UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended September 30, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _________ to _________
Commission File Number: 0-24277
Clarus Corporation
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(Exact name of registrant as specified in its charter)
Delaware 58-1972600
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3970 Johns Creek Court
Suwanee, Georgia 30024
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(Address of principal executive offices)
(Zip code)
(770) 291-3900
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(Registrant's telephone number, including area code)
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(Former name, former address and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
- -
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, ($.0001 Par Value)
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15,560,049 shares outstanding as of October 31, 2001
1
INDEX
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CLARUS CORPORATION
PART I FINANCIAL INFORMATION
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) - September 30, 2001
and December 31, 2000;
Condensed Consolidated Statements of Operations (unaudited) - Three and
nine months ended September 30, 2001 and 2000;
Condensed Consolidated Statements of Cash Flows (unaudited) - Nine
months ended September 30, 2001 and 2000;
Notes to Condensed Consolidated Financial Statements (unaudited) -
September 30, 2001
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
CLARUS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share and per share amounts)
September 30, December 31,
2001 2000
------------------- ------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 78,303 $ 118,303
Marketable securities 47,235 50,209
Accounts receivable, less allowance for doubtful accounts
of $2,433 and $3,917 in 2001 and 2000, respectively 3,890 8,126
Deferred marketing expense, current 1,029 5,321
Prepaids and other current assets 2,880 2,731
------------------- ------------------
Total current assets 133,337 184,690
PROPERTY AND EQUIPMENT, NET 8,211 7,619
OTHER ASSETS:
Deferred marketing expense, net of current portion 1,736 2,508
Investments 7,563 13,619
Intangible assets, net of accumulated amortization of $12,618 and
$6,146 in 2001 and 2000, respectively 49,561 58,214
Deposits and other long-term assets 713 254
------------------- ------------------
Total other assets 59,573 74,595
------------------- ------------------
TOTAL ASSETS $ 201,121 $ 266,904
=================== ==================
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
3
CLARUS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(unaudited)
(in thousands, except share and per share amounts)
September 30, December 31,
2001 2000
------------------- -------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 5,997 $ 11,059
Deferred revenue 3,181 2,295
------------------- -------------------
Total current liabilities 9,178 13,354
LONG-TERM LIABILITIES:
Deferred revenue 264 881
Long-term debt 5,000 5,000
Other long-term liabilities 860 847
------------------- -------------------
Total liabilities 15,302 20,082
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value; 5,000,000 shares authorized; none
issued - -
Common stock, $.0001 par value; 100,000,000 shares authorized;
15,632,974 and 15,609,029 shares issued and 15,557,974 and 15,534,029
outstanding in 2001 and 2000, respectively 2 2
Additional paid-in capital 360,642 362,415
Accumulated deficit (175,214) (114,769)
Treasury stock, at cost (2)
(2)
Accumulated other comprehensive income/(loss) 391 (572)
Unearned stock compensation - (252)
------------------- -------------------
Total stockholders' equity 185,819 246,822
------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 201,121 $ 266,904
=================== ===================
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4
CLARUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
Three months ended Nine months ended
September 30 September 30
-------------------------------------- --------------------------------------
2001 2000 2001 2000
REVENUES:
License fees $ 713 $ 10,262 $ 6,624 $ 23,903
Services fees 2,311 3,281 6,966 6,731
-------------------------------------- --------------------------------------
Total revenues 3,024 13,543 13,590 30,634
COST OF REVENUES:
License fees 14 15 138 113
Services fees 2,561 3,970 9,210 7,900
-------------------------------------- --------------------------------------
Total cost of revenues 2,575 3,985 9,348 8,013
OPERATING EXPENSES:
Research and development, exclusive of
noncash expense 3,433 7,504 13,559 15,860
Noncash research and development - - - 826
In-process research and development expense - - - 8,300
Sales and marketing, exclusive of noncash
expense 5,451 9,407 22,849 24,654
Noncash sales and marketing 1,688 2,018 5,064 5,846
General and administrative, exclusive of
noncash expense 2,648 4,166 10,285 9,161
Noncash general and administrative 28 375 252 1,851
Depreciation and amortization 2,838 2,948 9,003 5,212
-------------------------------------- --------------------------------------
Total operating expenses 16,086 26,418 61,012 71,710
OPERATING LOSS (15,637) (16,860) (56,770) (49,089)
GAIN ON SALE OF ASSETS 10 - 4 547
LOSS ON IMPAIRMENT OF INVESTMENTS (2,614) - (9,098) -
REALIZED GAIN/(LOSS) ON SALE OF INVESTMENTS 11 (5) 22 (5)
AMORTIZATION OF DEBT DISCOUNT - - - (982)
INTEREST INCOME 1,390 3,307 5,574 7,869
INTEREST EXPENSE (57) (58) (177) (290)
-------------------------------------- --------------------------------------
NET LOSS $ (16,897) $ (13,616) $ (60,445) $ (41,950)
====================================== ======================================
Loss per common share:
Basic $ (1.09) $ (0.89) $ (3.89) $ (2.98)
Diluted $ (1.09) $ (0.89) $ (3.89) $ (2.98)
Weighted average shares outstanding
Basic 15,547 15,371 15,521 14,057
Diluted 15,547 15,371 15,521 14,057
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5
CLARUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands, except share amounts)
Nine months ended
September 30,
---------------------------------------
2001 2000
---------------- ------------------
OPERATING ACTIVITIES:
Net loss $ (60,445) $ (41,950)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization on property and equipment 2,531 1,935
Amortization of intangible assets 6,472 3,277
In-process research and development - 8,300
Loss on impairment of investments 8,056 -
Loss on impairment of marketable securities 1,042 -
Gain on sale of marketable securities (22) -
Noncash interest expense associated with original issue discount on debt - 982
Provision for doubtful accounts 3,433 2,597
Noncash research and development expense - 826
Noncash sales and marketing expense 5,064 5,846
Noncash general and administrative expense 252 1,851
Exchange of software for cost-method investments - (10,368)
Gain on sale of assets (4) (547)
Changes in operating assets and liabilities:
Accounts receivable 803 (14,337)
Prepaid and other current assets (149) (3,567)
Deposits and other long-term assets (459) (83)
Accounts payable and accrued liabilities (5,062) 8,901
Deferred revenue 269 1,498
Other long-term liabilities 13 -
---------------- ------------------
NET CASH USED IN OPERATING ACTIVITIES (38,206) (34,839)
INVESTING ACTIVITIES:
Purchase of marketable securities (55,631) (43,604)
Proceeds from sale and maturity of marketable securities 58,456 -
Acquisitions, net of cash acquired - (33,535)
Purchase of investments (2,000) (3,211)
Proceeds from sale of assets - 1,864
Purchases of property and equipment (3,119) (4,562)
---------------- ------------------
NET CASH USED IN INVESTING ACTIVITIES (2,294) (83,048)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock - 244,427
Proceeds from long-term debt - 5,000
Repayment of long-term debt and capital lease obligations - (7,025)
Proceeds from the exercises of stock options 148 2,575
Proceeds from issuance of common stock related to employee stock
purchase plan 260 -
---------------- ------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 408 244,977
---------------- ------------------
Effect of exchange rate change on cash 92 39
CHANGE IN CASH AND CASH EQUIVALENTS (40,000) 127,129
CASH AND CASH EQUIVALENTS, beginning of period 118,303 14,127
---------------- ------------------
CASH AND CASH EQUIVALENTS, end of period $ 78,303 $ 141,256
================ ==================
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 121 $ 290
================ ==================
NONCASH TRANSACTIONS:
6
Issuance of warrants to purchase 50,000 shares of common stock in
connection with marketing agreements $ - $ 986
================ ==================
Issuance of 39,118 shares of common stock in connection with marketing
agreements $ - $ 3,761
================ ==================
Issuance of 1,148,000 shares of common stock in connection with SAI
acquisition $ - $ 30,353
================ ==================
Receipt of marketable securities in satisfaction of trade account
receivable $ - $ 1,214
================ ==================
Retirement of 82,500 shares of common stock pursuant to acquisition $ 2,181 $ -
================ ==================
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
7
CLARUS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Clarus
Corporation and subsidiaries (the "Company") for the three and nine months ended
September 30, 2001, 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 in notes required by accounting principles generally accepted in the
United States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation of the unaudited condensed consolidated financial
statements have been included. The results of the three and nine months ended
September 30, 2001 are not necessarily indicative of the results to be obtained
for the year ending December 31, 2001. These interim financial statements should
be read in conjunction with the Company's audited consolidated financial
statements and footnotes thereto included in the Company's Form 10-K for the
fiscal year ended December 31, 2000, filed with the Securities and Exchange
Commission.
NOTE 2. EARNINGS PER SHARE
Basic and diluted net loss per share were computed in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share", using
the weighted average number of common shares outstanding. The diluted net loss
per share for the three and nine months ended September 30, 2001 and 2000 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 Nine months ended
September 30, September 30,
------------------------------ -------------------------------
2001 2000 2001 2000
---- ---- ---- ----
Effect of shares issuable under stock options 307 1,271 282 1,346
Effect of shares issuable pursuant to warrants to
purchase common stock 1 164 - 188
------------------------------ -------------------------------
Total effect of common stock equivalents 308 1,435 282 1,534
------------------------------ -------------------------------
NOTE 3. STOCK OPTION EXCHANGE PROGRAM
On April 9, 2001, the Company announced a voluntary stock option exchange
program for its employees. Under the program, employees were given the
opportunity, if they so choose, to cancel outstanding stock options previously
granted to them on or after November 1, 1999 in exchange for an equal number of
new options to be granted at a future date. The exercise price of these new
options will be equal to the fair market value of the Company's common stock on
the date of grant, which the Company expects to be later than November 9, 2001.
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 will be exchanged
with new options on February 9, 2002, with an exercise price equal to fair
market value on that date. Employees who participated in the first exchange were
not eligible for the second exchange. The exchange program has been designed to
comply with Financial Accounting Standards Board ("FASB") Interpretation No. 44
"Accounting for Certain Transactions Involving Stock Compensation" and is not
expected to result in any additional compensation charges or variable plan
accounting. Members of the Company's Board of Directors and its officers are not
eligible to participate in the exchange program.
NOTE 4. STOCK OPTIONS
On August 15, 2001, the Company granted options to purchase 150,000 shares of
common stock to a senior executive with an exercise price equal to the fair
market value at the date of grant. These options are designated as nonqualified
options and will expire if not exercised in full before August 14, 2011.
Twenty-five percent of the shares subject to the option shall vest on the first
anniversary of the date of grant and the remaining portion of the option shall
vest in equal monthly installments for 36 months beginning on August 15, 2001.
8
NOTE 5. MARKETABLE SECURITIES
During the second quarter of 2001, the Company recognized a charge of $1.0
million for other than temporary losses from equity investments in a publicly
traded company. The Company had recorded unrealized losses on this investment of
$1.0 million through March 31, 2001. The securities were originally acquired as
settlement of a trade accounts receivable.
