certify that:================================================================================UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549FORM 10-Q
(Mark(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2002 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _________ to _________
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2002 OR
o 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
(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)
Delaware
(State or other jurisdiction of
incorporation or organization)58-1972600
(I.R.S. Employer
Identification Number)3970 Johns Creek Court
Suwanee, Georgia 30024---------------------------------------- (Address
(Address of principal executive offices)(Zip
(Zip code)(770) 291-3900
--------------------------------------------------- (Registrant's
(Registrant’s telephone number, including area code)---------------------------------------------------- (Former
(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
Xx NO--- ---oIndicate the number of shares outstanding of each of the
issuer'sissuer’s classes of common stock, as of the latest practical date.Common Stock, ($
.00010.0001 Par Value)-------------------------------------------------- 15,623,347
15,675,251 shares outstanding as ofAugust 9,November 11, 2002================================================================================INDEX
-----CLARUS CORPORATION
SIGNATURES 3330 2PART I. FINANCIAL INFORMATION Item 1. Financial Statements
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements CLARUS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)(in
(in thousands, except share and per share amounts)
June 30, December 31, 2002 2001 --------- ------------ASSETS CURRENT ASSETS: Cash and cash equivalents $ 38,676 $ 55,628 Marketable securities 68,629 65,264 Accounts receivable, less allowance for doubtful accounts of $787 and $675 in 2002 and 2001, respectively 999 2,566 Deferred marketing expense, current - 391 Prepaids and other current assets 1,596 2,472 --------- -------- Total current assets 109,900 126,321 PROPERTY AND EQUIPMENT, NET 4,183 7,352 OTHER ASSETS: Deferred marketing expense, net of current portion - 98 Investments - 200 Goodwill - 6,736 Intangible assets, net of accumulated amortization of 1,493 in 2001 - 4,079 Deposits and other long-term assets 592 488 --------- -------- TOTAL ASSETS $ 114,675 $145,274 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued liabilities $ 8,155 $ 6,506 Deferred revenue 1,844 5,206 --------- -------- Total current liabilities 9,999 11,712 LONG-TERM LIABILITIES: Deferred revenue 104 1,969 Long-term debt 5,000 5,000 Other long-term liabilities 258 265 --------- -------- Total liabilities 15,361 18,946 STOCKHOLDERS' EQUITY: Preferred stock, $0.0001 par value; 5,000,000 shares authorized; none issued - - Common stock, $0.0001 par value; 100,000,000 shares authorized; 15,676,501 and 15,638,712 shares issued and 15,601,501 and 15,563,712 outstanding in 2002 and 2001, respectively 2 2 Additional paid-in capital 360,845 360,670 Accumulated deficit (261,651) (234,623) Treasury stock, at cost (2) (2) Accumulated other comprehensive income 120 281 --------- -------- Total stockholders' equity 99,314 126,328 --------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 114,675 $145,274 ========= ========
September 30,
2002December 31,
2001ASSETS CURRENT ASSETS: Cash and cash equivalents $ 17,745 $ 55,628 Marketable securities 84,832 65,264 Accounts receivable, less allowance for doubtful accounts of $631 and $675 in
2002 and 2001, respectively963 2,566 Prepaids and other current assets 1,337 2,295 Assets held for sale 845 12,798 Total current assets 105,722 138,551 PROPERTY AND EQUIPMENT, NET 2,435 6,035 OTHER ASSETS: Investments — 200 Deposits and other long-term assets 45 488 TOTAL ASSETS $ 108,202 $ 145,274 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable and accrued liabilities $ 5,200 $ 6,506 Liabilities to be assumed, in connection with assets held for sale 2,252 7,175 Total current liabilities 7,452 13,681 LONG-TERM LIABILITIES: Long-term debt 5,000 5,000 Other long-term liabilities 256 265 Total liabilities 12,708 18,946 STOCKHOLDERS’ EQUITY: Preferred stock, $0.0001 par value; 5,000,000 shares authorized; none issued — — Common stock, $0.0001 par value; 100,000,000 shares authorized; 15,728,108
and 15,638,712 shares issued and 15,653,108 and 15,563,712 outstanding in
2002 and 2001, respectively2 2 Additional paid-in capital 361,018 360,670 Accumulated deficit (265,640 ) (234,623 ) Treasury stock, at cost (2 ) (2 ) Accumulated other comprehensive income 116 281 Total stockholders’ equity 95,494 126,328 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 108,202 $ 145,274 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
3 CLARUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)(in
(in thousands, except per share amounts)
Three months ended Six months ended June 30, June 30, -------------------- -------------------- 2002 2001 2002 2001REVENUES: License fees $ 1,013 $ 3,600 $ 2,486 $ 5,910 Services fees 1,531 2,595 3,999 5,125 --------- --------- --------- --------- Total revenues 2,544 6,195 6,485 11,035 COST OF REVENUES: License fees 3 80 17 124 Services fees 1,881 3,341 3,819 7,119 --------- --------- --------- --------- Total cost of revenues 1,884 3,421 3,836 7,243 OPERATING EXPENSES: Research and development 2,553 4,570 5,182 10,125 Sales and marketing, exclusive of non-cash expense 2,680 9,329 6,228 17,398 Non-cash sales and marketing 352 1,688 450 3,376 General and administrative, exclusive of non-cash expense 3,594 2,330 5,099 5,024 Non-cash general and administrative - 112 - 224 Provision for doubtful accounts 1 555 3 2,610 Intangible impairment loss 10,360 - 10,360 - Depreciation and amortization on property and equipment 1,304 838 2,433 1,683 Amortization of intangible assets 227 2,463 455 4,483 Loss on disposal of assets 795 7 785 7 --------- --------- --------- --------- Total operating expenses 21,866 21,892 30,995 44,930 OPERATING LOSS (21,206) (19,118) (28,346) (41,138) OTHER INCOME 6 11 12 10 LOSS ON IMPAIRMENT OF INVESTMENTS - (3,386) - (6,484) INTEREST INCOME 685 1,762 1,418 4,184 INTEREST EXPENSE (56) (56) (112) (120) --------- --------- --------- --------- NET LOSS $(20,571) $(20,787) $(27,028) $(43,548) ========= ========= ========= ========= Loss per common share (Note 2): Basic $ (1.32) $ (1.34) $ (1.73) $ (2.81) Diluted $ (1.32) $ (1.34) $ (1.73) $ (2.81) Weighted average shares outstanding (Note 2): Basic 15,588 15,507 15,580 15,507 Diluted 15,588 15,507 15,580 15,507
Three months ended
September 30,Nine months ended
September 30,2002 2001 2002 2001 REVENUES: License fees $ — $ — $ — $ — Services fees — — — — Total revenues — — — — COST OF REVENUES: License fees — — — — Services fees — — — — Total cost of revenues — — — — OPERATING EXPENSES: Research and development — — — — Sales and marketing — — — — General and administrative, exclusive of non-cash expense 2,419 2,577 8,781 9,505 Non-cash general and administrative — 28 — 252 Depreciation and amortization on property and equipment 817 691 2,881 2,140 (Gain)/Loss on disposal of assets (28 ) (10 ) 757 (4 ) Total operating expenses 3,208 3,286 12,419 11,893 Operating loss (3,208 ) (3,286 ) (12,419 ) (11,893 ) Other income 14 11 26 22 Loss on impairment of investments — (2,614 ) — (9,098 ) Interest income 568 1,390 1,986 5,574 Interest expense (56 ) (57 ) (169 ) (177 ) Loss from continuing operations $ (2,682 ) $ (4,556 ) $ (10,576 ) $ (15,572 ) DISCONTINUED OPERATIONS Loss from discontinued operations (1,307 ) (12,341 ) (20,441 ) (44,873 ) NET LOSS $ (3,989 ) $ (16,897 ) $ (31,017 ) $ (60,445 ) Loss per common share, basic and diluted (Note 3): Net loss from continuing operations $ (0.17 ) $ (0.29 ) $ (0.68 ) $ (1.00 ) Net loss from discontinued operations $ (0.09 ) $ (0.80 ) $ (1.31 ) $ (2.89 ) Net loss $ (0.26 ) $ (1.09 ) $ (1.99 ) $ (3.89 ) Weighted average shares outstanding (Note 3): Basic 15,630 15,547 15,597 15,521 Diluted 15,630 15,547 15,597 15,521 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4 CLARUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)(in
(in thousands, except share amounts)
Six months ended June 30, -------------------- 2002 2001 --------- --------OPERATING ACTIVITIES: Net loss $ (27,028) $(43,548) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization on property and equipment 2,433 1,683 Amortization of intangible assets 455 4,483 Loss on impairment of investments - 5,506 Impairment of intangible assets 10,360 Loss on impairment of marketable securities - 979 Gain on sale of investments (15) (10) Noncash sales and marketing expense 450 3,376 Noncash general and administrative expense - 224 Provision for doubtful accounts 3 2,610 Loss on disposal of property and equipment 785 7 Changes in operating assets and liabilities: Accounts receivable 1,564 (1,082) Prepaid and other current assets 876 (815) Deposits and other long-term assets (104) (17) Accounts payable and accrued liabilities 1,649 (2,189) Deferred revenue (5,227) 777 Other long-term liabilities (7) 9 --------- -------- NET CASH USED IN OPERATING ACTIVITIES (13,806) (28,007) INVESTING ACTIVITIES: Purchase of marketable securities (20,282) (40,794) Proceeds from sale of marketable securities 2,628 4,664 Proceeds from maturity of marketable securities 14,140 32,189 Proceeds from sale of investments 200 - Purchase of investments - (2,000) Proceeds from sale of property and equipment 27 - Purchases of property and equipment (76) (2,694) --------- -------- NET CASH USED IN INVESTING ACTIVITIES (3,363) (8,635) FINANCING ACTIVITIES: Proceeds from the exercises of stock options 136 70 Proceeds from issuance of common stock related to employee stock purchase plan 78 96 --------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 214 166 --------- -------- Effect of exchange rate change on cash 3 83 CHANGE IN CASH AND CASH EQUIVALENTS (16,952) (36,393) CASH AND CASH EQUIVALENTS, beginning of period 55,628 118,303 --------- -------- CASH AND CASH EQUIVALENTS, end of period $ 38,676 $ 81,910 ========= ======== SUPPLEMENTAL CASH FLOW DISCLOSURE: Cash paid for interest $ 56 $ 64 ========= ======== NONCASH TRANSACTIONS: Retirement of 82,500 shares of common stock pursuant to a terminated employment agreement with former owners of the SAI/Redeo Companies $ - $ 2,181 ========= ======== Retirement of 7,500 shares related to the termination of a sales and marketing agreement. $ 39 $ - ========= ========
Nine months ended
September 30,2002 2001 OPERATING ACTIVITIES: Continuing operations: Loss from continuing operations $ (10,576 ) $ (15,572 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization on property and equipment 2,881 2,140 Loss on impairment of investments — 8,056 Loss on impairment of marketable securities — 1,042 Gain on sale of investments (15 ) (22 ) Noncash general and administrative expense — 252 (Gain)/Loss on disposal of property and equipment 757 (4 ) Changes in operating assets and liabilities: Accounts receivable 1,900 803 Prepaid and other current assets 958 (10 ) Deposits and other long-term assets 443 (459 ) Accounts payable and accrued liabilities (1,306 ) (5,062 ) Other long-term liabilities (9 ) 13 NET CASH USED IN CONTINUING OPERATIONS (4,967 ) (8,823 ) Discontinued operations: Loss from discontinued operations $ (20,441 ) $ (44,873 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization on property and equipment 523 391 Amortization of intangible assets 455 6,472 Impairment of intangible assets 10,360 — Noncash sales and marketing expense 450 5,064 Loss on disposal of property and equipment 161 — Provision for doubtful accounts (297 ) 3,433 Changes in operating assets and liabilities: Prepaid and other current assets 26 (139 ) Deferred revenue (4,923 ) 269 NET CASH USED IN DISCONTINUED OPERATIONS (13,686 ) (29,383 ) NET CASH USED IN OPERATING ACTIVITIES $ (18,653 ) $ (38,206 ) INVESTING ACTIVITIES: Continuing operations Purchase of marketable securities (97,690 ) (55,631 ) Proceeds from sale of marketable securities 4,228 18,960 Proceeds from maturity of marketable securities 73,717 39,496 Proceeds from sale of investments 200 — Purchase of investments — (2,000 ) Proceeds from sale of property and equipment 83 — Purchases of property and equipment (121 ) (2,089 ) NET CASH USED IN CONTINUING OPERATIONS (19,583 ) (1,264 ) Discontinued operations Purchases of property and equipment (61 ) (1,030 ) NET CASH USED IN DISCONTINUED OPERATIONS (61 ) (1,030 ) NET CASH USED IN INVESTING ACTIVITIES (19,644 ) (2,294 ) FINANCING ACTIVITIES: Continuing operations Proceeds from the exercises of stock options 268 148 Proceeds from issuance of common stock related to employee stock purchase plan 119 260
NET CASH PROVIDED BY FINANCING ACTIVITIES 387 408 Effect of exchange rate change on cash 27 92 CHANGE IN CASH AND CASH EQUIVALENTS (37,883 ) (40,000 ) CASH AND CASH EQUIVALENTS, beginning of period 55,628 118,303 CASH AND CASH EQUIVALENTS, end of period $ 17,745 $ 78,303 SUPPLEMENTAL CASH FLOW DISCLOSURE: Cash paid for interest $ 113 $ 121 NONCASH TRANSACTIONS: Retirement of 82,500 shares of common stock pursuant to a terminated
employment agreement with former owners of the SAI/Redeo Companies$ — $ 2,181 Retirement of 7,500 shares related to the termination of a sales and marketing
agreement.$ 39 $ — See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5 CLARUS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSNOTE 1.BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Clarus Corporation and subsidiaries (the
"Company"“Company”) for the three andsixnine months endedJuneSeptember 30, 2002, have been prepared in accordance with accounting principles generally accepted in the United States of America and instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the unaudited condensed consolidated financial statements have been included. The results of the three andsixnine months endedJuneSeptember 30, 2002 are not necessarily indicative of the results to be obtained for the year ending December 31, 2002. These interim financial statements should be read in conjunction with theCompany'sCompany’s audited consolidated financial statements and footnotes thereto included in theCompany'sCompany’s Form 10-K for the fiscal year ended December 31, 2001, filed with the Securities and Exchange Commission.NOTE 2.DISCONTINUED OPERATIONS
On October 17, 2002, the Company signed a definitive Asset Purchase Agreement with Epicor Software Corporation to sell substantially all of its core products and operations in an all cash transaction for a purchase price of $1.0 million. The transaction is expected to close during the fourth quarter of this year. The acquisition, which is subject to approval of the Clarus stockholders and other conditions, is part of a strategy adopted by the Board of Directors to increase stockholder value by redeploying the Company’s assets to enhance future growth and further reduce operating losses. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144 , “Accounting for the Impairment or Disposal of Long-Lived Assets”, and the Company’s further intent to divest all remaining operations, the Company has categorized these assets and operations as discontinued operations for all periods presented. The assets to be acquired and the liabilities to be assumed by Epicor under the agreement with Epicor as well as the remaining assets held for sale and the liabilities to be assumed are as follows:
September 30,
2002December 31,
2001Prepaids and other current assets 151 177 Deferred marketing expense — 489 Property and equipment, net 694 1,317 Intangible assets — 10,815 Assets held for sale $ 845 $ 12,798 Deferred revenue $ 2,252 $ 7,175 Liabilities to be assumed, in connection with assets held for sale $ 2,252 $ 7,175 NOTE 3.EARNINGS PER SHARE
Basic and diluted net loss per share were computed in accordance with
Statement of Financial Accounting Standards ("SFAS")SFAS No. 128,"Earnings“Earnings perShare"Share”, using the weighted average number of common shares outstanding. The diluted net loss per share for the three andsixnine months endedJuneSeptember 30, 2002 and 2001 does not include the effect of common stock equivalents, calculated using the treasury stock method, as their impact would be antidilutive. The potentially dilutive effect of excluded common stock equivalents are as follows (in thousands):
Three months ended Six months ended June 30, June 30, ------------------ ----------------- 2002 2001 2002 2001 ------ ------ ------ ------Effect of shares issuable under stock options 180 196 141 289 Effect of shares issuable pursuant to warrants to purchase common stock - - - 1 ------ ------ ------ ------ Total effect of dilutive common stock equivalents 180 196 141 290 ------ ------ ------ ------
Three months ended
September 30,Nine months ended
September 30,2002 2001 2002 2001 Effect of shares issuable under stock options 102 307 128 282 Effect of shares issuable pursuant to warrants to purchase common
stock— 1 — — Total effect of dilutive common stock equivalents 102 308 128 282 6 NOTE
3.4.STOCK OPTION EXCHANGE PROGRAMOn April 9, 2001, the Company announced a voluntary stock option exchange program for its employees. Under the program, employees were given the opportunity to cancel outstanding stock options previously granted to them on or after November 1, 1999 in exchange for an equal number of new options to be granted at a future date. The exercise price of the new options was equal to the fair market value of the
Company'sCompany’s common stock on the date of grant. During the first phase of the program 366,174 options with a weighted average exercise price of $30.55 per share were canceled and new options to purchase 263,920 shares with an exercise price of $3.49 per share were issued on November 9, 2001. During the second phase of the program 273,188 options with a weighted average exercise price of $43.87 per share were canceled and new options to purchase 198,052 shares with an exercise price of $4.10 per share were issued on February 11, 2002. Employees who participated in the first exchange were not eligible for the second exchange. The exchange program was designed to comply with Financial Accounting Standards Board("FASB"(“FASB”) Interpretation No. 44"Accounting“Accounting for Certain Transactions Involving StockCompensation"Compensation” and did not result in any additional compensation charges or variable accounting. Members of theCompany'sCompany’s Board of Directors and its executive officers were not eligible to participate in the exchange program.NOTE
4.5.RESTRUCTURING AND RELATED COSTSDuring 2001 and 2002, the
Company'sCompany’s management approved restructuring plans to reorganize and reduce operating costs. Restructuring and related charges of $513,000,$498,000$519,000 and $3.1 million were expensed in the first, third and fourth quarters of 2001, respectively, to better align theCompany'sCompany’s cost structure with projected revenue. The first and third quarter charges were comprised entirely of employee separation and related costs for 23 and 43 employees, respectively. The fourth quarter charge was comprised of $1.9 million for employee separation and related costs for 115 employees and $1.2 million for facility closures and consolidation costs. During the first quarter of 2002, the Company determined that amounts previously charged during 2001 of approximately $202,000 that related to employee separation and related charges were no longer required and this amount was credited to sales and marketing expense in the accompanying condensed consolidated statement of operations during the three months ended March 31, 2002. TheCompany'sCompany’s management approved further reductions and reorganizations during the three and nine months endedJuneSeptember 30, 2002, which resulted in restructuring and related charges of$3.8 million. These charges were$1.7 million and $5.5 million, respectively. The charge for the three months ended September 30, 2002 was comprised of6$2.2$1.2 million for employee separation and related costs for10247 employees and$1.6$500,000 for facility closures and consolidation costs. The charge for the nine months ended September 30, 2002 was comprised of $3.2 million for employee separation and related costs for 149 employees and $2.3 million for facility closures and consolidation costs.The Company expects to complete the facility closures and consolidation during 2002. The facility closures and consolidation costs relate to the abandonment of the
Company'sCompany’s leased facilities in Limerick, Ireland; Maidenhead, England; and near Toronto, Canada, as well as the restructuring of theCompany'sCompany’s leased facility in Suwanee, Georgia. Total facility closures and consolidation costs include the write-down of property and equipment and leasehold improvements to their net realizable value, remaining lease liabilities, construction costs and brokerage fees to sublet the abandoned space offset by estimated sublease income. The estimated costs of abandoning these leased facilities, including estimated costs to sublease, were based on market information trend analysis provided by a commercial real estate brokerage firm retained by the Company.InThe Company is in the process of renegotiating the terms of its lease for the facility in Suwanee, Georgia and expects to incur restructuring and related costs in connection with theCompany's continuing restructuring program, the Company implemented a further reductionrenegotiation ofits worldwide workforce and incurred a related restructuring charge of approximately $1.3$2.9 million duringJulythe fourth quarter of 2002.The July 2002 charge is comprised of employee separation and related costs for 47 employees.The following is a reconciliation of the components of the accrual for restructuring and related costs, the amounts charged against the accrual during 2001 and 2002 and the balance of the accrual as of
JuneSeptember 30, 2002:
Six Months Ended June 30, 2002 Accruals Expenditures Balance ------------------------------------- Balance During 2001 During 2001 12/31/01 Accruals Expenditures Credits 06/30/02 ----------- ------------ -------- -------- ------------ ------- --------(in thousands) Employee separation costs $2,939 $2,259 $ 680 $2,239 $2,388 $202 $ 329 Facility closure costs 1,218 9 1,209 1,568 401 - 2,376 ------ ------ ------ ------ ------ ---- ------ Total restructuring and related costs $4,157 $2,268 $1,889 $3,807 $2,789 $202 $2,705 ====== ====== ====== ====== ====== ==== ======
Nine Months Ended September 30,
2002During 2001 During 2001 12/31/01 Accruals Expenditures Credits 09/30/02 (in thousands) Employee separation costs $ 2,939 $ 2,259 $ 680 $ 3,245 $ 3,555 $ 202 $ 168 Facility closure costs 1,218 9 1,209 2,269 2,242 — 1,236 Total restructuring and related
costs$ 4,157 $ 2,268 $ 1,889 $ 5,514 $ 5,797 $ 202 $ 1,404 The accrual for restructuring and related costs is included in accounts payable and accrued liabilities in the accompanying condensed consolidated balance sheets.
