need to
consider other options, including divesting ourselves of securities that could
be deemed to be "investment securities" under the Investment Company Act and/or
acquiring sufficient non-investment assets so as not to be regarded as an
investment company under the Investment Company Act, either of which options
could be disadvantageous to us and/or our shareholders. If we were deemed to be
an investment company under the Investment Company Act, and were unable to rely
on an exclusion under the Investment Company Act, we would be forced to comply
with substantive requirements of Investment Company Act, including: (i)
limitations on our ability to borrow; (ii) limitations on our capital structure;
(iii) restrictions on acquisitions of interests in associated companies; (iv)
prohibitions on transactions with affiliates; (v) restrictions on specific
investments; (vi) limitations on our ability to issue stock options; and (vii)
compliance with reporting, record keeping, voting, proxy disclosure and other
rules and regulations. Registration as an investment company would subject us to
restrictions that would significantly impair our ability to pursue our
fundamental business strategy of acquiring and operating an established
business. In the event the SEC or a court took the position that we were an
investment company, our failure to register as an investment company would not
only raise the possibility of an enforcement action by the SEC or an adverse
judgment by a court, but also could threaten the validity of corporate actions
and contracts entered into by us during the period we were deemed to be an
unregistered investment company.
RISKS RELATED TO OWNERSHIP OF COMMON STOCK
WE ARE VULNERABLE TO VOLATILE MARKET CONDITIONS.
The market prices of our common stock have been highly volatile. The market
has from time to time experienced significant price and volume fluctuations that
are unrelated to the operating performance of particular companies. Please see
the table contained in Item 5 of this Report which sets forth the range of high
and low bids of our common stock for the calendar quarters indicated.
WE DO NOT EXPECT TO PAY DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE FUTURE.
Although our stockholders may receive dividends if, as and when declared by
our Board of Directors, we do not intend to pay dividends on our common stock in
the foreseeable future. Therefore, you should not purchase our common stock if
you need immediate or future income by way of dividends from your investment.
OUR COMMON STOCK IS CURRENTLY QUOTED ON THE NASDAQ NATIONAL MARKET SYSTEM BUT
COULD BE DELISTED.
To continue to be listed on the Nasdaq National Market System, we must
maintain certain requirements. If we fail to satisfy one or more of the
requirements, our Common Stock may be delisted. If our Common Stock is delisted,
and does not become listed on another stock exchange, then it will be traded, it
at all, in the over-the-counter market commonly referred to as the OTC Bulletin
Board and/or the "pink sheets". If this occurs, it may be more difficult for you
to sell our Common Stock, since there is generally less market-maker interest,
and less liquidity, in Bulletin Board stocks than in Nasdaq listed securities.
Also, if our Common Stock is delisted and its trading price remains below
$5.00 per share, trading could potentially be subject to certain other rules of
the Securities Exchange Act of 1934. Such rules require additional disclosure by
broker-dealers in connection with any trades involving a stock defined as a
"penny stock". "Penny stock" is defined as any non-Nasdaq equity security that
has a market price of less than $5.00 per share, subject to certain exceptions.
Such rules require the delivery of a disclosure schedule explaining the penny
stock market and the risks associated with that market before entering into any
penny stock transaction. Disclosure is also required to be made about
compensation payable to both the broker-dealer and the registered representative
and current quotations for the securities. The rules also impose various sales
practice requirements on broker-dealers who sell penny stocks to persons other
than established customers and accredited investors. For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and must receive the purchaser's written consent to the
transaction prior to the sale. Finally, monthly statements are required to be
sent disclosing recent price information for the
6
penny stocks. The additional burdens imposed upon broker-dealers by such
requirements could discourage broker-dealers from effecting transactions in our
Common Stock. This could severely limit the market liquidity of our Common Stock
and your ability to sell the Common Stock.
OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AUTHORIZES THE ISSUANCE OF
SHARES OF PREFERRED STOCK.
Our amended and restated certificate of incorporation provides that our
Board of Directors will be authorized to issue from time to time, without
further stockholder approval, up to 5,000,000 shares of preferred stock in one
or more series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each series,
including the dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, including sinking fund provisions, redemption price or
prices, liquidation preferences and the number of shares constituting any series
or designations of any series. Such shares of preferred stock could have
preferences over our common stock with respect to dividends and liquidation
rights. We may issue additional preferred stock in ways, which may delay, defer
or prevent a change in control of the Company without further action by our
stockholders. Such shares of preferred stock may be issued with voting rights
that may adversely affect the voting power of the holders of our common stock by
increasing the number of outstanding shares having voting rights, and by the
creation of class or series voting rights.
WHERE YOU CAN FIND MORE INFORMATION
At your request, we will provide you, without charge, a copy of any
exhibits to this annual report on Form 10-K. If you want an exhibit or more
information, call, write or e-mail us at:
Clarus Corporation
One Pickwick Plaza
Greenwich, Connecticut 06830
Telephone: (203) 302-2000
Fax: (203) 302-2020
www.claruscorp.com or nekern@claruscorp.com
Contact: Nigel Ekern, Chief Administrative Officer
Our fiscal year ends on December 31. We file annual, quarterly, and other
reports, proxy statements and other information with the Securities and Exchange
Commission. You may read and copy any reports, statements, or other information
we file at the SEC's public reference rooms in Washington, D.C., New York, New
York, and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also available to
the public from commercial document retrieval services and at the Internet site
maintained by the SEC at http://www.sec.gov.
ITEM 2. PROPERTIES
Our corporate headquarters is located in Greenwich, Connecticut where we
lease approximately 2,700 square feet for $11,312 a month, pursuant to a lease,
which expires on December 15, 2003. We entered into an oral agreement in 2003
with Kanders & Company pursuant to which we sublease approximately 1,989 square
feet in Greenwich, Connecticut for $9,572 a month (subject to increases every
three years). The agreement provides for a one-year term and Clarus has the
option to renew for up to nine additional one-year terms. Under the terms of the
agreement, we are required to pay approximately $325,000 in build-out
construction costs, fixtures, equipment and furnishings related to preparation
of the space. In the event Clarus was to undergo a change in control, our
remaining rent through the tenth anniversary of the commencement of the
agreement would immediately accelerate and the present value of such rent would
be placed in escrow for the benefit of Kanders & Company. We also lease
approximately 5,200 square feet near Toronto, Canada, that was used for the
delivery of services as well as research and development through October 2001.
This facility has been sub-leased for approximately $4,000 a month, pursuant to
a sublease, which expires on January 30, 2006.
In December 2002, the Company executed a lease termination agreement
pursuant to which it agreed to abandon its principal facility in Suwanee,
Georgia on March 31, 2003. Pursuant to the terms of the termination agreement,
the Company paid to the lessor $2.9 million in cash which has been included in
general and administrative expense in the accompanying statement of operations
for 2002. The lease is scheduled to terminate March 31, 2003.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to the following pending judicial and administrative
proceedings. After reviewing the proceedings that are currently pending
(including the probable outcome, reasonably anticipated costs and expenses,
availability and limits of insurance coverage, and our established reserves for
uninsured liabilities) we do not believe that any liabilities that may result
from these proceedings are reasonably likely to have a material adverse effect
on our liquidity, financial condition or results of operations, however, the
results of complex legal proceedings are difficult to predict. An unfavorable
resolution of the following proceedings could materially adversely affect the
Company's business, results of operations, liquidity or financial condition.
Following its public announcement on October 25, 2000, of its
financial results for the third quarter of 2000, the Company and
certain of its directors and officers were named as defendants in
fourteen putative class action lawsuits filed in the United States
District Court for the Northern District of Georgia. The fourteen class
action lawsuits were
7
consolidated into one case, Case No. 1:00-CV-2841, pursuant to an
order of the court dated November 17, 2000. A consolidated amended
complaint was then filed on May 14, 2001 on behalf of all purchasers
of common stock of the Company during the period beginning December 8,
1999 and ending on October 25, 2000.