NOTE 6. INVESTMENTS
During the second quarter of 2001, the Company made an equity investment of $2.0
million in a privately held strategic partner. Prior to 2001, the Company made
equity investments of $17.7 million in eleven privately held companies. The
Company's equity interest in these entities ranges from 2.5% to 12.5% and the
Company is accounting for these investments using the cost method of accounting.
During the third quarter of 2001, the second quarter of 2001, the first quarter
of 2001 and the fourth quarter of 2000, the Company recorded charges of $2.6
million, $2.4 million, $3.1 million and $4.1 million, respectively, for other
than temporary losses on these investments. These companies are primarily
early-stage companies and are subject to significant risk due to their limited
operating history and current economic and capital market conditions. The
Company has not recognized any material revenue from these companies during
2001. During the year ended December 31, 2000, the Company recognized $17.2
million in total revenue from these companies. In the third quarter of 2000, the
Company made additional equity investments of $2.8 million in two privately held
companies and new investments of $5.2 million in three privately held companies
and recognized $8.1 million in total revenue from these privately held
companies. For the nine months ended September 30, 2000, the Company made equity
investments of $13.6 million and recognized $12.2 million in total revenue from
eight privately held companies.
NOTE 7. ACQUISITIONS
On May 31, 2000, the Company acquired all of the outstanding capital stock of
SAI (Ireland) Limited, SAI Recruitment Limited, i2Mobile.com Limited and SAI
America Limited (collectively the "SAI/Redeo Companies"). The SAI/Redeo
Companies specialize in electronic payment settlement. The purchase
consideration was approximately $63.2 million, consisting of approximately $30.0
million in cash (exclusive of $350,000 of cash acquired), 1,148,000 shares of
the Company's common stock with a fair value of $30.4 million, assumed options
to acquire 163,200 shares of the Company's common stock with an exercise price
of $23.50 (estimated fair value of $1.8 million using the Black-Scholes option
pricing model) and acquisition costs of approximately $995,000.
The acquisition was treated as a purchase for accounting purposes, and
accordingly, the assets and liabilities were recorded based on their preliminary
fair value at the date of acquisition. The Company evaluated the developed
technologies and the in-process research and development to determine their
stage of development, their expected income generating ability, as well as risk
factors associated with achieving technological feasibility. The Company
expensed approximately $8.3 million to in-process research and development in
the second quarter of 2000. The goodwill, $48.2 million, and the developed
technologies, $4.1 million, are being amortized over eight years. The assembled
workforce, $450,000, and the customer base, $100,000, are being amortized over
seven and four years, respectively. The goodwill balance was reduced in the
first quarter of 2001 by $1.5 million as a result of 55,000 shares issued as
part of the original purchase consideration being cancelled when a related
employment agreement was terminated prior to the first anniversary of the
acquisition date. The goodwill balance was further reduced in the second quarter
of 2001 by $727,000 as a result of 27,500 shares issued as part of the original
purchase consideration being cancelled when a related employment agreement was
terminated prior to the second anniversary of the acquisition date.
On April 28, 2000, the Company acquired all of the capital stock of iSold.com,
Inc., a Delaware corporation ("iSold"). iSold has developed a software program
that provides auctioning capabilities to its clients. The purchase consideration
was approximately $2.5 million in cash of which $1.6 million was paid at the
date of acquisition and $900,000 was paid in April 2001. The acquisition was
treated as a purchase for accounting purposes with approximately $500,000 of the
purchase consideration allocated to developed technologies and approximately
$2.0 million to goodwill. The developed technologies are being amortized over
three years and the goodwill is being amortized over four years.
9
NOTE 8. COMPREHENSIVE INCOME (LOSS)
SFAS No. 130 "Reporting Comprehensive Income", establishes standards of
reporting and display of comprehensive income (loss) and its components of net
income (loss) and "Other Comprehensive Income (Loss)". "Other Comprehensive
Income (Loss)" refers to revenues, expenses and gains and losses that are not
included in net income (loss) but rather are recorded directly in stockholders'
equity. The components of comprehensive loss for the three and nine months ended
September 30, 2001 and 2000 were as follows (in thousands):
Three months ended Nine months ended
September 30, September 30,
2001 2000 2001 2000
-------------------------------- ---------------------------------
Net loss $ (16,897) $ (13,616) $ (60,445) $ (41,950)
Unrealized gain on marketable securities 162 3 871 296
Foreign currency translation adjustments 9 31 92 39
-------------------------------- ---------------------------------
Comprehensive loss $ (16,726) $ (13,582) (59,482) (41,615)
================================ =================================
NOTE 9. CREDIT AND CUSTOMER CONCENTRATIONS
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. As of September 30, 2001, two
customers accounted for more than 10% each, totaling $3.2 million or 51.4% of
the gross accounts receivable balance on that date. The percentage by customer
was 21.1% and 30.3%, respectively, at September 30, 2001. As of December 31,
2000, four customers accounted for more than 10% each, totaling $6.7 million or
56.0% of the gross accounts receivable balance on that date. The percentage by
customer was 10.4%, 11.2%, 14.5%, and 19.9%, respectively, at December 31, 2000.
During the quarter ended September 30, 2001, one customer accounted for more
than 10% of total revenue, totaling $490,000 or 16.2%. During the quarter ended
September 30, 2000, five customers accounted for more than 10% each, totaling
$9.3 million or 68.5% of total revenue. The percentage by customer was 10.0%,
11.7%, 12.9%, 15.5% and 18.4% respectively, for the quarter ended September 30,
2000. During the nine months ended September 30, 2001, four customers accounted
for more than 10% each, totaling $7.3 million or 53.5%, of total revenue. The
percentage by customer was 11.8%, 12.7%, 13.7% and 15.3%, respectively, for the
nine months ended September 30, 2001. During the nine months ended September 30,
2000, no customers accounted for more than 10% of total revenue.
NOTE 10. CONTINGENCIES
The Company is a party to lawsuits in the normal course of its business.
Litigation in general, and securities litigation in particular, can be expensive
and disruptive to normal business operations. Moreover, the results of complex
legal proceedings are difficult to predict. An unfavorable resolution of the
following lawsuit could adversely affect the Company's business, results of
operations, or financial condition.
Following its public announcement on October 25, 2000, of its financial results
for the third quarter of 2000, the Company and certain of its directors and
officers were named as defendants in fourteen putative class action lawsuits
filed in the United States District Court for the Northern District of Georgia
on behalf of all purchasers of common stock of the Company during various
periods beginning as early as October 20, 1999 and ending on October 25, 2000.
The fourteen class action lawsuits filed against the Company were consolidated
into one case, Case No. 1:00-CV-2841, pursuant to an order of the court dated
November 17, 2000. On March 22, 2001, the Court entered an order appointing as
the lead Plaintiffs John Nittolo, Dean Monroe, Ronald Williams, V&S Industries,
Ltd., VIP World Asset Management, Ltd., Atlantic Coast Capital Management, Ltd.,
and T.F.M. Investment Group. Pursuant to the previous Consolidation Order of the
Court, a Consolidated Amended Complaint was filed on May 14, 2001. On June 29,
2001, the Company filed a motion to dismiss the consolidated case. The
plaintiffs responded to the Company's motion to dismiss on August 6, 2001. The
Company replied with a rebuttal to the plaintiffs' response on August 27, 2001.
The class action complaint alleges claims against the Company and other
defendants for violations of Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934, as amended, and Rule 10b-5 promulgated thereunder with respect to
alleged material misrepresentations and omissions in public filings made with
the Securities and Exchange Commission and certain press releases and other
public statements made by the Company and certain of its officers relating to
its business, results of operations, financial condition and future prospects,
as a result of which, it is alleged, the market price of the Company's common
stock was artificially inflated during the class periods. The class action
complaint focuses on statements made concerning an account receivable from one
of the Company's customers. The plaintiffs seek unspecified compensatory damages
and costs (including attorneys' and expert fees), expenses and other unspecified
relief on behalf of the class. The Company believes that it has complied with
all of its obligations under the Federal securities laws and the Company intends
to defend this lawsuit vigorously. As a result of consultation with legal
representation and current insurance coverage, the Company does not believe the
lawsuit will have a material impact on the Company's results of operations or
financial position.
10
NOTE 11. COMMITMENTS
In March 2001, the Company terminated a services agreement with a development
partner. As a result, the Company paid termination fees of $300,000 in the
second quarter of 2001 and $300,000 in the third quarter of 2001. The $600,000
expense, recorded in the quarter ended March 31, 2001, is included in research
and development expense in the accompanying condensed consolidated statement of
operations for the nine months ended September 30, 2001.
NOTE 12. NEW ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Assets to Be Disposed
of". The Company is required to adopt SFAS 144 effective January 1, 2002. The
adoption of SFAS 144 is not expected to have a material impact on the Company's
financial statements.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets". SFAS 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. SFAS 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually. SFAS 142 will also require that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values.
The Company is required to adopt the provisions of SFAS 141 immediately and SFAS
142 effective January 1, 2002. Goodwill and intangible assets determined to have
an indefinite useful life acquired in a purchase business combination completed
after June 30, 2001, but before SFAS 142 is adopted in full will not be
amortized, but will continue to be evaluated for impairment in accordance with
the accounting literature in effect prior to the issuance of SFAS 142. Goodwill
and intangible assets acquired in business combinations completed before July 1,
2001 will continue to be amortized prior to the adoption of SFAS 142.
At September 30, 2001, the Company's unamortized goodwill and intangibles
totaled $49.6 million. Amortization expense related to goodwill was $4.7 million
and $5.8 million for the year ended December 31, 2000 and the nine months ended
September 30, 2001, respectively. Because of the extensive effort needed to
comply with adopting SFAS 142, it is not practicable to reasonably estimate the
impact of adopting these Statements on the Company's financial statements at the
date of this report, including whether it will be required to recognize any
transitional impairment losses as the cumulative effect of a change in
accounting principle.
In September 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement was amended in June 2000 by
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities." The Company adopted these new pronouncements in January of
2001. The new Statements require all derivatives to be recorded on the balance
sheet at fair value and establish accounting treatment for three types of
hedges: hedges of changes in the fair value of assets, liabilities or firm
commitments; hedges of the variable cash flows of forecasted transactions; and
hedges of foreign currency exposures of net investments in foreign operations.
The Company has no derivatives and the adoption of these pronouncements did not
have any impact on the Company's results of operations or financial position.
NOTE 13. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current
period presentation.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company develops, markets and supports Internet-based business-to-business
electronic commerce solutions that automate the procurement and management of
operating resources. The Company's multiple solutions provide a framework to
enable Internet-based digital marketplaces, allowing companies to create trading
communities and additional revenue opportunities. The Company's multiple
solutions, based on a free trade model, provide a direct Internet-based
connection between buyer and supplier without requiring transactions to be
executed through a centralized portal. The Company's product line includes
solutions that serve "market makers" (businesses utilizing the Internet for the
purpose of facilitating and increasing the efficiency of the distribution
channels of chosen vertical markets) as well as other solutions that best serve
the sourcing, purchasing and settlement processes of business enterprises. The
Company also provides implementation and ongoing customer support services as
part of its complete sourcing, procurement and settlement solutions. To achieve
broad market adoption of the Company's solutions and services, the Company has
developed a multi-channel distribution strategy that includes both a direct
sales force and a growing number of indirect channels, including application
service providers, system integrators and resellers.