7 NOTE
5.6.COMPREHENSIVE INCOME (LOSS)SFAS No. 130
"Reporting“Reporting Comprehensive Income (Loss)"”, establishes standards of reporting and display of comprehensive income (loss) and its components of net income (loss) and"Other“Other Comprehensive Income (Loss)"”."Other“Other Comprehensive Income (Loss)"” refers to revenues, expenses and gains and losses that are not included in net income (loss) but rather are recorded directly instockholders'stockholders’ equity. The components of comprehensive loss for the three andsixnine months endedJuneSeptember 30, 2002 and 2001 were as follows (in thousands):
Three months ended Six months ended June 30, June 30, -------------------- -------------------- 2002 2001 2002 2001 -------- --------- -------- --------Net loss $(20,571) $(20,787) $(27,028) $(43,548) Unrealized gain (loss) on marketable securities 18 812 (164) 709 Foreign currency translation adjustments 87 (7) 3 83 -------- -------- -------- -------- Comprehensive loss $(20,466) $(19,982) $(27,189) $(42,756) ======== ======== ======== ========
Three months ended
September 30,Nine months ended
September 30,2002 2001 2002 2001 Net loss $ (3,989 ) $ (16,897 ) $ (31,017 ) $ (60,445 ) Unrealized gain (loss) on marketable securities (28 ) 162 (192 ) 871 Foreign currency translation adjustments 24 9 27 92 Comprehensive loss $ (3,993 ) $ (16,726 ) $ (31,182 ) $ (59,482 )
NOTE6.7.CREDIT AND CUSTOMER CONCENTRATIONSThe
Company'sCompany’s accounts receivable potentially subject the Company to credit risk, as collateral is generally not required. As ofJuneSeptember 30, 2002,fourthree customers accounted for more than 10% each, totaling$1.1 million$838,000 or64.2%52.6% of the gross accounts receivable balance on that date. The percentage by customer was23.8%27.2%,18.2%, 11.8%15.2%, and10.4%10.2%, respectively, atJuneSeptember 30, 2002. As of December 31, 2001, four customers accounted for more than 10% each, totaling $1.7 million or 53.2% of the gross accounts receivable balance on that date. The percentage of total accounts receivable due from each of these four customers was 15.8%, 13.9%, 12.6% and 10.9%, respectively, at December 31, 2001.During the quarter ended
June 30, 2002, two customers accounted for more than 10% of total revenue, totaling $1.0 million or 40.7% of total revenue. The percentage by customer was 30.6% and 10.1% respectively, for the quarter ended June 30, 2002. During the quarter ended June 30, 2001, three customers accounted for more than 10% each, totaling $4.0 million or 63.8% of total revenue. The percentage by customer was 25.0%, 23.9% and 14.9%, respectively, for the quarter ended June 30, 2001. During the 7six months ended JuneSeptember 30, 2002, one customer accounted for more than 10% of total revenue, totaling$2.6 million$167,000 or39.5%11.0% of total revenue. During thesixquarter ended September 30, 2001, one customer accounted for more than 10%, totaling $500,000 or 16.0% of total revenue. During the nine months endedJuneSeptember 30, 2002, one customer accounted for more than 10% of total revenue, totaling $2.7 million or 33.8% of total revenue. During the nine months ended September 30, 2001,threefour customers accounted for more than 10% each, totaling$6.3$7.5 million or57.0%52.8% of total revenue. The percentage by customer was28.2%14.6%,15.3%14.3%, 12.2%, and13.5%11.7%, respectively, for thesixnine months endedJuneSeptember 30, 2001.As a result of
BarclaysB2B's recenta customer’s decision to discontinue its external operations to focus on internal cost reduction,the Company was notified that BarclaysB2B will terminatethis customer terminated itscurrentsoftware license and service agreements with the Company effective August 31, 2002.Upon terminationThe Company refunded a total of $2.5 million to this customer during theCompany will be required to refund to BarclaysB2Bfourth quarter of 2002 for prepaid software license and support feesof approximately $2.7 millionless costs incurred by the Company associated with terminating the contract. The $2.5 million was included in accounts payable and accrued liabilities in the accompanying condensed consolidated balance sheet as of September 30, 2002. During thesixnine months endedJuneSeptember 30, 2002, revenues from theCompany'sCompany’s agreements withBarclaysB2Bthis customer represented39.5%33.8% of theCompany'sCompany’s total revenues for this period.NOTE
7.8.ACCOUNTS PAYABLE AND ACCRUED LIABILITIESAccounts payable and accrued liabilities include the following (in thousands):
June 30, December 31, 2002 2001 ------- ------------Accounts payable $ 461 $ 588 Accrued compensation, benefits, and commissions 1,237 1,386 Restructuring reserves 2,705 1,889 Payable to BarclaysB2B 2,657 - Other 1,095 2,643 ------ ------ Total $8,155 $6,506 ====== ======
September 30,
2002December 31,
2001Accounts payable $ 180 $ 588 Accrued compensation, benefits, and commissions 512 1,386 Restructuring reserves 1,404 1,889 Payable to customer 2,541 — Other 563 2,643 Total $ 5,200 $ 6,506 NOTE
8.9.CONTINGENCIESThe Company is a party to lawsuits in the normal course of its business. Litigation in general, and securities litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable resolution of the following lawsuit could adversely affect the
Company'sCompany’s business, results of operations, liquidity or financial condition.8 Following its public announcement on October 25, 2000, of its financial results for the third quarter, the Company and certain of its directors and officers were named as defendants in fourteen putative class action lawsuits filed in the United States District Court for the Northern District of Georgia on behalf of all purchasers of common stock of the Company during various periods beginning as early as October 20, 1999 and ending on October 25, 2000. The fourteen class action lawsuits filed against the Company were consolidated into one case, Case No. 1:00-CV-2841, pursuant to an order of the court dated November 17, 2000. On March 22, 2001, the Court entered an order appointing as the lead Plaintiffs John Nittolo, Dean Monroe, Ronald Williams, V&S Industries, Ltd., VIP World Asset Management, Ltd., Atlantic Coast Capital Management, Ltd., and T.F.M. Investment Group. Pursuant to the previous Consolidation Order of the Court, a Consolidated Amended Complaint was filed on May 14, 2001.
The class action complaint alleges claims against the Company and other defendants for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder with respect to alleged material misrepresentations and omissions in public filings made with the Securities and Exchange Commission and certain press releases and other public statements made by the Company and certain of its officers relating to its business, results of operations, financial condition and future prospects, as a result of which, it is alleged, the market price of the
Company'sCompany’s common stock was artificially inflated during the class periods. The class action complaint focuses on statements made concerning an account receivable from one of theCompany'sCompany’s customers. The plaintiffs seek unspecified compensatory damages and costs (includingattorneys'attorneys’ and expert fees), expenses and other unspecified relief on behalf of the classes. The Company believes that it has complied with all of its obligations under the Federal securities laws and the Company intends to defend this lawsuit vigorously. As a result of consultation with legal representation and current insurance coverage, the Company does not believe the lawsuit will have a material impact on theCompany'sCompany’s results of operations or financial position.NOTE
9.10.NEW ACCOUNTING PRONOUNCEMENTSIn June 2002, the FASB issued SFAS 146,
"Accounting“Accounting for Costs Associated with Exit or DisposalActivities"Activities”. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force("EITF"(“EITF”) Issue No. 94-3,"Liability“Liability Recognition for Certain Employee termination Benefits and Other Costs to Exit an8Activity (including Certain Costs Incurred in a Restructuring) "”. The provisions of SFAS 146 are effective for theCompany'sCompany’s 2003 fiscal year. The Company does not believe that SFAS 146 will have a material impact on its financial statementsIn April 2002, the FASB issued SFAS 145,
"Rescission“Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections"Corrections”. SFAS 145 rescinds SFAS 4,"Reporting“Reporting Gains and Losses from Extinguishment ofDebt"Debt”, SFAS 44,"Accounting“Accounting for Intangible Assets of MotorCarriers"Carriers” and SFAS 64,"Extinguishments“Extinguishments of Debt Made to Satisfy Sinking FundRequirements"Requirements”. SFAS 145 amends SFAS 13,"Accounting“Accounting forLeases"Leases”, eliminating an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications with similar economic effects as sale-leaseback transactions. This statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under certain conditions. The provisions related to SFAS 13 are effective for transactions occurring after May 15, 2002. All other provisions of the statement are effective for financial statements issued on or after May 15, 2002. The adoption of SFAS 145 did not have a material impact on theCompany'sCompany’s financial statements.At the November 2001 EITF meeting, the FASB released Staff Announcement Topic D-103,
"Income“Income Statement Characterization of Reimbursements Received for`Out-of-Pocket'‘Out-of-Pocket’ ExpensesIncurred"Incurred” stating that the Staff believes that reimbursements received for out-of-pocket expenses should be characterized as revenue. The Company adopted this Staff Announcement effective January 1, 2002. Historically the Company has not reflected such reimbursements as revenue in its consolidated statements of operations. Upon adoption of this FASB Staff Announcement, comparative financial statements for prior periods were reclassified to provide consistent presentation. The adoption of this FASB Staff Announcement did not have any impact on theCompany'sCompany’s financial position or results of operations, however, theCompany'sCompany’s services fees revenue and cost of services fees revenue increased by an equal amount as a result of the gross-up of revenues and expenses for reimbursable expenses. For the three andsixnine months endedJuneSeptember 30, 2002, the Company recorded revenue from reimbursement of out-of-pocket expenses of approximately$62,000$57,000 and$150,000,$207,000, respectively. For the three andsixnine months endedJuneSeptember 30, 2001, theCompany'sCompany’s services fees revenue and cost of services fees revenue increased by approximately$202,000$99,000 and$470,000,$569,000, respectively, as a result of the reclassification of these reimbursements.In August 2001, the FASB issued SFAS No. 144,
"Accounting“Accounting for the Impairment or Disposal of Long-LivedAssets"Assets”. This statement supersedes SFAS No. 121,"Accounting“Accounting for the Impairment of Long-Lived Assets and Assets to Be DisposedOf"Of”. The Company adopted SFAS 144 effective January 1, 2002, which did not have a material impact on theCompany'sCompany’s financial statements. On October 17, 2002, the Company signed a definitive Asset Purchase Agreement with Epicor Software Corporation to sell substantially all of its core products and operations in an all cash transaction for a purchase price of $1.0 million. The9 transaction is expected to close during the fourth quarter of this year. The acquisition is subject to approval of the Clarus stockholders and other conditions. As a result of this pending transaction and the Company’s further intent to divest all remaining operations, the Company has categorized these assets and operations as discontinued operations in accordance SFAS No. 144.