Generally the amended complaint alleges claims against the Company
and the other defendants for violations of Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934, as amended, and Rule 10b-5
promulgated thereunder. Generally, it is alleged that the defendants
made material misrepresentations and omissions in public filings made
with the Securities and Exchange Commission and in certain press
releases and other public statements. The amended complaint alleges
that the market price of the Company's common stock was artificially
inflated during the class periods. The plaintiffs seek unspecified
compensatory damages and costs (including attorneys' and expert fees),
expenses and other unspecified relief on behalf of the classes. The
Court denied a motion to dismiss brought by the defendants and the case
is currently in discovery.
On December 18, 2002, Peachtree Equity Partners, as the assignee of
a five-year Promissory Note from the Company in the amount of
$5,000,000 due March 14, 2005, brought an action in the Georgia state
court for prepayment of the Note, plus interest and attorneys fees. The
action asserts that certain Change of Control provisions, as defined in
the Note, have been triggered, thus permitting the holder to demand
immediate prepayment in full. The Company has denied the material
allegations of the Complaint and asserted various affirmative defenses.
During 2002, ten former employees of the Company commenced an
action in the United States District Court for the Northern District of
Georgia seeking back pay, employee benefits, interest and attorneys
fees. The Company denies the material allegations set forth by the
plaintiffs and asserted various affirmative defenses.
In addition to the above, in the normal course of business, we are
subjected to claims and litigations in the areas of general liability. We
believe that we have adequate insurance coverage for most claims that are
incurred in the normal course of business. In such cases, the effect on our
financial statements is generally limited to the amount of our insurance
deductibles. At this time, we do not believe any such claims will have a
material impact on the Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
These are the results of voting by stockholders present or represented by
proxy at our special meeting held on December 6, 2002:
Item 1. Sale of Revenue-Generating Operations and Related Assets. Proposal
to consider and vote on the sale of substantially all of the assets of the
Company's electronic commerce business, which represents substantially all of
the Company's revenue-generating operations and related assets, pursuant to an
Asset Purchase Agreement dated October 17, 2002, between the Company and Epicor
Software Corporation for cash consideration. The stockholders approved this
proposal. There were 10,588,519 shares voting for the proposal, 135,724 shares
voting against the proposal, 17,939 shares abstaining, and 4,433,413 broker
non-votes.
Item 2. Elimination of Classified Board. Proposal to consider and vote on
the adoption and approval of our proposed Amended and Restated Certificate of
Incorporation and proposed Amended and Restated Bylaws to eliminate the
classification of the Company's Board of Directors into three separate classes.
The stockholders approved this proposal. There were 10,541,427 shares voting for
the proposal, 177,051 shares voting against the proposal, 23,704 shares
abstaining, and 4,433,413 broker non-votes.
Item 3. Reimbursement of Expenses. To approve the reimbursement of expenses
incurred by Warren B. Kanders on behalf of himself, Burtt R. Ehrlich and
Nicholas Sokolow in connection with their successful solicitation of proxies.
The stockholders approved this proposal. There were 14,088,184 shares voting for
the proposal, 1,049,502 shares voting against the proposal, and 37,909 shares
abstaining.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been listed on the Nasdaq National Market System
("NASDAQ") since May 26, 1998, the effective date of our initial public
offering. On August 28, 1998, we changed our name from SQL Financials
International, Inc. to Clarus Corporation. Effective September 2, 1998, we
changed our NASDAQ symbol from "SQLF" to "CLRS". Prior to May 26, 1998, there
was no established trading market for our common stock. The following table sets
forth, for the indicated periods, the high and low closing sales prices for our
common stock as reported by the NASDAQ.
8
Closing Sales Price
--------------------
High Low
----- ------
Calendar Year 2001
First Quarter $9.25 $5.09
Second Quarter $7.29 $5.08
Third Quarter $8.45 $3.55
Fourth Quarter $6.27 $3.30
Calendar Year 2002
First Quarter $6.25 $3.44
Second Quarter $6.04 $3.73
Third Quarter $5.20 $4.16
Fourth Quarter $6.00 $4.53
Calendar Year 2003
First Quarter (through March 14, 2003) $5.87 $5.01
STOCKHOLDERS
On March 14, 2003, the last reported sales price for our common stock on
the NASDAQ was $5.11 per share. As of March 14, 2003, there were 155 holders of
record of our common stock.
DIVIDENDS
We currently anticipate that we will retain all future earnings for use in
our business and do not anticipate that we will pay any cash dividends in the
foreseeable future. The payment of any future dividends will be at the
discretion of our Board of Directors and will depend upon, among other things,
our results of operations, capital requirements, general business conditions,
contractual restrictions on payment of dividends, if any, legal and regulatory
restrictions on the payment of dividends, and other factors our Board of
Directors deems relevant.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth certain information regarding our equity
plans as at December 31, 2002.
- ----------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
- ----------------------------------------------------------------------------------------------------------------------
PLAN CATEGORY NUMBER OF SECURITIES WEIGHTED AVERAGE EXERCISE NUMBER OF SECURITIES
TO BE ISSUED UPON PRICE OF OUTSTANDING REMAINING AVAILABLE FOR
EXERCISE OF OPTIONS, WARRANTS AND FUTURE ISSUANCE UNDER EQUITY
OUTSTANDING OPTIONS, RIGHTS COMPENSATION PLANS
WARRANTS AND RIGHTS (EXCLUDING SECURITIES
REFLECTED IN COLUMN (a))
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans 2,854,906 $7.76 1,899,110
approved by security
holders (1)(2)
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans 58,334 $55.48 58,334
not approved by security
holders (3)(4)
- ----------------------------------------------------------------------------------------------------------------------
2,913,240 $8.72 1,957,444
Total
- ----------------------------------------------------------------------------------------------------------------------
(1) Includes nonqualified stock options issued and issuable by the Company
under the Stock Incentive Plan of Software Architects International,
Limited (the "SAI Plan") assumed by the Company, pursuant to the Stock
Purchase Agreement, dated May 31, 2000, by and among Clarus, SAI (Ireland)
Limited, SAI Recruitment Limited, i2Mobile.com Limited, SAI America Limited
(collectively, the "SAI/Redeo Companies") and the shareholders of the
SAI/Redeo Companies. Under the SAI Plan, the Company may grant stock
options to eligible participants who must be employees of the Company or
its subsidiaries or consultants, but not directors or officers of the
Company.
(2) Excludes 77,851 shares purchased under our Employee Stock Purchase Plans
for a weighted average price of $5.39 but includes 922,149 shares of our
common stock remaining available for future issuance under such plans.
Under such plans, employees have an opportunity to purchase shares of
the Company's common stock at a discount. Generally, eligible employees, as
defined in the plan documents, may elect to have up to 15 percent of their
annual salary, up to a maximum of $12,500 per six month purchase period,
withheld to purchase the Company's common stock at a price equal to the
lower of 85 percent of the market price of our common stock at either the
beginning or the end of the six month offering period.
(3) Includes 25,000 warrants previously granted by the Company to a strategic
partner in return for completion of predetermined sales and marketing
milestones. The exercise price of these warrants is $53.75 per share and
the warrants expire on October 31, 2003.
(4) Includes 33,334 warrants previously granted by the Company to a third party
software developer in exchange for services. The exercise price of the
33,334 warrants was $56.78 per share and the warrants expire on March 31,
2003.
