UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 2000March 31, 2001
or
[ ][_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
Commission File Number: 0-24277
Clarus Corporation
-----------------------------------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 58-1972600
------------------------------- --------------------------------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3970 Johns Creek Court
Suwanee, Georgia 30024
----------------------------------------
(Address of principal executive offices)
(Zip code)
(770) 291-3900
---------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------________________________________________________
(Former name, former address and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---NO_
-
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, ($.0001 Par Value)
--------------------------------------------------------
15,525,069-----------------------------------------------
15,517,560 shares outstanding as of October 31, 2000May 11, 2001
1
INDEX
- -----
CLARUS CORPORATION
Page
------
PART I FINANCIAL INFORMATION
- ------------- ---------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) -
September 30, 2000March 31, 2001 and December 31, 1999........................... 32000;
Condensed Consolidated Statements of Operations (unaudited) -
Three and nine months ended September 30, 2000March 31, 2001 and 1999............ 52000;
Condensed Consolidated Statements of Cash Flows (unaudited) -
NineThree months ended September 30, 2000March 31, 2001 and 1999...................... 62000;
Notes to Condensed Consolidated Financial Statements (unaudited) -
September 30, 2000................................................. 7March 31, 2001
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 9Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 25Risk
PART II OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings.............................................. 25Proceedings
Item 6. Exhibits and Reports on Form 8-K............................... 258-K
SIGNATURES
-2-2
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
CLARUS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share and per share amounts)
September 30,March 31, December 31,
2001 2000
1999
---------------------- -------------------------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $141,256 $14,127$114,481 $118,303
Marketable securities 45,114 -0-
Trade accounts36,518 50,209
Accounts receivable, less allowance for doubtful accounts
of $2,817$4,788 and $271$3,917 in 2001 and 2000, and 1999, respectively 20,915 10,3898,454 8,126
Deferred marketing expense, current 6,752 5,7233,890 5,321
Prepaids and other current assets 5,591 1,9653,494 2,731
-------- ---------------
Total current assets 219,628 32,204166,837 184,690
PROPERTY AND EQUIPMENT, 6,985 4,122NET 8,497 7,619
OTHER ASSETS:
Deferred marketing expense, 2,765 4,293net of current portion 2,251 2,508
Investments 10,520 13,619
Intangible assets, net of accumulated amortization of $4,061$8,166 and
$784$6,146 in 2001 and 2000, and 1999, respectively 60,455 6,649
Investments 14,747 1,16854,740 58,214
Deposits and other long-term assets 220 127248 254
-------- ---------------
Total other assets 78,187 12,23767,759 74,595
-------- ---------------
TOTAL ASSETS $304,800 $48,563$243,093 $266,904
======== ========
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
-3-3
CLARUS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(unaudited) (continued)
(in thousands, except share and per share amounts)
September 30,March 31, December 31,
2001 2000
1999
------------------- --------------------------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 17,14410,549 $ 6,32611,059
Deferred revenue 3,814 3,081
Current maturities of long-term debt 3 6,046
-------- --------2,831 2,295
--------- ---------
Total current liabilities 20,961 15,453
NONCURRENT13,380 13,354
LONG-TERM LIABILITIES:
Deferred revenue 1,058 2931,031 881
Long-term debt net of current maturities 5,000 -0-5,000
Other non-currentlong-term liabilities 202 202
-------- --------852 847
--------- ---------
Total liabilities 27,221 15,94820,263 20,082
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value; 5,000,000 shares authorized; none
issued - -
Common stock, $.0001 par value; 100,000,000 shares authorized,
15,501,971authorized;
15,586,184 and 11,600,68115,609,029 shares issued and 15,426,97115,511,184 and
11,525,681
shares15,534,029 outstanding in 20002001 and 1999,2000, respectively 2 12
Additional paid-in capital 367,390 77,008361,085 362,415
Accumulated deficit (86,072) (44,122)(137,530) (114,769)
Treasury stock, at cost (2) (2)
Foreign currency translation adjustment 39 -0-
Unrealized gain on marketable securities 296 -0-Accumulated other comprehensive loss (585) (572)
Deferred compensation (4,074) (270)
-------- --------(140) (252)
--------- ---------
Total stockholders' equity 277,579 32,615
-------- --------222,830 246,822
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $304,800 $ 48,563
======== ========243,093 $ 266,904
========= =========
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
-4-4
CLARUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in thousands, except per share amounts)
Three months ended
Nine months ended
September 30, September 30,
--------------------------------- -----------------------------------March 31,
----------------------
2001 2000
---- ----
2000 1999 2000 1999
REVENUES:
License fees $ 10,2622,310 $ 2,259 $ 23,903 $10,1385,796
Services fees 3,281 6,497 6,731 21,298
----------------------------- ------------------------------2,262 1,210
----------------------
Total revenues 13,543 8,756 30,634 31,4364,572 7,006
COST OF REVENUES:
License fees 15 258 113 96944 39
Services fees 4,135 3,988 8,234 12,598
----------------------------- ------------------------------4,060 1,572
----------------------
Total cost of revenues 4,150 4,246 8,347 13,5674,104 1,611
OPERATING EXPENSES:
Research and development, exclusive of noncash expense 7,423 2,178 15,759 6,730
In-process5,006 3,084
Noncash research and development expense -0- -0- 8,300 -0-- 826
Sales and marketing, exclusive of noncash expense 9,324 4,190 24,421 11,0078,069 6,463
Noncash sales and marketing 1,688 1,812
General and administrative, exclusive of noncash expense 4,166 1,505 9,161 4,727
Depreciation and amortization 2,948 967 5,212 2,800
Noncash research and development expense -0- -0- 826 -0-
Noncash sales and marketing expense 2,017 -0- 5,846 -0-4,749 2,626
Noncash general and administrative expense 375 42 1,851 126
----------------------------- ------------------------------112 1,145
Depreciation and amortization 2,865 700
----------------------
Total operating expenses 26,253 8,882 71,376 25,39022,489 16,656
OPERATING LOSS (16,860) (4,372) (49,089) (7,521)
Gain on sale of ERP assets -0- -0- 547 -0-
Loss on sale of investments (5) -0- (5) -0-
Interest income 3,307 82 7,869 310
Interest expense (58) (19) (1,272) (70)
----------------------------- ------------------------------(22,021) (11,261)
LOSS ON IMPAIRMENT OF INVESTMENTS (3,099) -
REALIZED GAIN ON SALE OF INVESTMENTS 1 -
AMORTIZATION OF DEBT DISCOUNT - (982)
INTEREST INCOME 2,422 986
INTEREST EXPENSE (64) (174)
----------------------
NET LOSS $(13,616) $(4,309) $(41,950) $(7,281)
============================= ==============================
Loss per common share:
Basic$(22,761) $(11,431)
======================
NET LOSS PER SHARE--BASIC AND DILUTED: $ (0.89) $(0.39)(1.47) $ (2.98) $ (0.66)
Diluted $ (0.89) $(0.39) $ (2.98) $ (0.66)
Weighted average shares outstanding
Basic 15,371 11,095 14,057 11,010
Diluted 15,371 11,095 14,057 11,010(0.93)
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 15,508 12,247
DILUTED 15,508 12,247
See Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
-5-5
CLARUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands, except share and warrant amounts)
NineThree months ended
September 30
-------------------------------------March 31,
------------------------------
2001 2000
1999-------------- ------------- -------
OPERATING ACTIVITIES:
Net loss $(41,950) $(7,281)$ (22,761) $ (11,431)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 5,212 2,858on property and equipment 845 473
Amortization of intangible assets 2,020 227
Loss on impairment of investments 3,099 -
Noncash interest expense associated with original issue
discount on debt discount- 982 -0-
In-process research and development 8,300 -0-
Provision for doubtful accounts 2,597 1,0842,055 526
Noncash research and development expense - 826
Noncash sales and marketing expense 1,688 1,812
Noncash general and administrative expense 112 1,145
Exchange of software for cost-method investments (6,764) (1,168)
Noncash research and development expense 826 -0-
Noncash sales and marketing expense 5,846 -0-
Noncash general and administrative expense 1,851 126
Loss on disposal of property and equipment -0- 53
Gain on sale of financial and human resources software business (547) -0-- (750)
Changes in operating assets and liabilities:
Accounts receivable (14,337) (1,646)(2,383) (4,163)
Prepaid and other current assets (3,567) (1,465)(763) 224
Deposits and other long-term assets (83) 1696 (40)
Accounts payable and accrued liabilities 8,901 43(510) 68
Deferred revenue 1,498 (1,379)686 889
Other non-currentlong-term liabilities -0- 176
-------- -------5 -
-------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (31,235) (8,430)(15,901) (9,212)
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (33,446) -0-
Purchase of marketable securities (43,604) -0-(23,265) -
Proceeds from sale and maturity of marketable securities 36,853 -
Purchases of property and equipment (4,562) (2,673)
Purchases of intangible assets (89) (73)
Net proceeds from sale of ERP assets 1,864 -0-
Purchase of investments in strategic partners (6,815) -0-
--------- --------(1,723) (891)
-------------- -------------
NET CASH USED INPROVIDED BY (USED IN) INVESTING ACTIVITIES (86,652) (2,746)11,865 (891)
FINANCING ACTIVITIES:
Repayments of long-term borrowings (7,025) (419)
Proceeds from long-term borrowings 5,000 2,100
Proceeds from issuance of common stock related to secondary offering 244,427 -0-- 244,456
Proceeds from long-term debt - 5,000
Repayment of long-term debt and capital lease obligations - (7,013)
Proceeds from the exercises of stock options 28 1,453
Proceeds from issuance of common stock related to options exercised 2,575 578
--------- -------employee
stock purchase plan 96 -
-------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 244,977 2,259
--------- -------124 243,896
-------------- -------------
Effect of exchange rate change on cash 39 -0-
INCREASE (DECREASE)90 -
CHANGE IN CASH AND CASH EQUIVALENTS 127,129 (8,917)(3,822) 233,793
CASH AND CASH EQUIVALENTS, beginning of period 118,303 14,127
14,799
-------- --------------------- -------------
CASH AND CASH EQUIVALENTS, end of period $141,256 $ 5,882
======== =======114,481 $ 247,920
============== =============
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 29064 $ 70
======== =======174
============== =============
NONCASH TRANSACTIONS:
Issuance of warrants to purchase 50,000 shares of common
stock in connection with marketing agreements at fair value $ - $ 986
$ -0-
======== ===================== =============
Issuance of 39,118 shares of common stock in connection
with marketing agreements at fair value $ 3,761- $ -0-
======== =======
Issuance4,361
============== =============
Retirement of 1,148,00055,000 shares of common stock in connectionpursuant to a
terminated employment agreement with SAI
acquisitiona former owner of the
SAI/Redeo Companies $ 30,3531,454 $ -0-
======== =======
Receipt of marketable securities in satisfaction of trade accounts receivable $ 1,214 $ -0-
======== =======-
============== =============
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
-6-6
CLARUS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Clarus
Corporation and subsidiaries (the "Company") for the three and nine months ended September 30, 2000,March
31, 2001, have been prepared in accordance with Generally Accepted
Accounting Principles for interim financial informationgenerally accepted accounting
principles and instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information in notes required by
Generally Accepted Accounting Principlesgenerally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the unaudited condensed
consolidated financial statements for this interim period have been included. The results of the interim periodsthree
months ended March 31, 2001 are not necessarily indicative of the results to be
obtained for the year ended December 31, 2000.2001. These interim financial
statements should be read in conjunction with the Company's audited consolidated
financial statements and footnotes thereto included in the Company's Form 10-K
for the fiscal year ended December 31, 1999,2000, filed with the Securities and
Exchange Commission.