In August 2001, the FASB issued SFAS 143,
"Accounting“Accounting for Asset RetirementObligations"Obligations”. SFAS 143 addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The provisions of SFAS 143 are effective for theCompany'sCompany’s 2003 fiscal year. The Company does not believe that SFAS 143 will have a material impact on its financial statements.In July 2001, the FASB issued SFAS No. 141,
"Business Combinations"“Business Combinations”, and SFAS No. 142,"Goodwill“Goodwill and Other IntangibleAssets"Assets”. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. SFAS 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values. The Company adopted SFAS 141 upon issuance and adopted SFAS 142 effective January 1, 2002. Upon adoption, the Company tested goodwill for impairment at January 1, 2002 according to the provisions of SFAS 142, which resulted in no impairment required as a cumulative effect of accounting change. In the second quarter of 2002, the Company tested goodwill for impairment according to the provisions of SFAS 142 and intangible assets with definite lives according to SFAS 144 due to certain changes in business strategy that effected theCompany'sCompany’s business plans, which resulted in an impairment of $6.7 million of goodwill and $3.6 million of intangible assets with definite lives. The Company recorded$2.2$1.8 million and$4.0$5.8 million, respectively, of amortization expense related to goodwill during the three andsixnine months endedJuneSeptember 30, 2001. As a result of adopting SFAS 142, the Company did not recognize any goodwill amortization during the three andsixnine months endedJuneSeptember 30, 2002.In September 1998, the FASB issued SFAS No. 133,
"Accounting“Accounting for Derivative Instruments and Hedging Activities."” This Statement was amended in June 2000 by Statement No. 138,"Accounting“Accounting for Certain Derivative Instruments and Certain Hedging Activities."” The Company adopted these new pronouncements in January of 2001. The new Statements require all derivatives to be recorded on the balance sheet at fair value and establish accounting treatment for three types of hedges: hedges of changes in the fair value of assets, liabilities or firm commitments; hedges of the variable cash flows of forecasted transactions; and hedges of foreign currency exposures of net investments in foreign operations. The Company has no derivatives and the adoption of these pronouncements did not have any impact on theCompany'sCompany’s results of operations or financial position.9NOTE
10.11.RECLASSIFICATIONSCertain prior period amounts have been reclassified to conform to the current period presentation.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This report contains certain forward-looking statements related to our future results, including certain projections and business trends. Assumptions relating to forward-looking statements involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. When used in this report, the words
"estimate," "project," "intend," "believe"“estimate,” “project,” “intend,” “believe” and"expect"“expect” and similar expressions are intended to identify forward-looking statements. Although we believe that assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate, and we may not realize the results contemplated by the forward-looking statement. Management decisions are subjective in many respects and susceptible to interpretations and periodic revisions based upon actual experience and business developments, the impact of which may cause us to alter our business strategy or capital expenditure plans that may, in turn, affect our results of operations. In light of the significant uncertainties inherent in the forward-looking information included in this report, you should not regard the inclusion of such information as our representation that we will achieve any strategy, objectives or other plans. The forward-looking statements contained in this report speak only as of the date of this report, and we have no obligation to update publicly or revise any of these forward-looking statements.These and other statements, which are not historical facts, are based largely upon our current expectations and assumptions and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those contemplated by such forward-looking statements. These risks and uncertainties include, among others, the risks and uncertainties described in
"Risk Factors"“Risk Factors” herein.Overview
The Company
develops,markets, and supports Internet-based business-to-business("B2B"(“B2B”) e-commerce solutions that automate the procurement, sourcing, and settlement of goods and services. TheCompany'sCompany’s software helps organizations reduce the costs associated with the purchasing and payment settlement of goods and services, and helps to maximize procurement economies of scale. TheCompany'sCompany’s digital marketplace solution provides a framework that allows companies to create trading communities and additional revenue opportunities. TheCompany'sCompany’s solutions also benefit suppliers by reducing sales costs and providing the opportunity to increase revenues. TheCompany'sCompany’s products have been licensed by customers such asBarclaysB2B, theBurlington Northern and Santa Fe Railway Company, Cox Enterprises, Mastercard International, Union Pacific Corporation, Parsons Brinckerhoff, Smurfit-Stone Container Corporation, and Wachovia Corporation.In May 2002 the Company announced that it had retained an investment banking firm to assist the Company in exploring all strategic alternatives to enhance stockholder
value. Such alternatives may includevalue, including a sale of the Company, its assets or its product lines or the adoption of a plan of liquidation.In addition,On October 17, 2002, the Company
maysigned a definitive Asset Purchase Agreement with Epicor Software Corporation to sell substantially all of its electronic commerce business in an all cash transaction for a purchase price of $1.0 million. The transaction is expected to close during the fourth quarter of this year. The acquisition, which is subject to approval of the Clarus stockholders and other conditions, is part of a strategy adopted by the Board of Directors to increase stockholder value by redeploying the Company’s assets to enhance future growth and further reduce operating losses. As a result of this agreement as well as the Company’s further intent to divest all remaining operations, the Company has categorized these assets and operations as discontinued operations. Following the sale of substantially all of the Company’s electronic commerce business, the Company plans to redeploy its cash to acquire a company orcompanies that may or maycompanies. If our stockholders do not approve the Asset Sale, it will not berelated toconsummated and we will pursue other strategies, including theCompany's currentpotential sale or liquidation of our electronic commerce business.Critical Accounting Policies and Use of Estimates
As a result of the
Company's announcement on exploring strategic alternativesCompany’s announced plan to sell substantially all of its electronic commerce business andthecontinuing poor market conditions, the Company has experienced a further decline in the demand for its software. While the Company has significantly reduced its head count, theCompany's announced strategyCompany’s pending asset sale makes the retention of certain employees critical to the success of this strategy. There is no guarantee that the Company will be able tosuccessfully execute oncomplete the sale of substantially all of itsannounced strategy to explore all strategic alternatives to enhance stockholder value. If demand for business-to-business software and related services remain soft, the Company's business, operating results, liquidity and financial condition will be adversely affected.electronic commerce business.The
Company's success depends on market acceptance of e-commerce as a viable method for corporate procurement and other commercial transactions and market adoption of the Company's current and future products. The competitive landscape the Company faces is continuously changing. It is difficult to estimate how competition will affect the Company's revenues. It is also very difficult to predict the Company's quarterly results. The Company has incurred significant net losses in each year since its inception. The Company may not increase its customer base sufficient to generate the substantial additional revenues necessary to become profitable. The Company has established strategic selling relationships with a number of outside companies. There is no guarantee that these relationships will generate the level of revenues currently anticipated. 10The Company's international sales and marketing activities cause the Company's business to be more susceptible to the numerous risks associated with international sales. The Company may not be successful in addressing these and other risks and difficulties that it may encounter. Please refer to the "Risk Factors" sections for additional information regarding the risks associated with the Company's operations and financial condition. The Company'sCompany’s discussion of financial condition and results of operations are based on the consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting periods. The Company continually evaluates its estimates and assumptions including those related to revenue recognition, allowance for doubtful accounts, impairment of long-lived assets, impairment of11 investments, and contingencies and litigation. The Company bases its estimates on historical experience and other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates.
The Company believes the following critical accounting policies include the more significant estimates and assumptions used by management in the preparation of its consolidated financial statements.
-
- The Company recognizes revenue from two primary sources, software licenses and services. Revenue from software licensing and services fees is recognized in accordance with Statement of Position (“SOP”) 97-2, “Software Revenue Recognition”, and SOP 98-9, “Software Revenue Recognition with Respect to Certain Transactions” and related interpretations. The Company recognizes software license revenue when: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the fee is fixed or determinable; and (4) collectibility is probable. - The Company maintains allowances for doubtful accounts based on expected losses resulting from the inability of the Company’s customers to make required payments. The Company recorded a reversal of the provision for doubtful accounts of ($300,000) and ($297,000) for the three and nine months ended September 30, 2002, respectively. The Company recorded a provision for doubtful accounts of $824,000 and $3.4 million for the three and nine months ended September 30, 2001, respectively. - The Company had significant long-lived assets, primarily intangibles and goodwill, as a result of acquisitions completed during 2000. The Company currently evaluates the carrying value of its long-lived assets, including intangibles, according to Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. Prior to 2002, the Company periodically evaluated the carrying value of its long-lived assets, including intangibles, according to SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”. During the fourth quarter of 2001, the Company’s evaluation of the performance of the SAI/Redeo companies compared to initial projections, negative economic trends and a decline in industry growth rate projections indicated that the carrying value of these intangible assets exceeded management’s revised estimates of future undiscounted cash flows. This assessment resulted in a $36.8 million impairment charge during the three months ended December 31, 2001 to goodwill and intangible assets based on the amount by which the carrying amount of these assets exceeded fair value. As a result of a change in the Company’s strategic direction during the second quarter of 2002, the Company determined that remaining goodwill and intangible assets should be tested for further impairment. The Company’s evaluation of the present value of future cash flows based on the change in strategic direction indicated the carrying value of the Company’s assets exceeded fair value. As a result, the Company recorded an additional impairment charge to goodwill of $6.7 million and an impairment charge to intangible assets of $3.6 million during the three months ended June 30, 2002. As a result of the impairment of the remaining intangible assets during the three months ended June 30, 2002, the Company did not record any amortization expense related to intangible assets with definite lives during the three months ended September 30, 2002. The Company recorded $227,000 of amortization expense related to intangible assets with definite lives during the three months ended September 30, 2001. The Company recorded $455,000 and $682,000 of amortization expense related to intangible assets with definite lives during the nine months ended September 30, 2002 and 2001, respectively. The Company recorded $1.8 million and $5.8 million of amortization expense related to goodwill during the three and nine months ended September 30, 2001. As a result of adopting SFAS 142, the Company did not record amortization expense related to goodwill during 2002. - The Company has made equity investments in several privately held companies. The Company records an impairment charge when it believes an investment has experienced a decline in value that is other than temporary. During the three and nine months ended September 30, 2001, the Company recorded impairment charges on investments of $2.6 million and $9.1 million, respectively. - The Company is a party to lawsuits in the normal course of its business. Litigation in general, and securities litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable resolution of the Company’s pending securities lawsuit could adversely affect the Company’s business, results of operations, liquidity or financial condition. See “Risk Factors” and “Part II Other Information – Item 1. Legal Proceedings” herein. Sources of Revenue
The Company’s revenue consists of license fees and services fees. License fees are generated from the licensing of the Company’s suite of products. Services fees are generated from consulting, implementation, training, content aggregation and maintenance and support services.
12 Revenue Recognition
The Company recognizes revenue from two primary sources, software licenses and services. Revenue from software licensing and services fees is recognized in accordance with Statement of Position
("SOP"(“SOP”) 97-2,"Software“Software RevenueRecognition"Recognition”, and SOP 98-9,"Software“Software Revenue Recognition with Respect to CertainTransactions"Transactions” and related interpretations. The Company recognizes software license revenue when: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the fee is fixed or determinable; and (4) collectibility is probable.- The Company maintains allowances for doubtful accounts based on expected losses resulting from the inability of the Company's customers to make required payments. As a result, the Company recorded a provision for doubtful accounts of $1,000 and $3,000 for the three and six months ended June 30, 2002, respectively. The Company recorded a provision for doubtful accounts of $555,000 and $2.6 million for the three and six months ended June 30, 2001, respectively. - The Company has significant long-lived assets, primarily intangibles and goodwill, as a result of acquisitions completed during 2000. The Company currently evaluates the carrying value of its long-lived assets, including intangibles, according to Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". Prior to 2002, the Company periodically evaluated the carrying value of its long-lived assets, including intangibles, according to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". During the fourth quarter of 2001, the Company's evaluation of the performance of the SAI/Redeo companies compared to initial projections, negative economic trends and a decline in industry growth rate projections indicated that the carrying value of these intangible assets exceeded management's revised estimates of future undiscounted cash flows. This assessment resulted in a $36.8 million impairment charge during the three months ended December 31, 2001 to goodwill and intangible assets based on the amount by which the carrying amount of these assets exceeded fair value. As a result of a change in the Company's strategic direction during the second quarter of 2002, the Company determined that remaining goodwill and intangible assets should be tested for further impairment. The Company's evaluation of the present value of future cash flows based on the change in strategic direction indicated the carrying value of the Company's assets exceeded fair value. As a result, the Company recorded an additional impairment charge to goodwill of $6.7 million and an impairment charge to intangible assets of $3.6 million during the three months ended June 30, 2002. The Company recorded $227,000 of amortization expense related to intangible assets with definite lives during the three months ended June 30, 2002 and 2001. The Company recorded $455,000 of amortization expense related to intangible assets with definite lives during the six months ended June 30, 2002 and 2001. The Company recorded $2.2 million and $4.0 million of amortization expense related to goodwill during the three and six months ended June 30, 2001. As a result of adopting SFAS 142, the Company did not record amortization expense related to goodwill during 2002. - The Company has made equity investments in several privately held companies. The Company records an impairment charge when it believes an investment has experienced a decline in value that is other than temporary. During the three and six months ended June 30, 2001, the Company recorded impairment charges on investments of $3.4 million and $6.5 million, respectively. - The Company is a party to lawsuits in the normal course of its business. Litigation in general, and securities litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable resolution of the Company's pending securities 11lawsuit could adversely affect the Company's business, results of operations, liquidity or financial condition. See "Risk Factors" and "Part II Other Information - Item 1. Legal Proceedings" herein. Sources of Revenue The Company's revenue consists of license fees and services fees. License fees are generated from the licensing of the Company's suite of products. Services fees are generated from consulting, implementation, training, content aggregation and maintenance and support services. Revenue Recognition The Company recognizes revenue from two primary sources, software licenses and services. Revenue from software licensing and services fees is recognized in accordance with Statement of Position ("SOP") 97-2, "Software Revenue Recognition", and SOP 98-9, "Software Revenue Recognition with Respect to Certain Transactions" and related interpretations. The Company recognizes software license revenue when: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the fee is fixed or determinable; and (4) collectibility is probable.SOP No. 97-2 generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of the elements. The fair value of an element must be based on evidence that is specific to the vendor. License fee revenue allocated to software products generally is recognized upon delivery of the products or deferred and recognized in future periods to the extent that an arrangement includes one or more elements to be delivered at a future date and for which fair values have not been established. Revenue allocated to maintenance is recognized ratably over the maintenance term, which is typically 12 months and revenue allocated to training and other service elements is recognized as the services are performed.
Under SOP No. 98-9, if evidence of fair value does not exist for all elements of a license agreement and post-contract customer support is the only undelivered element, then all revenue for the license arrangement is recognized ratably over the term of the agreement as license revenue. If evidence of fair value of all undelivered elements exists, but evidence does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. Revenue from hosted software agreements are recognized ratably over the term of the hosting arrangements.
Operating Expenses
Cost of license fees includes royalties and software duplication and distribution costs. The Company recognizes these costs as software applications are shipped.
Cost of services fees includes personnel related expenses and third-party consulting fees incurred to provide implementation, training, maintenance, content aggregation, and upgrade services to customers and partners. These costs are recognized as they are incurred for time and material arrangements and are recognized using the percentage of completion method for fixed price arrangements.
Research and development expenses consist primarily of personnel related expenses and third-party consulting fees. The Company accounts for software development costs under Statement of Financial Accounting Standards No. 86,
"Accounting“Accounting for the Costs of Computer Software to be Sold, Leased or OtherwiseMarketed"Marketed”. The Company charges research and development costs related to new products or enhancements to expense as incurred until technological feasibility is established, after which the remaining costs are capitalized until the product or enhancement is available for general release to customers. The Company defines technological feasibility as the point in time at which a working model of the related product or enhancement exists. Historically, the costs incurred during the period between the achievement of technological feasibility and the point at which the product is available for general release to customers have not been material.Sales and marketing expenses consist primarily of personnel related expenses, including sales commissions and bonuses, expenses related to travel, customer meetings, trade show participation, public relations, promotional activities, regional sales offices, and advertising.
General and administrative expenses consist primarily of personnel related expenses for financial, administrative and management personnel, fees for professional services, board of director fees, information technology expenses, occupancy charges, and the provision for doubtful accounts.
The Company allocates the total cost of its information technology function and costs related to the occupancy of its corporate headquarters to each of the functional areas.Information technology expenses include personnel related expenses, communication charges, and software support. Occupancy charges include rent, utilities, and maintenance services.12Limited Operating History TheAs a result of the Company’s announced plan to sell substantially all of its electronic commerce business the Companyhas a limited operating history as an e-commerce business that makes it difficult to forecastno longer allocates the total cost of itsfuture operating results. Prior period results should not be relied on to predict the Company's future performance. Pro-forma Results The Company prepares and releases quarterly unaudited financial statements prepared in accordance with generally accepted accounting principles ("GAAP"). The Company also discloses and discusses certain pro forma financialinformationin the related earnings releases and investor conference calls. This pro forma financial information excludes restructuringtechnology function or costsand expensesrelated toreductions in employee workforce and office closures and consolidation, depreciation and amortization on property and equipment, amortizationthe occupancy ofintangibles, intangible impairment losses, stock-based compensation expenses, losses realized onits corporate headquarters to each of thedisposal of assets, gains on sales of marketable securities, and losses on impairment of investments,functional areas but recognizes all ofwhich are included in our financial results for GAAP reporting purposes. The Company believes the disclosure of the pro forma financial information helps investors more meaningfully evaluate the results of the Company's ongoing operations. The pro forma measures are not in accordance with GAAP and may be different from pro forma measures used by other companies including the Company's competitors. Therefore, we urge you to carefully review the GAAP financial information included as part of this Form 10-Q, compare GAAP financial information with the pro forma financial results disclosed below and read the associated reconciliation. Pro Forma Condensed Consolidated Statements of Operations (in thousands, except per share data) (unaudited)
Three months ended Six months ended June 30 June 30 ------------------------ ------------------------- 2002 2001 2002 2001REVENUES: License fees $ 1,013 $ 3,600 $ 2,486 $ 5,910 Services fees 1,531 2,595 3,999 5,125 ------- -------- -------- -------- TOTAL REVENUES 2,544 6,195 6,485 11,035 COST OF REVENUES: License fees 3 80 17 124 Services fees 1,336 3,341 3,274 6,958 ------- -------- -------- -------- TOTAL COST OF REVENUES 1,339 3,421 3,291 7,082 OPERATING EXPENSES: Research and development 1,806 4,570 4,435 10,125 Sales and marketing 2,046 9,329 5,796 17,264 General and administrative 1,714 2,885 3,221 7,416 -------- -------- -------- -------- TOTAL OPERATING EXPENSES 5,566 16,784 13,452 34,805 -------- -------- -------- -------- Operating loss $(4,361) $(14,010) $(10,258) $(30,852) Loss on foreign currency transactions (9) - (3) - Interest income, (net) 629 1,706 1,306 4,064 -------- -------- -------- -------- Pro forma net loss $(3,741) $(12,304) $ (8,955) $(26,788) ======== ======== ======== ======== Weighted average shares outstanding - basic and diluted 15,588 15,507 15,580 15,507 ======== ======== ======== ======== Pro forma net loss per share - basic and diluted $ (0.24) $ (0.79) $ (0.57) $ (1.73) ======== ======== ======== ========13Reconciliation of GAAP Net Loss to Pro Forma Net Loss (in thousands, except per share data) (unaudited)
Three months ended Six months ended June 30 June 30 2002 2001 2002 2001 ------------------------- ------------------------Net loss $(20,571) $(20,787) $(27,028) $(43,548) Restructuring costs/1/ 3,807 - 3,605 513 Depreciation and amortization on property and equipment 1,304 838 2,433 1,683 Amortization of intangibles 227 2,463 455 4,483 Intangible impairment loss 10,360 - 10,360 - Stock-based compensation 352 1,800 450 3,600 Loss on disposal of assets 795 7 785 7 Gain on sale of marketable securities (15) (11) (15) (10) Loss on impairment of investments - 3,386 - 6,484 -------- -------- -------- -------- Pro forma net loss $ (3,741) $(12,304) $ (8,955) $(26,788) ======== ======== ======== ======== Weighted average shares outstanding - basic and diluted 15,588 15,507 15,580 15,507 -------- -------- -------- -------- Pro forma net loss per share - basic and diluted $ (0.24) $ (0.79) $ (0.57) $ (1.73) -------- -------- -------- --------- ---------- /1/ Restructuring costs are comprised of employee severance and termination costs and office closures and consolidation costs. For the three and six months ended June 30, 2002 and 2001,these costsconsist of the following:in general and administrative expense.