9
ITEM 6. SELECTED FINANCIAL DATA
Our selected financial information set forth below should be read in
conjunction with our consolidated financial statements, including the notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of Part II of this Report. The following statement of
operations and balance sheet data have been derived from our audited
consolidated financial statements and should be read in conjunction with those
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of Part II of this Report.
Years Ended December 31,
------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(in thousands, except per share data)
Statement of Operations Data:
Revenues:
License fees............................................... $ 2,808 $ 7,807 $24,686 $ 15,101 $ 17,372
Services fees.............................................. 6,226 9,866 -- 25,676 27,744
------- ------- ------- -------- --------
Total revenues........................................... 9,034 17,673 35,013 40,777 45,116
Cost of revenues:..............................................
License fees............................................... 26 211 154 1,351 1,969
Service fees............................................... 5,498 12,921 12,901 17,152 17,428
------- ------- ------- -------- --------
Total cost of revenues................................... 5,524 13,132 13,055 18,503 19,397
Operating expenses:
Research and development, exclusive of noncash expense..... 7,263 16,220 22,390 9,003 6,335
Noncash research and development........................... -- -- 424 -- --
In-process research and development........................ -- -- 8,300 -- 10,500
Sales and marketing, exclusive of noncash expense.......... 7,488 27,294 36,230 15,982 11,802
Noncash sales and marketing................................ 450 6,740 7,001 1,930 --
General and administrative, exclusive of noncash expense... 12,574 9,381 9,897 4,996 4,387
Provision for doubtful accounts............................ (560) 5,537 5,824 1,245 739
Noncash general and administrative......................... -- 252 1,098 874 880
Loss on impairment of goodwill............................. 6,801 36,756 -- -- --
Loss on impairment of intangible assets.................... 3,559 -- -- -- --
Gain on sale of e-commerce assets to Epicor................ (514) -- -- -- --
Gain on sale of ERP assets to Geac......................... -- -- (1,347) (9,417) --
(Gain)/Loss on disposal of property and equipment.......... 2,262 (20) -- -- --
Depreciation and amortization.............................. 4,243 12,212 8,132 3,399 2,154
------- ------- ------- -------- --------
Total operating expenses............................... 43,566 114,372 97,949 28,012 36,797
------- ------- ------- -------- --------
Operating loss................................................. (40,056) (109,831) (75,991) (5,738) (11,078)
Gain on foreign currency transactions.......................... 12 107 -- -- --
Gain/(Loss) on sale of marketable securities................... 15 (11) (100) -- --
Loss on impairment of marketable securities and investments... -- (16,461) (4,128) -- --
Amortization of debt discount.................................. -- -- (982) -- --
Interest income................................................ 2,441 6,570 10,902 442 636
Interest expense............................................... (225) (228) (348) (105) (224)
Minority interest.............................................. -- -- -- -- (36)
-------- ---------- ---------- -------- --------
Net loss.......................................................$(37,813) $ (119,854) $(70,647) $(5,401) $(10,702)
======== ========== ======== ======== ========
Net loss per common share:
Basic and diluted.......................................... $ (2.42) $ (7.72) $ (4.90) $(0.49) $ (1.70)
======= ======= ======= ========= =======
Weighted average common shares outstanding:
Basic and diluted.......................................... 15,615 15,530 14,420 11,097 6,311
======= ======= ======= ======= =======
As of December 31,
----------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Balance Sheet Data:
Cash and cash equivalents............................. $42,225 $55,628 $118,303 $14,127 $14,799
Marketable securities................................. 52,885 65,264 50,209 -- --
Total assets.......................................... 97,764 145,274 266,904 48,563 40,082
Long-term debt, net of current portion................ -- 5,000 5,000 -- 245
Total stockholders' equity............................ 89,360 126,328 246,822 32,615 22,111
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements, including
information about or related to our future results, certain projections and
business trends. Assumptions relating to forward-looking statements involve
judgments with respect to, among other things, future economic, competitive and
market conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control. When
used in this report, the words "estimate," "project," "intend," "believe,"
"expect" and similar expressions are intended to identify forward-looking
statements. Although we believe that our assumptions underlying the
forward-looking statements are reasonable, any or all of the assumptions could
prove inaccurate, and we may not realize the results contemplated by the
forward-looking statements. Management decisions are subjective in many respects
and susceptible to interpretations and periodic revisions based upon actual
experience and business developments, the impact of which may cause us to alter
our business strategy or capital expenditure plans that may, in turn, affect our
results of operations. In light of the significant uncertainties inherent in the
forward-looking information included in this report, you should not regard the
inclusion of such information as our representation that we will achieve any
strategy, objectives or other plans. The forward-looking statements contained in
this report speak only as of the date of this report, and we have no obligation
to update publicly or revise any of these forward-looking statements.
These and other statements, which are not historical facts, are based
largely upon our current expectations and assumptions and are subject to a
number of risks and uncertainties that could cause actual results to differ
materially from those contemplated by such forward-looking statements. These
risks and uncertainties include, among others, our planned effort to redeploy
our assets to enhance stockholder value following the completion of the
transaction with Epicor, and the risks and uncertainties set forth in the
section headed "Factors That May Affect Our Future Results" of Part I of this
Report and described in Part II of this Report. The Company cannot guarantee its
future performance.
OVERVIEW
AS PART OF OUR STRATEGY TO LIMIT OPERATING LOSSES AND ENABLE THE COMPANY TO
REDEPLOY ITS ASSETS AND USE ITS SUBSTANTIAL CASH AND CASH EQUIVALENT ASSETS TO
ENHANCE STOCKHOLDER VALUE, WE HAVE SOLD OUR ELECTRONIC COMMERCE BUSINESS, WHICH
REPRESENTED SUBSTANTIALLY ALL OF OUR REVENUE-GENERATING OPERATIONS AND RELATED
ASSETS, ALL FURTHER DESCRIBED HEREIN. THE INFORMATION APPEARING BELOW, WHICH
RELATES TO PRIOR PERIODS, IS, THEREFOR NOT INDICATIVE OF THE RESULTS WHICH MAY
BE EXPECTED FOR ANY SUBSEQUENT PERIODS. FUTURE PERIODS WILL PRIMARILY REFLECT
GENERAL AND ADMINISTRATIVE EXPENSES ASSOCIATED WITH THE CONTINUING
ADMINISTRATION OF THE COMPANY AND ITS EFFORTS TO REDEPLOY ITS ASSETS THROUGH A
MERGER WITH OR ACQUISITION OF AN ESTABLISHED OPERATING BUSINESS.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
The Company's discussion of financial condition and results of operations
is based on the consolidated financial statements which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these consolidated financial statements require management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
consolidated financial statements. Estimates also affect the reported amounts of
revenues and expenses during the reporting periods. The Company continually
evaluates its estimates and assumptions including those related to revenue
recognition, allowance for doubtful accounts, impairment of long-lived assets,
impairment of investments, and contingencies and litigation. The Company bases
its estimates on historical experience and other assumptions that are believed
to be reasonable under the circumstances. Actual results could differ from these
estimates.