NOTE 2. EARNINGS PER SHARE
Basic and diluted net loss per share waswere computed in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," using
the weighted average number of common shares outstanding. The diluted net loss
per share for the quarterquarters ended March 31, 2001 and nine-month periods ended September 30, 2000 and
1999 does not include the
effect of the common stock equivalents, calculated byusing the treasury stock method, at September 30, 2000 and 1999
as their impact would be antidilutive (shown below inantidilutive. The potentially dilutive effect of
excluded common stock equivalents are as follows (in thousands):
Three months ended Nine months ended
September 30, September 30,
----------------------------- ---------------------------------
2000 1999 2000 1999
Shares issuable under stock options 1,271 1,142 1,346 640
Shares issuable pursuant to warrants to purchase
common stock 164 19 188 3
Total 1,435 1,161 1,534 643
Three months ended
March 31,
-------------------------
2001 2000
------ ------
Effect of shares issuable under stock options 332 1,624
Effect of shares issuable pursuant to warrants
to purchase common stock 1 214
-------------------------
Total 333 1,838
-------------------------
NOTE 3. STOCKHOLDERS' EQUITYSTOCK OPTION EXCHANGE PROGRAM
On March 10, 2000,April 9, 2001, the Company sold 2,243,000 sharesannounced a voluntary stock option exchange
program for its employees. Under the program, employees will be given the
opportunity, if they so choose, to cancel outstanding stock options previously
granted to them on or after November 1, 1999 in exchange for an equal number of
new options to be granted at a future date. The exercise price of these new
options will be equal to the fair market value of the Company's common stock on
the date of grant, which will be no earlier than six months and one day after
the date of cancellation. The Company intends to offer employees a second
opportunity to exchange outstanding stock options beginning on or about July 9,
2001 and ending on or about August 6, 2001. Employees participating in a public
offering yielding net proceedsthe first
exchange will not be eligible for the second exchange. The exchange program has
been designed to comply with FASB Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation" and is not expected to result in any
additional compensation charges or variable plan accounting. Members of the
CompanyCompany's Board of approximately $244.4 million.Directors and its officers are not eligible to participate in
the exchange program.
NOTE 4. INVESTMENTS
As of September 30, 2000Prior to 2001, the Company has made equity investments of $14.7$17.7 million in nineeleven
privately held companiescompanies. The Company's equity interest in these entities ranges
from 3.5% to 12.5% and issued a letter of intent to invest $1.5
million in a tenth privately held company, which was executed subsequent to
quarter-end. Thesethe Company is accounting for these investments are recorded at original cost and are accounted
for using the
cost method of accounting. During the three months ended September
30,first quarter of 2001 and the fourth
quarter of 2000, the Company recognized $9.6 million in license revenue from software
sales to these companies. The Company had previously recognized license revenue
from software sales to these companiesrecorded a charge of $3.8 million during the first six
months of 2000 and $3.1 million during the twelve months ended December 31,
1999.and $4.1 million,
respectively, for other than temporary losses on these investments. These
companies are primarily early stageearly-stage companies and are subject to significant
risk due to their limited operating history. As a result,history and current economic conditions. In
the first quarter of 2001, the Company can give no assurancesdid not make any additional equity
investments and did not recognize any revenue from these companies. During the
year ended December 31, 2000, the Company recognized $17.2 million in total
revenue from these companies. In the first quarter of 2000, the Company made an
equity investment of $750,000 and recognized $855,000 in total revenue in one
privately held company. In the second quarter of 2001, the Company made an
equity investment of $2.0 million in a privately held company. No revenue has
been recognized related to the ultimate value of the Company's
investments.
-7-this investment.
7
NOTE 5. ACQUISITIONS
On May 31, 2000, the Company acquired all of the outstanding capital stock of
SAI (Ireland) Limited, SAI Recruitment Limited, i2Mobile.com Limited and SAI
America Limited (the "SAI/RodeoRedeo Companies"). The SAI/RodeoRedeo Companies specialize
in electronic payment settlement. The purchase consideration was approximately
$63.1$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-
ScholesBlack-Scholes option pricing model) and acquisition costs
of approximately $900,000.$995,000.
The acquisition was treated as a purchase for accounting purposes, and
accordingly, the assets and liabilities were recorded based on their preliminary
fair value at the date of acquisition. The Company retained a third-party
valuation firm to assistevaluated the Company in its evaluation of developed
technologies and the in-process research and development. The third-party evaluated SAI/Rodeo
Companies' developmental productsdevelopment to determine their
stage of development, their expected income generating ability, as well as risk
factors associated with achieving technological feasibility. The Company
expensed approximately $8.3 million to in-process research and development related to this acquisition in
the second quarter of 2000. The values ascribed to intangible assetsgoodwill, $48.2 million, and their respective useful livesthe developed
technologies, $4.1 million, are being amortized over eight years. The assembled
workforce, $450,000, and the customer base, $100,000, are being amortized over
seven and four years, respectively. The goodwill balance was reduced in the
first quarter of 2001 by $1.5 million as follows:
Intangible Useful
Asset Life
(in thousands) (in years)
-----------------------------------------------
Goodwill $49,891 8
Developed technologies 4,100 4
Assembled workforce 450 7
Customer base 100 4
The following unaudited pro forma information presents the resultsa result of operations55,000 shares issued as
part of the Company as iforiginal purchase consideration being cancelled when a related
employment agreement was terminated prior to the first anniversary of the
acquisition had taken place on January 1, 1999, and
excludes the write-off of purchased research and development of $8.3 million (in
thousands, except per share amounts):
Three months ended Nine months ended
September 30, September 30,
----------------------------------- -----------------------------------------
2000 1999 2000 1999
Revenues $13,543 $9,816 $ 31,516 $ 34,010
Net loss (13,616) (7,000) (46,124) (14,046)
Basic earnings per share:
Net loss per common share $(0.89) $(0.57) $ (3.14) $ (1.16)
Equivalent number of shares 15,371 12,243 14,689 12,159
Diluted earnings per share:
Net loss per share $(0.89) $(0.57) $ (3.14) $ (1.16)
Equivalent number of shares 15,371 12,243 14,689 12,159
-8-
date.
On April 28, 2000, the Company acquired all of the capital stock of iSold.com,
Inc., a Delaware corporation ("iSold"). iSold has developed a software program
that provides auctioning capabilities to its clients. The effectspurchase consideration
was approximately $2.5 million in cash of thiswhich $1.6 million was paid at the
date of acquisition and $900,000 was paid in April 2001. The acquisition was
treated as a purchase for accounting purposes with approximately $500,000 of the
purchase consideration allocated to developed technologies and approximately
$2.0 million to goodwill. The developed technologies are not significant tobeing amortized over
three years and the Company's financial position.goodwill is being amortized over four years.
NOTE 6. COMPREHENSIVE INCOME (LOSS)
SFAS No. 130 "Reporting Comprehensive Income", establishes standards of
reporting and display of comprehensive income (loss) and its components of net
income (loss) and "Other Comprehensive Income".Income (Loss) ". "Other Comprehensive
Income"Income (Loss) " refers to revenue,revenues, expenses and gains and losses that are not
included in net income (loss) but rather are recorded directly in stockholders'
equity. The components of comprehensive income (loss) for the three and nine months ended
September 30,March 31, 2001 and 2000 and 1999 were as follows (in thousands):
Three months ended Nine months ended
September 30 September 30
------------------------------ ---------------------------------
2000 1999 2000 1999
Net loss $(13,616) $(4,309) $(41,950) $(7,281)
Unrealized gain on marketable securities 3 -0- 296 -0-
Foreign currency translation adjustments 31 -0- 39 -0-
Comprehensive loss (13,582) (4,309) (41,615) (7,281)
Three months ended
March 31,
--------------------------
2001 2000
------------- -----------
Net loss $ (22,761) $ (11,431)
Unrealized loss on marketable securities (103) -
Foreign currency translation adjustments 90 -
--------------------------
Comprehensive loss (22,774) (11,431)
==========================
NOTE 7. CONVERTIBLE SECURITIES
On March 14, 2000,CREDIT AND CUSTOMER CONCENTRATIONS
The Company's accounts receivable potentially subject the Company entered into a securities purchase agreement with
Wachovia Capital Investments, Inc. Wachovia purchased a 4.5% convertible
subordinated promissory note due on March 15, 2005 in the original principal
amount of $5.0 million, which may be converted into shares of common stockto credit
risk, as collateral is generally not required. As of the Company at a price of $147.20 per share of common stock.
NOTE 8. CUSTOMER CONCENTRATIONS
Fivefirst quarter ended
March 31, 2001, three customers in the third quarter of 2000 accounted for more than 10% each, totaling $5.3
million or 39.7% of the license fees in the quarter. Onegross accounts receivable balance on that date. The
percentage by customer was 10.3%, 14.6%, and 14.8%, respectively, at March 31,
2001. As of December 31, 2000, four customers accounted for more than 10% each,
totaling $6.7 million or 56.0% of license feesthe gross accounts receivable balance on that
date. The percentage by customer was 10.4%, 11.2%, 14.5%, and 19.9%,
respectively, at December 31, 2000.
During the quarter ended March 31, 2001, two customers accounted for more than
10% each, totaling $2.0 million or 44.2%, of total revenue. The percentage by
customer was 16.9% and 27.3%, respectively, for the nine monthsquarter ended September 30,March 31,
2001. During the quarter ended March 31, 2000, five customers accounted for more
than 10% each, totaling $5.5 million or 78.3% of total revenue. The percentage
by customer was 11.1%, 12.2%, 13.3%, 17.4% and 24.3%, respectively, for the
quarter ended March 31, 2000.
NOTE 9.8. CONTINGENCIES
The Company is involveda party to lawsuits in claims and other legal actions arising out of the ordinarynormal course of its business. In addition, at least eight putative stockholder
class action lawsuits have been filed against the Company since October 30,
2000.
Litigation in general, and securities litigation in particular, can be expensive
and disruptive to normal business operations. Moreover, the results of complex
legal proceedings are difficult to predict. We believe that we have
complied with our obligations under Federal securities laws and we intend to
defend these lawsuits vigorously. An unfavorable resolution of one or
more of thesethe following lawsuits could adversely affect ourthe Company's business,
results of operations, or financial condition.
Following its public announcement on October 25, 2000, of its financial results
for the third quarter, the Company and certain of its directors and officers
were named as defendants in fourteen putative class action lawsuits filed in the
United States District Court for the Northern District of Georgia on behalf of
all purchasers of common stock of the Company during various periods beginning
as early as October 20, 1999 and ending on October 25, 2000. The fourteen class
action lawsuits filed against the Company were consolidated into one case, Case
No. 1:00-CV-2841, pursuant to an order of the court dated November 17, 2000. On
March 22, 2001, the Court entered an order appointing as the lead Plaintiffs
John Nittolo, Dean Monroe, Ronald Williams, V&S Industries, Ltd., VIP World
Asset Management, Ltd., Atlantic Coast Capital Management, Ltd., and T.F.M.
Investment Group. Pursuant to the previous Consolidation Order of the Court, a
Consolidated Amended Complaint was filed on May 14, 2001.
The class action complaints allege claims against the Company and other
defendants for violations of Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934, as amended, and Rule 10b-5 promulgated thereunder with respect to
alleged material misrepresentations and omissions in public filings made with
the Securities and Exchange Commission and certain press releases and other
public statements made by the Company and certain of its officers relating to
its business, results of operations, financial condition and future prospects,
as a result of which, it is alleged, the market price of our common stock was
artificially inflated during the class periods. The class action complaints
focus on statements made concerning an account receivable from one of the
Company's customers. The plaintiffs seek unspecified compensatory damages and
costs (including attorneys' and expert fees), expenses and other unspecified
relief on behalf of the classes. The Company believes that it has complied with
all of its obligations under the Federal securities laws and the Company intends
to defend these lawsuits vigorously. As a result of consultation with legal
representation and current insurance coverage, the Company does not believe the
lawsuits will have a material impact on the Company's results of operations or
financial position.
8
NOTE 9. COMMITMENTS
In March 2001, the Company terminated a services agreement with a development
partner. As a result, the Company must pay termination fees of $300,000 in the
second quarter of 2001 and $300,000 in the third quarter of 2001. The total
$600,000 liability is included in the accounts payable and accrued liabilities
balance in the accompanying condensed consolidated balance sheet as of March 31,
2001. The expense is recorded in research and development expenses in the
accompanying condensed consolidated statement of operations for the three months
ended March 31, 2001.
NOTE 10. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current
period presentation.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company develops, markets and supports Internet-based business-to-business
electronic commerce solutions that automate the procurement and management of
operating resources. The Company's multiple solutions provide a framework to
enable Internet-based digital marketplaces, allowing companies to create trading
communities and additional revenue opportunities. The Company's multiple
solutions, based on a free trade model, provide a direct Internet-based
connection between buyer and supplier -9-
without requiring transactions to be
executed through a centralized portal. The Company's product line includes
solutions that serve "market makers" (businesses utilizing the Internet for the
purpose of facilitating and increasing the efficiency of the distribution
channels of chosen vertical markets) as well as other solutions that best serve
the purchasing processes of business enterprises. The Company also provides
implementation and ongoing customer support services as an integral part of its complete
procurement solutions. To achieve broad market adoption of the Company's
solutions and services, the Company has developed a multi-channel distribution
strategy that includes both a direct sales force and a growing number of
indirect channels, including application service providers, system integrators
and resellers.