Forward-Looking Statements
This report contains certain forward-looking statements related to our future
prospects or results, including certain projections and business trends.
Assumptions relating to forward-looking statements involve judgments with
respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control. When
used in this report, the words "estimate", "project", "intend", "believe" and
"expect" and similar expressions are intended to identify forward-looking
statements. Although we believe that assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate, and we
may not realize the results contemplated by the forward-looking statement.
Management decisions are subjective in many respects and susceptible to
interpretations and periodic revisions based upon actual experience and business
developments, the impact of which may cause us to alter our business strategy or
capital expenditure plans that may, in turn, affect our results of operations.
In light of the significant uncertainties inherent in the forward-looking
information included in this report, you should not regard the inclusion of such
information as our representation that we will achieve any strategy, objectives
or other plans. The forward-looking statements contained in this report speak
only as of the date of this report, and we have no obligation to update publicly
or revise any of these forward-looking statements.
These and other statements, which are not historical facts, are based largely
upon our current expectations and assumptions and are subject to a number of
risks and uncertainties that could cause actual results to differ materially
from those contemplated by such forward-looking statements. These risks and
uncertainties include, among others, the risks and uncertainties described in
the "Risk Factors" section of this discussion beginning on page 20 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 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". Accordingly, 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. Services fee revenue allocated to
maintenance is recognized ratably over the maintenance term, which is typically
twelve months, and services fee revenue allocated to training and other service
elements is recognized as the services are performed.
12
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 the applications are
shipped.
Cost of services fees includes personnel related expenses and third-party
consulting fees incurred to provide implementation, training, maintenance,
content aggregation, and upgrade services to customers and partners. These costs
are recognized as they are incurred.
Research and development expenses consist primarily of personnel related
expenses and third-party consulting fees. The Company accounts for software
development costs under Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed". The Company charges research and development costs related to new
products or enhancements to expense as incurred until technological feasibility
is established, after which the remaining costs are capitalized until the
product or enhancement is available for general release to customers. The
Company defines technological feasibility as the point in time at which a
working model of the related product or enhancement exists. Historically, the
costs incurred during the period between the achievement of technological
feasibility and the point at which the product is available for general release
to customers have not been material.
Sales and marketing expenses consist primarily of personnel related expenses,
including sales commissions and bonuses, expenses related to travel, 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, and the provision for doubtful accounts. The Company
allocates the total cost of its information technology function and costs
related to the occupancy of its corporate headquarters, to each of the
functional areas. Information technology expenses include personnel related
expenses, communication charges, and software support. Occupancy charges include
rent, utilities, and maintenance services.
The Company has incurred significant costs to develop its business-to-business
e-commerce technology and products and to recruit and train personnel. The
Company believes its success is contingent upon increasing its customer base and
investing in further development of its products and services. This will require
significant expenditures for sales, marketing, research and development, and to
a lesser extent support infrastructure. The Company therefore expects to
continue to incur operating losses for the next several quarters.
Limited Operating History
The Company has a limited operating history as an e-commerce business that makes
it difficult to forecast its future operating results. Prior period results
should not be relied on to predict the Company's future performance.
Results of Operations
Revenues
In the second half of 2000, the Company expanded its business model to include
ratable revenue recognition. Total revenues for the three and nine months ended
September 30, 2001 were impacted by the use of programs that result in revenues
recognized ratably. The Company includes in its definition of ratable programs
contracts which do not result in all license revenue being recognized at the
time the contract is executed. Examples of ratable programs include but are not
limited to: traditional, perpetual license contracts with extended payment
terms, subscriptions and milestone arrangements. For the three months ended
September 30, 2001, the Company recognized 24.6% of license revenue from ratable
programs. For the nine months ended September 30, 2001, the Company recognized
44.2% of license revenue from ratable programs. Although lowering reported total
revenue and license revenue for the three and nine months ended September 30,
2001, the Company believes that the benefits achieved over time of the ratable
model are a more linear revenue pattern as well as increased visibility and
predictability of financial results.
13
Total Revenues. Total revenues for the quarter ended September 30, 2001
decreased 77.7% to $3.0 million from $13.5 million during the same period in
2000. Total revenues for the nine months ended September 30, 2001 decreased
55.6% to $13.6 million from $30.6 million during the same period in 2000. The
decrease in total revenues resulted from the softening demand for
business-to-business software and related services and the information
technology market generally. During the quarter ended September 30, 2001, one
customer accounted for more than 10%, totaling $490,000 or 16.2%, of total
revenue. During the quarter ended September 30, 2000, five customers accounted
for more than 10% each, totaling $9.3 million or 68.5% of total revenue. The
percentage by customer was 10.0%, 11.7%, 12.9%, 15.5% and 18.4%, respectively,
for the quarter ended September 30, 2000. During the nine months ended September
30, 2001, four customers accounted for more than 10% each, totaling $7.3 million
or 53.5%, of total revenue. The percentage by customer was 11.8%, 12.7%, 13.7%
and 15.3%, respectively, for the nine months ended September 30, 2001. During
the nine months ended September 30, 2000, no customer accounted for more than
10% of total revenue.
License Fees. License fees decreased 93.1% to $713,000, or 23.6% of total
revenues, for the quarter ended September 30, 2001 from $10.3 million, or 75.8%
of total revenues, for the same period in 2000. License fees decreased 72.3% to
$6.6 million, or 48.7% of total revenues, for the nine months ended September
30, 2001 from $23.9 million, or 78.0% of total revenues, for the same period in
2000. The decrease in license fees was attributable to the softening demand for
business-to-business software and the information technology market generally.
Services Fees. Services fees decreased 29.6% to $2.3 million, for the quarter
ended September 30, 2001, from $3.3 million for the same period in 2000.
However, services fees increased as a percentage of total revenues to 76.4%, for
the quarter ended September 30, 2001, from 24.2% for the same period in 2000.
Services fees increased 3.5% to $7.0 million, for the nine months ended
September 30, 2001, from $6.7 million for the same period in 2000, and also
increased as a percentage of total revenues to 51.3%, for the nine months ended
September 30, 2001, from 22.0% for the same period in 2000. The decrease in
service revenues from the third quarter 2000 to the third quarter 2001 is
primarily due to reduced implementation revenue as a result of the reduction in
new customers licensing the Company's products. The year over year increase in
services fees is primarily due to an increase in new license customers signed
during 2000 partially offset by the softening demand for business-to-business
software and related services and the information technology market generally.
Cost of Revenues
Total Cost of Revenues. Cost of revenues decreased 35.4% to $2.6 million, or
85.2% of total revenue, during the quarter ended September 30, 2001 from $4.0
million, or 29.4% of total revenue, during the same period in 2000. Cost of
revenues increased 16.7% to $9.3 million, or 68.8% of total revenue, during the
nine months ended September 30, 2001 from $8.0 million, or 26.2% of total
revenue, during the same period in 2000. The decrease in cost of revenues from
the third quarter 2000 to the third quarter 2001 is primarily a result of a
decrease in the cost of services fees due to lower personnel related costs.
During the three months ended September 30, 2001, the Company had an average of
31.0% fewer employees in services compared to the same period in 2000. The
reduced personnel related costs are a result of Company instituted cost control
measures completed in the first and third quarters of 2001. The year to year
increase in cost of revenues is primarily due to an increase in cost of services
fees due to higher personnel related costs. During the nine months ended
September 30, 2001, the Company had an average of 14.5% more employees in
services compared to the same period in 2000. Severance expenses, related to 18
employees of approximately $247,000, also negatively impacted the cost of
revenues for the nine months ended September 30, 2001.
Cost of License Fees. Cost of license fees decreased 6.7% to $14,000 in the
third quarter of 2001 from $15,000 in the third quarter of 2000. Cost of license
fees increased 22.1% to $138,000 for the nine months ended September 30, 2001
from $113,000 in the same period of 2000. Cost of license fees may vary from
period to period depending on the product mix licensed, but are expected to
remain a small percentage of license fees.
Cost of Services Fees. Cost of services fees decreased 35.5% to $2.6 million, or
110.8% of total services fees revenues, during the quarter ended September 30,
2001 compared to $4.0 million, or 121.0% of total services fees revenues, during
the same period in 2000. Cost of services fees increased 16.6% to $9.2 million,
or 132.2% of total services fees revenues, during the nine months ended
September 30, 2001 compared to $7.9 million, or 117.4% of total services fees
revenues, during the same period in 2000. As discussed above, the decrease in
the cost of services fees for the three months ended September 30, 2001 was
primarily attributable to lower personnel related costs in both the services
implementation and customer support areas. The increase in the cost of services
fees for the nine months ended September 30, 2001 was primarily attributable to
higher personnel related costs and severance as discussed above. The Company has
incurred cost of services fees in excess of services revenues due primarily to
the hiring and training of personnel in anticipation of future growth. As a
result of slower than anticipated growth, the Company instituted cost control
actions in the first and third quarters of 2001, including the reduction in
personnel discussed above, to more closely align the cost structure with the
anticipated growth. The Company anticipates that services fees will exceed costs
by late 2001.
14
Research and Development, Exclusive of Noncash Expense
Research and development expenses decreased 54.3% to approximately $3.4 million,
or 113.5% of total revenues, during the quarter ended September 30, 2001 from
$7.5 million, or 55.4% of total revenues, during the same period in 2000.
Research and development expenses decreased 14.5% to approximately $13.6
million, or 99.8% of total revenues, during the nine months ended September 30,
2001 from $15.9 million, or 51.8% of total revenues, during the same period in
2000. Research and development expenses decreased in the quarter ended September
30, 2001 compared to the quarter ended September 30, 2000 as a result of a
reduction of consulting fees incurred to develop the Company's products.
Consulting fees were $562,000 in the third quarter of 2001 compared to $4.3
million in the third quarter of 2000. Research and development expenses
decreased for the nine months ended September 30, 2001 compared to the nine
months ended September 30, 2000 primarily due to a decrease in consulting fees
partially offset by increased personnel related expenses incurred to develop the
Company's products and the acquisition of the SAI/Redeo companies. Consulting
fees were $3.3 million for the nine months ended September 30, 2001 compared to
$8.8 million for the same period of 2000. During the nine months ended September
30, 2001, the Company had an average of 20.7% more employees in the research and
development area compared to the same period of 2000. The results for the nine
months ended September 30, 2001 were also negatively impacted by $600,000 as a
result of terminating a services agreement with a development partner. The
Company plans to utilize in-house research and development personnel in the
future, but expects to incur consulting fees for certain specialized development
projects.