The Company believes the following critical accounting policies include the
more significant estimates and assumptions used by management in the preparation
of its consolidated financial statements. Our accounting policies are more fully
described in Note 1 of our consolidated financial statements.
o The Company has recognized revenue from two primary sources, software
licenses and services. Revenue from software licensing and services
fees is recognized in accordance with Statement of Position ("SOP")
97-2, "Software Revenue Recognition", and SOP 98-9, "Software Revenue
Recognition with Respect to Certain Transactions" and related
interpretations. The Company recognized software license revenue when:
(1) persuasive evidence of an arrangement exists; (2) delivery has
occurred; (3) the fee is fixed or determinable; and (4) collectibility
is probable.
o The Company maintains allowances for doubtful accounts based on
expected losses resulting from the inability of the Company's
customers to make required payments. The Company recorded a reversal
of the provision for
11
doubtful accounts of ($560,000) during the year ended December 31,
2002. The Company has recorded a provision for doubtful accounts of
$5.5 million and $5.8 million, respectively, in the years ended
December 31, 2001 and 2000. If the financial condition of these
customers were to deteriorate additional allowances may be required.
o The Company had significant long-lived assets, primarily intangibles,
as a result of acquisitions completed during 2000. During 2002, the
Company evaluated the carrying value of its long-lived assets,
including intangibles, according to Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" and
SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets". Prior to 2002, the Company periodically evaluated the
carrying value of its long-lived assets, including intangibles,
according to SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The
Company recorded impairment charges on goodwill of $6.8 million and
$36.8 million in 2002 and 2001, respectively, and impairment charges
on intangible assets of $3.5 million in 2002.
o The Company has made equity investments in several privately held
companies. The Company records an impairment charge when it believes
an investment has experienced a decline in value that is other than
temporary. During the years ended December 31, 2001 and 2000, the
Company recorded impairment charges on investments of $15.4 million
and $4.1 million, respectively. The Company did not record an
impairment charge on investments during 2002.
o The Company is a party to the pending judicial and administrative
proceedings described elsewhere herein. An unfavorable resolution of
those proceedings could materially adversely affect the Company's
business, results of operations, liquidity or financial condition.
STOCK OPTION EXCHANGE PROGRAM
On April 9, 2001, the Company announced a voluntary stock option exchange
program for its employees. Under the program, employees were given the
opportunity to cancel outstanding stock options previously granted to them on or
after November 1, 1999, in exchange for an equal number of new options to be
granted at a future date. The exercise price of the new options was equal to the
fair market value of the Company's common stock on the date of grant. During the
first phase of the program 366,174 options with a weighted average exercise
price of $30.55 per share were canceled and new options to purchase 263,920
shares with an exercise price of $3.49 per share were granted on November 9,
2001. During the second phase of the program 273,188 options with a weighted
average exercise price of $43.87 per share were canceled and new options to
purchase 198,052 shares with an exercise price of $4.10 per share were granted
on February 11, 2002. Employees who participated in the first exchange were not
eligible for the second exchange. The exchange program was designed to comply
with Financial Accounting Standards Board ("FASB") Interpretation No. 44
"Accounting for Certain Transactions Involving Stock Compensation" and did not
result in any additional compensation charges or variable accounting with
respect to the new grants. Members of the Company's Board of Directors and its
executive officers were not eligible to participate in the exchange program.
SOURCES OF REVENUE
Prior to December 6, 2002, the Company's revenue consisted of license fees
and services fees. License fees were generated from the licensing of the
Company's suite of products. Services fees were generated from consulting,
implementation, training, content aggregation and maintenance support services.
Following the sale of the Company's remaining operating assets, the Company's
revenue consists of interest, dividend and other investment income from
short-term investments. Future revenues from operation is dependent on the
Company's ability to redeploy its assets through a merger with or acquisition of
an established business.
REVENUE RECOGNITION
The Company historically recognized revenue from two primary sources,
software licenses and services. Revenue from software licensing and services
fees was recognized in accordance with SOP 97-2, "Software Revenue Recognition",
and SOP 98-
12
9, "Software Revenue Recognition with Respect to Certain Transactions" and
related interpretations. The Company recognizes software license revenue when:
(1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3)
the fee is fixed or determinable; and (4) collectibility is probable.
SOP No. 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair values of the elements. The fair value of an element must be based
on evidence that is specific to the vendor. License fee revenue allocated to
software products generally was recognized by the Company upon delivery of the
products or deferred and recognized in future periods to the extent that an
arrangement includes one or more elements to be delivered at a future date and
for which fair values have not been established. Revenue allocated to
maintenance was recognized ratably over the maintenance term, which is typically
12 months and revenue allocated to training and other service elements is
recognized as the services are performed.
Under SOP No. 98-9, if evidence of fair value does not exist for all
elements of a license agreement and post-contract customer support was the only
undelivered element, then all revenue for the license arrangement was recognized
ratably over the term of the agreement as license revenue. If evidence of fair
value of all undelivered elements exists but evidence does not exist for one or
more delivered elements, then revenue was recognized using the residual method.
Under the residual method, the fair value of the undelivered elements was
deferred and the remaining portion of the arrangement fee was recognized as
revenue. The Company uses the residual method since it does not have fair value
of the license fees. Revenue from hosted software agreements are recognized
ratably over the term of the hosting arrangements.
COST OF REVENUES AND OPERATING EXPENSES
Cost of license fees includes royalties and software duplication and
distribution costs. The Company recognized these costs as the applications were
shipped.
Cost of services fees includes personnel related expenses and third-party
consulting fees incurred to provide implementation, training, maintenance,
content aggregation, and upgrade services to customers and partners. These costs
were recognized as they are incurred for time and material arrangements and are
recognized using the percentage of completion method for fixed price
arrangements.
Research and development expenses consisted primarily of personnel related
expenses and third-party consulting fees. The Company accounts for software
development costs under Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed". The Company charges research and development costs related to new
products or enhancements to expense as incurred until technological feasibility
is established, after which the remaining costs are capitalized until the
product or enhancement is available for general release to customers. The
Company defines technological feasibility as the point in time at which a
working model of the related product or enhancement exists. Historically, the
costs incurred during the period between the achievement of technological
feasibility and the point at which the product is available for general release
to customers have not been material.
Sales and marketing expenses consisted primarily of personnel related
expenses, including sales commissions and bonuses, expenses related to travel,
customer meetings, trade show participation, public relations, promotional
activities, regional sales offices, and advertising.
General and administrative expenses consist primarily of personnel related
expenses for financial, administrative and management personnel, fees for
professional services, board of director fees and the provision for doubtful
accounts. The Company allocates the total cost of its information technology
function and costs related to the occupancy of its corporate headquarters, to
each of the functional areas. Information technology expenses include personnel
related expenses, communication charges, and software support. Occupancy charges
include rent, utilities, and maintenance services.
RESTRUCTURING AND RELATED COSTS
During 2002 and 2001, the Company's management approved restructuring plans
to reorganize and reduce operating costs. Restructuring and related charges of
$4.2 million were expensed in 2001 to better align the Company's cost structure
with projected revenue. The charges were comprised of $3.0 million for employee
separation and related costs for 181 employees and $1.2 million for facility
closure and consolidation costs.
During the first quarter of 2002, the Company determined that amounts
previously charged during 2001 of approximately $202,000 that related to
employee separation and related charges were no longer required and this amount
was credited to sales and marketing expense in the accompanying consolidated
statement of operations during 2002. Restructuring and related charges of $8.6
million were expensed during 2002. The charges for 2002 were comprised of $4.6
million for employee separation and related costs for 183 employees and $4.0
million for facility closures and consolidation costs.
13
The facility closures and consolidation costs for 2001 and 2002 relate to
the abandonment of the Company's leased facilities in Suwanee, Georgia;
Limerick, Ireland; Maidenhead, England; and near Toronto, Canada. Total
facilities closure and consolidation costs include remaining lease liabilities,
construction costs and brokerage fees to sublet the abandoned space, net of
estimated sublease income. The estimated costs of abandoning these leased
facilities, including estimated costs to sublease, were based on market
information trend analysis provided by a commercial real estate brokerage firm
retained by the Company. The Company incurred a charge in the fourth quarter
2002 of $2.1 million for facility closure and consolidation costs as a result of
the termination of its lease for the facility in Suwanee, Georgia.