Forward-Looking Statements
This report contains certain forward-looking statements, including or related to
our future results, including certain projections and business trends.
Assumptions relating to forward-looking statements involve judgments with
respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control. When
used in this report, the words "estimate," "project," "intend," "believe" and
"expect" and similar expressions are intended to identify forward-looking
statements. Although we believe that assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate, and we
may not realize the results contemplated by the forward-looking statement.
Management decisions are subjective in many respects and susceptible to
interpretations and periodic revisions based upon actual experience and business
developments, the impact of which may cause us to alter our business strategy or
capital expenditure plans that may, in turn, affect our results of operations.
In light of the significant uncertainties inherent in the forward-looking
information included in this report, you should not regard the inclusion of such
information as our representation that we will achieve any strategy, objectives
or other plans. The forward-looking statements contained in this report speak
only as of the date of this report, and we have no obligation to update publicly
or revise any of these forward-looking statements.
These and other statements, which are not historical facts, are based largely
upon our current expectations and assumptions and are subject to a number of
risks and uncertainties that could cause actual results to differ materially
from those contemplated by such forward-looking statements. These risks and
uncertainties include, among others, the risks and uncertainties described in
the "Risk Factors" section of this discussion.
Sources of Revenue
The Company's revenue consists of license fees and services fees. License fees
are generated from the licensing of the Company's suite of products. Services fees are
generated from consulting, implementation, training, content aggregation and
maintenance and support services.
Revenue Recognition
Effective January 1, 1998, theThe Company adoptedrecognizes 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") No.
97-2, "Software Revenue
Recognition." UnderRecognition", and SOP No. 97-2,98-9, "Software Revenue Recognition with Respect to
Certain Transactions". Accordingly, the Company recognizes software license
revenue is recognized when the following criteria are met:
. a signed and executed contract is obtained;
. shipmentwhen: (1) persuasive evidence of the productan arrangement exists; (2) delivery has
occurred; .(3) the license fee is fixed or determinable; and .(4) collectibility is
probable;
Revenues from consulting, implementationprobable.
SOP No. 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair values of the elements. The fair value of an element must be based
on evidence that is specific to the vendor. License fee revenue allocated to
software products generally is recognized upon delivery of the products or
deferred and recognized in future periods to the extent that an arrangement
includes one or more elements to be delivered at a future date and for which
fair values have not been established. Services fee revenue allocated to
maintenance is recognized ratably over the maintenance term, which is typically
twelve months, and services fee revenue allocated to training services areand other service
elements is recognized as the services are performed.
Maintenance fees relate to10
Under SOP No. 98-9, if evidence of fair value does not exist for all elements of
a license agreement and post-contract customer maintenancesupport is the only undelivered
element, then all revenue for the license arrangement is recognized ratably over
the term of the agreement as license revenue. If evidence of fair value of all
undelivered elements exists but evidence does not exist for one or more
delivered elements, then revenue is recognized using the residual method. Under
the residual method, the fair value of the undelivered elements is deferred and
support and are included in services fees. Maintenance feesthe remaining portion of the arrangement fee is recognized as revenue. Revenue
from hosted software agreements are recognized ratably over the term of the
software support services agreement, which is
typically 12 months. Content aggregation services are recognized ratably over
the term of the content services agreement, which is typically 3 years. Amounts
that have been received in cash or billed but that do not yet qualify for
revenue recognition are reflected as deferred revenues.
Effective January 1, 1999, the Company adopted SOP No. 98-9 "Software Revenue
Recognition with Respect to Certain Transactions." The implementation of this
statement did not have a material impact on the Company's results of operations.hosting arrangements.
Operating Expenses
Cost of license fees includes royalties and software duplication and
distribution costs. The Company recognizes these costs as the applications are
shipped.
Cost of services fees includes personnel related expenses and third-party
consulting fees incurred to provide implementation, training, maintenance,
content aggregation, and upgrade services to customers and partners. These costs
are recognized as they are incurred.
Research and development expenses consist primarily of personnel related
expenses and third-party consulting fees. The Company accounts for software
development costs under Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed." The Company charges research and development costs related to new
products or enhancements to expense as incurred until technological feasibility
is established, after which the remaining costs are capitalized until the
product or enhancement is available for general release to customers. The
Company defines technological feasibility as the point in time at which a
working model of the related product or enhancement exists. Historically, the
costs incurred during the period between the achievement of technological
feasibility and the point at which the product is available for general release
to customers have not been material.
Sales and marketing expenses consist primarily of personnel related expenses,
including sales commissions and bonuses, expenses related to travel, trade show
participation, public relations, promotional activities, regional sales offices,
and advertising.
-10-
General and administrative expenses consist primarily of personnel related
expenses for financial, administrative and management personnel, fees for
professional services, and bad debt expense.the provision for doubtful accounts. The Company
allocates the total cost of its information technology function and costs
related to the occupancy of its corporate headquarters, to each of the
functional areas. Information technology expenses include personnel related
expenses, communication charges, and software support. Occupancy charges include
rent, utilities, and maintenance services.
The Company has incurred significant costs to develop its business-to-business
e-commerce technology and products and to recruit and train personnel. The
Company believes its success is contingent upon increasing its customer base and
investing in further development of its products and services. This will require
significant expenditures for sales, marketing, research and development, and to
a lesser extent support infrastructure. The Company therefore expects to
continue to incur substantial operating losses for the foreseeable future.
Sale of Human Resources and Financial Software Business
On October 18, 1999, the Company sold all of the assets of its human resources
and financial software ("ERP" business) to Geac Computer Systems, Inc. and Geac
Canada Limited. In this sale, the Company received approximately $13.5 million
in proceeds. See "-Liquidity and Capital Resources."
Limited Operating History
The Company has a limited operating history as an e-commerce business that makes
it difficult to forecast its future operating results. Prior period results
should not be relied on to predict the Company's future performance.
ClosingResults of Follow-On Offering
OnOperations
Quarter Ended March 10,31, 2001 and 2000
Revenues
In the second half of 2000, the Company closed a follow-on offeringexpanded its business model to include
ratable revenue recognition. Total revenues in the first quarter of its common stock2001 were
impacted by the use of subscription programs, and received approximately $244.4 million. See "-Liquidityother programs that result in
revenues taken ratably. The impact from subscription programs was $1.0 million
in the first quarter of 2001. The impact from all other programs requiring
ratable revenue recognition was $2.9 million in the first quarter of 2001.
Although lowering reported total revenue and Capital
Resources."
Acquisitionslicense revenue in the first
quarter of SAI/Rodeo and iSold.com
On May 31, 2000,2001, the Company acquired allbenefits achieved over time of the outstanding capital stockratable model are a more
linear revenue pattern as well as increased visibility and predictability of
SAI (Ireland) Limited, SAI Recruitment Limited and its subsidiaries and related
companies, i2Mobile.com Limited and SAI America Limited (the "SAI/Rodeo
Companies"). The SAI/Rodeo Companies specialize in electronic payment
settlement. The purchase consideration was approximately $63.1 million,
consisting of approximately $30.0 million in cash, 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 common stock with an exercise price of $23.50
(estimated fair value of $1.8 million using the Black-Scholes option pricing
model) and approximately $900,000 in acquisition costs.
On April 28, 2000, the Company acquired all of the capital stock of iSold.com,
Inc., a Delaware corporation ("iSold"). iSold has developed a software program
that provides auctioning capabilities to its clients.
Results of Operations
The following table sets forth certain statement of operations data dividing
revenues between the Company's previous human resources and financial software
business (ERP) and the Company's current e-commerce business for the periods
indicated.
-11-
Three months ended Nine months ended
September 30, September 30,
----------------------- --------------------
2000 1999 2000 1999
Revenues: e-commerce
License fees $ 10,262 $ 1,579 $ 23,903 $ 5,174
Services fees 3,281 402 6,731 905
-------------------- -------------------
Total revenues 13,543 1,981 30,634 6,079
Revenues: ERP
License fees -0- 680 -0- 4,964
Services fees -0- 6,095 -0- 20,393
-------------------- -------------------
Total revenues -0- 6,775 -0- 25,357
Cost of revenues: e-commerce
License fees 15 38 113 50
Services fees 4,135 1,036 8,234 1,825
-------------------- -------------------
Total cost of revenues 4,150 1,074 8,347 1,875
Cost of revenues: ERP
License fees -0- 220 -0- 919
Services fees -0- 2,952 -0- 10,773
-------------------- -------------------
Total cost of revenues -0- 3,172 -0- 11,692
Gross margin on e-commerce license fees 10,247 1,541 23,790 5,124
Gross margin on e-commerce services fees (854) (634) (1,503) (920)
Gross margin on ERP license fees -0- 460 -0- 4,045
Gross margin on ERP services fees -0- 3,143 -0- 9,620
Operating expenses:
Research and development, exclusive of noncash
expense 7,423 2,178 15,759 6,730
In-process research and development expense -0- -0- 8,300 -0-
Sales and marketing, exclusive of noncash
expense 9,324 4,190 24,421 11,007
General and administrative, exclusive of
noncash expense 4,166 1,505 9,161 4,727
Depreciation and amortization 2,948 967 5,212 2,800
Noncash research and development expense -0- -0- 826 -0-
Noncash sales and marketing expense 2,017 -0- 5,846 -0-
Noncash general and administrative expense 375 42 1,851 126
-------------------- --------------------
Total operating expenses 26,253 8,882 71,376 25,390
OPERATING LOSS (16,860) (4,372) (49,089) (7,521)
Gain on sale of ERP assets -0- -0- 547 -0-
Loss on sale of investments 5 -0- 5 -0-
Interest income 3,307 82 7,869 310
Interest expense 58 19 1,272 70
-------------------- --------------------
NET LOSS $(13,616) $(4,309) $(41,950) $(7,281)
==================== ====================
Revenuesresults.
Total Revenues. Total revenues for the quarter ending September 30, 2000
increased 54.7%ended March 31, 2001 decreased
34.7% to $13.5$4.6 million from $8.8$7.0 million during the same period in 1999. For the nine months ended September 30, 2000, total revenues decreased
2.6% to $30.6 million from $31.4 million during the same period in 1999.2000. The
quarterly increasedecrease in total revenues resulted primarily from increased e-
commercethe expansion of the
Company's business model
11
discussed above. The decrease in license feesfee revenues was partially offset by decreased services fees, as a result
of the sale of the Company's ERP business in October 1999. The year-to-date
decrease in total revenues is primarily attributable to decreased services fees,
as a result of the sale of the Company's ERP business in October 1999, partially
offset by increased e-commerce license fees.
e-commerce License Fees. License fees increased 549.9% to $10.3 million, or
75.8% of total e-commerce revenues, for the quarter ended September 30, 2000
from $1.6 million, or 79.7% of total e-commerce revenues, in the same period in
1999. For the nine months ended September 30, 2000, e-commerce license fees
increased 362.0% to $23.9 million from $5.2 million during the same period in
1999. The increase in e-commerce license fees was the result of an
increase in services fees, resulting from an increase in new license customers
signed during 2000. During the amount of software licensed. The majority of the Company's e-commerce
license revenue for both the quarter ended and the nine months ended September
30, 2000 was derived from the licensing of products that have became generally
available since June 1, 2000. Five customers in the thirdfirst quarter of 20002001, two customers accounted
for more than 10% each, totaling $2.0 million or 44.2% of total revenues,
compared to five customers in the first quarter of 2000, totaling $5.5 million
or 78.3% of total revenues. The percentage by customer for the first quarter
of 2001 was 16.9% and 27.3%, respectively, and the percentage by customer for
the first quarter of 2000 was 11.1%, 12.2%, 13.3%, 17.4% and 24.3%,
respectively.
License Fees. License fees decreased 60.1% to $2.3 million, or 50.5% of total
revenues, for the quarter ended March 31, 2001 from $5.8 million, or 82.7% of
total revenues, for the same period in 2000. The decrease in license fees was
attributable to the expansion of the license fees in the quarter. One
customer accounted for 10% of license fees for the nine months ended September
30, 2000.
-12-
e-commerceCompany's business model, discussed above.