Noncash Research and Development Expense
Noncash research and development expenses of approximately $826,000 were
recognized during the first quarter of 2000. The expenses resulted from the
Company's agreement with a third party to develop certain software that the
Company intends to sell in the future. The agreement required the third party to
reach certain milestones related to the software development in order to receive
warrants to purchase 50,000 shares of the Company's common stock with an
exercise price of $56.78. The third party completed two of the three scheduled
milestones in the first quarter of 2000 and they were granted warrants to
purchase 33,334 shares of common stock. The third milestone was not reached by
the scheduled due date, and as a result the warrants to purchase the remaining
16,666 shares of common stock were forfeited. The warrants to purchase 33,334
shares remain outstanding at September 30, 2001 and expire in the first quarter
of 2003. At the end of the first quarter of 2000, the value of the warrants
earned approximated $826,000 and was computed using the Black-Scholes option
pricing model.
In-Process Research and Development Expense
In-process research and development expense was approximately $8.3 million for
the nine months ended September 30, 2000. The Company recorded this expense in
the second quarter of 2000 related to its acquisition of the SAI/Rodeo companies
on May 31, 2000 (the "Valuation Date").
At the Valuation Date, the SAI/Redeo companies had technology under development
that had not yet reached technological feasibility and had no alternative future
use in the event that the proposed products did not prove to be feasible. The
product under development was a settlement portal that completes the B2B
commerce chain cycle for the buy side, sell side, and net marketmakers. The
Company's goal is to complete the procurement cycle from order fulfillment to
settlement automatically and at the lowest possible cost. The initial
development and commercial release of the Company's Settlement product was
completed during the third quarter of 2000. The Company is continuing to invest
in further development and enhancements of the Settlement product. During the
nine months ended September 30, 2001, 24.9% of the Company's license revenue was
derived from licensing the Settlement product. During the nine months ended
September 30, 2000, 6.9% of the Company's license revenue was derived from
licensing the Company's Settlement product.
The value of the in-process research and development ("IPR&D") was determined
using a discounted cash flow model, focusing on the income-producing
capabilities of the in-process technologies and taking into consideration (i)
the analysis of the stage of completion of each project and (ii) the exclusion
of value related to research and development yet-to-be completed as part of the
on-going IPR&D projects. Under this approach, the value is determined by
estimating the revenue contribution generated by each of the identified products
classified within the classification segments. Revenue estimates were based on
(i) individual product revenues, (ii) anticipated growth rates, (iii)
anticipated product development and introduction schedules, (iv) product sales
cycles, and (v) the estimated life of a product's underlying technology.
Based upon the revenue estimates, operating expense projections, including cost
of sales, general and administrative, selling and marketing, income taxes and a
use charge for contributory assets, were deducted to arrive at operating income.
Revenue growth rates were estimated by management for each product with
consideration to relevant market sizes and growth factors, expected industry
trends, the anticipated nature and timing of new product introductions by the
Company as well as competitors, individual product sales cycles, and the
estimated life of each product's underlying technology. Operating expense
estimates reflect the Company's historical expense ratios. Additionally, these
projects will require continued research and development after they have
15
reached a state of technological and commercial feasibility. The resulting
operating income stream was discounted to reflect its present value at the date
of the acquisition.
The rate used to discount the net cash flows from the purchased IPR&D was 28%.
This rate is equal to the weighted average cost of capital of the Company,
taking into account (i) the required rates of return from investments in various
areas of the enterprise, (ii) reflecting the inherent uncertainties in future
revenue estimates from technology investments including the uncertainty
surrounding the successful development of the acquired IPR&D, (iii) the useful
life of such technology, (iv) the profitability levels of such technology, if
any, and (v) the uncertainty of technological advances, all of which were
unknown at the time.
To date, actual revenues attributable to the IPR&D have been lower than the
original projections. No assurance can be given that future revenues and
operating profit attributable to the purchased IPR&D will not deviate from the
projections used to value such technology. Ongoing operations and financial
results for acquired businesses, and the Company as a whole, are subject to a
variety of factors which may not have been known or estimable at the Valuation
Date. To date, actual costs of completing the project and the timing thereof
have been consistent with the estimates used in developing the valuation of the
purchased IPR&D.
Sales and Marketing, Exclusive of Noncash Expense
Sales and marketing expenses decreased 42.0% to $5.5 million, or 180.3% of total
revenues, during the quarter ended September 30, 2001 from $9.4 million, or
69.5% of total revenues, during the same period in 2000. Sales and marketing
expenses decreased 7.3% to $22.8 million, or 168.1% of total revenues, during
the nine months ended September 30, 2001 from $24.7 million, or 80.5% of total
revenues, during the same period in 2000. The decrease was primarily
attributable to a decrease in variable compensation as a result of lower license
revenue during the periods and a decrease in sales and marketing personnel. The
Company had an average of 8.9% fewer employees during the third quarter of 2001
in the sales, marketing and business development areas compared to the third
quarter of 2000. The Company had an average of 9.8% fewer employees during the
nine months ended September 30, 2001 in the sales, marketing and business
development areas compared to the same period of 2000.
Noncash Sales and Marketing Expense
During the quarters ended September 30, 2001 and 2000, noncash sales and
marketing expenses of approximately $1.7 million and $2.0 million, respectively,
were recognized in connection with sales and marketing agreements signed by the
Company during the fourth quarter of 1999 and the first quarter of 2000. During
the nine months ended September 30, 2001 and 2000, noncash sales and marketing
expenses of approximately $5.1 million and $5.8 million, respectively, were
recognized in connection with these agreements. In connection with these
agreements, the Company issued warrants and shares of common stock to certain
strategic partners, all of whom are also customers, in exchange for their
participation in the Company's sales and marketing efforts. The Company recorded
the value of these warrants and common stock as deferred sales and marketing
expenses, which are being amortized over the life of the agreements which range
from nine months to five years.
General and Administrative, Exclusive of Noncash Expense
General and administrative expenses decreased 36.4% to $2.6 million during the
quarter ended September 30, 2001, or 87.6% of total revenue from $4.2 million,
or 30.8% of total revenues, during the same period in 2000. General and
administrative expenses increased 12.3% to $10.3 million during the nine months
ended September 30, 2001, or 75.7% of total revenue from $9.2 million, or 29.9%
of total revenues, during the same period in 2000. The decrease in general and
administrative expense for the three months ended September 30, 2001 was
primarily attributable to a decrease in the provision for doubtful accounts and
reduced headcount. The increase in general and administrative expense for the
nine months ended September 30, 2001 was primarily attributable to an increase
in the provision for doubtful accounts and the acquisition of the SAI/Redeo
companies in May, 2000. The Company recorded a provision for doubtful accounts
of $823,000 and $3.4 million for the three and nine months ended September 30,
2001, respectively. The Company recorded a provision for doubtful accounts of
$2.1 million and $2.6 million for the three and nine months ended September 30,
2000, respectively.
Noncash General and Administrative Expense
Noncash general and administrative expenses decreased to approximately $28,000,
or 0.9% of total revenues, during the third quarter of 2001, from $375,000, or
2.8% of total revenues, during the same period in 2000. Noncash general and
administrative expenses decreased to approximately $252,000, or 1.9% of total
revenues, during the nine months ended September 30, 2001, from $1.9 million, or
6.0% of total revenues, during the same period in 2000. The decrease in the
three and nine months periods ended September 30, 2001 was primarily
attributable to the termination in the fourth quarter of 2000 of an arrangement
where the Company granted 160,000 options to a senior executive during the first
quarter of 2000 at an exercise price below the fair market
16
value at the date of grant. Fifteen percent of these options vested immediately
and the remainder vested over four years. In the first quarter of 2000, the
Company immediately expensed $814,500 associated with the intrinsic value of the
vested options and recorded the intrinsic value of the unvested options, $4.6
million, as deferred compensation to be amortized evenly over the four-year
vesting period. Approximately $864,000 was expensed in the first nine months of
2000 related to the unvested options. As a result of the termination, all
options except those that were vested on the original grant date were forfeited
and the Company reversed in the fourth quarter of 2000 approximately $864,000 of
compensation expense related to the forfeited, unvested options. In the third
quarter of 2000, the Company granted 18,750 options to a new board member at a
price below the fair market value at the date of grant. Deferred compensation of
approximately $266,000 was recorded related to this grant. The amount expensed
during 2001 relates primarily to these options.
Depreciation and Amortization
Depreciation and amortization decreased to $2.8 million in the quarter ended
September 30, 2001 from $2.9 million in the same period of 2000. Depreciation
and amortization increased to $9.0 million in the nine months ended September
30, 2001 from $5.2 million in the same period of 2000. The year to year increase
is primarily the result of the Company's amortization of its intangible assets
associated with the acquisitions of iSold.com and the SAI/Redeo companies
completed in the second quarter of 2000.
Gain on Sale of Assets
For the three and nine month periods ended September 30, 2001, the Company
recorded a gain on the sale property and equipment of $10,000 and $4,000,
respectively. For the nine month period ended September 30, 2000, the Company
recorded a gain on the sale of its human resources and financial software
business to Geac Computer Systems, Inc., and Geac Canada Limited of $547,000.
The gain was recorded following an escrow settlement from the original sale in
October, 1999.
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. The losses were necessitated by other than temporary
losses to the value of investments the Company has made in privately held
companies and marketable securities of one publicly traded company. The
privately held companies are primarily early-stage companies and are subject to
significant risk due to their limited operating history and current economic and
capital market conditions.
Interest Income
Interest income decreased to $1.4 million in the third quarter of 2001, or 46.0%
of total revenues from $3.3 million, or 24.4% of total revenues, in the same
period of 2000. Interest income decreased to $5.6 million for the nine months
ended September 30, 2001, or 41.0% of total revenues from $7.9 million, or 25.7%
of total revenues, in the same period of 2000. The decrease in interest income
was due to lower levels of cash available for investment and lower interest
rates. The Company expects to continue to use cash to fund operating losses and,
as a result, interest income on available cash is expected to decline in future
quarters.
Interest Expense and Amortization of Debt Discount
Interest expense decreased 1.7% to $57,000 in the third quarter of 2001 from
$58,000 in the same period of 2000. Interest expense decreased 39.0% to $177,000
for the nine months ended September 30, 2001 from $290,000 in the same period of
2000. This decrease in interest expense is primarily due to higher levels of
debt in the first quarter of 2000 as compared to 2001. In March of 2000, the
Company entered into a $5.0 million borrowing arrangement with an interest rate
of 4.5% with Wachovia Capital Investments, Inc. The interest expense in 2001 is
primarily related to this agreement.
In 1999, the Company entered into financing agreements for $7.0 million. In
connection with the financing, the Company issued warrants valued at
approximately $982,000 using the Black-Scholes option pricing model as debt
discount to be amortized over the life of the financing agreement. The entire
$7.0 million plus interest was paid prior to the end of the first quarter of
2000. As a result, the entire value of the warrants was amortized as a debt
discount in the quarter ended March 31, 2000.
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, 2001 and 2000, respectively.
17
Liquidity and Capital Resources
On March 10, 2000, the Company completed a follow-on offering of 2,243,000
shares of common stock at an offering price of $115.00 per share. The proceeds,
net of expenses, from this public offering of approximately $244.4 million were
placed in investment grade cash equivalents and marketable securities. Although
operating activities may provide cash in certain periods, to the extent the
Company experiences growth in the future, the Company's operating and investing
activities will use significant amounts of cash. The Company believes its liquid
current assets should adequately meet the Company's needs until the Company
achieves break-even cash flow, which is currently forecasted to occur in 2002.