The following is a reconciliation of the components of the accrual for
restructuring and related costs, the amounts charged against the accrual during
2001 and 2002 and the balance of the accrual as of December 31, 2002:
2001 2002
----------------------------------------------- --------------------------------------------------------
Accruals Expenditures Balance Accruals Expenditures Balance December
During 2001 During 2001 December 31, 2001 During 2002 During 2002 Credits 31, 2002
------------ ------------- ----------------- ----------- ------------ -------- ----------------
(in thousands)
Employee separation costs $2,939 $2,259 $ 680 $4,645 $4,196 $ 202 $ 927
Facility closure costs 1,218 9 1,209 3,905 4,977 - 137
------ ------ ----- ------ ------ ----- ------
Total restructuring
and related costs $4,157 $2,268 $1,889 $8,550 $9,173 $ 202 $ 1,064
====== ====== ===== ====== ====== ===== =======
COMPARISON OF RESULTS OF OPERATIONS BETWEEN THE YEARS ENDED DECEMBER 31, 2002
AND 2001
The following discussion covers historical results of operations for the
periods indicated for the Company's prior businesses. On December 6, 2002, the
Company completed the disposition of substantially all its operating assets, and
the Company is now evaluating alternative ways to redeploy its assets into new
businesses. The discussion below is therefore not material to an understanding
of future revenue, earnings, operations, business or prospects of the Company.
REVENUES
Total Revenues. Total revenues decreased 48.9% to $9.0 million in 2002 from
$17.7 million in 2001. The decrease in total revenues resulted primarily from a
decrease in information technology spending and the announcement by the Company
during the quarter ended June 30, 2002 to explore all strategic alternatives as
part of its strategy to limit operating losses and enable it to reposition its
business in order to enhance stockholder value. For the year ended December 31,
2002, one customer accounted for more than 10%, totaling $2.7 million or 29.9%
of total revenue. For the year ended December 31, 2001, three customers
accounted for more than 10% each, totaling $6.2 million or 35.3% of total
revenue. The percentage of total revenue recognized from these three customers
was 12.2%, 11.9%, and 11.2%.
License Fees. License fees decreased 64.0% to $2.8 million, or 31.1% of
total revenues, in 2002 from $7.8 million, or 44.2% of total revenues, in 2001.
The decrease in license fees was the result of a decrease in the amount of
software licensed. This decrease is due to the factors discussed above.
Services Fees. Services fees decreased 36.9% to $6.2 million from $9.9
million in 2002, but increased as a percentage of total revenues to 68.9% in
2002 from 55.8% in 2001. This decrease is primarily attributable to a decrease
in implementation and training services and maintenance fees, a direct result of
the decrease in the amount of software licensed.
COST OF REVENUES
Total Cost of Revenues. Cost of revenues decreased 57.9% to $5.5 million,
or 61.1% of total revenues, during the year ended December 31, 2002 from $13.1
million, or 74.3% of total revenues, during the same period in 2001. The
decrease in the total cost of revenues is primarily attributable to a decrease
in personnel related costs.
Cost of License Fees. Cost of license fees decreased to $26,000 in 2002
from $211,000 in 2001. Cost of license fees includes royalties and software
duplication and distribution costs. The decrease in cost of license fees is
primarily attributable to a decrease in royalty fees paid by the Company
pursuant to equipment manufacturer agreements for certain of its applications..
The cost of license fees may vary from period to period depending on the product
mix licensed, but remain a small percentage of license fees.
Cost of Services Fees. Cost of services fees decreased 57.4% to $5.5
million, or 88.3% of total services fees, in 2002 compared to $12.9 million, or
131.0% of total services fees, in 2001. The decrease in the cost of services
fees was primarily attributable to a decrease in personnel related costs, a
decrease in consulting fees and a decrease in expenses related to employee
separation and facility closure costs. The Company had an average of 73.9% fewer
employees during the year ended December 31, 2002 compared to the same period
during 2001. Consulting fees related to subcontracted services during the year
ended December 31, 2002 were approximately $289,000 compared to approximately
$422,000 during the year ended December 31,
14
2001. The Company incurred $858,000 of expense related to employee separation
and related benefit costs incurred as part of the Company's restructuring
initiative during the twelve months ended December 31, 2002 compared to $1.0
million during the twelve months ended December 31, 2001.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased 55.2% to $7.3 million, or 80.4%
of total revenues, in 2002 from $16.2 million, or 91.8% of total revenues, in
2001. Research and development expenses decreased primarily due to decreased
consulting fees incurred to develop the Company's products and a decrease in
personnel related costs partially offset by increased employee separation and
related benefit costs. Consulting fees decreased to approximately $798,000
during the year ended December 31, 2002 from approximately $3.6 million during
the year ended December 31, 2001. The Company had an average of 64.0% fewer
employees in the research and development area during 2002 compared to the same
period of 2001. The Company incurred $1.3 million of expense related to employee
separation and related benefit costs incurred as part of the Company's
restructuring initiative during the twelve months ended December 31, 2002
compared to $217,000 during the twelve months ended December 31, 2001.
SALES AND MARKETING, EXCLUSIVE OF NONCASH EXPENSE
Sales and marketing expenses decreased 72.6% to $7.5 million, or 82.9% of
total revenues, in 2002 from $27.3 million, or 154.4% of total revenues, in
2001. The decrease was primarily attributable to the reduction of sales and
marketing personnel, a decrease in variable compensation as a result of lower
license revenue during 2002, and a reduction of promotional activities
associated with building market awareness of the Company's e-commerce products.
The Company had an average of 80.4% fewer sales and marketing employees during
2002 compared to the same period in 2001. The Company incurred $1.2 million of
expense related to employee separation and related benefit costs incurred as
part of the Company's restructuring initiative during the twelve months ended
December 31, 2002 compared to $1.1 million during the twelve months ended
December 31, 2001.
NONCASH SALES AND MARKETING EXPENSE
During the years ended December 31, 2002 and 2001, non-cash sales and
marketing expenses of approximately $450,000 and $6.7 million, respectively,
were recognized in connection with sales and marketing agreements signed by the
Company during the fourth quarter of 1999 and the first quarter of 2000. In
connection with these agreements, the Company issued warrants and shares of
common stock to certain strategic partners, all of whom were also customers, in
exchange for their participation in the Company's sales and marketing efforts.
The Company recorded the value of these warrants and common stock as deferred
sales and marketing costs, which were being amortized over the life of the
agreements which ranged from nine months to five years. Included in the results
for 2001 is $1.4 million of expense recorded in the fourth quarter as a result
of terminating the sales and marketing agreement with one customer.
GENERAL AND ADMINISTRATIVE, EXCLUSIVE OF NONCASH EXPENSE
General and administrative expenses, including the provision for doubtful
accounts, decreased 19.5% to $12.0 million in 2002 from $14.9 million in 2001.
As a percentage of total revenues, general and administrative expenses increased
to 133.0% in 2002 from 84.4% in 2001. During 2002 the Company recorded a
reversal of the provision for doubtful accounts of $560,000 compared to a
provision for doubtful accounts of approximately $5.5 million for the year ended
December 31, 2001. The decrease in general and administrative expenses was
primarily attributable to decreases in personnel related costs and a decrease in
the provision for doubtful accounts partially offset by employee separation and
related benefit costs and facility closure and consolidation costs. The Company
had an average of 54.9% fewer general and administrative employees during 2002
compared to the same period in 2001. The Company incurred $1.1 million of
expense related to employee separation and related benefit costs incurred as
part of the Company's restructuring initiative during the twelve months ended
December 31, 2002 compared to $526,000 during the twelve months ended December
31, 2001. The Company incurred $3.9 million of expense related to facility
closure and consolidation costs during the twelve months ended December 31, 2002
compared to $1.2 million for the twelve months ended December 31, 2001.