Services Fees. Services fees increased 716.2%86.9% to $3.3$2.3 million, for the quarter
ended September 30, 2000,March 31, 2001, from $402,000$1.2 million for the same period in 1999,2000, and also
increased as a percentage of total e-commerce revenues to 24.2%49.5%, for the three month period ended September 30, 2000,March
31, 2001, from 20.3% in17.3% for the same period in 1999. For the nine months ended September 30, 2000, service fees increased
643.8% to $6.7 million from $905,000 during the same period2000. The increase in 1999. These
increases are primarily attributable to increased demand for the Company's
services as a result of the growth in e-commerce license fees.
ERP License Fees. The Company sold its ERP business in October 1999, and as a
result had no ERP license fees during the periods ended September 30, 2000. ERP
license fees represented $680,000, or 30.1% of total license fee revenue, during
the quarter ending September 30, 1999. ERP license fees represented $5.0
million, or 49.0% of total license fee revenue during the nine months ended
September 30, 1999.
ERP Services Fees. The Company sold its ERP business in October 1999, and as a
result had no ERP services fees
is primarily due to an increase in new license customers signed during the periods ended September 30, 2000. ERP
services fees represented $6.1 million, or 93.8% of total services fees, during
the three month period ended September 30, 1999. ERP services revenue
represented $20.4 million, or 95.8% of total services fees, during the nine
months ended September 30, 1999.
Cost of Revenues
Total Cost of Revenues. Cost of revenues decreased 2.3%increased 154.7% to $ 4.1$4.1 million, or
30.6%89.8% of total revenue, during the quarter ended September 30, 2000March 31, 2001 from $4.2$1.6
million, or 48.5%23.0% of total revenue, during the same period in 1999. Cost2000. The increase
in the cost of revenues, decreased 38.5% to $8.3 million, or 27.2% of total revenue, from $13.6
million, or 43.2% of total revenue, during the nine months ended September 30,
2000. The decrease both in total and as a percentage of total revenues, in both
comparable periods is
primarily a result of an increase in the change in mix in revenue fromcost of services fees which historicallydue to higher
personnel related costs. During the first quarter of 2001, the Company had a higheran
average of 79 employees in the services implementation and customer support
areas compared to an average of 40 employees in the same period of 2000.
Severance expenses, related to nine employees of approximately $168,000, also
negatively impacted the cost of revenues to license
fees.
e-commercein the first quarter of 2001.
Cost of License Fees. Cost of e-commerce license fees decreased to
$15,000 for the quarter ended September 30, 2000 from $38,000 during the same
period in 1999. For the nine months ending September 30, 2000, cost of e-
commerce license fees increased 12.8% to $113,000$44,000 in the
first quarter of 2001 from $50,000 during$39,000 in the same period
in 1999.first quarter of 2000. Cost of license
fees may vary from period to period depending on the product mix licensed, but
are expected to remain a small percentage of license fees.
e-commerce Cost of Services Fees. Cost of services fees increased 299.1%158.3% to $4.1 million,
or 126.0%179.5% of total e-commerce services fees revenues, during the quarter ended September 30, 2000March 31,
2001 compared to $1.0$1.6 million, or 257.7%129.9% of total e-commerce
services fees revenues, during
the same period in 1999. For2000. As discussed above, the nine months ended
September 30, 2000, cost of e-commerce services fees increased to $8.2 million
from $1.8 million during the same period in 1999. The increase in the cost of
e-commerce services fees for the first quarter of 2001 was primarily attributable to increases in bothhigher
personnel related costs in both the services implementation and consulting fees. The consulting fees related to
sub-contracted services was approximately $1.0 million for the quarter ended
September 30, 2000 and approximately $1.7 million for the nine months ended
September 30, 2000. There were no consulting fees expensed during the three
months and nine months ended September 30, 1999. Although the Company intends
to increase the number of services employees, it will continue sub-contracting
some consulting and implementation engagements to its system integrator
partners.
ERP Cost of License Fees.customer support
areas. The Company sold its ERP business in October 1999,
and as a result had no ERP license fees or ERP cost of license fees during the
periods ended September 30, 2000. During the quarter ended September 30,1999,
cost of ERP license fees totaled $220,000 or 32.4% of ERP license fees. For the
nine months ended September 30, 1999, cost of ERP license fees totaled $919,000
or 18.5% of ERP license fees. ERP cost of license fees represented 85.3% of the
total cost of license fees during the quarter ended September 30, 1999 and 94.8%
of the total cost of license fees during the nine months ended September 30,
1999.
ERP Cost of Services Fees. The Company sold its ERP business in October 1999,
and as a result had no ERP services fees or ERPhas incurred cost of services fees during the
period ended September 30, 2000. During the quarter ended September 30, 1999,
ERP costin excess of services fees
totaled approximately $3.0 million, or 48.4%due primarily to the hiring and training of ERP
services fees. Forpersonnel in anticipation of future
growth. As a result of slower than anticipated growth, the nine months ended September 30, 1999,Company instituted
cost control actions in the first quarter of ERP2001, including the reduction in
personnel discussed above, to more closely align the cost structure with the
anticipated growth. While the Company believes these costs will continue to be
greater than services fees totaled $10.8 million or 52.8% of ERP services fees. ERP cost ofin the near term, the Company plans for services fees
represented 74.0% of the total cost of services fees during the
quarter ended September 30, 1999, and 85.5% of total cost of services fees
during the nine months ended September 30, 1999.to exceed costs by late 2001.
Research and Development, Expense, Exclusive of Noncash Expense
Research and development expenses increased 240.8%62.3% to approximately $7.4$5.0 million,
or 54.8%109.5% of total revenues, during the quarter ended September 30, 2000March 31, 2001 from $2.2$3.1
million, or 24.9%44.0% of total revenues, during the same period in 1999.2000. Research
and development expense increased 134.2% to approximately $15.8
million, or 51.4% of total revenues, during the nine months ending September 30,
2000 from $6.7 million, or 21.4% of total revenues, during the same period in
1999. Research and development
-13-
expenses increased primarily due to increased personnel related
expenses and increased consulting fees incurred to develop the Company's products. Consulting
fees increasedDuring
the first quarter of 2001, the Company had an average of 85 employees in the
research and development area compared to approximately $4.8 million during the quarter ended September
30, 2000 from approximately $124,000 duringan average of 60 employees in the same
period in 1999. Consulting
fees increased to approximately $9.2 million during the nine months ending
September 30, 2000 from approximately $440,000 during the same period in 1999.of 2000. The first quarter of 2001 was also negatively impacted by
$600,000 as a result of terminating a services agreement with a development
partner. The Company continuesplans to invest substantial resources inutilize in-house research and development
but expects research and development expense to decline in the near
term. The Company intends to aggressively hire in research and developmentpersonnel moving forward, but expects increases in personnel related costs to be offset by
decreases inincur consulting fees in the fourth quarter of 2000.
In-Process Research and Development Expense
In-process research andfor certain
specialized development expense was approximately $8.3 million for
the nine months ending September 30, 2000. The Company recorded this expense in
the second quarter of 2000 related to its acquisition of the SAI/Rodeo Companies
on May 31, 2000.
Sales and Marketing Expense, Exclusive of Noncash Expense
Sales and marketing expenses increased 122.5% to $9.3 million, or 68.8% of total
revenues, during the quarter ended September 30, 2000 from $4.2 million, or
47.9% of total revenues, during the same period in 1999. Sales and marketing
expenses increased 121.9% to $24.4 million, or 79.7% of total revenues, during
the nine months ending September 30, 2000 from $11.0 million, or 35.0% of total
revenues, during the same period in 1999. The increase was primarily
attributable to the additional sales and marketing personnel and promotional
activities associated with building market awareness of the Company's e-commerce
products. The Company expects a significant increase in sales and marketing
expense in the near term, due in large part to fourth quarter advertising
commitments.
General and Administrative Expense, Exclusive of Noncash Expense
General and administrative expenses increased 176.8% to $4.2 million during the
quarter ending September 30, 2000, or 30.8% of total revenue from $1.5 million,
or 17.2% of total revenues, during the same period in 1999. General and
administrative expenses increased 93.8% to $9.2 million, or 29.9% of total
revenues, during the nine months ending September 30, 2000 from $4.7 million, or
15.0% of total revenues, during the same period in 1999. The increase in
general and administrative expense was primarily attributable to increases in
personnel related costs and an additional bad debt expense for a specifically
identified accounts receivable of $2.0 million in the third quarter of 2000.
Depreciation and Amortization Expense
Depreciation and amortization increased to $2.9 million in the period ended
September 30, 2000 from $967,000 in the same period in 1999. Depreciation and
amortization increased to $5.2 million in the nine months ending September 30,
2000 from $2.8 million in the same period in 1999. The increases in both
comparable periods is primarily the result of the Company's amortization of its
intangible assets associated with acquisitions completed in the second quarter
of 2000.projects.
Noncash Research and Development Expense
Noncash research and development expenses of approximately $826,000 were
recognized during the first quarter of 2000. The expenses resulted from the
Company's agreement with a third party to develop certain software that the
Company intends to sell in the future. The agreement required the third party to
reach certain milestones related to the software development in order to receive
warrants to purchase 50,000 shares of the Company' common stock with an exercise
price of $56.78. The third party completed two of the three scheduled milestones
in the first quarter of 2000 and they were granted warrants to purchase 33,334
shares of common stock. The value of the warrants earned
approximated $826,000 and was computed using the Black-Scholes option pricing
model. The third milestone was not reached by the scheduled due
date, and as a result the warrants to purchase the remaining 16,666 shares of
common stock were forfeited. WarrantsThe warrants to purchase 33,334 shares remain
outstanding at September
30, 2000March 31, 2001 and expire in the first quarter of 2003. -14-At the
end of the first quarter of 2000, the value of the warrants earned approximated
$826,000 and was computed using the Black-Scholes option pricing model.
12
Sales and Marketing, Exclusive of Noncash Expense
Sales and marketing expenses increased 24.8% to $8.1 million, or 176.5% of total
revenues, during the quarter ended March 31, 2001 from $6.5 million, or 92.2% of
total revenues, during the same period in 2000. The increase was primarily
attributable to an increase in sales and marketing personnel related costs,
partially offset by a decrease in promotional activities. The remaining
increased personnel related costs are primarily related to additions made to the
Company's sales force. During the first quarter of 2001, the Company had an
average of 107 employees in the sales, marketing and business development areas
compared to an average of 88 employees in the same period of 2000.
Noncash Sales and Marketing Expense
During the threequarters ended March 31, 2001 and nine months ended September 30, 2000, noncash sales and marketing
expenses of approximately $2.0$1.7 million and $5.8$1.8 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, someall of whom are also customers, in
exchange for their participation in the Company's sales and marketing efforts.
The Company recorded the value of these warrants and common stock as deferred
sales and marketing expenses, which are being amortized over the life of the
agreements which range from nine months to five years.
General and Administrative, Exclusive of Noncash Expense
General and administrative expenses increased 80.8% to $4.7 million during the
quarter ended March 31, 2001, or 103.9% of total revenue from $2.6 million, or
37.5% of total revenues, during the same period in 2000. The increase in general
and administrative expense was primarily attributable to increases in personnel
related costs and an increase in the provision for doubtful accounts from
$526,000 in the first quarter of 2000 to $2.0 million in the first quarter of
2001 for specifically identified accounts receivable. During the first quarter
of 2001, the Company had an average of 58 employees in the finance and
administration areas compared to an average of 37 employees in the same period
of 2000.
Noncash General and Administrative Expense
Noncash general and administrative expenses increaseddecreased to approximately $375,000,$112,000,
or 2.8%2.4% of total revenues, during the thirdfirst quarter of 2000,2001, from $42,000,$1.1 million,
or 0.5%16.3% of total revenues, during the same period in 1999. Noncash general and
administrative expenses increased to $1.9 million, or 6.0% of total revenues,
during the nine months ended September 30, 2000 from $126,000, or 0.4% of total
revenues, during the same period2000. The decrease in 1999. The increases in both the
quarter and
the nine months ending September 30, 2000 wereended March 31, 2001 was primarily attributable to the termination in
the fourth quarter of 2000 of an arrangement where the Company grantinggranted 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 vestvested over four years. TheIn the
first quarter of 2000, the Company immediately expensed $814,500 associated with
the intrinsic value of the vested options and recorded the intrinsic value of
the unvested options, ($5.4 million)$4.6 million, as deferred compensation. Thecompensation to be amortized
evenly over the four-year vesting period. Approximately $288,000 was expensed in
the first quarter of 2000 related to the unvested options. As a result of the
termination, all options except those that were vested on the original grant
date were forfeited and the Company recognizedreversed in the fourth quarter of 2000
approximately $864,000 of compensation expense related to this arrangement of approximately $288,000 and
$1.7 million, respectively, in the quarter and nine months ended September 30,
2000.forfeited options.