On March 14, 2000, the Company entered into a securities purchase agreement with
Wachovia Capital Investments, Inc. Wachovia purchased a 4.5% convertible
subordinated promissory note (the "Note") in the original principal amount of
$5.0 million. The Note provides for the ability of the holder to convert, at its
option, all or any portion of the principal of the Note into common stock of the
Company at the price of $147.20 per share. If at any time after the date of the
Note, the quoted price per share of the Company's common stock exceeds 200% of
the conversion price then in effect for at least twenty trading days in any
period of thirty consecutive trading days, the Company has the right to require
that the holder of the Note convert all of the principal of the Note into common
stock of the Company at the price of $147.20 per share. The Note is due March
15, 2005 and the $5.0 million principal amount was placed in investment grade
cash equivalents.
On August 15, 2001, the Company granted options to purchase 150,000 shares of
common stock to a senior executive with an exercise price equal to the fair
market value at the date of grant. These options are designated as nonqualified
options and will expire if not exercised in full before August 14, 2011.
Twenty-five percent of the shares subject to the option shall vest on the first
anniversary of the date of grant and the remaining portion of the option shall
vest in equal monthly installments for 36 months beginning on August 15, 2001.
Cash used in operating activities was approximately $38.2 million during the
nine months ended September 30, 2001. The cash used was primarily attributable
to the Company's net loss, an increase in current and long-term assets, and a
decrease in accounts payable and accrued liabilities partially offset by noncash
items, a decrease in accounts receivable and an increase in deferred revenue.
Cash used in operating activities was approximately $34.8 million during the
nine months ended September 30, 2000. This was primarily attributable to the
Company's net loss, and an increase in accounts receivable and other current
assets, partially offset by noncash items, an increase in accounts payable and
accrued liabilities and an increase in deferred revenue.
Cash used by investing activities was approximately $2.3 million during the nine
months ended September 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 strategic partner partially offset
by proceeds received from the sale and maturity of marketable securities. Cash
used by investing activities was approximately $83.0 million during the nine
months ended September 30, 2000. The cash used by investing activities was
primarily attributable to the acquisitions of the SAI/Redeo companies and
iSold.com, Inc., the purchase of marketable securities, the purchase of property
and equipment and investments in strategic partners partially offset by proceeds
received from the sale of assets of $1.9 million.
Cash provided by financing activities was approximately $408,000 during the nine
months ended September 30, 2001. The cash provided by financing activities was
primarily attributable to proceeds from shares issued under the employee stock
purchase plan and stock option exercises. Cash provided by financing activities
was approximately $245.0 million during the nine months ended September 30,
2000. The cash provided by financing activities during the nine months ended
September 30, 2000 was primarily attributable to the proceeds from the sale of
2,243,000 shares of common stock for approximately $244.4 million, the issuance
of long-term debt of $5.0 million, and the proceeds from stock option exercises,
partially offset by the repayment of $7.0 million in interim funding provided by
Transamerica Business Credit Corp., Silicon Valley Bank and Sand Hill Capital
II, L.P.
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. As of September 30, 2001, two
customers accounted for more than 10% each, totaling $3.2 million or 51.4% of
the gross accounts receivable balance on that date. The percentage by customer
was 21.1% and 30.3%, respectively, at September 30, 2001. As of December 31,
2000, four customers accounted for more than 10% each, totaling $6.7 million or
56.0% of the gross accounts receivable balance on that date. The percentage by
customer was 10.4%, 11.2%, 14.5%, and 19.9%, respectively, at December 31, 2000.
During the second quarter of 2001, the Company made an equity investment of $2.0
million in a privately held strategic partner. Prior to 2001, the Company made
equity investments of $17.7 million in eleven privately held companies. The
Company's equity interest in these entities ranges from 2.5% to 12.5% and the
Company is accounting for these investments using the cost method of accounting.
During the third quarter of 2001, the second quarter of 2001, the first quarter
of 2001 and the fourth quarter of 2000, the Company recorded a charge of $2.6
million, $2.4 million, $3.1 million and $4.1 million, respectively, for other
than temporary
18
losses on these investments. These companies are primarily early-stage companies
and are subject to significant risk due to their limited operating history and
current economic conditions.
At September 30, 2001, the Company had net operating loss carryforwards,
research and experimentation credit, and alternative minimum tax credit
carryforwards for U.S. federal income tax purposes which expire in varying
amounts beginning in the year 2009. The Company's ability to benefit from
certain net operating loss carryforwards is limited under section 382 of the
Internal Revenue Code as the Company is deemed to have had an ownership change
of greater than 50%. Accordingly, certain net operating losses may not be
realizable in future years due to this limitation.
During the first quarter of 2000, the Company issued 50,000 warrants and
approximately 39,000 shares of the Company's common stock to certain strategic
partners, all of whom are also customers, in exchange for their participation in
the Company's sales and marketing efforts. The sales and marketing agreement
signed with one strategic partner also included cash payments of $300,000 in
each of the last two years of the related agreement. For the quarter ended March
31, 2000, the Company recorded the fair value of these warrants, common stock,
and cash payments as deferred sales and marketing expense of approximately
$986,000, $3.8 million, and $600,000, respectively. The strategic partners
earned the warrants pro-rata on a quarterly basis over the first three quarters
of 2000. One of the strategic partners failed to earn any of the 25,000 warrants
while the other strategic partner met the predetermined sales and marketing
milestones and earned all of the 25,000 warrants. Deferred sales and marketing
expenses are amortized over the term of the sales and marketing agreements,
which range from nine months to five years.
On May 31, 2000, the Company acquired the SAI/Redeo companies. As part of the
acquisition, two former executives of the SAI/Redeo companies signed employment
agreements. As a result of the voluntary termination of one agreement prior to
the first anniversary of the acquisition date, the executive was required to
return to the Company for cancellation 55,000 shares of common stock issued in
connection with the agreement. During the first quarter of 2001, the Company
recorded the fair value of these shares as of the acquisition date,
approximately $1.5 million, as a reduction to the intangible balance associated
with the SAI/Redeo acquisition. As a result of the voluntary termination of the
second agreement prior to the second anniversary of the acquisition date, the
executive was required to return to the Company for cancellation 27,500 shares
of common stock issued in connection with the agreement. During the second
quarter of 2001, the Company recorded the fair value of these shares as of the
acquisition date, approximately $727,000, as a reduction to the intangible
balance associated with the SAI/Redeo acquisition.
New Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Assets to Be Disposed
of". The Company is required to adopt SFAS 144 effective January 1, 2002. The
adoption of SFAS 144 is not expected to have a material impact on the Company's
financial statements.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets". SFAS 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. SFAS 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually. SFAS 142 will also require that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values.
The Company is required to adopt the provisions of SFAS 141 immediately and SFAS
142 effective January 1, 2002. Goodwill and intangible assets determined to have
an indefinite useful life acquired in a purchase business combination completed
after June 30, 2001, but before SFAS 142 is adopted in full will not be
amortized, but will continue to be evaluated for impairment in accordance with
the accounting literature in effect prior to the issuance of SFAS 142. Goodwill
and intangible assets acquired in business combinations completed before July 1,
2001 will continue to be amortized prior to the adoption of SFAS 142.
At September 30, 2001, the Company's unamortized goodwill and intangibles
totaled $49.6 million. Amortization expense related to goodwill was $4.7 million
and $5.8 million for the year ended December 31, 2000 and the nine months ended
September 30, 2001, respectively. Because of the extensive effort needed to
comply with adopting SFAS 142, it is not practicable to reasonably estimate the
impact of adopting these Statements on the Company's financial statements at the
date of this report, including whether it will be required to recognize any
transitional impairment losses as the cumulative effect of a change in
accounting principle.
In September 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement was amended in June 2000 by
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging
19
Activities." The Company adopted these new pronouncements in January of 2001.
The new Statements require all derivatives to be recorded on the balance sheet
at fair value and establish accounting treatment for three types of hedges:
hedges of changes in the fair value of assets, liabilities or firm commitments;
hedges of the variable cash flows of forecasted transactions; and hedges of
foreign currency exposures of net investments in foreign operations. The Company
has no derivatives and the adoption of these pronouncements did not have any
impact on the Company's results of operations or financial position.
Risk Factors
In addition to other information in this quarterly report on Form 10-Q, the
following risk factors should be carefully considered in evaluating the Company
and its business because such factors currently may have a significant impact on
its business, operating results and financial condition. As a result of the risk
factors set forth below, actual results could differ materially from those
projected in any forward-looking statements.
The softening demand for business-to-business software and related services
could negatively affect our business, operating results, financial condition,
and stock price.
Our 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 uncertaintly may contribute to lower
revenues. Continued delays or reductions in technology spending could have a
material adverse effect on demand for our products and services, and
consequently our business, operating results, financial condition, and stock
price.
Our success 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 uncertain and subject to a number of risks.
The success of our suite of business-to-business e-commerce applications,
including Clarus eProcurement and Clarus eMarket, depends upon the development
and expansion of the market for Internet-based software applications, in
particular e-commerce applications. This market is new and rapidly evolving.
Many significant issues relating to commercial use of the Internet, including
security, reliability, cost, ease of use, quality of service and government
regulation, remain unresolved and could delay or prevent Internet growth. If
widespread use of the Internet for commercial transactions does not develop or
if the Internet otherwise does not develop as an effective forum for corporate
procurement, the demand for our product suite and our overall business,
operating results and financial condition will be materially and adversely
affected.
If the market for Internet-based procurement applications fails to develop or
develops more slowly than we anticipate or if our Internet-based products or new
Internet-based products we may develop do not achieve market acceptance, our
business, operating results and financial condition could be materially and
adversely affected. The adoption of the Internet for corporate procurement and
other commercial transactions requires accepting new ways of transacting
business. In particular, enterprises with established patterns of purchasing
goods and services that have already invested substantial resources in other
means of conducting business and exchanging information may be particularly
reluctant to adopt a new strategy that may make some of their existing personnel
and infrastructure obsolete. Also, the security and privacy concerns of existing
and potential users of Internet-based products and services may impede the
growth of online business generally and the market's acceptance of our products
and services in particular. A functioning market for these products may not
emerge or be sustained.
Our quarterly operations are volatile and difficult to predict. If we fail to
meet the expectations of public market analysts or investors, the market price
of our common stock may decrease significantly.
We believe that our quarterly and annual operating results will fluctuate
significantly in the future, and our results of operations may fall below the
expectations of securities analysts and investors. If this occurs or if market
analysts perceive that it will occur, the market price of our common stock could
decrease substantially. Recently, when the market price of a security has been
volatile, holders of that security have often instituted securities class action
lawsuits against the company that issued the security. We have been the subject
of such lawsuits. These lawsuits divert the time and attention of our management
and an adverse judgment could cause our financial condition or operating results
to suffer.