NONCASH GENERAL AND ADMINISTRATIVE EXPENSE
The Company did not incur any noncash general and administrative expenses
during 2002. The Company incurred noncash general and administrative expenses of
approximately $252,000, or 1.4% of total revenues, during 2001. In the third
quarter of 2000, the Company granted 18,750 options to a new board member at a
price below the fair market value at the date of grant. The amount expensed
during 2001 relates primarily to these options.
LOSS ON IMPAIRMENT OF INTANGIBLE ASSETS
As a result of a change in the Company's strategic direction during the
second quarter of 2002, the Company determined that remaining goodwill and
intangible assets should be tested for further impairment. The Company's
evaluation of the present value
15
of future cash flows based on the change in strategic direction indicated the
carrying value of the Company's assets exceeded fair value. As a result, the
Company recorded an additional impairment charge to goodwill of $6.8 million and
an impairment charge to intangible assets of $3.5 million during the three
months ended June 30, 2002. The Company evaluates the carrying value of its
long-lived assets, including intangibles, according to SFAS No. 142, "Goodwill
and Other Intangible Assets" and SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". Prior to 2002, the Company evaluated the
carrying value of its long-lived assets, including intangibles, according to
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". During the fourth quarter of 2001, the
Company's evaluation of the performance of the SAI/Redeo companies compared to
initial projections, negative economic trends and a decline in industry growth
rate projections indicated that the carrying value of goodwill exceeded expected
cash flows. The $36.8 million write-down was based on the amount by which the
carrying amount of goodwill exceeded fair value.
GAIN ON SALE OF E-COMMERCE ASSETS
On December 6, 2002, the Company sold its e-commerce software business to
Epicor Software Corporation for approximately $1.0 million, of which $200,000
was placed in escrow. The Company recorded a gain during the fourth quarter of
2002 on the sale of this business of approximately $514,000.
(GAIN)/LOSS ON SALE OF PROPERTY AND EQUIPMENT
During the years ended December 31, 2002 and 2001, the Company recorded a
loss on the disposal of property and equipment of $2.3 million and a gain on the
disposal of property and equipment of $20,000, respectively. The loss on the
disposal of assets during the year ended December 31, 2002 is primarily
attributable to the write down of assets located in the Suwanee, Limerick, and
Maidenhead offices.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization decreased 65.3% to $4.2 million, or 47.0% of
total revenues, in 2002, from $12.2 million, or 69.1% of total revenues, in
2001. The decrease is primarily the result of adopting SFAS 142, effective
January 1, 2002, which requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized. The amortization during 2002
relates to intangible assets with definite lives. The Company recorded $455,000
and $909,000 of amortization expense related to intangible assets with definite
lives during the twelve months ended December 31, 2002 and 2001, respectively.
The Company recorded $7.6 million of amortization expense related to goodwill
during the twelve months ended December 31, 2001. As a result of adopting SFAS
142, the Company did not record amortization expense related to goodwill during
2002.
LOSS ON IMPAIRMENT OF INVESTMENTS
During the year ended December 31, 2001, the Company recorded a loss on
impairment of investments of approximately $16.5 million. These losses were
necessitated by other than temporary losses to the value of investments the
Company had made in privately held companies and marketable securities of one
publicly traded company. The privately held companies are primarily early-stage
companies and are subject to significant risk due to their limited operating
history and volatile industry-based economic conditions. As of December 31,
2001, all investments but one had been written off. The remaining balance,
representing a single investment and valued at $200,000 in the accompanying
December 31, 2001 balance sheet, was sold and cash of $200,000 was received
during the first quarter of 2002.
INTEREST INCOME
Interest income decreased 62.8% to $2.4 million in 2002, or 27.0% of total
revenues, from $6.6 million, or 37.2% of total revenues, in 2001. The decrease
in interest income was due to lower levels of cash available for investment and
lower interest rates.
INTEREST EXPENSE
Interest expense decreased 1.3% to $225,000 in 2002 from $228,000 in 2001.
In March of 2000, the Company entered into a $5.0 million borrowing arrangement
with an interest rate of 4.5% with Wachovia Capital Investments, Inc. The
interest expense in 2002 and 2001 is primarily related to this borrowing
arrangement.
INCOME TAXES
As a result of the operating losses incurred since the Company's inception,
no provision or benefit for income taxes was recorded in 2002 or in 2001.
16
COMPARISON OF RESULTS OF OPERATIONS BETWEEN THE YEARS ENDED DECEMBER 31, 2001
AND 2000
REVENUES
Total Revenues. Total revenues decreased 49.5% to $17.7 million in 2001
from $35.0 million in 2000. The decrease in total revenues resulted primarily
from a decrease in license revenue due to the softening demand for
business-to-business software and a decline in the information technology market
generally. For the year ended December 31, 2001, three customers accounted for
more than 10% each, totaling $6.2 million or 35.3% of total revenue. The
percentage of total revenue recognized from these three customers was 12.2%,
11.9%, and 11.2%. For the year ended December 31, 2000, one customer accounted
for more than 10%, totaling $4.0 million or 11.6% of total revenue.
License Fees. License fees decreased 68.4% to $7.8 million, or 44.2% of
total revenues, in 2001 from $24.7 million, or 70.5% of total revenues, in 2000.
The decrease in license fees was the result of a decrease in the amount of
software licensed. This decrease is due to the factors discussed above.
Services Fees. Services fees decreased 4.5% to $9.9 million from $10.3
million in 2001, but increased as a percentage of total revenues to 55.8% in
2001 from 29.5% in 2000. This decrease is primarily attributable to a decrease
in implementation and training services, a direct result of the decrease in the
amount of software licensed, partially offset by an increase in maintenance
fees.
COST OF REVENUES
Total Cost of Revenues. Cost of revenues increased 0.6% to $13.1 million,
or 74.3% of total revenues, during the year ended December 31, 2001 compared to
$13.1 million, or 37.3% of total revenues, during the same period in 2000. The
increase in the total cost of revenues and increase in percentage of total
revenues is primarily a result of a change in the mix of revenue to services
fees from license fees, which historically have a higher cost of revenues.
Cost of License Fees. Cost of license fees increased to $211,000 in 2001
from $154,000 in 2000. Cost of license fees includes royalties and software
duplication and distribution costs. The increase in cost of license fees is
primarily attributable to an increase in royalty fees paid by the Company
pursuant to equipment manufacturer agreements for certain of its applications.
The cost of license fees may vary from period to period depending on the product
mix licensed, but remain a small percentage of license fees.
Cost of Services Fees. Cost of services fees increased 0.2% to $12.9
million, or 131.0% of total services fees, in 2001 compared to $12.9 million, or
124.9% of total services fees, in 2000. The increase in the cost of services
fees was primarily attributable to restructuring costs and an increase in
personnel related costs partially offset by a decrease in consulting fees. The
Company incurred $1.0 million of expense related to employee separation and
related benefit costs and $0.2 million of facility closure costs incurred as
part of the Company's restructuring initiative. The Company had an average of
21.7% more employees during the year ended December 31, 2001 compared to the
same period during 2000. The consulting fees related to subcontracted services
were approximately $422,000 during the year ended December 31, 2001 compared to
approximately $2.4 million during the year ended December 31, 2000.
RESEARCH AND DEVELOPMENT, EXCLUSIVE OF NONCASH EXPENSE
Research and development expenses decreased 27.6% to $16.2 million, or
91.8% of total revenues, in 2001 from $22.4 million, or 63.9% of total revenues,
in 2000. Research and development expenses decreased primarily due to decreased
consulting fees incurred to develop the Company's products partially offset by
an increase in personnel related costs, restructuring costs of $217,000 incurred
during 2001 and a $600,000 fee incurred during 2001 as a result of terminating a
services agreement with a development partner. Consulting fees decreased to
approximately $3.6 million during the year ended December 31, 2001 from
approximately $12.3 million during the year ended December 31, 2000. The Company
had an average of 6.5% more employees in the research and development area
during 2001 compared to the same period of 2000.