(in thousands) Three Months Ended Three Months Ended Six Months Ended Six Months Ended June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001Cost of services fees revenue $ 545 $ - $ 545 $ 161 Research and development 747 - 747 - Sales and marketing 634 - 432 134 General and administrative 1,881 - 1,881 218 ------- ----- ------- ------ Total $ 3,807 $ - $ 3,605 $ 513 ======= ===== ======= ======13 Restructuring and Related Costs
During 2001 and 2002, the
Company'sCompany’s management approved restructuring plans to reorganize and reduce operating costs. Restructuring and related charges of $513,000,$498,000$519,000 and $3.1 million were expensed in the first, third and fourth quarters of 2001, respectively, to better align theCompany'sCompany’s cost structure with projected revenue. The first and third quarter charges were comprised entirely of employee separation and related costs for 23 and 43 employees, respectively. The fourth quarter charge was comprised of $1.9 million for employee separation and related costs for 115 employees and $1.2 million for facility closures and consolidation costs. During the first quarter of 2002, the Company determined that amounts previously charged during 2001 of approximately $202,000 that related to employee separation and related charges were no longer required and this amount was credited to sales and marketing expense in the accompanying condensed consolidated statement of operations during the three months ended March 31, 2002. TheCompany'sCompany’s management approved further reductions and reorganizations during the three and nine months endedJuneSeptember 30, 2002, which resulted in restructuring and related charges of$3.8 million. These charges were$1.7 million and $5.5 million, respectively. The charge for the three months ended September 30, 2002 was comprised of$2.2$1.2 million for employee separation and related costs for10247 employees and$1.6$500,000 for facility closures and consolidation costs. The charge for the nine months ended September 30, 2002 was comprised of $3.2 million for employee separation and related costs for 149 employees and $2.3 million for facility closures and consolidation costs.The Company expects to complete the facility closures and consolidation during 2002. The facility closures and consolidation costs relate to the abandonment of the
Company'sCompany’s leased facilities in Limerick, Ireland; Maidenhead, England; and near Toronto, Canada, as well as the restructuring of theCompany'sCompany’s leased facility in Suwanee, Georgia. Total facility closures and consolidation costs include the write-down of property and equipment and leasehold improvements to their net realizable value, remaining lease liabilities, construction costs and brokerage fees to sublet the abandoned space offset by estimated sublease income. The estimated costs of abandoning these leased facilities, including estimated costs to sublease, were based on market information trend analysis provided by a commercial real estate brokerage firm retained by the Company.InThe Company is in the process of renegotiating the terms of its lease for the facility in Suwanee, Georgia and expects to incur restructuring and related costs in connection with theCompany's continuing restructuring program, the Company implemented a further reductionrenegotiation ofits worldwide workforce and incurred a related restructuring charge of approximately $1.3$2.9 million duringJuly,the fourth quarter of 2002.The July 2002 charge is comprised of employee separation and related costs for 47 employees.The following is a reconciliation of the components of the accrual for restructuring and related costs, the amounts charged against the accrual during 2001 and 2002 and the balance of the accrual as of
JuneSeptember 30, 2002:14
Six Months Ended June 30, 2002 Accruals Expenditures Balance ----------------------------------- Balance During 2001 During 2001 12/31/01 Accruals Expenditures Credits 06/30/02 ----------- ------------ -------- -------- ------------ ------- --------(in thousands) Employee separation costs $2,939 $2,259 $ 680 $ 2,239 $ 2,388 $ 202 $ 329 Facility closure costs 1,218 9 1,209 1,568 401 - 2,376 ------ ------ ------- ------- --------- ----- ------ Total restructuring and related costs $4,157 $2,268 $ 1,889 $ 3,807 $ 2,789 $ 202 $2,705 ====== ====== ======= ======= ========= ===== ======
Nine Months Ended September 30,
2002Accruals During 2001 Expenditures During 2001 Balance 12/31/01 Accruals Expenditures Credits Balance 09/30/02 (in thousands) Employee separation costs $ 2,939 $ 2,259 $ 680 $ 3,245 $ 3,555 $ 202 $ 168 Facility closure costs 1,218 9 1,209 2,269 2,242 — 1,236 Total restructuring and
related costs$ 4,157 $ 2,268 $ 1,889 $ 5,514 $ 5,797 $ 202 $ 1,404 The accrual for restructuring and related costs is included in accounts payable and accrued liabilities in the accompanying condensed consolidated balance sheets.
Results of Operations
Continuing Operations
General and Administrative, Exclusive of Noncash Expense
14 As a result of the Company’s announced plan to sell substantially all of its electronic commerce business the Company no longer allocates the total cost of its information technology function or costs related to the occupancy of its corporate headquarters to each of the functional areas but recognizes all of these costs in general and administrative expense. General and administrative expenses decreased 6.1% to $2.4 million during the quarter ended September 30, 2002 from $2.6 million during the same period in 2001. General and administrative expenses decreased 7.6% to $8.8 million during the nine months ended September 30, 2002 from $9.5 million during the same period in 2001. The decrease in general and administrative expense for the three months ended September 30, 2002 was primarily attributable to reduced headcount partially offset by severance related costs and facility restructuring costs. The Company had approximately $192,000 of severance related costs and approximately $555,000 in facility restructuring expenses during the three months ended September 20, 2002 compared to $64,000 of severance related costs during the three months ended September 30, 2001. The Company had an average of 56.3% fewer employees during the three months ended September 30, 2002 in the general and administrative areas compared to the same period of 2001. The decrease in general and administrative expense for the nine months ended September 30, 2002 was primarily attributable to reduced headcount, partially offset by severance and related costs and facility restructuring costs. The Company had approximately $389,000 of severance related costs and approximately $2.1 million in facility restructuring expenses during the nine months ended September 20, 2002 compared to $282,000 of severance related costs during the nine months ended September 30, 2001. The Company had an average of 52.7% fewer employees during the nine months ended September 30, 2002 in the general and administrative areas compared to the same period of 2001.
Noncash General and Administrative Expense
For the three months ended September 30, 2001, noncash general and administrative expenses were $28,000. For the nine months ended September 30, 2001, noncash general and administrative expenses were $252,000. In the third quarter of 2000, the Company granted 18,750 options to a new board member at a price below the fair market value at the date of grant. The amount expensed during 2001 relates primarily to these options.
Depreciation and Amortization on Property and Equipment
Depreciation and amortization on property and equipment increased to $817,000 in the quarter ended September 30, 2002 from $691,000 in the same period of 2001. Depreciation and amortization on property and equipment increased to $2.9 million in the nine months ended September 30, 2002 from $2.1 million in the same period of 2001. The increase in depreciation and amortization on property and equipment during 2002 is primarily due to financial and customer relationship software implemented during 2001.
Loss on Disposal of Assets
For the three months ended September 30, 2002, the Company recorded a gain on the disposal of assets of $28,000. For the nine months ended September 30, 2002, the Company recorded a loss on the disposal of assets of $757,000. For the three and nine month periods ended September 30, 2001, the Company recorded a gain on the disposal of assets of $10,000 and $4,000, respectively. The loss on the disposal of assets during the nine months ended September 30, 2002 is primarily attributable to the write down of assets located in the Suwanee and Maidenhead offices to their net realizable value.
Other Income
For the three months ended September 30, 2002 and 2001, the Company recorded other income of $14,000 and $11,000, respectively. For the nine months ended September 30, 2002, and 2001 the Company recorded other income of $26,000 and $22,000 respectively. These amounts are comprised of losses on foreign currency and realized gains and losses on sales of marketable securities.
Loss on Impairment of Investments
During the three and nine months ended September 30, 2001, the Company recorded a loss on impairment of investments of approximately $2.6 million and $9.1 million, respectively. These losses were necessitated by other than temporary losses to the value of investments the Company has made in privately held companies. These companies are primarily early-stage companies and are subject to significant risk due to their limited operating history and current economic and capital market conditions.
Interest Income
Interest income decreased to $568,000 in the third quarter of 2002 from $1.4 million during the same period of 2001. Interest income decreased to $2.0 million in the first nine months of 2002 from $5.6 million during the same period of 2001. The decrease
15 in interest income was due to lower levels of cash available for investment and lower interest rates. The Company expects to continue to use cash to fund operating losses and, as a result, interest income on available cash is expected to decline in future quarters.
Interest Expense
Interest expense for the three months ended September 30, 2002 was $56,000 compared to $57,000 for the three months ended September 30, 2001. Interest expense for the nine months ended September 30, 2002 was $169,000 compared to $177,000 during the same period of 2001. In March of 2000, the Company entered into a $5.0 million borrowing arrangement with an interest rate of 4.5% with Wachovia Capital Investments, Inc. The interest expense in 2002 and 2001 is primarily related to this agreement. The $5.0 million is due on March 15, 2005.
Income Taxes
As a result of the operating losses incurred since the Company’s inception, no provision or benefit for income taxes was recorded during the three and nine months ended September 30, 2002 and 2001.
Discontinued Operations
On October 17, 2002, the Company signed a definitive Asset Purchase Agreement with Epicor Software Corporation to sell substantially all of its core products and operations in an all cash transaction for a purchase price of $1.0 million. The transaction is expected to close during the fourth quarter of this year. The acquisition, which is subject to approval of the Clarus stockholders and other conditions, is part of a strategy adopted by the Board of Directors to increase stockholder value by redeploying the Company’s assets to enhance future growth and further reduce operating losses. As a result of this agreement as well as the Company’s further intent to divest all remaining operations, the Company has categorized these assets and operations as discontinued operations.
Following is a summary statement of operations for the discontinued operations
Discontinued Operations Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
Three months ended
September 30Nine months ended
September 302002 2001 2002 2001 REVENUES: License fees $ 162 $ 713 $ 2,649 $ 6,624 Services fees 1,354 2,411 5,352 7,535 TOTAL REVENUES 1,516 3,124 8,001 14,159 COST OF REVENUES: License fees 5 14 21 138 Services fees 864 2,471 4,276 9,078 TOTAL COST OF REVENUES 869 2,485 4,297 9,216 OPERATING EXPENSES: Research and development 1,007 3,185 5,692 12,658 Sales and marketing, exclusive of non-cash expense 932 5,136 6,801 21,797 Non-cash sales and marketing — 1,688 450 5,064 General and administrative (300 ) 824 (297 ) 3,434 Intangible impairment loss — — 10,360 — Depreciation and amortization on property and equipment 154 157 523 391 Amortization of intangible assets — 1,990 455 6,472 Loss on disposal of assets 161 — 161 — TOTAL OPERATING EXPENSES 1,954 12,980 24,145 49,816 Loss from discontinued operations, net of income tax
provision$ (1,307 ) $ (12,341 ) $ (20,441 ) $ (44,873 ) Weighted average shares outstanding – basic and diluted 15,630 15,547 15,597 15,521 16
Net loss from discontinued operations per share – basic and
diluted$ (0.09 ) $ (0.80 ) $ (1.31 ) $ (2.89 ) Revenues
Total Revenues. Total revenues for the quarter ended
JuneSeptember 30, 2002 decreased58.9%51.5% to$2.5$1.5 million from$6.2$3.1 million during the same period in 2001. Total revenues for thesixnine months endedJuneSeptember 30, 2002 decreased41.2%43.5% to$6.5$8.0 million from$11.0$14.2 million during the same period in 2001. The decrease in total revenues in both periods resulted primarily from a decrease in license revenue due to reduced demand for theCompany'sCompany’s software products as a result of reduced information technology spending and the announcement by the Company to explore all strategic alternatives during the quarter ended June 30, 2002.During the quarter ended
June 30, 2002, two customers accounted for more than 10% of total revenue, totaling $1.0 million or 40.7% of total revenue. The percentage by customer was 30.6% and 10.1% respectively, for the quarter ended June 30, 2002. During the quarter ended June 30, 2001, three customers accounted for more than 10% each, totaling $4.0 million or 63.8% of total revenue. The percentage by customer was 25.0%, 23.9%, and 14.9%, respectively, for the quarter ended June 30, 2001. During the six months ended JuneSeptember 30, 2002, one customer accounted for more than 10% of total revenue, totaling$2.6 million$167,000 or39.5%11.0% of total revenue. During thesixquarter ended September 30, 2001, one customer accounted for more than 10%, totaling $500,000 or 16.0% of total revenue. During the nine months endedJuneSeptember 30, 2002, one customer accounted for more than 10% of total revenue, totaling $2.7 million or 33.8% of total revenue. During the nine months ended September 30, 2001,threefour customers accounted for more than 10% each, totaling$6.3$7.5 million or57.0%52.8% of total revenue. The percentage by customer was28.2%14.6%,15.3%14.3%, 12.2%, and13.5%11.7%, respectively, for thesixnine months endedJuneSeptember 30, 2001.As a result of
BarclaysB2B's recenta customer’s decision to discontinue its external operations to focus on internal cost reduction,the Company was notified that BarclaysB2B will terminatethis customer terminated itscurrentsoftware license and service agreements with the Company effective August 31, 2002.Upon terminationThe Company refunded a total of $2.5 million to this customer during theCompany will be required to refund to BarclaysB2Bfourth quarter of 2002 for prepaid software license and support feesof approximately $2.7 millionless costs incurred by the Company associated with terminating the contract. The $2.5 million was included in accounts payable and accrued liabilities in the accompanying condensed consolidated balance sheet as of September 30, 2002. During thesixnine months endedJuneSeptember 30, 2002, revenues from theCompany'sCompany’s agreements withBarclaysB2Bthis customer represented39.5%33.8% of theCompany'sCompany’s total revenues for this period.License Fees. License fees decreased
71.9%77.3% to$1.0 million$162,000 or39.8%10.7% of total revenues, for the quarter endedJuneSeptember 30, 2002 from$3.6 million,$713,000, or58.1%22.8% of total revenues, for the same period in 2001. License fees decreased57.9%60.0% to$2.5$2.6 million or38.3%33.1% of total revenues, for thesixnine months endedJuneSeptember 30, 2002 from$5.9$6.6 million, or53.6%46.8% of total revenues, for the same period in 2001. The decrease in license fees was primarily attributable to the decision by the Company to explore strategic alternatives during the quarter ended June 30, 2002, the softening demand for business-to-business software and the information technology market generally.Services Fees. Services fees decreased
41.0%43.8% to$1.5$1.4 million for the quarter endedJuneSeptember 30, 2002, from$2.6$2.4 million for the same period in 2001. Services fees decreased22.0%29.0% to$4.0$5.4 million, for thesixnine months endedJuneSeptember 30, 2002, from$5.1$7.5 million for the same period in 2001. Services fees, however, increased as a percentage of total revenues to60.2%89.3%, for the quarter endedJuneSeptember 30, 2002, from41.9%77.2% during the same period in 2001, and to61.7%66.9% for thesixnine months endedJuneSeptember 30, 2002, from46.4%53.2% during the same period in 2001. The decrease in services fees revenue for the threeand sixmonths endedJuneSeptember 30, 2002 is primarily attributable to a decrease in implementation and training services, a direct result of the decrease in the amount of software licensed. The decrease in services fees revenue for the nine months ended September 30, 2002 is primarily attributable to a decrease in implementation and training services, a direct result of the decrease in the amount of software licensed, partially offset by an increase in maintenance fees. As a result of the decision by the Company to explore strategic alternatives during the quarter ended June 30, 2002 and the Company’s announcement on October 17, 2002 of the execution of a definitive asset purchase agreement with Epicor, the Company anticipatescertain customers may terminate their relationships with the Company which would result ina decrease in maintenance fees in future periods.Cost of Revenues
Total Cost of Revenues. Cost of revenues decreased
44.9%65.0% to$1.9 million,$869,000, or74.1%57.3% of total revenue, during the quarter endedJuneSeptember 30, 2002 from$3.4$2.5 million, or55.2%79.5% of total revenue, during the same period in 2001. Cost of revenues decreased47.0%53.4% to$3.8$4.3 million, or59.2%53.7% of total revenue, during thesixnine months endedJuneSeptember 30, 2002 from$7.2$9.2 million, or65.6%65.1% of total revenue, during the same period in 2001. The decreases in cost of revenues are primarily a result of a decrease in the cost of services fees15due to lower personnel related costs, partially offset by costs associated withan increase in restructuring costs incurred during the three and nine months endedJuneSeptember 30, 2002. During the three months endedJuneSeptember 30, 2002, the Company had an average of64.5%81.1% fewer employees in services compared to the same period in 2001. During thesixnine months endedJuneSeptember 30, 2002, the Company had an average of61.5%65.7% fewer employees in services compared to the same period in 2001. The reduced personnel related costs are a result of Company instituted cost control measures that began during 2001 and theCompany'sCompany’s announced strategy in May 2002 to pursue strategic alternatives such as a sale of the Company, its assets or its product lines. The Company had approximately $178,000 of severance related costs during the three months ended September 20, 2002 compared to $86,000 of severance related costs during the three months ended September 30, 2001. The Company had approximately $722,000 of17 severance related costs during the nine months ended September 20, 2002 compared to $247,000 of severance related costs during the nine months ended September 30, 2001.