Because the percentage of our revenues represented by maintenance services and
other recurring forms of revenue is smaller than that of many software companies
with a longer history of operations, we do not have a significant recurring
revenue stream that could lessen the effect of quarterly fluctuations in
operating results. Many factors may cause significant fluctuations in our
quarterly and annual operating results, including:
20
o changes in the demand for our products;
o the timing, composition and size of orders from our customers;
o customer spending patterns and budgetary resources;
o our success in generating new customers;
o the timing of introductions of or enhancements to our products;
o changes in our pricing policies or those of our competitors;
o our ability to anticipate and adapt effectively to developing markets
and rapidly changing technologies;
o our ability to attract, retain and motivate qualified personnel,
particularly within our sales and marketing and research and
development organizations;
o the publication of opinions or reports about us, our products, our
competitors or their products;
o unforeseen events affecting business-to-business e-commerce;
o changes in general economic conditions;
o bad debt write-offs;
o impairment of strategic investments;
o actions taken by our competitors, including new product introductions
and enhancements;
o our ability to scale our network and operations to support large
numbers of customers, suppliers and transactions;
o our success in maintaining and enhancing existing relationships and
developing new relationships with strategic partners, including
application service providers, systems integrators, resellers,
value-added trading communities and other partners; and
o our ability to control costs.
Our quarterly revenues are especially subject to fluctuation because they can
depend on the sale of relatively large orders for our products and related
services. As a result, our quarterly operating results may fluctuate
significantly if we are unable to complete one or more substantial sales in a
given quarter.
Recently, we announced our strategy to serve the large to mid-size enterprise
market that emphasizes license agreements that require the recognition of
revenue over a fixed period of time. In these cases, we recognize revenues on a
ratable basis over the life of the contract, which can be from two to 36 months.
Therefore, if we do not book a sufficient number of large orders in a particular
quarter, our revenues in future periods could be lower than expected. As we
emphasize license agreements requiring ratable revenue recognition, the
potential for fluctuations in our quarterly results could decrease but our
revenues could be lower than expected. Furthermore, our quarterly revenues may
be affected significantly by other revenue recognition policies and procedures.
These policies and procedures may evolve or change over time based on applicable
accounting standards and how these standards are interpreted.
We continue to invest in many areas, including research and development, sales
and marketing, services, and support infrastructure, based upon our expectations
of future revenue growth. These expenditures are relatively fixed in the short
term. If our revenues fall below expectations and we are not able to quickly
reduce spending in response, our operating results for that quarter and future
periods may be harmed.
21
Our stock price is highly volatile.
Our stock price has fluctuated dramatically. The market price of our common
stock may decrease significantly in the future in response to the following
factors, some of which are beyond our control:
o Variations in our quarterly operating results;
o Announcements that our revenue or income are below analysts'
expectations;
o Changes in analysts' estimates of our performance or industry
performance;
o Changes in market valuations of similar companies;
o Sales of large blocks of our common stock;
o Announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
o Loss of a major customer or failure to complete significant license
transactions;
o Additions or departures of key personnel; and
o Fluctuations in stock market price and volume, which are particularly
common among highly volatile securities of software and
Internet-based companies.
We may not effectively implement our business strategy.
Our future performance will depend in part on successfully developing,
introducing and gaining market acceptance of our products. On October 18, 1999,
we sold substantially all of the assets of our financial and human resources
software business to Geac Computer Systems, Inc. and Geac Canada Limited. Our
financial and human resources software business had historically been our
primary business. We began marketing our Clarus eProcurement solution in the
second quarter of 1998. We added Clarus eMarket and Clarus Auctions to our
product line in the second quarter of 2000, and introduced Clarus Settlement in
the third quarter of 2000. If we do not successfully implement our
business-to-business e-commerce growth strategy, our business will suffer
materially and adversely. Our focus as an organization is on the large to
mid-size enterprise (LME) market. While we anticipate that this market is
increasingly more receptive to purchasing our solutions, we cannot be sure of
the adoption rate. The actual rate may be slower or less than our expectations,
which would materially and adversely affect our business, results of operations
and financial condition.
We may 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 our financial results.
We 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:
o transactions that include both currently available software products
and products that are under development or other undeliverable
elements;
o transactions where the customers demands services that include
signficant modifications or customizations that could delay product
delivery or acceptance;
o transactions that involve acceptance criteria that may preclude
revenue recognition or if there are identified product-related
issues, such as performance issues; and
o transactions that involve payment terms or fees that depend on
contingencies.
Generally accepted accounting principles ("GAAP") for software revenue
recognition requires that our license agreements meet specific criteria in order
to recognize revenue when we initially deliver software. Although we have
standard form license agreements that meet the GAAP criteria for immediate
revenue recognition on delivered elements, we do on some occasions negotiate the
terms of our license agreements. Some of these negotiated agreements may not
meet the GAAP criteria for
22
immediate software revenue recogntion on delivered elements.
Although our business model allows for time-based license agreements, we
continue to record some of our 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.
We may not generate the substantial additional revenues necessary to become
profitable and we anticipate that we will continue to incur losses.
We have incurred significant net losses in each year since our formation. In
addition, we have incurred significant costs to develop our e-commerce
technology and products, and to recruit and train personnel. We believe our
success is contingent upon increasing our customer base and investing in further
development of our products and services. This will require significant
expenditures in research and development, sales and marketing, services, and
support infrastructure. As a result, we will need to generate significant
revenues to achieve and maintain profitability in the future. We cannot be
certain that we will ever achieve such growth in the future.
If our ratable business model is unsuccessful, the market may adopt our products
at a slower rate than anticipated, and our business may suffer materially.
We offer flexible payment methods to our customers. These programs are unproven
and represents a significant departure from the fee-based software licensing
strategies that our competitors and we have traditionally employed. If we do not
successfully develop and support our ratable business model, the market may
adopt our products at a slower rate than anticipated, and our business may
suffer materially.
We expect to evolve to our ratable business model over time. The adoption rate
of our flexible business model may, from quarter to quarter, fluctuate or be
rejected by the market altogether. As we continue this evolution, we may find
that the majority of our revenues continue to come from traditional revenue
recognition license arrangements that result in revenues being taken up front.
If our ratable business model results fluctuate due to uneven adoption rates or
if our business model is rejected entirely, our business, results of operations,
and financial condition would be materially and adversely affected.
An increase in the length of our sales cycle may contribute to fluctuations in
our operating results.
As our products and competing products become increasingly sophisticated and
complex, the length of our sales cycle is likely to increase. The loss or delay
of orders due to increased sales and evaluation cycles could materially and
adversely affect our business, results of operations and financial condition
and, in particular, could contribute to significant fluctuations in our
quarterly operating results. A customer's decision to license and implement our
solutions may present significant enterprise-wide implications for the customer
and involve a substantial commitment of its management and resources. The period
of time between initial customer contact and the purchase commitment typically
ranges from four to nine months for our applications. Our sales cycle could
extend beyond current levels as a result of lengthy evaluation and approval
processes that typically accompany major initiatives or capital expenditures or
other delays over which we have little or no control.
Competition from other electronic procurement providers may reduce demand for
our products and cause us to reduce the price of our products.
The market for Internet-based procurement applications, and e-commerce
technology generally, is rapidly evolving and intensely competitive. The
intensity of competition has increased and is expected to further increase in
the future. We may not compete effectively in our markets. Competitive pressure
may result in our reducing the price of our products, which would negatively
affect our revenues and operating margins. If we are unable to compete
effectively in our markets, our business, results of operations and financial
condition would be materially and adversely affected.
In targeting the e-commerce market, we must compete with electronic procurement
providers such as Ariba and Commerce One. We also encounter competition with
respect to different aspects of our solution from companies such as Concur
Technologies, Extensity, VerticalNet, PurchasePro, FreeMarkets, and i2. We also
anticipate competition from some of the large enterprise software developers,
such as Oracle, PeopleSoft and SAP.
While we expect the large to mid-size enterprise (LME) market to begin the
adoption of business-to-business software, we may not be the supplier of choice
for this market. The mid-size market may prefer to purchase their
business-to-business software from their ERP vendors. Should this market not be
receptive to independent software vendors (ISV), such as us, for their software
our business could be seriously harmed.
23
In addition, because there are relatively low barriers to entry in the
business-to-business exchange market, we expect additional competition from
other established and emerging companies, particularly if they acquire one of
our competitors.
Many of our 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 we do. In addition, many of our competitors have well-established
relationships with our current and potential customers and have extensive
knowledge of our industry. In the past, we have lost potential customers to
competitors for various reasons, including lower prices and incentives not
matched by us. In addition, current and potential competitors have established
or may establish cooperative relationships among themselves or with third
parties to increase the 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. We also expect that
competition will increase as a result of industry consolidations.
We may not be able to compete successfully against our current and future
competitors.
We may not be able to maintain referenceable accounts.
The implementation of our 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. Our ability to
attract additional customers for our product suite will depend on using our
existing customers as referenceable accounts. As a result, our solutions may not
achieve significant market acceptance. In addition, current customers are
subject to the effects of being acquired, which may jeopardize their
referencability in the future.
We may not realize the entire value of our sales and marketing agreements with
certain customers.
During the fourth quarter of 1999 and the first quarter of 2000, we issued
warrants and shares of common stock to certain strategic partners, all of whom
are also customers, in exchange for their participation in our sales and
marketing efforts. We recorded the value of these warrants and common stock as
deferred sales and marketing expenses, which are being amortized over the life
of the agreements which range from nine months to five years. If these strategic
partners discontinue being referenceable customers we will be required to
write-off the remaining balance of deferred sales and marketing expense.
We expect our product line to appeal to early-stage companies, which expose us
to higher than normal credit risk.
Our product line supports Internet-based business-to-business electronic
commerce solutions that automate the procurement and management of operating
resources. As a result of this functionality many early-stage businesses, in
addition to many companies with traditional business models, are interested in
acquiring our products. Many early-stage companies acquire their funding
periodically based upon investors' perception of their progress and likelihood
of success. Typically, they do not have internal operations sufficient to
generate cash, which would guarantee their ongoing viability. While we evaluate
all potential customers' ability to pay, if an increasing number of our
customers fail in their operations and are unable to continue to pay amounts due
under our license agreement, we will experience material and adverse financial
losses related to these sales.
Losses from our investments in strategic partners could negatively impact our
operating results.
We have made several financial investments in private companies. These companies
are primarily early-stage enterprises with limited operating histories. If these
partners are unsuccessful in executing their business plans, we may experience
losses on these investments, which would negatively impact our operating
results.
Market adoption of our solutions will be impeded if we do not continue to
establish and maintain strategic relationships.
Our success depends in part on the ability of our strategic partners to expand
market adoption of our solutions. If we are unable to maintain our existing
strategic partnerships or enter into new partnerships, we may need to devote
substantially more resources to direct sales of our products and services. We
would also lose anticipated customer introductions and co-marketing benefits.
We expect to rely on a number of third-party application service providers to
host our solutions. If we are unable to establish and maintain effective,
long-term relationships with our application service providers, or if these
providers do not meet our customers' needs or expectations, our business could
be seriously harmed. In addition, we lose a significant amount of control over
our solution when we engage application service providers, and we cannot
adequately control the level and quality of their service. By relying on
third-party application service providers, we are wholly reliant on their
information technology infrastructure, including the maintenance of their
computers and communication equipment. An unexpected natural disaster or failure
or disruption of an application service provider's infrastructure could have a
material adverse effect on our business.