NONCASH RESEARCH AND DEVELOPMENT EXPENSE
Noncash research and development expenses of approximately $424,000 were
recognized during 2000.
IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSE
In-Process Research and Development ("IPR&D") expense was approximately
$8.3 million for the year ended December 31, 2000. The Company recorded this
expense in the second quarter of 2000 related to its acquisition of the
SAI/Redeo Companies on May 31, 2000 (the "Valuation Date").
17
At the Valuation Date, the SAI/Redeo Companies had technology under
development that had not demonstrated technological or commercial feasibility.
As of the Valuation Date, the projects associated with the IPR&D efforts had not
yet reached technological feasibility and the IPR&D had no alternative future
use in the event that the proposed products did not prove to be feasible. These
development efforts fall within the definition of IPR&D contained in Statement
of Financial Accounting Standards ("SFAS") No. 2.
At the Valuation Date, the technologies were approximately 70.5% complete.
The acquired in-process technologies were originally anticipated to become
commercially viable in years 2000, 2001, and 2002. Expenditures to complete the
acquired in-process technologies were expected to total approximately $3.5
million. The initial development and commercial release of the Company's
Settlement product was completed during the third quarter of 2000. During the
year ended December 31, 2001, 23.0% of the Company's license revenue was derived
from licensing the Settlement product. During the year ended December 31, 2000,
12.8% of the Company's license revenue was derived from licensing the Company's
Settlement product.
Valuation of IPR&D: Amounts allocated to IPR&D were calculated using
established valuation techniques in the high technology industry and the Company
expensed such amounts in the quarter that the acquisition was consummated
because technological feasibility had not been achieved and no alternative
future uses had been established. Consistent with the Company's policy for
internally developed technology, the Company concluded that the IPR&D had no
alternative future use after taking into consideration the potential for usage
of the technology in different products, resale of the software, and internal
usage.
Upon consummation of the SAI/Redeo acquisition, the Company immediately
recognized expense of $8.3 million representing the acquired IPR&D that had not
yet reached technological feasibility and had no alternative future use. The
value assigned to acquired IPR&D was determined by identifying products under
research in areas for which technological feasibility had not been established.
The IPR&D technology was then segmented into two classifications: (i) IPR&D -
completed and (ii) IPR&D - to-be-completed, giving explicit consideration to the
value created by research and development efforts of SAI/Redeo prior to the
acquisition and to be created by the Company after the acquisition. These value
creation efforts were estimated by considering the following major factors: (i)
time-based data, (ii) cost-based data, and (iii) complexity-based data. The
value of the IPR&D was determined using a discounted cash flow model similar to
the income approach.
From the revenue estimates, operating expense estimates, including cost of
sales, general and administrative, selling and marketing, income taxes and a use
charge for contributory assets, were deducted to arrive at operating income.
Revenue growth rates were estimated by management for each product and gave
consideration to relevant market sizes and growth factors, expected industry
trends, the anticipated nature and timing of new product introductions by us and
our competitors, individual product sales cycles, and the estimated life of each
product's underlying technology. Operating expense estimates reflect the
Company's historical expense ratios. The resulting operating income stream was
discounted to reflect its present value at the date of the acquisition. The rate
used to discount the net cash flows from the purchased IPR&D was 28%, which is
equal to the weighted average cost of capital of the Company. To date, actual
revenues attributable to the IPR&D have been lower than the original
projections.
SALES AND MARKETING, EXCLUSIVE OF NONCASH EXPENSE
Sales and marketing expenses decreased 24.7% to $27.3 million, or 154.4% of
total revenues, in 2001 from $36.2 million, or 103.5% of total revenues, in
2000. The decrease was primarily attributable to the reduction of sales and
marketing personnel, a decrease in variable compensation as a result of lower
license revenue during 2001, and a reduction of promotional activities
associated with building market awareness of the Company's e-commerce products.
The Company experienced a significant increase in sales and marketing expenses
in the fourth quarter of 2000 due in large part to advertising commitments
associated with the Company's branding campaign. The Company had an average of
12.6% fewer sales and marketing employees during 2001 compared to the same
period in 2000.
NONCASH SALES AND MARKETING EXPENSE
During the years ended December 31, 2001 and 2000, non-cash sales and
marketing expenses of approximately $6.7 million and $7.0 million, respectively,
were recognized in connection with sales and marketing agreements signed by the
Company during the fourth quarter of 1999 and the first quarter of 2000.
GENERAL AND ADMINISTRATIVE, EXCLUSIVE OF NONCASH EXPENSE
General and administrative expenses, including the provision for doubtful
accounts, decreased 5.1% to $14.9 million in 2001 from $15.7 million in 2000. As
a percentage of total revenues, general and administrative expenses increased to
84.4% in 2001 from 44.9% in 2000. Included in general and administrative
expenses is a provision for doubtful accounts of $5.5 million and $5.8 million
for the years ended December 31, 2001 and 2000, respectively. The decrease in
general and administrative expenses was primarily attributable to decreases in
personnel related costs and a decrease in the provision for doubtful accounts.
The Company had an average of 8.5% fewer general and administrative employees
during 2001 compared to the same period in 2000.
18
NONCASH GENERAL AND ADMINISTRATIVE EXPENSE
Noncash general and administrative expenses decreased to approximately
$252,000, or 1.4% of total revenues, in 2001 from approximately $1.1 million, or
3.1% of total revenues, in 2000. The decrease was primarily attributable to the
Company granting 160,000 options to a senior executive during the first quarter
of 2000 at an exercise price below the fair market value at the date of grant.
Fifteen percent of these options vested immediately and the remainder vested
over four years. The Company immediately expensed $814,500 associated with the
intrinsic value of the vested options and recorded the intrinsic value of the
unvested options, $4.6 million, as deferred compensation. This arrangement was
terminated in the fourth quarter of 2000 and all options except those vesting
immediately were forfeited. The Company recognized net compensation expense
related to this arrangement of $814,500 during the year ended 2000.
LOSS ON IMPAIRMENT OF INTANGIBLE ASSETS
In the fourth quarter of 2001, the Company recognized an intangible asset
impairment loss of $36.8 million related to the write-down of goodwill
associated with the acquisition of the SAI/Redeo companies. The Company
periodically evaluates the carrying value of its long-lived assets, including
intangibles, according to SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". During the
fourth quarter of 2001, the Company's evaluation of the performance of the
SAI/Redeo companies compared to initial projections, negative economic trends
and a decline in industry growth rate projections indicated that the carrying
value of the goodwill exceeded expected cash flows. The $36.8 million write-down
was based on the amount by which the carrying amount of goodwill exceeded fair
value.
GAIN ON SALE OF ERP ASSETS
On October 18, 1999, the Company sold its human resources and financial
software business to Geac Computer Systems, Inc. and Geac Canada Limited. The
Company received approximately $13.9 million in proceeds. A gain of $9.4 million
was recorded in 1999, with an additional gain of approximately $1.3 million
recorded during 2000, following an escrow settlement.
GAIN ON SALE OF PROPERTY AND EQUIPMENT
During the year ended December 31, 2001, the Company recorded a gain on the
sale of property and equipment of $20,000. The gain on the disposal of assets
during the year ended December 31, 2001 is primarily attributable to the sale of
property and equipment to exiting employees.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization increased 50.2% to $12.2 million, or 69.1% of
total revenues, in 2001, from $8.1 million, or 23.2% of total revenues, in 2000.
This increase is primarily the result of the Company's amortization of its
intangible assets associated with acquisitions completed in the second quarter
of 2000.