In the third quarter of 2000, the Company granted 18,750 options to a new board
member at a price below the fair market value at the date of grant. Deferred
compensation of approximately $226,000$266,000 was recorded related to this grantgrant. The
amount expensed in the first quarter of 2001 relates primarily to these options.
Depreciation and compensation expenseAmortization
Depreciation and amortization increased to $2.9 million in the quarter ended
March 31, 2001 from $700,000 in the same period of 2000. The increase is
primarily the result of the Company's amortization of its intangible assets
associated with the acquisitions of iSold.com and the SAI/Redeo Companies
completed in the second quarter of 2000.
Loss on Impairment of Investments
During the first quarter of 2001, the Company recorded a loss on impairment of
investments of approximately $45,000$3.1 million. The loss was recognized. Forty
percentnecessitated by other
than temporary losses to the value of these options will be fully vested on June 13, 2001investments the Company has made in
privately held companies. These companies are primarily early-stage companies
and the remainder
will vest quarterly through July 30, 2001.are subject to significant risk due to their limited operating history and
current economic conditions.
Interest Income
Interest income increased to $3.3$2.4 million in the thirdfirst quarter of 2000,2001, or 24.4%53.0%
of total revenues from $82,000,$986,000, or 0.9%14.1% of total revenues, in the same period
of 1999. Interest income increased to $7.9 million during the nine
months ended September 30, 2000, or 25.7% of total revenues, from $310,000, or
1.0% of total revenues, in the same period in 1999.2000. The increase in interest income was due to higher levels of cash
available for investment, a
13
direct result of the Company's follow-on offering completed in March 2000. The
Company expects to continue to use cash to fund operating losses and, as a
result, interest income on available cash is expected to decline in future
quarters.
Interest Expense and Amortization of Debt Discount
Interest expense increased 205.3%decreased 63.2% to $58,000$64,000 in the thirdfirst quarter of 20002001 from
$19,000 during$174,000 in the same period of 2000. This decrease in 1999. Interestinterest expense increased 1,717.1% to
$1.3 million during the nine months ended September 30, 2000 from $70,000 during
the same period in 1999. The increase for the nine months ended September 30,
2000 is
primarily due to higher levels of debt in the first quarter of 2000 as compared
to 1999. This2001. The interest expense incurred in the first quarter of 2000 was primarily the
result of an interim funding of $7.0 million received in December 1999.1999 and
repaid prior to the end of the first quarter of 2000. In March of 2000, the
Company entered into a $5.0 million borrowing arrangement with Wachovia Capital
Investments, Inc. The interest expense in the first quarter 2001 is primarily
related to this agreement.
As part of the interim funding agreement discussed above, the Company also
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 period endingquarter 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 during the quarterquarters ended
March 31, 2001 and nine
months ended September 30, 2000, and 1999, respectively.
Liquidity and Capital Resources
On March 10, 2000, the Company completed a follow-on offering of 2,243,000
shares of common stock at an offering price of $115.00 per share. The proceeds,
net of expenses, from this public offering of approximately $244.4 million were
placed in investment grade cash equivalents and marketable securities. The
Company believes the proceeds from this follow-on offering will be adequate to
provide for the Company's capital expenditures and working capital requirements
for the foreseeable future. Although
operating activities may provide cash in certain periods, to the extent the
Company experiences growth in the future, the Company's operating and investing
activities will use significant amounts of cash. -15-
The Company believes its liquid
current assets and to the extent necessary, additional external financing,
should adequately meet the Company's needs until the Company achieves break-even
cash flow, which is currently forecasted to occur in the second quarter of 2002.
On March 14, 2000, the Company entered into a securities purchase agreement with
Wachovia Capital Investments, Inc. Wachovia purchased a 4.5% convertible
subordinated promissory note (the "Note") in the original principal amount of
$5.0 million,
which may be convertedmillion. The Note provides for the ability of the holder to convert, at its
option, all or any portion of the principal of the Note into shares of common stock of the
Company.Company at the price of $147.20 per share. If at any time after the date of the
Note, the quoted price per share of the Company's common stock exceeds 200% of
the conversion price then in effect for at least twenty trading days in any
period of thirty consecutive trading days, the Company has the right to require
that the holder of the Note convert all of the principal of the Note into common
stock of the Company at the price of $147.20 per share. The Note is due March
15, 2005 and the $5.0 million principal amount was placed in investment grade
cash equivalents.
Cash used in operating activities was approximately $31.2$15.9 million during the
nine monthsquarter ended September 30, 2000.March 31, 2001. The cash used was primarily attributable to the
Company's net loss, and to increasesan increase in accounts receivable and prepaid and other
current assets, offset by noncash items and increasesa decrease in accounts payable and accrued liabilities
partially offset by noncash items and an increase in deferred revenue. Cash used
in operating activities was approximately $8.4$9.2 million during the nine monthsquarter ended
September
30, 1999.March 31, 2000. This was primarily attributable to the Company's net loss, and
increasesan increase in accounts receivable, partially offset by noncash items and prepaid and other current assets, and
decreasesan
increase in deferred revenue.
Cash used forprovided by investing activities was approximately $86.7$11.9 million during the
nine monthsquarter ended September 30, 2000.March 31, 2001. The cash provided by investing activities was
primarily attributable to proceeds received from the sale and maturity of
marketable securities partially offset by the funds used for acquisitions,
purchases of investments in strategic partners,to purchase marketable
securities and property and equipment. The cash used for investing activities was partially
offset by proceeds related to the sale of ERP assets of approximately $1.9
million. Cash used forin investing activities was
approximately $2.7 million$891,000 during the nine month periodquarter ended September 30, 1999. CashMarch 31, 2000 and was used primarily to
purchase property and equipment during this period.equipment.
Cash provided by financing activities was approximately $245.0 million$124,000 during the
nine month periodquarter ended September 30, 2000,March 31, 2001, and the cash provided by financing activities was
approximately $2.3$243.9 million during the nine monthsquarter ended September 30, 1999.March 31, 2000. The cash
provided by financing activities during the period ended September 30,March 31, 2001 was
primarily attributable to proceeds from shares issued under the employee stock
purchase plan and stock option exercises. The cash provided by financing
activities during the period ended March 31, 2000 was primarily attributable to
the proceeds from the sale of 2,243,000 shares of common stock for approximately
$244.4 million, and the issuance of long-term debt of $5.0 million, which wasand the proceeds
from stock option exercises, partially offset by the repayment of $7.0 million
in interim funding provided by Transamerica Business Credit Corp., Silicon
Valley Bank and Sand Hill Capital II, L.P.
On October 18, 1999,14
The Company's accounts receivable potentially subject the Company sold its human resourcesto credit
risk, as collateral is generally not required. As of the first quarter ended
March 31, 2001, three customers accounted for more than 10% each, totaling $5.3
million or 39.7% of the gross accounts receivable balance on that date. The
percentage by customer was 10.3%, 14.6%, and financial software
business14.8%, respectively, at March 31,
2001. As of December 31, 2000, four customers accounted for more than 10% each,
totaling $6.7 million or 56.0% of the gross accounts receivable balance on that
date. The percentage by customer was 10.4%, 11.2%, 14.5%, and 19.9%,
respectively, at December 31, 2000.
Prior to Geac Computer Systems, Inc. and Geac Canada Limited. The2001, the Company received approximately $13.5made equity investments of $17.7 million in proceeds. A gaineleven
privately held companies. During the first quarter of $9.4 million was
recorded in 1999, with an additional gain of approximately $547,000 recorded in2001 and the secondfourth
quarter of 2000, following the escrow settlement.
TheCompany recorded a charge of $3.1 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 conditions.
At March 31, 2001, the Company had net operating loss carryforwards, research
and experimentation credit, and alternative minimum tax credit carryforwards for
U.S. federal income tax purposes of approximately $70.6$77.8 million, at September 30, 2000,$720,000,
$53,000, respectively, which will expire at various dates through 2019.in varying amounts beginning in the year
2009. The
Company established a valuation allowance equal to the net operating losses and
all other deferred tax assets. The Company will record the income tax benefits
from these deferred tax assets when it becomes more likely than not they will be
realized, which will reduce the Company's effective tax rate in future periods.
Section 382 of the Internal Revenue Code may limit the Company's ability to benefit from certain net operating loss
carryforwards becauseis limited under section 382 of the Internal Revenue Code as the
Company is deemed to have had an ownership change of moregreater than 50%, as defined in Section 382. The Company may
not realize.
Accordingly, certain net operating loss carryforwardslosses may not be realizable in future years
due to this limitation.
During the first six monthsquarter of 2000, the Company issued 50,000 warrants and
approximately 39,000 shares of the Company's common stock to certain strategic
partners, someall 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 cash payments of $300,000 in
each of the last two years of the related agreement. For the quarter ended March
31, 2000, the Company recorded the fair value of these warrants, and common stock,
and cash payments as deferred sales and marketing expense of approximately
$986,000, $3.8 million, and $4.4 million,$600,000, respectively. The strategic partners
earned the warrants pro-rata on a quarterly basis over the first three quarters
of 2000. One of the strategic partners failed to earn any of the 25,000 warrants
while the other strategic partner met the predetermined sales and marketing
milestones and earned all of the 25,000 warrants. Deferred sales and marketing
expenses will beare amortized over the term of the sales and marketing agreements,
which range from sixnine months to five years.
During 1999,On May 31, 2000, the Company entered intoacquired the SAI/Redeo Companies. As part of the
acquisition, a former executive of the SAI/Redeo Companies signed an employment
agreement. As a result of the voluntary termination of this agreement with a third partyprior to
develop
certain software that it intendsthe first anniversary of the acquisition date, the executive was required to
sell inreturn to the future. The third party was to
be compensatedCompany for these services with warrants to purchase 50,000cancellation 55,000 shares of the
Company's common stock at an exercise price of $56.78 per share. The agreement
requiresissued in
connection with the third party to reach certain milestones related to the software
development in order to earn the warrants. The third party completed two of the
three scheduled milestones in the first quarter of 2000 and they were granted
warrants to purchase 33,334 shares of the Company's common stock.agreement. The Company recorded the issuance of the warrants at the time they were earned by the third
party and the warrants were valued at approximately $826,000 based on the fair value of these
shares at the warrants on theacquisition date, of the grant using the Black-Scholes option
pricing model. The third milestone was not reached by the scheduled due date,
andapproximately $1.5 million, as a result the warrants to purchase the remaining 16,666 shares of the
Company's common stock were forfeited.
During 1999, the Company entered into a reseller agreement that allows the
reseller to license its products in a certain territory. The Company will
receive royalty amounts from the reseller if certain minimum revenue
requirements are met by the reseller. The Company will recognize these license
fees as the products are licensed to end users. Additionally, the reseller has
the ability to earn warrants to purchase up to 150,000 shares of the Company's
common stock if certain revenue targets are met. The Company will record the
issuance of the warrants at the time they are earned by the reseller based on
the fair value of the warrant on the date they are earned. During the first nine
months of 2000, the reseller did not license any of the Company's products.
Accordingly, no warrants were granted relatedreduction to
the reseller agreement.
-16-
intangible balance associated with the SAI/Redeo acquisition.
New Accounting Pronouncements
In September 1998, the Financial Accounting Standards Board ("FASB") issued StatementSFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement was amended in June 2000 by Statement No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." Statement No. 138 will be effective for theThe Company beginningadopted
these new pronouncements in January of 2001. The new Statement requiresStatements require all
derivatives to be recorded on the balance sheet at fair value and establishesestablish
accounting treatment for three types of hedges: hedges of changes in the fair
value of assets, liabilities or firm commitments; hedges of the variable cash
flows of forecasted transactions; and hedges of foreign currency exposures of
net investments in foreign operations. To date,
theThe Company has not invested in derivative instruments nor participated in
hedging activitiesno derivatives and therefore, does not anticipate there will be a materialthe
adoption of these pronouncements had no impact on the Company's results of
operations or financial position from Statements No.
133 or No. 138.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101") and amended it in March and June 2000. We are required to adopt the
provisions of SAB 101 in the fourth quarter of 2000. We are currently reviewing
the provisions of SAB 101 and have not fully assessed the impact of its
adoption. While SAB 101 does not supersede the software industry-specific
revenue recognition guidance, with which we believe we comply with, the SEC
Staff has recently informally indicated its views related to SAB 101 that may
change current interpretations of software revenue recognition requirements.