24
We rely exclusively on third-party content services providers to provide catalog
aggregation and management services to our customers, as part of our procurement
solution. If we are unable to maintain an effective, long-term relationship with
our content services providers, or if their services do not meet our customers'
needs or expectations, our business could be seriously harmed. If the demand for
our solutions continues to increase, we will need to develop relationships with
additional third-party service providers to provide these types of services. Our
competitors have or may develop relationships with these third parties and, as a
result, these third parties may be more likely to recommend competitors'
products and services rather than ours.
Many of our strategic partners have multiple strategic relationships, and they
may not regard us as important to their businesses. In addition, our strategic
partners may terminate their relationships with us, pursue other partnerships or
relationships or attempt to develop or acquire products or services that compete
with our solutions. Further, our existing strategic relationships may interfere
with our ability to enter into other desirable strategic relationships. A
significant number of our Clarus eProcurement and Clarus eMarket customers have
been obtained through referrals from Microsoft, but Microsoft is not obligated
to refer any potential customers to us, and it has entered into strategic
relationships with other providers of electronic procurement applications.
We rely on strategic selling relationships with our partners.
We have established strategic selling relationships with a number of outside
companies. Some of these companies have made significant revenue commitments to
us as part of these relationships. While we do not reflect these commitments in
our financial statements, this information is included in "backlog" information
we share with market analysts and investors. Some of these strategic selling
partners may not have the ability to meet their financial commitments to us if
they are not able to generate a sufficient level of sales to meet these
commitments.
Much of our sales growth and future success is expected to come from our channel
partners. While we expect to invest significantly in these relationships
including sales training, product integration and joint selling, we cannot
predict the channels partner's commitment or level of success. Additionally the
timetable for productivity of any channel partner may vary based on many factors
out of our control. We expect that the development of most relationships will
take three to six months, although we cannot be assured of this timetable or if
these relationships will ever deliver any results. Should our channel
relationship prove unproductive or take longer to deliver results our financial
results and path to profitability could suffer serious adverse consequences.
Our success depends on our continuing ability to attract, hire, train and retain
a substantial number of highly skilled managerial, technical, sales, marketing
and customer support personnel in light of our recent reductions in headcount.
We have reduced our headcount in 2001 based on our current expectations of
future revenue growth, and as part of our cost reduction initiative. These
reductions may make it more difficult for us to attract, hire and retain the
personnel we need. If we are unable to hire or fail to retain competent
personnel, our business, results of operations and financial condition could be
materially and adversely affected. We do not maintain key-man life insurance
policies on any of our employees.
If we are unable to manage our internal resources, we may incur increased
administrative costs and be unable to capitalize on revenue opportunities.
The growth of our e-commerce business coupled with the rapid evolution of our
market has strained, and may continue to strain, our administrative, operational
and financial resources and internal systems, procedures and controls. Our
inability to manage our internal resources effectively could increase
administrative costs and distract management. If our management is distracted,
we may not be able to capitalize on opportunities to increase revenues.
As we expand our international sales and marketing activities and international
operations, our business will be more susceptible to numerous risks associated
with international operations.
To be successful, we believe we must expand our international operations and
hire additional international personnel. As a result, we expect to commit
significant resources to expand our international sales and marketing
activities. We are subject to a number of risks associated with international
business activities. These risks generally include:
o currency exchange rate fluctuations;
o seasonal fluctuations in purchasing patterns;
o unexpected changes in regulatory requirements;
25
o tariffs, export controls and other trade barriers;
o longer accounts receivable payment cycles and difficulties in
collecting accounts receivable;
o difficulties in managing and staffing international operations;
o potentially adverse tax consequences, including restrictions on the
repatriation of earnings;
o increased transactions costs related to sales transactions conducted
outside the U.S.;
o reduced protection of intellectual property rights and increased risk
of piracy;
o challenges of retaining and maintaining strategic relationships with
customers and business alliances in international markets;
o foreign laws and courts may govern many of the agreements with
customers and resellers;
o difficulties in maintaining knowledgeable sales representatives in
countries outside the U.S.;
o adequacy of local infrastructures outside the U.S.;
o differing technology standards, translations, and localization
standards;
o uncertain demand for electronic commerce;
o linguistic and cultural differences;
o the burdens of complying with a wide variety of foreign laws; and
o political, social, and economic instability.
We have limited experience in marketing, selling and supporting our products and
services in foreign countries.
We intend to expand the geographic scope of our customer base and operations. We
opened our first international sales office in the United Kingdom during the
first quarter of 2000 and acquired the SAI/Redeo companies, which have
significant operations in Ireland, in the second quarter of 2000. We have
limited experience in managing geographically dispersed operations and in
operating in Ireland and the United Kingdom.
We may not be able to recover the carrying value of our intangibles.
We periodically assess the impairment of long-lived assets, including
identifiable intangibles and related goodwill, in accordance with the provisions
of Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Assets to be Disposed of". An impairment
review is performed whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. Although we have not incurred any
impairment charges to date, we can give no assurance that future impairment
charges will not be required due to factors we consider important including, but
not limited to, significant underperformance relative to historical or projected
operating results, significant changes in the manner of use of the acquired
assets and significant negative industry or economic trends.
Any acquisitions that we attempt or make could prove difficult to integrate or
require a substantial commitment of management time and other resources.
As part of our business strategy, we may seek to acquire or invest in additional
businesses, products or technologies that may complement or expand our business.
If we identify an appropriate acquisition opportunity, we may not be able to
negotiate the terms of that acquisition successfully, finance it, or integrate
it into our existing business and operations. We have completed only three
acquisitions to date. We may not be able to select, manage or absorb any future
acquisitions successfully, particularly acquisitions of large companies.
Further, the negotiation of potential acquisitions, as well as the integration
of an acquired business, would divert management time and other resources. We
may use a substantial portion of our available cash to make an
26
acquisition. On the other hand, if we make acquisitions through an exchange of
our securities, our stockholders could suffer dilution. In addition, any
particular acquisition, even if successfully completed, may not ultimately
benefit our business.
We may not achieve anticipated benefits of prior acquisitions.
The accounting treatment for our acquisition of the SAI/Redeo companies
negatively impacted our results of operations in the second quarter of 2000. We
recognized a write-off of acquired in-process research and development and
amortization expense related to this acquisition. Amortization of this
acquisition will adversely affect our results of operations through 2008. The
amounts allocated under purchase accounting to developed technology and
in-process research and development in the acquisition involved valuation
estimations of future revenues, expenses, operating profit, and cash flows. The
actual revenues, expenses, operating profits, and cash flows from the acquired
technology recognized in the future may vary materially from such estimates. If
we do not continue to develop and enhance the acquired technology, if the market
for this technology changes, or if actual revenues are lower than estimated the
net realizable value of our intangibles may be less than the carrying value
requiring us to incur an impairment charge to appropriately reflect the value of
the intangibles.
We may incur costs and liabilities related to potential or pending litigation.
In a number of lawsuits filed against us in the fourth quarter of 2000, our
company and several of our officers have been named as defendants in a number of
securities class action lawsuits filed in the United States District Court for
the Northern District of Georgia. The plaintiffs purport to represent a class of
all persons who purchased or otherwise acquired our common stock in certain
periods beginning on October 20, 1999 and through October 25, 2000. The
consolidated complaint alleges, among other things, that 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 made in public filings made with the Securities
and Exchange Commission and certain press releases and other public statements.
The plaintiffs seek unspecified damages and costs. This lawsuit diverts the time
and attention of management and an adverse judgment could cause our financial
condition or operating results to suffer.
We expect to depend on our Clarus eProcurement and Clarus eMarket products for a
significant portion of our revenues for the foreseeable future.
We anticipate that revenues from our Clarus eProcurement and Clarus eMarket
products and related services will continue to represent a significant portion
of our revenues for the foreseeable future. As a result, a decline in the price
of, profitability of or demand for our Clarus eProcurement and Clarus eMarket
products would seriously harm our business. Our Clarus eMarket solution was
introduced in the second quarter of 2000.
Our products may perform inadequately in a high volume environment.
Any failure by our principal products to perform adequately in a high volume
environment could materially and adversely affect the market for these products
and our business, results of operations and financial condition. Our products
and the third party software and hardware on which it may depend may not operate
as designed when deployed in high volume environments.
Defects in our products could delay market adoption of our solutions or cause us
to commit significant resources to remedial efforts.
We could lose revenues as a result of software errors or other product defects.
As a result of their complexity, software products may contain undetected errors
or failures when first introduced or as new versions are released. Despite our
testing of our software products and their use by current customers, errors may
appear in new applications after commercial shipping begins. If we discover
errors, we may not be able to correct them.
Errors and failures in our products could result in the loss of customers and
market share or delay in market adoption of our applications, and alleviating
these errors and failures could require us to expend significant capital and
other resources. The consequences of these errors and failures could materially
and adversely affect our business, results of operations and financial
condition. Because we do not maintain product liability insurance, a product
liability claim could materially and adversely affect our business, results of
operations and financial condition. Provisions in our license agreements may not
effectively protect us from product liability claims.
Our success depends on the continued use of Microsoft technologies or other
technologies that operate with our products.
Our products operate with, or are based on, Microsoft's proprietary products. If
businesses do not continue to adopt these technologies as anticipated, or if
they adopt alternative technologies that we do not support, we may incur
significant costs in
27
redesigning our products or lose market share. Our customers may be unable to
use our products if they experience significant problems with Microsoft
technologies that are not corrected.
The failure to maintain, support or update software licensed from third parties
could materially and adversely affect our products' performance or cause product
shipment delays.
We have entered into license agreements with third-party licensors for products
that enhance our products, are used as tools with our products, are licensed as
products complementary to ours or are integrated with our products. If these
licenses terminate or if any of these licensors fail to adequately maintain,
support or update their products, we could be required to delay the shipment of
our products until we could identify and license software offered by alternative
sources. Product shipment delays could materially and adversely affect our
business, operating results and financial condition, and replacement licenses
could prove costly. We may be unable to obtain additional product licenses on
commercially reasonable terms. Additionally, our inability to maintain
compatibility with new technologies could impact our customers' use of our
products.
Illegal use of our proprietary technology could result in substantial litigation
costs and divert management resources.
Our success will depend significantly on internally developed proprietary
intellectual property and intellectual property licensed from others. We rely on
a combination of patent, copyright, trademark and trade secret laws, as well as
on confidentiality procedures and licensing arrangements, to establish and
protect our proprietary rights in our products. Existing patent, trade secret
and copyright laws provide only limited protection of our proprietary rights. We
have applied for registration of our trademarks. We enter into license
agreements with our customers that give the customer the non-exclusive right to
use the object code version of our products. These license agreements prohibit
the customer from disclosing object code to third parties or reverse-engineering
our products and disclosing our confidential information. Despite our efforts to
protect our products' proprietary rights, unauthorized parties may attempt to
copy aspects of our products or to obtain and use information that we regard as
proprietary. Third parties may also independently develop products similar to
ours.