LOSS ON IMPAIRMENT OF INVESTMENTS
During the years ended December 31, 2001 and 2000, the Company recorded a
loss on impairment of investments of approximately $16.5 million and $4.1
million, respectively. These losses were necessitated by other than temporary
losses to the value of investments the Company had made in privately held
companies and marketable securities of one publicly traded company. The
privately held companies are primarily early-stage companies and are subject to
significant risk due to their limited operating history and volatile
industry-based economic conditions. As of December 31, 2001, all investments but
one have been written off. The remaining balance representing a single
investment and valued at $200,000 in the accompanying December 31, 2001 balance
sheet, was sold and cash of $200,000 was received during the first quarter of
2002.
INTEREST INCOME
Interest income decreased 39.7% to $6.6 million in 2001, or 37.2% of total
revenues, from $10.9 million, or 31.1% of total revenues, in 2000. The decrease
in interest income was due to lower levels of cash available for investment and
lower interest rates.
INTEREST EXPENSE AND AMORTIZATION OF DEBT DISCOUNT
Interest expense decreased 34.5% to $228,000 in 2001 from $348,000 in
2000. This decrease in interest expense is primarily due to higher levels of
debt in the first quarter of 2000 as compared to 2001. In March of 2000, the
Company entered into a $5.0 million borrowing arrangement with an interest rate
of 4.5% with Wachovia Capital Investments, Inc. The interest expense in 2001 is
primarily related to this borrowing arrangement.
19
In 1999, the Company entered into financing agreements for $7.0 million. In
connection with the financing, the Company issued warrants valued at
approximately $982,000 using the Black-Scholes option pricing model as debt
discount to be amortized over the life of the financing agreement. The entire
$7.0 million plus interest was paid prior to the end of the first quarter of
2000. As a result, the entire value of the warrants was amortized as a debt
discount in the quarter ended March 31, 2000.
INCOME TAXES
As a result of the operating losses incurred since the Company's inception,
no provision or benefit for income taxes was recorded in 2001 or in 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased to $42.2 million at
December 31, 2002 from $55.6 million at December 31, 2001. Marketable securities
decreased to $52.9 million at December 31, 2002 from $65.3 million at December
31, 2001. The overall decrease in cash and cash equivalents and marketable
securities is due primarily to cash used in operating activities partially
offset by cash provided from investing activities and financing activities.
Cash used in operating activities was approximately $27.3 million during
2002. The cash used was primarily attributable to the Company's net loss and to
decreases in accounts payable and accrued liabilities, deferred revenue,
accounts receivable and prepaid and other current assets. Cash used in operating
activities was approximately $42.4 million during 2001. The cash used was
primarily attributable to the Company's net loss and to decreases in accounts
payable and accrued liabilities partially offset by an increase in deferred
revenue.
Cash provided by investing activities was approximately $13.4 million
during 2002. The cash provided by investing activities during 2002 was primarily
attributable to the sale and maturity of marketable securities and proceeds
related to the sale of the e-commerce assets partially offset by purchases of
marketable securities and property and equipment. Cash used for investing
activities was approximately $20.8 million during 2001. The cash was used for
purchases of investments, marketable securities, and property and equipment
partially offset by the sale and maturity of marketable securities.
Cash provided by financing activities was approximately $519,000 during
2002 and approximately $458,000 during 2001. The cash provided by financing
activities during 2002 and 2001 was primarily attributable to proceeds from
shares issued under the employee stock purchase plan and stock option exercises.
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. As of December 31, 2002, four
customers accounted for more than 10% each, totaling $814,000 or 77.3% of the
gross accounts receivable balance on that date. The percentage of total accounts
receivable due from these four customers was 42.3%, 12.4%, 11.5% and 11.1%,
respectively, at December 31, 2002. As of December 31, 2001, four customers
accounted for more than 10% each, totaling $1.7 million or 58.1% of the gross
accounts receivable balance on that date. The percentage of total accounts
receivable due from these four customers was 17.2%, 15.2%, 13.8% and 11.9%,
respectively, at December 31, 2001.
During the year ended December 31, 2002, one customer accounted for more
than 10%, totaling $2.7 million, or 29.9% of total revenue. During the year
ended December 31, 2001, three customers accounted for more than 10% each,
totaling $6.2 million, or 35.3% of total revenue. The percentage of total
revenue recognized from these three customers was 12.2%, 11.9% and 11.2%,
respectively.
During the second quarter of 2001, the Company made an equity investment of
$2.0 million in a privately held strategic partner. Prior to 2001, the Company
made equity investments of $17.7 million in eleven privately held companies. The
Company's equity interest in these entities ranged from 2.5% to 12.5% and the
Company is accounting for these investments using the cost method of accounting.
During 2001 and 2000 the Company recorded charges of $15.4 million and $4.1
million, respectively, for other than temporary losses on these investments.
These companies are primarily early-stage companies and are subject to
significant risk due to their limited operating history and current economic and
capital market conditions. The Company has not recognized any material revenue
from these companies during 2002 or 2001. During the year ended December 31,
2000 the Company recognized $16.0 million in total revenue from these companies.
On December 6, 2002, the Company granted options to purchase 1,250,000
shares of common stock to three senior executives. 450,000 of these options were
issued with an exercise price of $5.35 per share, 400,000 were issued with an
exercise price of $7.50 per share and 400,000 were issued with an exercise price
of $10.00 per share. The options issued at $5.35 per share were issued at less
than the fair market value on that date of $5.45 and will result in compensation
charges of $45,000 recognized over the vesting period. Twenty percent of the
options vest annually over five years on the anniversary of the date of grant.
At December 31, 2002, the Company has net operating loss, capital loss,
research and experimentation credit and alternative minimum tax credit
carryforwards for U.S. federal income tax purposes of approximately $114.1
million, $13.6 million, $1.3 million and $53,000, respectively, which expire in
varying amounts beginning in the year 2009. The Company also has incurred
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foreign losses in the amount of approximately U.S.$23.2 million that are
available to offset future taxable income in foreign jurisdictions. The
Company's ability to benefit from certain net operating loss carryforwards will
be limited under section 382 of the Internal Revenue Code if the Company is
deemed to have had an ownership change of greater than 50%. Accordingly, certain
net operating losses may not be realizable in future years due to this
limitation.
During the first six months of 2000, the Company issued 25,000 warrants and
approximately 39,000 shares of the Company's common stock to certain strategic
partners, all of whom are also customers, in exchange for their participation in
the Company's sales and marketing efforts. The sales and marketing agreement
signed with one strategic partner also included an obligation to make cash
payments of $300,000 in each of the last two years of the related agreement. The
Company recorded the fair value of these warrants, common stock, and cash
payments as deferred sales and marketing costs of approximately $454,000, $3.8
million, and $600,000, respectively. Deferred sales and marketing costs were
amortized over the term of the sales and marketing agreements, which range from
nine months to five years.
During the fourth quarter of 2001, the sales and marketing agreement with
one customer was terminated requiring a charge of $1.4 million to write-off the
remaining balance in deferred sales and marketing costs. Also, as a result of
the termination, the Company is no longer obligated to make cash payments of
$300,000 for each of the last two years of the related agreement.
At the 2002 annual meeting of our stockholders held on May 21, 2002, Warren
B. Kanders, Burtt R. Ehrlich and Nicholas Sokolow were elected by our
stockholders to serve on our Board of Directors. Under the leadership of these
new directors, our Board of Directors adopted a strategy of seeking to enhance
stockholder value. By pursuing opportunities to redeploy our assets through an
acquisition of, or merger with, an operating business that will serve as a
platform company, using our substantial cash, other non-operating assets
(including, to the extent available, our net operating loss carry-forward) and
our publicly-traded stock to enhance future growth.