Such SEC interpretations could result in many software companies, including us,
recording a cumulative effect of a change in accounting principles.position.
Risk Factors
In addition to other information in this quarterly report on Form 10-Q, the
following risk factors should be carefully considered in evaluating usthe Company
and ourits business because such factors currently may have a significant impact on
ourits business, operating results and financial condition. As a result of the risk
factors set forth below, actual results could differ materially from those
projected in any forward-looking statements.
We may not effectively implement our business strategy.
Our future performance will depend in part on successfully developing,
introducing and gaining market acceptance of our product suite, which is
designed to automate the procurement and management of operating resources.products. On October 18, 1999,
we sold substantially all of the assets of our financial and human resources
software business to Geac Computer Systems, Inc. and Geac Canada Limited. Our
financial and human resources software business had historically been our
primary business. We began marketing our Clarus eProcurement solution in the
second quarter of 1998. We added Clarus eMarket and Clarus Auctions to our
product line in the second quarter of 2000, and introduced Clarus Settlement in
the third quarter of 2000. If we do not successfully implement our
business-
to-businessbusiness-to-business e-commerce growth strategy, our business will suffer
materially and adversely. Our focus as an organization is on the large to
mid-size enterprise (LME) market. While we anticipate that this market is
increasingly more receptive to purchasing our solutions, we cannot be sure of
the adoption rate. The
15
actual rate may be slower or less than our expectations, which would materially
and adversely affect our business, results of operations and financial
condition.
We may not achieve significant market acceptance without a critical
mass of large buying organizations and their suppliers.
Unless a critical mass of large buying organizations and their suppliers join
our SupplierUniverse network, our solutions may not achieve widespread market
acceptance, and our business would be seriously harmed.able to maintain referenceable accounts.
The implementation of our product suite by large buying organizations can be complex,
time consuming and expensive. In many cases, these organizations must change
established business practices and conduct business in new ways. Our ability to
attract additional customers for our product suite will depend on using our
existing customers as referenceable accounts. As a result, our operating
resource solutions may not achieve significant market acceptance. If a sufficient and increasing numberIn addition,
current customers are subject to the effects of suppliers fail to join our
SupplierUniverse network, our network will be less attractive to buyers and
other suppliers. To provide buyers on our SupplierUniverse network an organized
means of accessing operating resources, we rely on suppliers to maintain web-
based catalogs, indexing services and other content aggregation tools. Our
inability to access and index these catalogs and services would resultbeing acquired, which may
jeopardize their referencability in our
customers having fewer products and services available to them through our
solutions, which would adversely affect the perceived usefulness of our
SupplierUniverse network.future.
We expect our product line to appeal to early stageearly-stage companies, which exposesexpose us
to higher than normal credit risk.
-17-
Our product line supports Internet-based business-to-business electronic
commerce solutions that automate the procurement and management of operating
resources. As a result of this functionality many early stageearly-stage businesses, in
addition to many companies with traditional business models, are interested in
acquiring our products in the future.products. Many early stageearly-stage companies acquire their funding
periodically based upon investor's perception of their progress and likelihood
of success. Typically, they do not have internal operations sufficient to
generate cash, which would guarantee their ongoing viability. While we evaluate
theall potential customers' ability to pay, of all potential customers, if an increasing number of our
customers fail in their operations and are unable to continue to pay amounts due
under our license agreement, we will experience material and adverse financial
losses related to these sales.
If our zero capital subscription-based model is unsuccessful, the market may adopt our
products at a slower rate than anticipated, and our business may suffer
materially.
We offer a zero capital subscription-based payment method to our customers. This model is
unproven and represents a significant departure from the fee-based software
licensing strategies that weour competitors and our competitorswe have traditionally employed. If
we do not successfully develop and support our zero capital subscription-based model, the
market may adopt our products at a slower rate than anticipated, and our
business may suffer materially. As of September 30,
2000,March 31, 2001, we have signed several
customers to this zero capital subscription-based payment method but revenuearrangements. Revenue associated with
these customers in 2000 and the thirdfirst quarter of 20002001 was immaterial.
We may not generate the substantial additional revenues necessary to become
profitable and anticipate that we will continue to incur losses.
We have incurred significant net losses in each year since our formation,
primarily related to our former enterprise resource planning business.formation. In
addition, we have incurred significant costs to develop our e-commerce
technology and products, and to recruit and train personnel. We believe our
success is contingent upon increasing our customer base and investing in further
development of our products and services. This will require significant
expenditures in research and development, sales and marketing, services, and
to
a lesser extent support infrastructure. As a result, we will need to generate significant
revenues to achieve and maintain profitability in the future. Although our revenue has grown in recent quarters, weWe cannot be
certain that we will ever achieve such growth will continue or that we will achieve sufficient revenues for
profitability.in the future.
As we expand our international sales and marketing activities and international
operations, our business will be more susceptible to numerous risks associated
with international operations.
To be successful, we believe we must expand our international operations and
hire additional international personnel. As a result, we expect to commit
significant resources to expand our international sales and marketing
activities. We are subject to a number of risks associated with international
business activities. These risks generally include:
. currency exchange rate fluctuations;
. seasonal fluctuations in purchasing patterns;
. unexpected changes in regulatory requirements;
. tariffs, export controls and other trade barriers;
. longer accounts receivable payment cycles and difficulties in collecting
accounts receivable;
. difficulties in managing and staffing international operations;
. potentially adverse tax consequences, including restrictions on the
repatriation of earnings;
16
. increased transactions costs related to sales transactions conducted
outside the U.S.;
. reduced protection of intellectual property rights and increased risk of
piracy;
. challenges of retaining and maintaining strategic relationships with
customers and business alliances in international markets;
. foreign laws and courts may govern many of the agreements with customers
and resellers;
. difficulties in maintaining knowledgeable sales representatives in
other
countries outside the U.S.;
. adequacy of local infrastructures outside the U.S.;
. differing technology standards, translations, and localization
standards;
. uncertain demand for electronic commerce;
. linguistic and cultural differences;
. the burdens of complying with a wide variety of foreign laws; and
. political, social, and economic instability.
-18-
We have limited experience in marketing, selling and supporting our products and
services in foreign countries. We do not have experience developing foreign
language versions of our products.
We intend to expand the geographic scope of our customer base and operations. We
opened our first international sales office in the United Kingdom during the
first quarter of 2000 and acquired the SAI/RodeoRedeo companies, which have
significant operations in Ireland, in the second quarter of 2000. We have
limited experience in managing geographically disburseddispersed operations and in
operating in Ireland.
Significant fluctuations in ourIreland and the United Kingdom.
Our quarterly operations are volatile and annual operating results may
adversely affectdifficult to predict. If we fail to
meet the expectations of public market analysts or investors, the market price
of our common stock.stock may decrease significantly.
We believe that our quarterly and annual operating results are likely towill fluctuate
significantly in the future, and our results of operations may fall below the
expectations of securities analysts and investors. If this occurs or if market
analysts perceive that it will occur, the market price of our common stock could
decrease substantially. Recently, when the market price of a security has been
volatile, holders of that security have often instituted securities class action
lawsuits against the company that issued the security. We have been the subject
of such lawsuits. These lawsuits divert the time and attention of our management
and an adverse judgment could cause our financial condition or operating results
to suffer.
Because the percentage of our revenues represented by maintenance services is
smaller than that of many software companies with a longer history of
operations, we do not have a significant recurring revenue stream that could
lessen the effect of quarterly fluctuations in operating results. Many factors
may cause significant fluctuations in our quarterly and annual operating
results, including:
. changes in the demand for our products;
. the timing, composition and size of orders from our customers;
. customer spending patterns and budgetary resources;
. our success in generating new customers;
. the timing of introductions of or enhancements to our products;
. changes in our pricing policies or those of our competitors;
. our ability to anticipate and adapt effectively to developing markets
and rapidly changing technologies;
17
. our ability to attract, retain and motivate qualified personnel,
particularly within our sales and marketing and research and development
organizations;
. the publication of opinions or reports about us, our products, our
competitors or their products;
. unforeseen events affecting business-to-business e-commerce;
. changes in general economic conditions;
. bad debt write-offs;
. impairment of strategic investments;
. actions taken by our competitors, including new product introductions
and enhancements;
. our ability to scale our network and operations to support large numbers
of customers, suppliers and transactions;
. our success in maintaining and enhancing existing relationships and
developing new relationships with strategic partners, including
application service providers, systems integrators, resellers,
value-
addedvalue-added trading communities and other partners; and
. our ability to control costs.
Our quarterly revenues are especially subject to fluctuation because they can
depend on the sale of relatively large orders for our products and related
services. As a result, our quarterly operating results may fluctuate
significantly if we are unable to complete one or more substantial sales in a
given quarter.
Recently, we announced our strategy to serve the large to mid-size enterprise
market that emphasizes license agreements that require the recognition of
revenue over a fixed period of time. In these cases, we recognize revenues on a
ratable basis over the life of the contract, which is typically 12 to 36 months.
Therefore, if we do not book a sufficient number of large orders in a particular
quarter, our revenues in future periods could be lower than expected. As we
emphasize license agreements requiring ratable revenue recognition, the
potential for fluctuations in our quarterly results could decrease but our
revenues could be lower than expected. Furthermore, our quarterly revenues may
be affected significantly by other revenue recognition policies and procedures.
These policies and procedures may evolve or change over time based on applicable
accounting standards and how these standards are interpreted.
We are increasing our investment in allmany areas, including research and
development, sales and marketing, services, and to a lesser extent support infrastructure, based
upon our expectations of future revenue growth. These expenditures are
relatively fixed in the short term. If our revenues fall below expectations and
we are not able to quickly reduce spending in response, our operating results
for that quarter and future periods may be harmed.
We may incur costs and liabilities related to potential or pending litigation.
-19-
In a number of lawsuits filed against us in October and Novemberthe fourth quarter of 2000,
our company and several of our officers have been named as defendants in a
number of securities class action lawsuits filed in the United States District
Court for the Northern District of Georgia. The plaintiffs purport to represent
a class of all persons who purchased or otherwise acquired our common stock in
certain periods beginning on October 20, 1999 and through October 25, 2000. The
complaints allege, among other things, that violations of Section 10(b) and
(20)a of the Securities Exchange Act of 1934, as amended and Rule 10b-5
promulgated thereunder, with respect to alleged material misrepresentations and
omissions made in public filings made with the Securities and Exchange
Commission and certain press releases and other public statements. The
plaintiffs seek unspecified damages and costs. These lawsuits divert the time
and attention of management and an adverse judgment could cause our financial
condition or operating results to suffer.
Competition from other electronic procurement providers may reduce demand for
our products and cause us to reduce the price of our products.
The market for Internet-based procurement applications, and e-commerce
technology generally, is rapidly evolving and intensely competitive. The
intensity of competition has increased and is expected to further increase in
the future. We may not compete
18
effectively in our markets. Competitive pressure may result in our reducing the
price of our products, which would negatively affect our revenues and operating
margins. If we are unable to compete effectively in our markets, our business,
results of operations and financial condition would be materially and adversely
affected.
In targeting the e-commerce market, we must compete with electronic procurement
providers such as Ariba and Commerce One. We also encounter competition with
respect to different aspects of our solution from companies such as Concur
Technologies, Extensity, Intelisys, VerticalNet, PurchasePro, FreeMarkets, and
i2. We also anticipate competition from some of the large enterprise resource planning software
vendors,developers, such as Oracle, PeopleSoft and SAP, which have announced business-to-business
electronic procurement solutions. A number of companies, including International
Business Machines, have stated an interest in electronic procurement.SAP.
In addition, because there are relatively low barriers to entry in the
business-to-business exchange market, we believe we will experience increasedexpect additional competition from
travelother established and expense softwareemerging companies, such as Concurparticularly if they acquire one of
our competitors.
Many of our current and Extensity. These companiespotential competitors have longer operating histories,
significantly greater financial, technical, marketing and marketingother resources,
significantly greater name recognition, and brand
recognitiona larger installed base of customers
than we have.do. In addition, somemany of our competitors have well-established
relationships with our current and potential customers and have extensive
knowledge of our industry. OthersIn the past, we have lost potential customers to
competitors for various reasons, including lower prices and incentives not
matched by us. In addition, current and potential competitors have established
or may establish cooperative relationships among themselves or with third
parties to increase the appealability of their products.products to address customer needs.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. We also expect that
competition will increase as a result of industry consolidation. For these
reasons,consolidations.