Cost of License Fees. Cost of license fees decreased
96.3%64.3% to$3,000$5,000 in thesecondthird quarter of 2002 from$80,000$14,000 in thesecondthird quarter of 2001. Cost of license fees decreased86.3%84.8% to$17,000$21,000 in the firstsixnine months of 2002 from$124,000$138,000 in the firstsixnine months of 2001. Cost of license fees may vary from period to period depending on the product mix licensed, but are expected to remain a small percentage of license fees.Cost of Services Fees. Cost of services fees decreased
43.7%65.0% to$1.9 million,$864,000, or122.9%63.8% of total services fees revenues, during the quarter endedJuneSeptember 30, 2002 compared to$3.3$2.5 million, or128.7%102.5% of total services fees revenues, during the same period in 2001. Cost of services fees decreased46.4%52.9% to$3.8$4.3 million, or95.5%79.9% of total services fees revenues, during thesixnine months endedJuneSeptember 30, 2002 compared to$7.1$9.1 million, or138.9%120.5% of total services fees revenues, during the same period in 2001. As discussed above, the decrease in the cost of services fees was primarily attributable to lower personnel related costs in both the services implementation and customer support areas, partially offset bycosts associated withan increase in restructuring costs incurred during the three and nine months endedJuneSeptember 30, 2002.The Company incurred costs related to employee severance and related costs of $545,000 during the three months ended June 30, 2002 and costs of $161,000 during the three months ended March 31, 2001.Research and Development Expense
Research and development expenses decreased
44.1%68.4% to approximately$2.6$1.0 million, or100.4%66.4% of total revenues, during the quarter endedJuneSeptember 30, 2002 from$4.6$3.2 million, or73.8%102.0% of total revenues, during the same period in 2001. During thesixnine months endedJuneSeptember 30, 2002, research and development expenses decreased48.8%55.0% to approximately$5.2$5.7 million, or79.9%71.1% of total revenues from$10.1$12.7 million, or91.8%89.4% of total revenues, during the same period in 2001. Research and development expenses decreased primarily as a result of a reduction in personnel related costs and consulting fees incurred to develop theCompany'sCompany’s products, partially offset bycosts associated withan increase in restructuring costs incurred during the three and nine months endedJuneSeptember 30, 2002. Consulting fees were$196,000$108,000 in thesecondthird quarter of 2002 compared to$1.6 million$562,000 in thesecondthird quarter of 2001. During the three months endedJuneSeptember 30, 2002, the Company had an average of52.5%68.4% fewer employees in the research and development area compared to the same period of 2001. Consulting fees were$706,000$814,000 in the firstsixnine months of 2002 compared to$3.7$3.3 million in the firstsixnine months of 2001. During thesixnine months endedJuneSeptember 30, 2002, the Company had an average of46.5%51.4% fewer employees in the research and development area compared to the same period of 2001. The Companyincurred costs related to employeehad approximately $221,000 of severanceandrelated costsof $747,000during the three months endedJune 30, 2002. The Company did not incur anySeptember 20, 2002 compared to $107,000 of severanceorrelated costs during the threeor six month periodsmonths endedJuneSeptember 30, 2001. The Company had approximately $968,000 of severance related costs during the nine months ended September 20, 2002 compared to $107,000 of severance related costs during the nine months ended September 30, 2001.Sales and Marketing Expense, exclusive of non-cash expense
Sales and marketing expenses decreased
71.3%81.9% to$2.7 million,$932,000, or105.3%61.5% of total revenues, during the quarter endedJuneSeptember 30, 2002 from$9.3$5.1 million, or150.6%164.4% of total revenues, during the same period in 2001. Sales and marketing expenses decreased64.2%68.8% to$6.2$6.8 million, or96.0%85.0% of total revenues, during thesixnine months endedJuneSeptember 30, 2002 from$17.4$21.8 million, or157.7%153.9% of total revenues, during the same period in 2001. The decrease was primarily attributable to a decrease in variable compensation as a result of lower license revenue during the period and a decrease in sales and marketing personnel, partially offset bycosts associated withan increase in restructuring costs incurred during the three and nine months endedJuneSeptember 30, 2002. The Company had an average of72.1%87.8% fewer employees during thesecondthird quarter of 2002 in the sales, marketing and business development areas compared to thesecondthird quarter of 2001. The Company had an average of67.5%71.9% fewer employees during the firstsixnine months of 2002 in the sales, marketing and business development areas compared to the firstsixnine months of 2001. The Company incurred severance and related costs of$634,000$561,000 and$432,000,$1.1 million, respectively, during the three andsixnine months endedJuneSeptember 30, 2002. ThecompanyCompany incurrednoseverance and related costs of $262,000 and $396,000, respectively, during the three and nine months ended September 30, 2001.Non-cash Sales and Marketing Expense
The Company did not incur any non-cash sales and marketing expense during the three months ended
JuneSeptember 30,2001 and $134,000 during the six months ended June 30, 2001. Noncash Sales and Marketing Expense2002. During the three months endedJuneSeptember 30,2002 and2001,noncashthe Company incurred non-cash sales and marketing expenses of approximately$352,000 and$1.7 millionrespectively, were recognizedin connection with sales and marketing agreements signed by the Company during the fourth quarter of 1999 and the first quarter of 2000. The Company recognized $450,000 and$3.4$5.1 million, respectively, associated with these agreements during thesixnine months endedJuneSeptember 30, 2002 and 2001. In connection with these agreements, the Company issued warrants and shares of common stock to certain strategic partners, all of whom were also customers, in exchange for their participation in theCompany'sCompany’s sales and marketing efforts. The decrease in noncash sales and marketing expense during 2002 is16due to the termination of the sales and marketing agreement with one customer during the fourth quarter of 2001. As of JuneSeptember 30, 2002 all deferred sales and marketing costs, previously capitalized, have been expensed.18 General and Administrative
Exclusive of Noncash ExpenseGeneral and administrative expenses,
includingcomprised entirely of the provision for doubtful accounts,increased 24.6%decreased 136.4% to$3.6 million$(300,000) during the quarter endedJuneSeptember 30, 2002or 141.3% of total revenuefrom$2.9 million, or 46.6% of total revenues,$824,000 during the same period in 2001. General and administrative expenses,includingcomprised entirely of the provision for doubtful accounts, decreased33.2%108.6% to$5.1 million$(297,000) during thesixnine months endedJuneSeptember 30, 2002or 78.7% of total revenuefrom$7.6$3.4 millionor 69.2% of total revenues,during the same period in 2001. Theincrease in general and administrative expense for the three months ended June 30, 2002 was primarily attributable to severance related costs and facility restructuring costs partially offset byCompany recorded adecrease inreversal of the provision for doubtful accountsand reduced headcount. The Company had approximately $313,000ofseverance related costs and approximately $1.6 million in facility restructuring expenses$(300,000) during the three months endedJune 20, 2002. The Company had an average of 50.5% fewer employees during the three months ended June 30, 2002 in the general and administrative areas compared to the same period of 2001. The Company recorded a provision for doubtful accounts of $1,000 during the three months ended JuneSeptember 30, 2002 compared to a provision of$555,000$824,000 for the three months endedJuneSeptember 30, 2001. Thedecrease in general and administrative expense for the six months ended June 30, 2002 was primarily attributable toCompany recorded adecrease inreversal of the provision for doubtful accountsand reduced headcount, partially offset by severance and related costs and facility restructuring costs. The Company had an averageof50.9% fewer employees$(297,000) during thesixnine months endedJune 30, 2002 in the general and administrative areas compared to the same period of 2001. The Company recorded a provision for doubtful accounts of $3,000 during the six months ended JuneSeptember 30, 2002 compared to a provision of$2.6$3.4 million for thesixnine months endedJuneSeptember 30, 2001.Noncash General and Administrative Expense For the three months ended March 31, 2001, noncash general and administrative expenses were $112,000, or 1.8% of total revenues. For the six months ended June 30, 2001, noncash general and administrative expenses were $224,000, or 2.0% of total revenues. In the third quarter of 2000, the Company granted 18,750 options to a new board member at a price below the fair market value at the date of grant. The amount expensed during 2001 relates primarily to these options.Loss on Impairment of Intangible Assets
In the second quarter of 2002, the Company recognized a goodwill impairment loss of $6.7 million and an intangible asset impairment loss of $3.6 million as a result of a change in the
Company'sCompany’s strategic direction. The Company periodically evaluates the carrying value of its long-lived assets, including intangibles, according to Statement of Financial Accounting Standards("SFAS"(“SFAS”) No. 142,"Goodwill“Goodwill and Other IntangibleAssets"Assets” and SFAS 144,"Accounting“Accounting for the Impairment or Disposal of Long-LivedAssets"Assets”. As a result of a change in theCompany'sCompany’s strategic direction during the second quarter of 2002, the Company determined that remaining goodwill and intangible assets should be tested for further impairment. TheCompany'sCompany’s evaluation of the present value of future cash flows based on the change in strategic direction indicated the carrying value of theCompany'sCompany’s assets exceeded fair value. As a result the Company recorded an additional impairment charge to goodwill and intangible assets of $10.4 million during the three months ended June 30, 2002.Depreciation and Amortization on Property and Equipment
Depreciation and amortization on property and equipment
increased to $1.3 million inwas $154,000 during the quarter endedJuneSeptember 30, 2002from $838,000 incompared to $157,000 during the same period of 2001. Depreciation and amortization on property and equipment increased to$2.4 million in$523,000 during thesixnine months endedJuneSeptember 30, 2002 from$1.7 million in$391,000 during the same period of 2001. The increase in depreciation and amortization on property and equipment during the nine months ended September 30, 2002 is primarily due tofinancial,professional services managementand customer relationshipsoftware implemented during 2001.Amortization of Intangible Assets
AmortizationThe Company did not incur any amortization of intangible assets
decreased to $227,000during the three months endedJuneSeptember 30,2002 from $2.52002. Amortization of intangible assets was $2.0 million during thesame period ofthree months ended September 30, 2001. Amortization of intangible assets decreased to $455,000 during thesixnine months endedJuneSeptember 30, 2002 from$4.5$6.5 million during the same period of 2001. The decrease is primarily the result of adopting SFAS 142, effective January 1, 2002, which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized. The amortization during 2002 relates to intangible assets with definite lives. As a result of adopting SFAS 142, the Company did not recognize any amortization related to goodwill during 2002. The Company recorded$2.2$1.8 million of amortization expense related to goodwill during the three months endedJuneSeptember 30, 2001 and$4.0$5.8 million during thesixnine months endedJuneSeptember 30, 2001. The Company recorded $227,000 of amortization related to intangible assets with definite lives during the three months endedJuneSeptember 30, 2001 and$455,000$682,000 during thesixnine months endedJuneSeptember 30, 2001.17Loss on Disposal of Assets
For the three and
six month periodsnine months endedJuneSeptember 30, 2002, the Company recorded a loss on the disposal of assets of$795,000 and $785,000, respectively. For the three and six month periods ended June 30, 2001, the Company recorded a$161,000. The loss on the disposal of assetsof $7,000. The increase induring theloss on the disposal of assets in the second quarter ofthree and nine months ended September 30, 2002 is primarily attributable to the write down of assets located in theMaidenhead andLimerick,officesIreland office to their net realizable value.Other Income For the three months ended June 30, 2002 and 2001, the Company recorded other income of $6,000 and $11,000, respectively. For the six months ended June 30, 2002, and 2001 the Company recorded other income of $12,000 and $10,000 respectively. These amounts are comprised of losses on foreign currency and realized gains and losses on marketable securities. Loss on Impairment of Investments During the three and six months ended June 30, 2001, the Company recorded a loss on impairment of investments of approximately $3.4 million and $6.5 million, respectively. These losses were necessitated by other than temporary losses to the value of investments the Company has made in privately held companies. These companies are primarily early-stage companies and are subject to significant risk due to their limited operating history and current economic and capital market conditions. Interest Income Interest income decreased to $685,000 in the second quarter of 2002, or 26.9% of total revenues from $1.8 million, or 28.4% of total revenues, in the same period of 2001. Interest income decreased to $1.4 million in the first six months of 2002, or 21.9% of total revenues from $4.2 million, or 37.9% of total revenues, in the same period of 2001. The decrease in interest income was due to lower levels of cash available for investment and lower interest rates. The Company expects to continue to use cash to fund operating losses and, as a result, interest income on available cash is expected to decline in future quarters. Interest Expense Interest expense for the three months ended June 30, 2002 and 2001 was $56,000. Interest expense for the six months ended June 30, 2002 was $112,000 compared to $120,000 during the same period of 2001. In March of 2000, the Company entered into a $5.0 million borrowing arrangement with an interest rate of 4.5% with Wachovia Capital Investments, Inc. The interest expense in 2002 and 2001 is primarily related to this agreement. The $5.0 million is due on March 15, 2005.Income Taxes
As a result of the operating losses incurred since the
Company'sCompany’s inception, no provision or benefit for income taxes was recorded during the three andsixnine months endedJuneSeptember 30, 2002 and2001, respectively.2001.Liquidity and Capital Resources
The
Company'sCompany’s cash and cash equivalents decreased to$38.7$17.7 million atJuneSeptember 30, 2002 from $55.6 million at December 31, 2001. Marketable securities increased to$68.6$84.8 million atJuneSeptember 30, 2002 from $65.3 million at December 31, 2001. The overall decrease in cash and cash equivalents and marketable securities is due primarily to cash used to fund operating losses.19 Cash used in operating activities was approximately
$13.8$18.7 million during thesixnine months endedJuneSeptember 30, 2002. The cash used was primarily attributable to theCompany'sCompany’s net loss and to a decrease in deferred revenue and accounts payable and accrued liabilities partially offset by noncash itemsan increase in accounts payableand a decrease in accounts receivable and prepaid and other assets. Cash used in operating activities was approximately$28.0$38.2 million during thesixnine months endedJuneSeptember 30, 2001. The cash used was primarily attributable to theCompany'sCompany’s net lossan increase in accounts receivable and prepaid and other current assets,and a decrease in accounts payable and accrued liabilities partially offset by noncash items andan increasea decrease indeferred revenue.accounts receivable.Cash used for investing activities was approximately
$3.4$19.6 million during thesixnine months endedJuneSeptember 30, 2002. The cash was used primarily for purchases of marketable securities partially offset by the sale of investments and the sale and maturity of marketable securities. Cash used by investing activities was approximately$8.6$2.3 million during thesixnine months endedJuneSeptember 30, 2001. The cash used by investing activities was primarily attributable to the purchase of marketable securities, the purchase of property and equipment and an investment in a private company partially offset by proceeds received from the sale and maturity of marketable securities.18Cash provided by financing activities was approximately
$214,000$387,000 during thesixnine months endedJuneSeptember 30, 2002, and approximately$166,000$408,000 during thesixnine months endedJuneSeptember 30, 2001. The cash provided by financing activities during thesixnine months endedJuneSeptember 30, 2002 and 2001 was primarily attributable to proceeds from shares issued under the employee stock purchase plan and stock option exercises.The
Company'sCompany’s accounts receivable potentially subject the Company to credit risk, as collateral is generally not required. As ofJuneSeptember 30, 2002,fourthree customers accounted for more than 10% each, totaling$1.1 million$838,000 or64.2%52.6% of the gross accounts receivable balance on that date. The percentage by customer was23.8%27.2%,18.2%, 11.8%15.2%, and10.4%10.2%, respectively, atJuneSeptember 30, 2002. As of December 31, 2001, four customers accounted for more than 10% each, totaling $1.7 million or 53.2% of the gross accounts receivable balance on that date. The percentage of total accounts receivable due from each of these four customers was 15.8%, 13.9%, 12.6% and 10.9%, respectively, at December 31, 2001.During the quarter ended
June 30, 2002, two customers accounted for more than 10% of total revenue, totaling $1.0 million or 40.7% of total revenue. The percentage by customer was 30.6% and 10.1% respectively, for the quarter ended June 30, 2002. During the quarter ended June 30, 2001, three customers accounted for more than 10% each, totaling $4.0 million or 63.8% of total revenue. The percentage by customer was 25.0%, 23.9%, and 14.9%, respectively, for the quarter ended June 30, 2001. During the six months ended JuneSeptember 30, 2002, one customer accounted for more than 10% of total revenue, totaling$2.6 million$167,000 or39.5%11.0% of total revenue. During thesixquarter ended September 30, 2001, one customer accounted for more than 10%, totaling $500,000 or 16.0% of total revenue. During the nine months endedJuneSeptember 30, 2002, one customer accounted for more than 10% of total revenue, totaling $2.7 million or 33.8% of total revenue. During the nine months ended September 30, 2001,threefour customers accounted for more than 10% each, totaling$6.3$7.5 million or57.0%52.8% of total revenue. The percentage by customer was28.2%14.6%,15.3%14.3%, 12.2%, and13.5%11.7%, respectively, for thesixnine months endedJuneSeptember 30, 2001.As a result of
BarclaysB2B's recenta customer’s decision to discontinue its external operations to focus on internal cost reduction,the Company was notified that BarclaysB2B will terminatethis customer terminated itscurrentsoftware license and service agreements with the Company effective August 31, 2002.Upon terminationThe Company refunded a total of $2.5 million to this customer during theCompany will be required to refund to BarclaysB2Bfourth quarter of 2002 for prepaid software license and support feesof approximately $2.7 millionless costs incurred by the Company associated with terminating the contract. The $2.5 million was included in accounts payable and accrued liabilities in the accompanying condensed consolidated balance sheet as of September 30, 2002. During thesixnine months endedJuneSeptember 30, 2002, revenues from theCompany'sCompany’s agreements withBarclaysB2Bthis customer represented39.5%33.8% of theCompany'sCompany’s total revenues for this period.AtThe Company has filed a definitive proxy seeking stockholder approval for the
July 15, 2002 meetingreimbursement of legal fees and other expenses in theCompany's Boardamount ofDirectors, the Board resolved to recommend to the stockholders of the Company for approval at the next meeting called for any purpose, that costs$531,343 incurred by Warren B. Kanders on behalf of himself, Burtt R.ErlichEhrlich, and Nicholas Sokolow in connection withthetheir successful solicitation of proxies for the 2002 annual meetingbe reimbursed byof our shareholders. Due to theCompany. These costsfact that we areapproximately $500,000.seeking stockholder approval for the reimbursement of these expenses, such expenses have not been reflected in our financial statements.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"“Note”) in the original principal amount of $5.0 million. The Note is due March 15, 2005 and the $5.0 million principal amount was placed in investment grade cash equivalents. Upon the occurrence of a change of control, as defined in the Note, the Company would be required to prepay the outstanding principal amount of the Note, together with any unpaid interest, within five business days after the occurrence of a change of control.As partThe Company expects to receive approximately $800,000 in net proceeds at closing as a result of the
Company's announced strategic alternatives process, many strategic options could constitute a changeAsset Sale. If the Asset Sale is consummated, the Company will be required to pay approximately $700,000 - $800,000 in severance compensation to its Chief Executive Officer and to certain ofcontrol, as definedits employees who do not receive offers of employment from Epicor. The Company will also pay fees of approximately $150,000 to the Company’s financial advisers in connection with theNote, and require a prepayment of the Note, together with any unpaid interest.Asset Sale.20 At
JuneSeptember 30, 2002, the Company had net operating loss carryforwards, research and experimentation credit, and alternative minimum tax credit carryforwards for U.S. federal income tax purposes, which expire in varying amounts beginning in the year 2009. TheCompany'sCompany’s ability to benefit from certain net operating loss carryforwards is limited under section 382 of the Internal Revenue Code as the Company is deemed to have had an ownership change of greater than 50%. Accordingly, certain net operating losses may not be realizable in future years due to this limitation.Although operating activities may provide cash in certain periods, to the extent the Company incurs continuing operating losses or experiences growth in the future, the
Company'sCompany’s operating and investing activities will continue to use cash. The Company currently estimates uses of cash to fund operatinglosses and for purchases of property and equipment.losses. The actual use of cash in operations during 2002 will be impacted dramatically by any fluctuations in projected revenue as theCompany'sCompany’s operating expenses are relatively fixed in the short term. The Company currently believes that existing cash and cash equivalents and marketable securities will be sufficient to meet operating and investing needs for the foreseeable future.The following summarizes the
Company'sCompany’s contractual obligations and commercial commitments atJuneSeptember 30, 2002, and the effect such obligations are expected to have on our liquidity and cash flow in future periods:
Total 2002 2003 2004 2005 2006 Thereafter ----- ---- ---- ---- ---- ---- ----------(in thousands) Long-term debt $ 5,000 $ - $ - $ - $ 5,000 $ - $ - Operating leases 6,990 914 1,774 1,803 1,802 644 53 -------- ------ ------- ------- ------- ------- ------ Total $ 11,990 $ 914 $ 1,774 $ 1,803 $ 6,802 $ 644 $ 53 ======== ====== ======= ======= ======= ======= ======
Total 2002 2003 2004 2005 2006 Thereafter (in thousands) Long-term debt $ 5,000 $ — $ — $ — $ 5,000 $ — $ — Operating leases 4,807 327 1,339 1,368 1,366 354 53 Total $ 9,807 $ 327 $ 1,339 $ 1,368 $ 6,366 $ 354 $ 53 The Company does not have commercial commitments under capital leases, lines of credit, standby lines of credit, guaranties, standby repurchase obligations or other such arrangements.