We may not be able to compete successfully against our current and given the relatively low barriers to entry and relatively high
availability of capital in today's markets, new competitors will likely emerge
in our markets and may rapidly acquire significant market share.future
competitors.
Market adoption of our solutions will be impeded if we do not continue to
establish and maintain strategic relationships.
Our success depends in part on the ability of our strategic partners to expand
market adoption of our solutions. If we are unable to maintain our existing
strategic partnerships or enter into new partnerships, we may need to devote
substantially more resources to direct sales of our products and services. We
would also lose anticipated customer introductions and co-marketing benefits.
We rely, and expect to continue to rely, increasingly, on a number of third-party application
service providers to host our solutions. If we are unable to establish and
maintain effective, long-term relationships with our application service
providers, or if these providers do not meet our customers' needs or
expectations, our business would be seriously harmed. In addition, we lose a
significant amount of control over our solution when we engage application
service providers, and we cannot adequately control the level and quality of
their service. By relying on third-party application service providers, we are
wholly reliant on their information technology infrastructure, including the
maintenance of their computers and communication equipment. An unexpected
natural disaster or failure or disruption of an application service provider's
infrastructure would have a material adverse effect on our business.
We rely exclusively on one third-party content services provider to provide
catalog aggregation and management services to our customers, as part of our
procurement solution. If we are unable to maintain an effective, long-term
relationship with our content services provider, or if their services do not
meet our customers' needs or expectations, our business could be seriously
harmed.
If the demand for our solutions continues to increase, we will need to develop
relationships with additional third-party application service providers to provide these
types of services. Our competitors have or may develop relationships with these
third parties and, as a result, these third parties may be more likely to
recommend competitors' products and services rather than ours.
Many of our strategic partners have multiple strategic relationships, and they
may not regard us as important to their businesses. In addition, our strategic
partners may terminate their relationships with us, pursue other partnerships or
relationships or attempt to develop or acquire products or services that compete
with our solutions. Further, our existing strategic relationships may interfere
with our ability to enter into other desirable strategic relationships. A
significant number of our new Clarus eProcurement sales and Clarus eMarket salescustomers have
occurredbeen retained through referrals from Microsoft, but Microsoft is not obligated
to refer any potential customers to us, and it may enterhas entered into strategic
relationships with other providers of electronic procurement applications.
Our stock price is highly volatile.
Our stock price has fluctuated dramatically. The market price of our common
stock may decrease significantly in the future in response to the following
factors, some of which are beyond our control:
. Variations in our quarterly operating results;
. Announcements that our revenue or income are below analysts'
expectations;
19
. Changes in analysts' estimates of our performance or industry
performance;
. Changes in market valuations of similar companies;
. Sales of large blocks of our common stock;
. Announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
. Loss of a major customer or failure to complete significant license
transactions;
. Additions or departures of key personnel; and
. Fluctuations in stock market price and volume, which are particularly
common among highly volatile securities of software and Internet-based
companies.
We rely on strategic selling relationships with our partners.
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We have established strategic selling relationships with a number of outside
companies. Some of these companies have made significant revenue commitments to
us as part of these relationships. While we do not reflect these commitments in
our financial statements, this information is included in "backlog" information
we share with market analysts and investors. Some of these strategic selling
partners may not have the ability to meet theretheir financial commitments to us, if
they are not able to generate a sufficient level of sales to meet these
commitments.
We expect to depend on our Clarus eProcurement and Clarus eMarket products for a
significant portion of our revenues for the foreseeable future.
We anticipate that revenues from our Clarus eProcurement and Clarus eMarket
products and related services will continue to represent substantially alla significant portion
of our revenues for the foreseeable future. As a result, a decline in the price
of, profitability of or demand for our Clarus eProcurement and Clarus eMarket
products would seriously harm our business. Our Clarus eMarket solution was
introduced in the second quarter of 2000.
Clarus eProcurement and Clarus eMarketOur products may perform inadequately in a high volume environment.
Any failure by our principal products Clarus eProcurement and Clarus eMarket, to perform adequately in a high volume
environment could materially and adversely affect the market for Clarus eProcurement and Clarus eMarketthese products
and our business, results of operations and financial condition. Specifically, Clarus
eProcurement was designed for use in environments that include numerous users,
large amounts of catalog and other data and potentially high peak transaction
volumes. Clarus eProcurementOur products
and the third party software and hardware on which it dependsmay depend may not operate
as designed when deployed in thesehigh volume environments.
Defects in our products could delay market adoption of our solutions or cause us
to commit significant resources to remedial efforts.
We could lose revenues as a result of software errors or other product defects.
As a result of their complexity, software products may contain undetected errors
or failures when first introduced or as new versions are released. Despite our
testing of our software products and their use by current customers, errors may
appear in new applications after commercial shipping begins. If we discover
errors, we may not be able to correct them.
Errors and failures in our products could result in the loss of customers and
market share or delay in market adoption of our applications, and alleviating
these errors and failures could require us to expend significant capital and
other resources. The consequences of these errors and failures could materially
and adversely affect our business, results of operations and financial
condition. Because we do not maintain product liability insurance, a product
liability claim could materially and adversely affect our business, results of
operations and financial condition. Provisions in our license agreements may not
effectively protect us from product liability claims.
Any acquisitions that we attempt or make could prove difficult to integrate or
require a substantial commitment of management time and other resources.
As part of our business strategy, we may seek to acquire or invest in additional
businesses, products or technologies that may complement or expand our business.
If we identify an appropriate acquisition opportunity, we may not be able to
negotiate the terms of that acquisition successfully, finance it, or integrate
it into our existing business and operations. We have completed only three
acquisitions to date. We may not be able to select, manage or absorb any future
acquisitions successfully, particularly
20
acquisitions of large companies. Further, the negotiation of potential
acquisitions, as well as the integration of an acquired business, would divert
management time and other resources. We may use a substantial portion of our
available cash to make an acquisition. On the other hand, if we make
acquisitions through an exchange of our securities, our stockholders could
suffer dilution. In addition, any particular acquisition, even if successfully
completed, may not ultimately benefit our business.
Financial impactWe may not be able to retain the existing employees of acquired companies.
We made two technology acquisitions in 2000: the SAI/Redeo Companies and
iSold.com. In connections with these acquisitions, we acquired products
complementary to our procurement solution. We have no experience in providing
these types of software products or services. We may not have the industry
experience or technical experience to successfully continue development,
marketing and support of these technologies without the continued involvement of
these existing employees. The accounting treatment of our acquisition of the
SAI/Redeo Companies negatively impacted our results of operations.
The accounting treatment for our acquisition of the SAI/RodeoRedeo Companies
negatively impacted our results of operations in the second quarter of 2000. We
recognized a write-off of acquired in-process research and development and
amortization expense related to our second quarter of 2000this acquisition. Amortization of this
acquisition will adversely affect our results of operations through 2008. The
amounts allocated under purchase accounting to developdeveloped technology and
in-process research and development in the acquisition involveinvolved valuation
estimations of future revenues, expenses, operating profit, and cash flows. The
actual revenues,
-21-
expenses, operating profits, and cash flows from the acquired
technology recognized in the future may vary materially from such estimates. If
the in-
processin-process research and development product is not successfully developed,
our sales and profitability may be adversely affected in future periods.
Additionally, the value of other intangible assets acquired may become impaired.
An increase in the length of our sales cycle may contribute to fluctuations in
our operating results.
As our products and competing products become increasingly sophisticated and
complex, the length of our sales cycle is likely to increase. The loss or delay
of orders due to increased sales and evaluation cycles could materially and
adversely affect our business, results of operations and financial condition
and, in particular, could contribute to significant fluctuations in our
quarterly operating results. A customer's decision to license and implement our
solutions may present significant enterprise-wide implications for the customer
and involve a substantial commitment of its management and resources. The period
of time between initial customer contact and the purchase commitment typically
ranges from four to nine months for our applications. Our sales cycle could
extend beyond current levels as a result of lengthy evaluation and approval
processes that typically accompany major initiatives or capital expenditures or
other delays over which we have little or no control.
Our success depends on the continued use of Microsoft technologies or other
technologies that operate with our products.
Our products operate with, or are based on, Microsoft's proprietary products. If
businesses do not continue to adopt these technologies as anticipated, or if
they adopt alternative technologies that we do not support, we may incur
significant costs in redesigning our products or lose market share. Our
customers may be unable to use our products if they experience significant
problems with Microsoft technologies that are not corrected.
The failure to maintain, support or update software licensed from third parties
could materially and adversely affect our products' performance or cause product
shipment delays.
We have entered into license agreements with third-party licensors for products
that enhance our products, are used as tools with our products, are licensed as
products complementary to ours or are integrated with our products. If these
licenses terminate or if any of these licensors fail to adequately maintain,
support or update their products, we could be required to delay the shipment of
our products until we could identify and license software offered by alternative
sources. Product shipment delays could materially and adversely affect our
business, operating results and financial condition, and replacement licenses
could prove costly. We may be unable to obtain additional product licenses on
commercially reasonable terms. Additionally, our inability to maintain
compatibility with new technologies could impact our customers' use of our
products.
If we are unable to manage our internal resources, we may incur increased
administrative costs and be unable to capitalize on revenue opportunities.
The growth of our e-commerce business coupled with the rapid evolution of our
market has strained, and may continue to strain, our administrative, operational
and financial resources and internal systems, procedures and controls. Our
inability to manage our internal resources effectively could increase
administrative costs and distract management. If our management is distracted,
we may not be able to capitalize on opportunities to increase revenues.
21
Our success depends on our continuing ability to attract, hire, train and retain
a substantial number of highly skilled managerial, technical, sales, marketing
and customer support personnel.
Competition for qualified personnel is intense, and we may fail to retain our
key employees or to attract or retain other highly qualified personnel. In
particular, there is a shortage of, and significant competition for, research
and development and sales personnel. Even if we are able to attract qualified
personnel, new hires frequently require extensive training before they achieve
desired levels of productivity. If we are unable to hire or fail to retain
competent personnel, our business, results of operations and financial condition
could be materially and adversely affected. We do not maintain key-man life
insurance policies on any of our employees.
Illegal use of our proprietary technology could result in substantial litigation
costs and divert management resources.
-22-
Our success will depend significantly on internally developed proprietary
intellectual property and intellectual property licensed from others. We rely on
a combination of patent, copyright, trademark and trade secret laws, as well as
on confidentiality procedures and licensing arrangements, to establish and
protect our proprietary rights in our products. We have no patents orExisting patent,
applications pending, and existing trade secret
and copyright laws provide only limited protection of our proprietary rights. We
have applied for registration of our trademarks. We enter into license
agreements with our customers that give the customer the non-exclusive right to
use the object code version of our products. These license agreements prohibit
the customer from disclosing object code to third parties or reverse-engineering
our products and disclosing our confidential information. Despite our efforts to
protect our products' proprietary rights, unauthorized parties may attempt to
copy aspects of our products or to obtain and use information that we regard as
proprietary. Third parties may also independently develop products similar to
ours.
Litigation may be necessary to enforce our intellectual property rights, to
protect our trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
resources and could harm our business, operating results and financial
condition.
Claims against us regarding our proprietary technology could require us to pay
licensing or royalty fees or to modify or discontinue our products.
Any claim that our products infringe on the intellectual property rights of
others could materially and adversely affect our business, results of operations
and financial condition. Because knowledge of a third party's patent rights is
not required for a determination of patent infringement and because the United
States Patent and Trademark Office is issuing new patents on an ongoing basis,
infringement claims against us are a continuing risk. Infringement claims
against us could cause product release delays, require us to redesign our
products or require us to enter into royalty or license agreements. These
agreements may be unavailable on acceptable terms. Litigation, regardless of the
outcome, could result in substantial cost, divert management attention and delay
or reduce customer purchases. Claims of infringement are becoming increasingly
common as the software industry matures and as courts apply expanded legal
protections to software products. Third parties may assert infringement claims
against us regarding our proprietary technology and intellectual property
licensed from others. Generally, third-party software licensors indemnify us
from claims of infringement. However, licensors may be unable to indemnify us
fully for such claims, if at all.
If a court determines that one of our products violates a third party's patent
or other intellectual property rights, there is a material risk that the revenue
from the sale of the infringing product will be significantly reduced or
eliminated, as we may have to:
. pay licensing fees or royalties to continue selling the product;
. incur substantial expense to modify the product so that the third
party's patent or other intellectual property rights no longer apply to
the product; or
. stop selling the product.