19The Company is in the process of renegotiating the terms of its lease for the facility in Suwanee, Georgia and expects to incur restructuring and related costs in connection with the renegotiation of $2.9 million during the fourth quarter of 2002. The Company does not engage in any transactions or have relationships or other arrangements with an unconsolidated entity. These include special purpose and similar entities or other off-balance sheet arrangements. The Company also does not trade in energy, weather or other commodity based contracts.
Related Party Transactions
The Company has filed a definitive proxy seeking stockholder approval for the reimbursement of legal fees and other expenses in the amount of $531,343 incurred by Warren B. Kanders on behalf of himself, Burtt R. Ehrlich, and Nicholas Sokolow in connection with their successful solicitation of proxies for the 2002 annual meeting of our shareholders. Due to the fact that we are seeking stockholder approval for the reimbursement of these expenses, such expenses have not been reflected in our financial statements.
On November 1, 2001, the Company engaged E.Com Consulting to perform market research and provide recommendations concerning the needs and opportunities associated with the
Company'sCompany’s settlement product. E.Com Consulting subcontracted with e-RM International, Inc.("e-RMI"(“e-RMI”) to assist with a portion of this project. e-RMI is a Delaware corporation whose sole shareholder is Chrismark Enterprises LLC. Chrismark Enterprises LLC is owned by Mark Johnson, a former director of the Company and his wife. The contract period of the engagement was November 1, 2001 through January 31, 2002 for which the Company agreed to pay total professional fees of $50,000 plus out-of-pocket expenses. Of this amount, $7,805 was paid to e-RMI. The Company expensed a total of $42,164 in connection with the engagement during the fourth quarter of 2001 and had a balance due E.Com of $34,359 at December 31, 2001 that is included in accounts payable and accrued liabilities in the accompanying consolidated balance sheet. The contract was terminated by the Company during January 2002. No expense was incurred during 2002 and all amounts due E.Com were paid in January, 2002. At the May 21, 2002 Annual Meeting of stockholders, Mr. Johnson was not re-elected a director of the Company.On February 7, 2002 Todd Hewlin joined the
Company'sCompany’s board of directors. Mr. Hewlin is a managing director of The Chasm Group, LLC, a consultancy organization focusing on helping technology companies develop and implement strategies that create and sustain market leadership positions for their core products while building shareholder value and a sustainable competitive advantage. During 2001, the Company engaged The Chasm Group to assist the Company on various strategic and organizational issues. The contract period of the engagement was November 15, 2001 through February 15, 2002 for which the company agreed to professional fees of $225,000 plus out-of-pocket expenses. The Company expensed a total of $145,000 during the three months ended March 31, 2002 that is included in general and administrative in the accompanying consolidated statement of operations and expensed $131,000 during the fourth quarter of 2001. The Company expensed an additional $54,000, outside the original21 engagement, during the three months ended March 31, 2002 related to further services performed by The Chasm Group that is included in general and administrative in the accompanying consolidated statement of operations. At the May 21, 2002 Annual Meeting of stockholders, Mr. Hewlin was not
re-electedelected a director of the Company.In the opinion of management, the rates, terms and considerations of the transactions with the related parties described above approximate those that the Company would have received in transactions with unaffiliated parties.
New Accounting Pronouncements
In June 2002, the FASB issued SFAS 146,
"Accounting“Accounting for Costs Associated with Exit or DisposalActivities"Activities”. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force("EITF"(“EITF”) Issue No. 94-3,"Liability“Liability Recognition for Certain Employee termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)"”. The provisions of SFAS 146 are effective for theCompany'sCompany’s 2003 fiscal year. The Company does not believe that SFAS 146 will have a material impact on its financialstatementsstatements.In April 2002, the FASB issued SFAS 145,
"Rescission“Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections"Corrections”. SFAS 145 rescinds SFAS 4,"Reporting“Reporting Gains and Losses from Extinguishment ofDebt"Debt”, SFAS 44,"Accounting“Accounting for Intangible Assets of MotorCarriers"Carriers” and SFAS 64,"Extinguishments“Extinguishments of Debt Made to Satisfy Sinking FundRequirements"Requirements”. SFAS 145 amends SFAS 13,"Accounting“Accounting forLeases"Leases”, eliminating an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications with similar economic effects as sale-leaseback transactions. This statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under certain conditions. The provisions related to SFAS 13 are effective for transactions occurring after May 15, 2002. All other provisions of the statement are effective for financial statements issued on or after May 15, 2002. The adoption of SFAS 145 did not have a material impact on theCompany'sCompany’s financial statements.At the November 2001 EITF meeting, the FASB released Staff Announcement Topic D-103,
"Income“Income Statement Characterization of Reimbursements Received for`Out-of-Pocket'‘Out-of-Pocket’ ExpensesIncurred"Incurred” stating that the Staff believes that reimbursements received for out-of-pocket expenses should be characterized as revenue. The Company adopted this Staff Announcement effective January 1, 2002. Historically the Company has not reflected such reimbursements as revenue in its consolidated statements of operations. Upon adoption of this FASB Staff Announcement, comparative financial statements for prior periods were reclassified to provide consistent presentation. The adoption of this FASB Staff Announcement did not have any impact on theCompany'sCompany’s financial position or results of operations, however, theCompany'sCompany’s services fees revenue and cost of services fees revenue increased by an20equal amount as a result of the gross-up of revenues and expenses for reimbursable expenses. For the three and sixnine months endedJuneSeptember 30, 2002, the Company recorded revenue from reimbursement of out-of-pocket expenses of approximately$62,000$57,000 and$150,000,$207,000, respectively. For the three andsixnine months endedJuneSeptember 30, 2001, theCompany'sCompany’s services fees revenue and cost of services fees revenue increased by approximately$202,000$99,000 and$470,000,$569,000, respectively, as a result of the reclassification of these reimbursements.In August 2001, the FASB issued SFAS No. 144,
"Accounting“Accounting for the Impairment or Disposal of Long-LivedAssets"Assets”. This statement supersedes SFAS No. 121,"Accounting“Accounting for the Impairment of Long-Lived Assets and Assets to Be DisposedOf"Of”. The Company adopted SFAS 144 effective January 1, 2002, which did not have a material impact on theCompany'sCompany’s financial statements. On October 17, 2002, the Company signed a definitive Asset Purchase Agreement with Epicor Software Corporation to sell substantially all of its core products and operations in an all cash transaction for a purchase price of $1.0 million. The transaction is expected to close during the fourth quarter of this year. The acquisition is subject to approval of the Clarus stockholders and other conditions. As a result this pending transaction and the Company’s further intent to divest all remaining operations, the Company has categorized these assets and operations as discontinued operations in accordance SFAS No. 144.In August 2001, the FASB issued SFAS 143,
"Accounting“Accounting for Asset RetirementObligations"Obligations”. SFAS 143 addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The provisions of SFAS 143 are effective for theCompany'sCompany’s 2003 fiscal year. The Company does not believe that SFAS 143 will have a material impact on its financial statements.In July 2001, the FASB issued SFAS No. 141,
"Business Combinations"“Business Combinations”, and SFAS No. 142,"Goodwill“Goodwill and Other IntangibleAssets"Assets”. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. SFAS 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values. The Company adopted SFAS 141 upon issuance and adopted SFAS 142 effective January 1, 2002. Upon adoption, the Company tested goodwill for impairment at January 1, 2002 according to the provisions of SFAS 142, which resulted in no impairment required as a cumulative effect of accounting change. In the second22 quarter of 2002, the Company tested goodwill for impairment according to the provisions of SFAS 142 and intangible assets with definite lives according to SFAS 144 due to certain changes in business strategy that effected the
Company'sCompany’s business plans, which resulted in an impairment of $6.7 million of goodwill and $3.6 million of intangible assets with definite lives. The Company recorded$2.2$1.8 million and$4.0$5.8 million, respectively, of amortization expense related to goodwill during the three andsixnine months endedJuneSeptember 30, 2001. As a result of adopting SFAS 142, the Company did not recognize any goodwill amortization during the three andsixnine months endedJuneSeptember 30, 2002.In September 1998, the FASB issued SFAS No. 133,
"Accounting“Accounting for Derivative Instruments and Hedging Activities."” This Statement was amended in June 2000 by Statement No. 138,"Accounting“Accounting for Certain Derivative Instruments and Certain Hedging Activities."” The Company adopted these new pronouncements in January of 2001. The new Statements require all derivatives to be recorded on the balance sheet at fair value and establish accounting treatment for three types of hedges: hedges of changes in the fair value of assets, liabilities or firm commitments; hedges of the variable cash flows of forecasted transactions; and hedges of foreign currency exposures of net investments in foreign operations. The Company has no derivatives and the adoption of these pronouncements did not have any impact on theCompany'sCompany’s results of operations or financial position.Risk Factors
In addition to other information in this quarterly report on Form 10-Q, the following risk factors should be carefully considered in evaluating the Company and its business because such factors currently may have a significant impact on the
Company'sCompany’s business, operating results, liquidity and financial condition. As a result of the risk factors set forth below, actual results could differ materially from those projected in any forward-looking statements.The Company'sIf the announced
planspending sale of substantially all of the Company’s electronic commerce business topursueEpicor is not completed, there may not be any other offers from potential acquirers of the Company’s electronic commerce business.If the sale of substantially all
strategic alternativesof the Company’s electronic commerce business toenhance stockholder value have, and are likely to continue to, reduce the demand for the Company's software. In May 2002Epicor (the “Asset Sale”) is not completed, the Companyannounced that it had retained an investment banking firmmay seek another purchaser for its electronic commerce business or some portion of the assets related toassistthis business. Although the Company had discussions with various companies concerning such a purchase, none of these companies may now have an interest inexploring all strategic alternativessuch a sale or be willing toenhance stockholder value.offer a reasonable purchase price. If no purchaser were found for these assets, the Company would likely cease operating its electronic commerce business.As a result of
this announced strategythe pending Asset Sale and the steps taken by the Company to reduce its operating expenses, the Company has experienced a dramatic decline in the demand for its software and its ability to acquire new customers.The Company has significantly reduced the number of its sales and marketing personnel from approximately 46 in April, 2002 to approximately 3 in August, 2002. Management believes that demand for the Company's software will continue to decline as a result of the Company's announced strategy. Continued decline in demand for the Company's products and services will negatively affect the Company's business, results of operations, liquidity and financial condition. The Company's announced plans to pursue strategic alternatives has caused, and is likely to continue to cause, the Company to lose its customers. 21The uncertainty surrounding the Company's announced strategy to pursue strategic alternatives has caused the Company's customers to question the Company's long-term commitment to its software and electronic commerce products and services. As a result, certain customers have indicated that they may terminate their relationships with the Company. If this uncertainty continues, the Company expects to lose existing software customers. The Company's ability to execute on its announced strategy to pursue strategic alternatives has been adversely effected by market conditions and the Company's declining business. Market conditions and the Company's public announcement to seek alternatives such as the sale of the Company, its assets, product lines or adopt a plan of liquidation has made it more difficult for the Company to negotiate the terms of any such transaction. As a result, the Company may not be able to sell the Company, its assets or product lines on terms that are acceptable to the Company or at all. If the Company does not successfully negotiate the sale of the Company, its assets or product lines, the Company may cease operating its software and electronic commerce business. As the Company pursues its announced strategy of pursuing strategic alternatives, the Company is dependent on certain key executives and employees. To execute on the Company's announced strategy to reduce its operating expenses and pursue a sale of the Company, its assets, product lines, or plan of liquidation, the Company must retain critical executives and certain employees that work in the support and services and development areas. The familiarity of these individuals with the Company's current products and services makes them especially critical to the Company's success in executing on any of its announced strategies. The loss of any such key executives or employees could make it more difficult for the Company to pursue and execute on its announced strategies.There is no guarantee that theCompanypending Asset Sale willcontinue to operate its software andoccur. If the Asset Sale does not occur, the Company’s electronic commercebusiness. The Company may use a substantial portion of its cash to acquire abusinessor businesses that are not related or complementary to the Company's current softwarewill be materially andelectronic commerce business. The Company may determine not to continue any operations and it may adopt a plan of liquidation. The Company may not be successful in any business it may acquire.adversely affected.Any acquisitions that the Company attempts or
makescompletes could prove difficult to integrate or require a substantial commitment of management time and other resources.As part of the
Company's announcedCompany’s strategy, the Companymayplans to seek to acquire or invest inadditional businesses, products or technologies that may or may not complement or expand its current business. The Company's management may not have experience in operating the types of business that may be acquired by the Company. In addition, acquisitions, particularly acquisitions of unrelated businesses,new businesses. Acquisitions involve a number ofspecial problemsunique risks including:.executing successful due diligence;. difficulty integrating acquired technologies, operations and personnel with the existing businesses; . diversion of management attention in connection with both negotiating the acquisitions and integrating the assets; . strain on managerial and operational resources as management tries to oversee larger operations; . the funding requirements for acquired companies may be significant; .exposure to unforeseen liabilities of acquired companies;.andincreased risk of costly and time-consuming litigation, including stockholderlawsuits; and . the requirement to record potentially significant additional future operating costs for the amortization of intangible assets.lawsuits.The Company may not be able to
successfullyaddress theseproblems.problems successfully. Moreover theCompany'sCompany’s future operating results will depend to a significant degree on its ability tosuccessfullyintegrate acquisitions (if any) successfully and manage operations while also controlling its expenses.22In addition, if the Company identifiesor its investment advisor, Morgan Joseph & Co. Inc., a New York based investment banking firm serving middle market companies, identify an appropriate acquisition opportunity, the Company may not be able to negotiatethefavorable termsoffor thatacquisition successfully.acquisition. The Company may not be able to select, manage or absorb or integrate any future acquisitions successfully, particularly acquisitions of large companies. Any acquisition, even ifsuccessfullyeffectively integrated, may not benefit the Company’s stockholders.The
softening demand for business-to-business software and related services has and is likely to continue to negatively affect the Company's software business, operating results, liquidity and financial condition. The Company's revenue growth and operating results depend significantly on the overall demand for technological goods and services, and in particular, demand for business-to-business software and services. Softening demand for these products and services caused by ongoing economic uncertainty and recently, the Company's announced strategy to pursue strategic alternatives has contributed to andCompany willcontinue to contribute to lower revenues. The successuse all of theCompany's software business depends upon market acceptance of e-commerce as a reliable method for corporate procurement and other commercial transactions. Market acceptance of e-commerce, generally, and the Internet specifically, as a forum for corporate procurement is subject to a number of risks. The successproceeds of theCompany's suite of business-to-business e-commerce applications, including Clarus eProcurementAsset Sale to pay costs andClarus eMarket, depends uponexpenses associated with thedevelopment and expansion of the market for Internet-based software applications, in particular e-commerce applications. This market is rapidly evolving. Many significant issues relating to commercial use of the Internet, including security, reliability, cost, ease of use, quality of service and government regulation, remain unresolved and could delay or prevent Internet growth. If widespread use of the Internet for commercial transactions does not develop or if the Internet otherwise does not develop as an effective forum for corporate procurement, the demand for the Company's product suite and our overall business, operating results, liquidity and financial condition will be materially and adversely affected. The Company's settlement platform is a new technology product in an evolving market. The Company's settlement product is a technology that is currently being marketed to early-adopting customers.Asset Sale.23 The Company
has limited experienceexpects to receive approximately $800,000 inmarketing this product. If the market for the settlement product fails to completely develop or develops more slowly than the Company anticipates or if the Company fails to develop and gain market acceptance of this product, the Company's software business, operating results, liquidity and financial condition could be materially and adversely affected. The Company's quarterly operations are volatile and default to predict. If the Company fails to meet the expectations of public market analysts or investors the market price of the Company's common stock may decrease significantly. The Company believes that its quarterly and annual operating results will fluctuate significantly in the future, and the 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 the Company's common stock could decrease substantially. Because the percentage of the Company's revenues represented by maintenance services and other recurring forms of revenue is smaller than that of many software companies with a longer history of operations, the Company does 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 the Company's quarterly and annual operating results, including: . changes in the demand for the Company's products; . the timing, composition and size of orders from the Company's customers; . customer spending patterns and budgetary resources; . the Company's success in attracting new customers; . the timing of introductions or enhancements to the Company's products; . changes in the Company's pricing policies or those of the Company's competitors; . the Company's ability to anticipate and adapt effectively to developing markets and rapidly changing technologies; 23. the Company's ability to retain and motivate critical personnel, particularly within the Company's finance and support and services organizations; . the publication of opinions or reports about the Company, its products, its competitors or their products; . unforeseen events affecting business-to-business e-commerce; . changes in general economic conditions; . bad debt write-offs; . impairment of intangibles; . impairment of investments; . actions taken by the Company's competitors, including new product introductions and enhancements; . restructuring of the Company's operations and related charges; . the Company's ability to scale its network and operations to support large numbers of customers, suppliers and transactions; . the Company's success in maintaining and enhancing existing relationships and developing new relationships with strategic partners, including application service providers, systems integrators, resellers and other partners; and . the Company's ability to control its costs. The Company's quarterly revenues are especially subject to fluctuation because they can depend on the sale of relatively large orders for the Company's products and related services. As a result, the Company's quarterly operating results may fluctuate significantly if the Company is unable to complete one or more substantial sales in a given quarter. The Company's stock price is highly volatile. The Company's stock price has fluctuated dramatically. The market price of the Company's common stock may decrease significantly in the future in response to the following factors, some of which are beyond the Company's control: . variations in the Company's quarterly operating results; . announcements that the Company's revenue or income are below analysts' expectations; . changes in analysts' estimates of the Company's performance or industry performance; . changes in market valuations of similar companies; . sales of large blocks of the Company's common stock; . announcements by the Company or its 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. 24The Company may be required to defer recognition of license fee revenue for a significant period of time after entering into a license agreement, which could negatively impact the Company's financial results. The Company may be required to defer recognition of license fee revenue for a significant period of time after entering into a license agreement for a variety of transactions, including: . transactions that include both currently available software products and products that are under development or other undeliverable elements; . transactions where the customers demand services that include significant modifications or customizations that could delay product delivery or acceptance; . transactions that involve acceptance criteria that may preclude revenue recognition or if there are identified product-related issues, such as performance issues; and . transactions that involve payment terms or fees that depend on contingencies. Generally accepted accounting principles ("GAAP") for software revenue recognition requires that the Company's license agreements meet specific criteria in order to recognize revenue when we initially deliver software. Although the Company has standard form license agreements that are designed to meet the GAAP criteria for immediate revenue recognition on delivered elements, the Company does on some occasions negotiate the terms of its license agreements. Some of these negotiated agreements may not meet the GAAP criteria for immediate software revenue recognition on delivered elements. Although the Company's business model allows for time-based license agreements, the Company continues to record some of its license fee revenue upon software delivery. The deferral of license fee revenue recognition on these agreements could have an adverse effect on our financial results. The Company may not generate the additional revenues and cut operating cost necessary to become profitable. The Company has incurred significantnetlosses in each year since its formation. In addition, the Company has incurred significant costs to develop its e-commerce technology and products, and to recruit and train personnel. The Company believes its success is contingent upon increasing its customer base and reducing operating costs. The Company cannot guarantee that it will be able to generate the additional revenue and cut operating costs necessary to be profitable. If the Company's flexible payment options are not well received, the market may adopt the Company's productsproceeds ata slower rate than anticipated, and the Company's business may suffer materially. The Company offers flexible payment methods to its customers. These programs are unproven and represents a significant departure from the fee-based software licensing strategies that the Company has traditionally employed. If the Company does not successfully execute these programs, the market may adopt its products at a slower rate than anticipated and the Company's business may suffer materially. The adoption rate of the Company's flexible payment options may, from quarter to quarter, fluctuate or be rejected by the market altogether. As the Company continues this program, the Company may find that the majority of its revenues continue to come from traditional revenue recognition license arrangements that result in revenues being recognized upon delivery. If the results of the Company's flexible payment options program fluctuate due to uneven adoption rates or if the Company's program is rejected entirely, its business, results of operations, liquidity and financial condition would be materially and adversely affected. An increase in the length of the Company's sales cycle may contribute to fluctuations in its operating results. As the Company pursues its announced strategy of exploring and pursuing strategic alternatives, the length of its sales cycle is likely to increase. The loss or delay of orders due to increased sales and evaluation cycles could materially and adversely affect its business, results of operations, liquidity and financial condition and, in particular, could contribute to significant fluctuations in its quarterly operating results. A customer's decision to license and implement its 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 the Company's applications. The Company's sales cycle could extend beyond current levelsclosing as a result oflengthy evaluation and approval processes that typically accompany major initiatives or capital expenditures or other delays over whichtheCompany has little or no control. 25The Company may not be able to maintain referenceable accounts. The implementation of the Company's product suite by buying organizations can be complex, time consuming and expensive. In many cases, these organizations must change established business practices and conduct business in new ways. The Company's ability to attract additional customers for its product suite will depend on using its existing customers as referenceable accounts. As a result, the Company's solutions may not achieve significant market acceptance. In addition, current customers are subject to the effects of being acquired, which may jeopardize their use of the Company's products and referencability in the future. Market adoption for the Company's solutions will be impeded if the Company does not continue to establish and maintain strategic relationships. The Company's success depends in part on the ability of its strategic partners to expand market adoption of its solutions.Asset Sale. If theCompanyAsset Sale isunable to maintain its existing strategic partnerships or enter into new partnerships, the Company would also lose anticipated customer introductions and co-marketing benefits. The Company relies exclusively on third-party content services providers to provide catalog aggregation and management services to its customers, as part of its procurement solution. If the Company is unable to maintain effective, long-term relationships with its content services providers, or if their services do not meet the Company's customers' needs or expectations, the Company's business could be seriously harmed. If the demand for the Company's solutions increases,consummated, the Company willneedbe required todevelop relationships with additional third-party service providerspay approximately $700,000 - $800,000 in severance compensation toprovide these typesits Chief Executive Officer and to certain ofservices.its employees who do not receive offers of employment from Epicor. TheCompany's 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. ManyCompany will also pay fees ofthe Company's strategic partners have multiple strategic relationships, and they may not regard the Company as important to their businesses. In addition, the Company's strategic partners may terminate their relationships with the Company, pursue other partnerships or relationships or attempt to develop or acquire products or services that compete with the Company's solutions. Further, the Company's existing strategic relationships may interfere with its ability to enter into other desirable strategic relationships. A significant number of the Company's Clarus eProcurement and Clarus eMarket customers have been obtained through referrals from Microsoft, but Microsoft is not obligated to refer any potential customersapproximately $150,000 to theCompany, and it has entered into strategic relationships with other providers of electronic procurement applications. The Company's international sales and marketing activities makes the Company's business more susceptible to risks associated with international business activities. The Company is 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; . potentially adverse tax consequences, including restrictions on the repatriation of earnings; . increased transaction costs related to sales transactions conducted outside the United States; . 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 countries outside the United States; 26. adequacy of local infrastructures outside the United States; . 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. The Company may incur costs and liabilities related to potential or pending litigation. In a number of lawsuits filed against the Company in the fourth quarter of 2000 that are now consolidated into one lawsuit, the Company and several of its 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. This lawsuit diverts the time and attention of management and an adverse judgment could cause the Company'sCompany’s financialcondition or operating results to suffer. In addition, ifadvisers in connection with theCompany's announced strategy to pursue strategic alternatives the Company does not continue its current software business operations, the Company may be subject to claims by its customers under its license agreements. The Company's estimate of costs associated with our restructuring and related activities may not be adequate. During 2001 and in April 2002, and in July 2002, the Company's management approved restructuring plans to reorganize and reduce operating costs. Restructuring and related charges of $4.2 million were expensed during 2001, $3.8 million in April 2002 and approximately $1.3 million in July 2002 to better align the Company's cost structure with projected revenue. These charges were comprised of employee separation related costs and facility closures and consolidation costs. If the estimates and assumptions used in the restructuring plan prove to be incorrect the Company may incur additional costs related to these activities. In addition the Company may pursue alternatives to the current facility closures and consolidation plans, including a buy-out of remaining lease obligations, which may result in additional costs. Defects in the Company's products could delay market adoption of its solutions or cause the Company to commit significant resources to remedial efforts The Company could lose revenues as a result of software errors or other product defects. The Company's products may perform inadequately in a high volume environment. As a result of their complexity, software products may contain undetected errors or failures when first introduced or as new versions are released. Despite the Company's testing of its software products and their use by current customers, errors may appear in new applications after commercial shipping begins. If the Company discovers errors, it may not be able to correct them. Errors and failures in the Company's products could result in the loss of customers and market share or delay in market adoption of the Company's applications, and alleviating these errors and failures could require the Company to expend significant capital and other resources. The consequences of these errors and failures could materially and adversely affect the Company's business, results of operations, liquidity and financial condition. Because the Company does not maintain product liability insurance, a product liability claim could materially and adversely affect the Company's business, results of operations, liquidity and financial condition. Provisions in the Company's license agreements may not effectively protect the Company from product liability claims. The success of the Company's software products depends on the continued use of Microsoft technologies or other technologies that operate with the Company's products. The Company's 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 the Company does not support, the Company may not be able to license its software products. Customers may be unable to use the Company's products if they experience significant problems with Microsoft technologies that are not corrected. 27Competition from other electronic procurement providers may continue to reduce demand for the Company's products and cause it to reduce the price of its products. The market for Internet-based procurement applications, and e-commerce technology generally, is intensely competitive. The intensity of competition has increased and is expected to increase in the future. The Company may not compete effectively in its current market or new markets it develops or enters. Competitive pressure has resulted in the Company reducing the price of its products, which has negatively affect its revenues and operating margins. The Company's competitors vary in size and in the scope and breath of the products and services they offer. If the Company is unable to compete effectively in its markets, the Company's business, results of operations, liquidity and financial condition would be materially and adversely affected. In the e-commerce market, the Company must compete with electronic procurement providers such as Ariba and Commerce One. The Company also encounters competition with respect to different aspects of its solution from companies such as VerticalNet, PurchasePro, FreeMarkets, and i2. The Company also faces competition from some of the large enterprise software developers, such as Oracle, PeopleSoft and SAP. In addition, because there are relatively low barriers to entry in the business-to-business exchange market, the Company expects additional competition from other established and emerging companies, particularly if they acquire one of the Company's competitors. Many of the Company's current and potential competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, significantly greater name recognition, and a larger installed base of customers than the Company does. In addition, many of the Company's competitors have well-established relationships with the Company's current and potential customers and have extensive knowledge of the industry. In the past, the Company has lost potential customers to competitors for various reasons, including lower prices and incentives not matched by the Company. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with their partners to increase the ability of their products to address customer needs. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. The Company also expects that competition will increase as a result of industry consolidations. The Company may not be able to compete successfully against its current and future competitors. The failure to maintain, support or update software licensed from third parties could materially and adversely affect the Company's products performance or cause product shipment delays. The Company has entered into license agreements with third-party licensers for products that enhance its products, are used as tools with the Company's products, are licensed as products complementary to the Company's products or are integrated with the Company's products. If these licenses terminate or if any of these licensors fail to stay in business or adequately maintain, support or update their products, the Company could be required to delay the shipment of its products until it could identify and license software offered by alternative sources. Product shipment delays could materially and adversely affect the Company's business, operating results, liquidity and financial condition, and replacement licenses could prove costly. The Company may be unable to obtain additional product licenses on commercially reasonable terms. Additionally, the Company's inability to maintain compatibility with new technologies could impact the Company's customers' use of its products. Illegal use of the Company's proprietary technology could result in substantial litigation costs and divert management resources. The Company's success will depend significantly on internally developed proprietary intellectual property and intellectual property licensed from others. The Company relies on a combination of patent, copyright, trademark and trade secret laws, as well as on confidentiality procedures and licensing arrangements, to establish and protect its proprietary rights in its products. Existing patent, trade secret and copyright laws provide only limited protection of the Company's proprietary rights. The Company has applied for registration of its trademarks. The Company enters into license agreements with its customers that give the customer the non-exclusive right to use the object code version of the Company's products. These license agreements prohibit the customer from disclosing object code to third parties or reverse-engineering its products and disclosing the Company's confidential information. Despite the Company's efforts to protect its products' proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. Third parties may also independently develop products similar to the Company's products. Litigation may be necessary to enforce the Company's intellectual property rights, to protect its 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 28could result in substantial costs and diversion of resources and could harm the Company's business, operating results, liquidity and financial condition.Asset Sale.Claims against the Company regarding its proprietary technology could require the Company to pay licensing or royalty fees or to modify or discontinue its products.
Any claim that the
Company'sCompany’s electronic commerce products infringe on the intellectual property rights of others could materially and adversely affect theCompany'sCompany’s business, results of operations, liquidity and financial condition. Even if the Asset Sale is completed the Company has agreed to indemnify and hold Epicor harmless from losses incurred in connection with the Company’s intellectual property. Because knowledge of a thirdparty'sparty’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 the Company are a continuing risk. Infringement claims against the Company couldcause product release delays, require the Company to redesign its products orrequire the Company 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 the Company regarding its proprietary technology and intellectual property licensed from others. Generally, third-party software licensors indemnify the Company from claims of infringement. However, licensors may be unable to indemnify the Company fully for such claims, if at all.If a court determines that oneThe Company’s indemnification obligations to Epicor for breaches of certain of its representations in the asset purchase agreement may significantly exceed the consideration the Company receives in the Asset Sale.
The Company has an obligation to indemnify Epicor for any losses from breaches of the
Company's products violatesCompany’s representations or warranties in the asset purchase agreement that occur within 24 months after the closing date of the Asset Sale or within the applicable statute of limitations period for claims relating to payment of applicable taxes and our compliance with applicable environmental laws, if longer. The Company indemnification obligations with respect to its breach of representations or warranties are subject to athird party's patent or othermaximum aggregate limit of $1.0 million, except, that:the maximum aggregate limit is $3.0 million with respect to indemnification for any losses Epicor suffers that are related to the Company’s breach of representations and warranties relating to the Company’s ownership of the assets to be sold to Epicor, its intellectual propertyrights,or its compliance with applicable “bulk sales” laws; andthere is no limit on the Company’s obligations to indemnify Epicor for losses resulting from the conduct of the Company’s business before the closing date of the Asset Sale, the assets not purchased or the liabilities not assumed by Epicor in the Asset Sale or a breach of any representation or warranty regarding the Company’s payment of applicable taxes or the Company’s compliance with applicable environmental laws.Although the Company is not aware of any facts or circumstances that would give rise to indemnification claims, the payment of any such indemnification obligations could materially and adversely impact the Company’s cash resources and its ability to pursue additional business opportunities.
For five years after the closing of the Asset Sale, the Company will be prohibited from competing with the assets to be sold to Epicor in the Asset Sale.
The Noncompetition Agreement that the Company will enter into with Epicor if the Asset Sale is completed provides that for a period of five years after the closing of the Asset Sale, neither the Company nor any of its affiliated entities will, directly or indirectly, anywhere in the world:
engage in any business that competes with the business of developing, marketing and supporting Internet-based business-to-business, electronic commerce solutions that automate the procurement, sourcing and settlement of goods and services including through the eProcurement, Sourcing, View (for eProcurement), eTour (for eProcurement), ClarusNET, and Settlement software products and all improvements and variations of these products;attempt to persuade any customer or vendor of Epicor to cease to do business with Epicor or reduce the amount of business being conducted with Epicor;solicit the business of any customer or vendor of Epicor, if the solicitation could cause a reduction in the amount of business that Epicor does with the customer or vendor; or24 hire, solicit for employment or encourage to leave the employment of Epicor any person who is then an employee of Epicor or was an employee of Epicor within the previous 90 days.The prohibitions contained in the Noncompetition Agreement with Epicor will restrict the business opportunities available to the Company and therefore may have a material
riskadverse effect on the Company’s ability to successfully redeploy its remaining assets.Following the Asset Sale, the Company will have no electronic commerce business.