In addition, if a court finds that one of our products infringes a third
party's patent or other intellectual property rights, then we may be liable to
that third party for actual damages and attorneys' fees. If a court finds that
we willfully infringed on a third party's patent, the third party may be able to
recover treble damages, plus attorneys' fees and costs.
A compromise of the encryption technology employed in our solutions could reduce
customer and market confidence in our products or result in claims against us.
A significant barrier to Internet-based commerce is the secure exchange of
valued and confidential information over public networks. Any compromise of our
security technology could result in reduced customer and market confidence in
our products and
22
in customer or third party claims against us. This could materially and
adversely affect our business, financial condition and operating results. Clarus
eProcurement reliesand Clarus eMarket rely on encryption technology to provide the
security and authentication necessary to protect the exchange of valuable and
confidential information. Advances in computer capabilities, discoveries in the
field of cryptography or other events or developments may result in a compromise
of the encryption methods we employ in Clarus eProcurement and Clarus eMarketseMarket to
protect transaction data.
Our success depends upon market acceptance of e-commerce as a reliable method
for corporate procurement and other commercial transactions.
-23-
Market acceptance of e-commerce, generally, and the Internet specifically, as a
forum for corporate procurement is uncertain and subject to a number of risks.
The success of our suite of business-to-business e-commerce applications,
including Clarus eProcurement and Clarus eMarkets,eMarket, depends upon the development
and expansion of the market for Internet-based software applications, in
particular e-commerce applications. This market is new and rapidly evolving.
Many significant issues relating to commercial use of the Internet, including
security, reliability, cost, ease of use, quality of service and government
regulation, remain unresolved and could delay or prevent Internet growth. If
widespread use of the Internet for commercial transactions does not develop or
if the Internet otherwise does not develop as an effective forum for corporate
procurement, the demand for our product suite and our overall business,
operating results and financial condition will be materially and adversely
affected.
If the market for Internet-based procurement applications fails to develop or
develops more slowly than we anticipate or if our Internet-based products or new
Internet-based products we may develop do not achieve market acceptance, our
business, operating results and financial condition could be materially and
adversely affected. The adoption of the Internet for corporate procurement and
other commercial transactions requires accepting new ways of transacting
business. In particular, enterprises with established patterns of purchasing
goods and services that have already invested substantial resources in other
means of conducting business and exchanging information may be particularly
reluctant to adopt a new strategy that may make some of their existing personnel
and infrastructure obsolete. Also, the security and privacy concerns of existing
and potential users of Internet-based products and services may impede the
growth of online business generally and the market's acceptance of our products
and services in particular. A functioning market for these products may not
emerge or be sustained.
The market for business-to-business e-commerce solutions is characterized by
rapid technological change, and our failure to introduce enhancements to our
products in a timely manner could render our products obsolete and unmarketable.
The market for e-commerce applications is characterized by rapid technological
change, frequent introductions of new and enhanced products and changes in
customer demands. In attempting to satisfy this market's demands, we may incur
substantial costs that may not result in increased revenues due to the short
life cycles for business-to-business e-commerce solutions. Because of the
potentially rapid changes in the e-commerce applications market, the life cycle
of our products is difficult to estimate.
Products, capabilities or technologies others develop may render our products or
technologies obsolete or noncompetitive and shorten the life cycles of our
products. Satisfying the increasingly sophisticated needs of our customers
requires developing and introducing enhancements to our products and
technologies in a timely manner that keeps pace with technological developments,
emerging industry standards and customer requirements while keeping our products
priced competitively. Our failure to develop and introduce new or enhanced
e-
commercee-commerce products that compete with other available products could materially
and adversely affect our business, results of operations and financial
condition.
InvestmentsLosses from our investments in strategic partners could negatively impact our
operating results.
We have made several financial investments in strategic partners.private companies. These companies
are primarily early-stage enterprises with limited operated histories. If these
partners are unsuccessful in executing their business plans, we may experience
losses on these investments, which would negatively impact our operating
results.
Failure to expand internetInternet infrastructure could limit our growth.
Our ability to increase the speed and scope of our services to customers is
limited by and depends on the speed and reliability of both the Internet and our
customers' internal networks. As a result, the emergence and growth of the
market for our services depends on improvements being made to the entire
Internet infrastructure as well as to our individual customers' networking
infrastructures. The recent growth in Internet traffic has caused frequent
periods of decreased performance. If the Internet's infrastructure is unable to
support the rapid growth of Internet usage, its performance and reliability may
decline, and overall Internet usage could grow more slowly or decline. If
Internet reliability and performance declines, or if necessary improvements do
not increase the Internet's capacity for increased traffic, our customers will
be hindered in their use of our solutions, and our business, operating results
and financial condition could suffer.
23
Future governmental regulations could materially and adversely affect our
Businessbusiness and e-commerce generally.
We are not subject to direct regulation by any government agency, other than
under regulations applicable to businesses generally, and few laws or
regulations specifically address commerce on the Internet. In view of the
increasing use and growth of the Internet, however, the federal government or
state governments may adopt laws and regulations covering issues such as user
-24-
privacy, property ownership, libel, pricing and characteristics and quality of
products and services. We could incur substantial costs in complying with these
laws and regulations, and the potential exposure to statutory liability for
information carried on or disseminated through our application systems could
force us to discontinue some, or all of our services. These eventualities could
adversely affect our business operating results and financial condition. The
adoption of any laws or regulations covering these issues also could slow the
growth of e-commerce generally, which would also adversely affect our business,
operating results or financial condition. Additionally, one or more states may
impose sales tax collection obligations on out-of-state companies that engage in
or facilitate e-commerce. The collection of sales tax in connection with
e-
commercee-commerce could impact the growth of e-commerce and could adversely affect
sales of our e-commerce products.
Legislation limiting further levels of encryption technology may adversely
affect our sales.sales
As a result of customer demand, it is possible that Clarus eProcurement and
Clarus eMarket will be required to incorporate additional encryption technology.
The United States government regulates the exportation of this technology.
Export regulations, either in their current form or as they may be subsequently
enacted, may further limit the levels of encryption or authentication technology
that we are able to use in our software and our ability to distribute our
products outside the United States. Any revocation or modification of our export
authority, unlawful exportation or use of our software or adoption of new
legislation or regulations relating to exportation or use of software and
encryption technology could materially and adversely affect our sales prospects
and, potentially, our business, financial condition and operating results as a
whole.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following discussion concerning the Company's market risk involves
forward-
lookingforward-looking statements that are subject to risks and uncertainties. Actual
results could differ materially from those discussed in the forward-looking
statements. The Company is exposed to market risk related to foreign currency
exchange rates, interest rates and investment values. The Company currently does
not use derivative financial instruments to hedge these risks or for trading
purposes.
Foreign Currency Risk
Substantially all of the revenue recognized to date by the Company has been
denominated in U.S. dollars, including sales made internationally. As a result,
a strengthening of the U.S. dollar could make the Company's products less
competitive in foreign markets. In addition, the Company has foreign
subsidiaries which subject the Company to risks associated with foreign currency
exchange rates and weak economic conditions in these foreign markets. An
increase or decrease in foreign currency exchange rates of 10% would not have a
material effect on the Company's financial position or results of operations.
The Company does not use derivatives as a means of hedging against foreign
currency risk.
Interest Rate Risk
The Company is exposed to market risk from changes in interest rates primarily
through its investing activities. The primary objective of the Company's
investment activities is to manage interest rate exposure is to investby investing in
short-
term,short-term, highly liquid investments. As a result of this strategy, the Company
believes that therethe Company is no material risksubject to minimal interest rate exposure. The
Company's investmentsmarketable securities are carried at market value, which approximates
cost. An increase or decrease in interest rates of 10% would not have a material
effect on the Company's financial position or results of operations.
Investments
ThePrior to 2001, the Company has made nine equity investments of $14.7$17.7 million as of September
30, 2000. Thesein eleven
privately held companies. The Company's equity interest in these entities ranges
from 3.5% to 12.5% and the Company is accounting for these investments are being valued at their original cost and are
accounted for underusing the
cost basismethod of accounting. During the first quarter of 2001 and the fourth
quarter of 2000, the Company recorded a charge of $3.1 million and $4.1 million,
respectively, for other than temporary losses on these investments. These
investmentscompanies are primarily in early stageearly-stage companies and are subject to significant
risk due to thetheir limited operating history and current economic conditions. In
the first quarter of 2001, the Company did not make any equity investments in
privately held companies and did not recognize any revenue from these companies.
During the year ended December 31, 2000, the Company recognized $17.2 million in
total revenue from these companies. In the first quarter of 2000, the Company
made an equity investment of $750,000 and
24
recognized $855,000 in total revenue in one privately held company. Subsequent
to the first quarter of 2001, the Company made an equity investment of $2.0
million in a privately held company. No revenue has been recognized related to
this investment.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We areThe Company is a party to lawsuits in the normal course of ourits business.
Litigation in general, and securities litigation in particular, can be expensive
and disruptive to normal business operations. Moreover, the results of complex
legal proceedings are difficult to predict. An unfavorable resolution of one or
more of the following lawsuits could adversely affect ourthe Company's business,
results of operations, or financial condition.
Following ourits public announcement on October 25, 2000, of ourits financial results
for the third quarter, wethe Company and certain of ourits directors and officers
were named as defendants in at least eightfourteen putative class action lawsuits filed in the
United States District Court for the Northern District of Georgia on behalf of
all purchasers of common stock of the Company during various periods beginning
as early as October 20, 1999 and ending on October 25, 2000. The following is a list of those cases known to us at this time are as follows:
named representative plaintiffs andfourteen class
action lawsuits filed against the Company were consolidated into one case, numbers: Joseph Razzano v. Clarus
Corporation et al., Case
No. 1:00-CV-2885;00-CV-2841, pursuant to an order of the court dated November 17, 2000. On
March 22, 2001, the Court entered an order appointing as the lead Plaintiffs
John Nittolo, v. Clarus Corporation et
al.Dean Monroe, Ronald Williams, V&S Industries, Ltd., Case No. 1:00-CV-2853; Gregory Jackson v. Clarus Corporation et al.VIP World
Asset Management, Ltd., Case
No. 1:00-CV-2841; George Inzlicht v. Clarus Corporation et al.Atlantic Coast Capital Management, Ltd., Case No. 1:00-
CV-2872; Edio Lewis v. Clarus Corporation et al., Case No. 1:00-CV-2846; Chad
Terefenko v. Clarus Corporation et al., Case No. 1:00-CV-2884; Andrew Schonzeit
v. Clarus Corporation et al., Case No. 1:00-CV-[not available at this time]; and Gary W. Parnes v. Clarus Corporation et al., Case No. 1:00-CV-2942. We have
received notice that other similar suits have been or may be filed.T.F.M.
Investment Group. Pursuant to the previous Consolidation Order of the Court, a
Consolidated Amended Complaint was filed on May 14, 2001.
The various class action complaints allege claims against usthe Company and other
defendants for violations of Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934, as amended, and Rule 10b-5 promulgated thereunder with respect to
alleged material misrepresentations and omissions in public filings made with
the Securities and Exchange Commission and certain press releases and other
public statements made by usthe Company and certain of ourits officers relating to
ourits business, results of operations, financial condition and future prospects,
as a result of which, it is alleged, the market price of our common stock was
artificially inflated during the class periods. The class action complaints
focus on statements made concerning an account receivable from one of ourthe
Company's customers. The plaintiffs seek unspecified compensatory damages and
costs (including attorneys' and expert fees), expenses and other unspecified
relief on behalf of the classes. We believeThe Company believes that we haveit has complied with
ourall of its obligations under the Federal securities laws and we intendthe Company intends
to defend these lawsuits vigorously.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data ScheduleExhibits-none
(b) Reports on Form 8-K
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On August 14, 2000, the Company filed a current report on Form 8-K/A to
report certain historical financial and pro forma financial information in
connection with the Company's acquisition of all of the outstanding stock of
SAI (Ireland) Limited, SAI Recruiting Limited, i2Mobile.com Limited and SAI
America Limited pursuant to a Stock Purchase Agreement dated May 31, 2000.8-K-none
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CLARUS CORPORATION
Date: November 14, 2000May 15, 2001 /s/ Mark D. Gagne
------------------------------
Chief Operating Officer andJames J. McDevitt
------------------------
James J. McDevitt,
Chief Financial Officer
-26-25