Except for our Cashbook, eMarket, eXpense, View (for eMarket) or eTour (for eMarket) products, the Company is selling its electronic commerce business, which currently represents substantially all of its revenue-generating operations and related assets. The Company intends to pursue a strategy of redeploying a substantial portion of its cash resources after the Asset Sale to acquire an operating business or businesses that will serve as a platform company. The Company may not be successful in acquiring such a business or in operating any business that it acquires.
As the
revenue fromCompany pursues completing the Asset Sale, reducing operating expenses and redeploying its remaining assets, the Company is dependent on certain key executives and employees.To execute on the Company’s announced strategy to complete the Asset Sale, reduce its operating expenses and redeploy its remaining assets, the Company must retain critical executives and employees. The loss of any such key executives or employees could make it more difficult for the Company to pursue and execute on its announced strategies.
The Company’s quarterly operations are volatile and difficult to predict. If the Company fails to meet the expectations of public market analysts or investors the market price of the Company’s common stock may decrease significantly.
The Company believes that its quarterly and annual operating results will fluctuate significantly in the future, and the 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 the Company’s common stock could decrease substantially. Many factors may cause significant fluctuations in the Company’s quarterly and annual operating results, including:
changes in general economic conditions;bad debt write-offs;impairment of intangibles;impairment of strategic investments;actions taken by the Company’s competitors, including new product introductions and enhancements;restructuring of the Company’s operations and related charges; andthe Company’s ability to control its costs.The Company’s stock price is highly volatile.
The Company’s stock price has fluctuated dramatically. The market price of the Company’s common stock may decrease significantly in the future in response to the following factors, some of which are beyond the Company’s control:
failure to complete the sale of substantially all of theinfringing productCompany’s electronic commerce business to Epicor;variations in the Company’s quarterly operating results;announcements that the Company’s revenue or income are below analysts’ expectations;changes in analysts’ estimates of the Company’s performance or industry performance;sales of large blocks of the Company’s common stock;25 announcements by the Company of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;additions or departures of key personnel; andfluctuations in stock market price and volume.The Company may not reduce operating costs necessary to become profitable.
The Company has incurred significant net losses in each year since its formation. In addition, the Company has incurred significant costs to develop its e-commerce technology and products, and to recruit and train personnel. The Company believes its success is contingent upon divesting itself of its electronic commerce business and reducing operating costs. The Company cannot guarantee that it will be
significantly reducedable to complete the Asset Sale and cut operating costs necessary to be profitable.The Company may incur costs and liabilities related to potential or
eliminated, aspending litigation.In a number of lawsuits filed against the Company
mayin the fourth quarter of 2000 that are now consolidated into one lawsuit, the Company and several of its officers haveto: . pay licensing feesbeen named as defendants in a number of securities class action lawsuits filed in the United States District Court for the Northern District of Georgia. This lawsuit diverts the time and attention of management and an adverse judgment could cause the Company’s financial condition orroyaltiesoperating results tocontinue 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.suffer.In addition, if
a court finds that one ofin connection with theCompany's products infringes a third party's patent or other intellectual property rights, thenCompany’s announced strategy to pursue strategic alternativesthe Company does not continue its current software business operations, the Company may beliablesubject tothat third party for actual damagesclaims by its customers under its license agreements.The Company’s estimate of costs associated with its restructuring and
attorneys' fees.related activities may not be adequate.During 2001 and in April 2002 and July 2002, the Company’s management approved restructuring plans to reorganize and reduce operating costs. Restructuring and related charges of $4.2 million were expensed during 2001, $3.8 million in April 2002 and $1.7 million in July 2002 to better align the Company’s cost structure with projected revenue. These charges were comprised of employee separation related costs and facility closure and consolidation costs. If
a court finds thattheCompany willfully infringed on a third party's patent, the third party may be able to recover treble damages, plus attorneys' feesestimates andcosts. A compromise of the encryption technology employedassumptions used in theCompany's solutions could reduce customer and market confidence in the Company's products or result in claims against the Company. A significant barrierrestructuring plan prove toInternet-based commerce is the secure exchange of valued and confidential information over public networks. Any compromise of the Company's security technology could result in reduced customer and market confidence in the Company's products and in customer or third party claims against the Company. This could materially and adversely affect the Company's business, financial condition, operating results and liquidity. Clarus eProcurement and Clarus eMarket rely on encryption technology to provide the security and authentication necessary to protect the exchange of valuable and confidential information. Advances in computer capabilities, discoveries in the field of cryptography or other events or developments may result in a compromise of the encryption methods the Company employs in Clarus eProcurement and Clarus eMarket to protect transaction data. The market for business-to-business e-commerce solutions is characterized by rapid technological change, and the Company's failure to introduce enhancements to its products in a timely manner could render the Company's 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,be incorrect, the Company may incursubstantialadditional coststhat may not result in increased revenues duerelated tothe 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 the Company's products is difficult to estimate. Products, capabilities or technologies others develop may render the Company's products or technologies obsolete or noncompetitive and shorten the life cycles of the Company's products. Satisfying the increasingly sophisticated needs of the Company's customers requires developing and introducing enhancements to the Company's products and technologies in a timely manner that keeps pace with technological developments, emerging industry standards and customer requirements while keeping 29the Company's products priced competitively. The Company's failure to develop and introduce new or enhanced e-commerce products that compete with other available products could materially and adversely affect the Company's software business. Future governmental regulations could materially and adversely affect the Company's software business and e-commerce generally. The Company is not subject to direct regulation by any government agency, other than under regulations applicable to businesses generally, and few laws or regulations specifically address commerce on the Internet. In view of the increasing use and growth of the internet, however, the federal government or state governments may adopt laws and regulations covering issues such as user privacy, property ownership, libel, pricing and characteristics and quality of products and services. For example, a number of comprehensive legislative and regulatory privacy proposals are now under consideration by federal, state, and local governments. The Company could incur substantial costs in complying withtheselaws and regulations, and the potential exposure to statutory liability for information carried on or disseminated through the Company's application systems could force the Company to discontinue some, or all of its services. These eventualities could adversely affect the Company's software business. The adoption of any laws or regulations covering these issues also could slow the growth of e-commerce generally, which would also adversely affect the Company's software business. Foreign governmental regulations could also materially and adversely affect the Company's business. For example, the European Union has enacted the European Data Privacy Directive, which relates to the protection and processing of certain types of personal data. Under the directive, personal data about citizens of European Union member states may not be transferred outside the European Union unless certain specified conditions are met. In addition, persons whose personal data is collected within the European Union are guaranteed certain rights, including the right to access and obtain information about their data and to object to certain forms of processing of their data. The directive therefore affects all companies that collect, process, or transfer personal data in the European Union or receive personal data from the European Union. Other countries outside the European Union have also recently enacted similar laws regulating the transmission of private data, including, without limitation, Argentina, Australia, Hong Kong, Poland and Switzerland. The potential effect of the European Union directive and other foreign data privacy regulations on the Company's business is uncertain. These laws could create uncertainty in the marketplace that could reduce demand for the Company's software or increase the cost of doing business as a result of litigation costs or increased service delivery costs, or could in some other manner have a material and adverse effect on the Company's business, results of operations, liquidity and financial condition. In addition, because the Company's services are accessible worldwide, and the Company facilitates sales of goods to users worldwide, other jurisdictions may claim that the Company is required to qualify to do business as a foreign corporation in a particular state or foreign country. The Company's failure to qualify as a foreign corporation in a jurisdiction could subject the Company to taxes and penalties and could result in the Company's inability to enforce contracts in such jurisdictions. Any such new legislation or regulation or the application of laws or regulations from jurisdictions whose laws do not currently apply to the Company's business, could have a material and adverse effect on the Company's business, results of operations, liquidity and financial condition. Security risks may affect the use of the Internet in electronic commerce. The secure transmission of confidential information over public networks is necessary to the conduct of electronic commerce. Advances in cryptography and other computer capabilities, however, could result in compromises or breaches of the Company's security systems or the security systems of other Web sites. If a particularly well-published compromise of security were to occur, the use of the Web for communications and commerce could be substantially affected. Anyone circumventing the Company's security measures could potentially misappropriate proprietary information or cause interruptions in the Company's operations. Because the Internet is a public network, computer viruses could be introduced to the Company's system or those of the Company's customers or suppliers, thereby disrupting the Company's operational network and making its services inaccessible. In the event the Company's security measures ever failed, the Company's business and financial condition would be substantially harmed. Furthermore, the Company may be required to expend substantial capital and other resources in order to protect against security breaches and interruptions and in order to keep the Company's security system up-to-date. Legislation limiting further levels of encryption technology may adversely affect the Company's sales. As a result of customer demand, it is possible that the Company's products 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 the Company's software and the Company's ability to distribute its products outside the United States. Any 30revocation or modification of the Company's export authority, unlawful exportation or use of the Company's software or adoption of new legislation or regulations relating to exportation or use of software and encryption technology could materially and adversely affect the Company's sales prospects and, potentially, the Company's business, financial condition, operating results and liquidity as a whole. Future taxation could harm the Company's business and Internet commerce generally. The Company files tax returns in such states as required by law based on principles applicable to traditional businesses. The Company does not collect sales or similar taxes in respect of transactions conducted through its software products or trading communications created with the Company's products. However, one or more states could seek to impose additional income tax obligations or sales tax collection obligations on out-of-state companies engaging in or facilitating online commerce. A number of proposals have been made at state and local levels that could impose such taxes on the sale of products and services through the Internet or the income derived from such sales. Such proposals, if adopted, could substantially impair the growth of electronic commerce and reduce the demand for the Company's electronic commerce products and digital marketplaces in general. Legislation limiting the ability of the states to impose taxes on Internet-based transactions was enacted by the United States Congress. This legislation was recently extended through November 1, 2003 as a result of the Internet Tax Non-discrimination Act, signed on November 28, 2001. If the moratorium is not renewed after November 1, 2003, any such taxes could adversely affect the Company's ability to license its electronic commerce products. Item 3. Quantitative and Qualitative Disclosures About Market Riskactivities.
Item 3. Quantitative and Qualitative Disclosures About Market Risk The following discussion concerning the
Company'sCompany’s market risk involves forward-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'sCompany’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 theCompany'sCompany’s financial position or results of operations.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'sCompany’s investment activities is to manage interest rate exposure by investing in short-term, highly liquid investments. As a result of this strategy, the Company believes that there is very little exposure. TheCompany'sCompany’s investments are carried at market value, which approximates cost. An increase or decrease in interest rates of 10% would not have a material effect on theCompany'sCompany’s financial position or results of operations.Investments
During the second quarter of 2001, the Company made an equity investment of $2.0 million in a privately held company. Prior to
26 2001, the Company made equity investments of $17.7 million in eleven privately held companies. The
Company'sCompany’s equity interest in these entities ranges from 2.5% to 12.5% and the Company is accounting for these investments using the cost method of accounting. During 2001 and 2000 the Company recorded charges of $15.4 million and $4.1 million, respectively, for other than temporary losses on these investments.PART II. OTHER INFORMATION Item 1. Legal Proceedings
Item 4. Controls and Procedures Within 90 days prior to the date of filing of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and the Chief Financial Officer, of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective for gathering, analyzing and disclosing the information the Company is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SEC’s rules and forms. The Chief Executive Officer and Chief Financial Officer also concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company’s periodic SEC filings. In connection with the new rules, the Company is in the process of further reviewing and documenting its disclosure controls and procedures, including its internal controls and procedures for financial reporting, and may from time to time make changes designed to enhance their effectiveness and to ensure that the Company’s systems evolve with its business.
There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of this evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings The Company is a party to lawsuits in the normal course of its business. Litigation in general, and securities litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable resolution of the following lawsuit could adversely affect the
Company'sCompany’s business, results of operations, liquidity or financial condition.31Following its public announcement on October 25, 2000, of its financial results for the third quarter, the Company and certain of its directors and officers were named as defendants in fourteen putative class action lawsuits filed in the United States District Court for the Northern District of Georgia on behalf of all purchasers of common stock of the Company during various periods beginning as early as October 20, 1999 and ending on October 25, 2000. The fourteen class action lawsuits filed against the Company were consolidated into one case, Case No. 1:00-CV-2841, pursuant to an order of the court dated November 17, 2000. On March 22, 2001, the Court entered an order appointing as the lead Plaintiffs John Nittolo, Dean Monroe, Ronald Williams, V&S Industries, Ltd., VIP World Asset Management, Ltd., Atlantic Coast Capital Management, Ltd., and T.F.M. Investment Group. Pursuant to the previous Consolidation Order of the Court, a Consolidated Amended Complaint was filed on May 14, 2001.
The class action complaint alleges claims against the Company and other defendants for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder with respect to alleged material misrepresentations and omissions in public filings made with the Securities and Exchange Commission and certain press releases and other public statements made by the Company and certain of its officers relating to its business, results of operations, financial condition and future prospects, as a result of which, it is alleged, the market price of the
Company'sCompany’s common stock was artificially inflated during the class periods. The class action complaint focuses on statements made concerning an account receivable from one of theCompany'sCompany’s customers. The plaintiffs seek unspecified compensatory damages and costs (includingattorneys'attorneys’ and expert fees), expenses and other unspecified relief on behalf of the classes. The Company believes that it has complied with all of its obligations under the Federal securities laws and the Company intends to defend this lawsuit vigorously. As a result of consultation with legal representation and current insurance coverage, the Company does not believe the lawsuit will have a material impact on theCompany'sCompany’s results of operations or financial position.Item 4. Submission of Matters to a Vote of Security Holders On May 21, 2002 the Annual Meeting of stockholders of the Company was held to elect nominees for director and to ratify the appointment of the Company's independent auditors. The following individuals were elected as directors with terms to expire in 2005. Nominee For Withheld ------- --- -------- Warren B. Kanders 5,223,790 16,658 Burtt R. Erlich 5,223,790 16,658 Nicholas Sokolow 5,223,790 16,658 With respect to the ratification of KPMG LLP as the Company's independent auditors for the fiscal year ending December 31, 2002, the results were as follows: For Against Abstain --------- ------- ------- 9,102,552 25,959 20,235 Item 5. Other Information At the July 15, 2002 meeting of the Company's Board of Directors, the Board resolved to recommend to the stockholders of the Company for approval at the next meeting called for any purpose, that costs incurred by Warren B. Kanders, Burtt R. Erlich and Nicholas Sokolow in connection with the solicitation of proxies for the 2002 annual meeting, be reimbursed by the Company. These costs are approximately $500,000. Item 6. Exhibits and Reports on Form 8-K a) The following Exhibits are filed as part of this report 3.1 Amended and Restated Bylaws 10.1 Amendment to Employment Agreement with Stephen P. Jeffery 10.2 Amendment to Employment Agreement with Steven M. Hornyak 10.3 Amendment to Employment Agreement with Sean Feeney 99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32b) Reports on form 8-K None27
Item 6. Exhibits and Reports on Form 8-K
a) The following Exhibits are filed as part of this report
2.1 Asset Purchase Agreement, dated as of October 17, 2002, by and between Epicor Software Corporation and Clarus Corporation (Incorporated by reference from the Company’s Form 8-K filed on October 18, 2002) 2.2 Form of Bill of Sale and Assumption Agreement (Incorporated by reference from the Company’s Form 8-K filed on October 18, 2002) 2.3 Form of Trademark Assignment (Incorporated by reference from the Company’s Form 8-K filed on October 18, 2002) 2.4 Form of Patent Assignment (Incorporated by reference from the Company’s Form 8-K filed on October 18, 2002) 2.5 Form of Noncompetition Agreement (Incorporated by reference from the Company’s Form 8-K filed on October 18, 2002) 2.6 Form of Legal Opinion (Incorporated by reference from the Company’s Form 8-K filed on October 18, 2002) 2.7 Form of Transition Services Agreement (Incorporated by reference from the Company’s Form 8-K filed on October 18, 2002) 2.8 Form of Escrow Agreement (Incorporated by reference from the Company’s Form 8-K filed on October 18, 2002) 2.9 Source Code Sublicense Agreement (Incorporated by reference from the Company’s Form 8-K filed on October 18, 2002) 99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
b) Reports on form 8-K
During the quarter ended September 30, 2002, the Company filed two Current Reports on Form 8-K. The first Form 8-K was dated and filed on July 5, 2002 to report under item 5 and 7 of Form 8-K and the second Form 8-K was dated and filed on September 12, 2002, to report under item 5 of Form 8-K. 28 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: August 14, 2002 /s/
CLARUS CORPORATION
Date: November 14, 2002
/s/ JAMES J. MCDEVITTJames J. McDevitt,
Chief Financial Officer and Secretary29 CERTIFICATION
I, Steven P. Jeffery, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Clarus Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in the quarterly report; 4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-4) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of this registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ STEPHEN P. JEFFERYChief Executive Officer 30 CERTIFICATION
I, James J. McDevitt,
------------------------------------- James J. McDevitt, Chief Financial Officer and Secretary 33
| 1. | I have reviewed this quarterly report on Form 10-Q of Clarus Corporation; | |
| 2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in the quarterly report; | |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-4) for the registrant and we have: |
| (a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; | ||
| (b) | evaluated the effectiveness of this registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and | ||
| (c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors: |
| (a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and | ||
| (b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: November 14, 2002 | /s/ JAMES J. MCDEVITT | ||
| Chief Financial Officer |