Litigation may be necessary to enforce our intellectual property rights, to
protect our trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
resources and could harm our business, operating results and financial
condition.
Claims against us regarding our proprietary technology could require us to pay
licensing or royalty fees or to modify or discontinue our products.
Any claim that our products infringe on the intellectual property rights of
others could materially and adversely affect our business, results of operations
and financial condition. Because knowledge of a third party's patent rights is
not required for a determination of patent infringement and because the United
States Patent and Trademark Office is issuing new patents on an ongoing basis,
infringement claims against us are a continuing risk. Infringement claims
against us could cause product release delays, require us to redesign our
products or require us to enter into royalty or license agreements. These
agreements may be unavailable on acceptable terms. Litigation, regardless of the
outcome, could result in substantial cost, divert management attention and delay
or reduce customer purchases. Claims of infringement are becoming increasingly
common as the software industry matures and as courts apply expanded legal
protections to software products. Third parties may assert infringement claims
against us regarding our proprietary technology and intellectual property
licensed from others. Generally, third-party software licensors indemnify us
from claims of infringement. However, licensors may be unable to indemnify us
fully for such claims, if at all.
If a court determines that one of our products violates a third party's patent
or other intellectual property rights, there is a material risk that the revenue
from the sale of the infringing product will be significantly reduced or
eliminated, as we may have to:
o pay licensing fees or royalties to continue selling the product;
o 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
o stop selling the product.
In addition, if a court finds that one of our products infringes a third party's
patent or other intellectual property rights, then we may be liable to that
third party for actual damages and attorneys' fees. If a court finds that we
willfully infringed on a third party's patent, the third party may be able to
recover treble damages, plus attorneys' fees and costs.
28
A compromise of the encryption technology employed in our solutions could reduce
customer and market confidence in our products or result in claims against us.
A significant barrier to Internet-based commerce is the secure exchange of
valued and confidential information over public networks. Any compromise of our
security technology could result in reduced customer and market confidence in
our products and in customer or third party claims against us. This could
materially and adversely affect our business, financial condition and operating
results. 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 we employ 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 our failure to introduce enhancements to our
products in a timely manner could render our products obsolete and unmarketable.
The market for e-commerce applications is characterized by rapid technological
change, frequent introductions of new and enhanced products and changes in
customer demands. In attempting to satisfy this market's demands, we may incur
substantial costs that may not result in increased revenues due to the short
life cycles for business-to-business e-commerce solutions. Because of the
potentially rapid changes in the e-commerce applications market, the life cycle
of our products is difficult to estimate.
Products, capabilities or technologies others develop may render our products or
technologies obsolete or noncompetitive and shorten the life cycles of our
products. Satisfying the increasingly sophisticated needs of our customers
requires developing and introducing enhancements to our products and
technologies in a timely manner that keeps pace with technological developments,
emerging industry standards and customer requirements while keeping our products
priced competitively. Our failure to develop and introduce new or enhanced
e-commerce products that compete with other available products could materially
and adversely affect our business, results of operations and financial
condition.
Failure to expand Internet infrastructure could limit our growth.
Our ability to increase the speed and scope of our services to customers is
limited by and depends on the speed and reliability of both the Internet and our
customers' internal networks. As a result, the emergence and growth of the
market for our services depends on improvements being made to the entire
Internet infrastructure as well as to our individual customers' networking
infrastructures. The recent growth in Internet traffic has caused frequent
periods of decreased performance. If the Internet's infrastructure is unable to
support the rapid growth of Internet usage, its performance and reliability may
decline, and overall Internet usage could grow more slowly or decline. If
Internet reliability and performance declines, or if necessary improvements do
not increase the Internet's capacity for increased traffic, our customers will
be hindered in their use of our solutions, and our business, operating results
and financial condition could suffer.
Future governmental regulations could materially and adversely affect our
business and e-commerce generally.
We are not subject to direct regulation by any government agency, other than
under regulations applicable to businesses generally, and few laws or
regulations specifically address commerce on the Internet. In view of the
increasing use and growth of the Internet, however, the federal government or
state governments may adopt laws and regulations covering issues such as user
privacy, property ownership, libel, pricing and characteristics and quality of
products and services. We could incur substantial costs in complying with these
laws and regulations, and the potential exposure to statutory liability for
information carried on or disseminated through our application systems could
force us to discontinue some, or all of our services. These eventualities could
adversely affect our business operating results and financial condition. The
adoption of any laws or regulations covering these issues also could slow the
growth of e-commerce generally, which would also adversely affect our business,
operating results or financial condition.
Several states have also proposed legislation that require online services to
establish privacy policies. In 1998, the European Union enacted the European
Data Privacy Directive relating to the protection and processing of personal
data. When fully implemented, this directive may have significant impact on the
manner in which we handle the personal data of the citizens of the European
Union and transfers of such information outside of member nations of 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.
Changes to existing laws or other passage of new laws intended to address these
issues, including some recently proposed changes, could create uncertainty in
the marketplace that could reduce demand for our 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 our
business, results of operations and financial condition. In addition, because
our services are accessible worldwide, and we facilitate sales of goods to users
worldwide, other jurisdictions
29
may claim that we are required to qualify to do business as a foreign
corporation in a particular state or foreign country. Our failure to qualify as
a foreign corporation in a jurisdiction could subject us to taxes and penalties
and could result in our 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 our business, could have
a material and adverse effect on our business, results of operations and
financial condition.
Legislation limiting further levels of encryption technology may adversely
affect our sales.
As a result of customer demand, it is possible that Clarus eProcurement and
Clarus eMarket will be required to incorporate additional encryption technology.
The United States government regulates the exportation of this technology.
Export regulations, either in their current form or as they may be subsequently
enacted, may further limit the levels of encryption or authentication technology
that we are able to use in our software and our ability to distribute our
products outside the United States. Any revocation or modification of our export
authority, unlawful exportation or use of our software or adoption of new
legislation or regulations relating to exportation or use of software and
encryption technology could materially and adversely affect our sales prospects
and, potentially, our business, financial condition and operating results as a
whole.
Future taxation could harm our business and Internet commerce generally.
We file tax returns in such states as required by law based on principles
applicable to traditional businesses. We do not collect sales or similar taxes
in respect of transactions conducted through our software products or trading
communications created with our 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 our 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. However, this
legislation, known as the Internet Tax Freedom Act, imposed only a three-year
moratorium, which expired on October 21, 2001. This tax moratorium has not been
renewed. As a result, states are currently allowed to impose taxes on
Internet-based commerce. There is legislation currently pending that may renew
the tax moratorium for a period of time. There is no assurance that this pending
legislation will be enacted. The imposition of such taxes, if the moratorium is
not renewed, could adversely affect our ability to license our electronic
commerce products.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following discussion concerning the Company'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
A majority of the revenue recognized to date by the Company has been denominated
in U.S. dollars, including sales made internationally. As a result, a
strengthening of the U.S. dollar could make the Company's products less
competitive in foreign markets. In addition, the Company has foreign
subsidiaries which subject the Company to risks associated with foreign currency
exchange rates and weak economic conditions in these foreign markets. An
increase or decrease in foreign currency exchange rates of 10% would not have a
material effect on the Company's financial position or results of operations.
The Company does not use derivatives as a means of hedging against foreign
currency risk.
Interest Rate Risk
The Company is exposed to market risk from changes in interest rates primarily
through its investing activities. The primary objective of the Company's
investment activities is to manage interest rate exposure by investing in
short-term, highly liquid investments. As a result of this strategy, the Company
believes that the Company is subject to minimal interest rate exposure. The
Company's marketable securities are carried at market value, which approximates
cost. An increase or decrease in interest rates of 10% would not have a material
effect on the Company's financial position or results of operations.
30
Investments
During the second quarter of 2001, the Company made an equity investment of $2.0
million in a privately held strategic partner. Prior to 2001, the Company made
equity investments of $17.7 million in eleven privately held companies. The
Company's equity interest in these entities ranges from 2.5% to 12.5% and the
Company is accounting for these investments using the cost method of accounting.
During the third quarter of 2001, the second quarter of 2001, the first quarter
of 2001 and the fourth quarter of 2000, the Company recorded a charge of $2.6
million, $2.4 million, $3.1 million and $4.1 million, respectively, for other
than temporary losses on these investments. These companies are primarily
early-stage companies and are subject to significant risk due to their limited
operating history and current economic conditions. The Company has not
recognized any material revenue from these companies during 2001. During the
year ended December 31, 2000, the Company recognized $17.2 million in total
revenue from these companies. In the third quarter of 2000, the Company made
additional equity investments of $2.8 million in two privately held companies
and new investments of $5.2 million in three privately held companies and
recognized $8.1 million in total revenue from these privately held companies.
For the nine months ended September 30, 2000, the Company made equity
investments of $13.6 million and recognized $12.2 million in total revenue from
eight privately held companies.
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's business, results of
operations, or financial condition.
Following its public announcement on October 25, 2000, of its financial results
for the third quarter of 2000, the Company and certain of its directors and
officers were named as defendants in fourteen putative class action lawsuits
filed in the United States District Court for the Northern District of Georgia
on behalf of all purchasers of common stock of the Company during various
periods beginning as early as October 20, 1999 and ending on October 25, 2000.
The fourteen class action lawsuits filed against the Company were consolidated
into one case, Case No. 1:00-CV-2841, pursuant to an order of the court dated
November 17, 2000. On March 22, 2001, the Court entered an order appointing as
the lead Plaintiffs John Nittolo, Dean Monroe, Ronald Williams, V&S Industries,
Ltd., VIP World Asset Management, Ltd., Atlantic Coast Capital Management, Ltd.,
and T.F.M.Investment Group. Pursuant to the previous Consolidation Order of the
Court, a Consolidated Amended Complaint was filed on May 14, 2001. On June 29,
2001, the Company filed a motion to dismiss the consolidated case. The
plaintiffs responded to the Company's motion to dismiss on August 6, 2001. The
Company replied with a rebuttal to the plaintiffs' response on August 27, 2001.
The class action complaint alleges claims against the Company and other
defendants for violations of Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934, as amended, and Rule 10b-5 promulgated thereunder with respect to
alleged material misrepresentations and omissions in public filings made with
the Securities and Exchange Commission and certain press releases and other
public statements made by the Company and certain of its officers relating to
its business, results of operations, financial condition and future prospects,
as a result of which, it is alleged, the market price of the Company's common
stock was artificially inflated during the class periods. The class action
complaint focuses on statements made concerning an account receivable from one
of the Company's customers. The plaintiffs seek unspecified compensatory damages
and costs (including attorneys' and expert fees), expenses and other unspecified
relief on behalf of the classes. The Company believes that it has complied with
all of its obligations under the Federal securities laws and the Company intends
to defend this lawsuit vigorously. As a result of consultation with legal
representation and current insurance coverage, the Company does not believe the
lawsuit will have a material impact on the Company's results of operations or
financial position.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Employment Agreement between the Company and Sean Feeney
(b) Reports on Form 8-K
None
31
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CLARUS CORPORATION
Date: November 14, 2001 /s/ James J. McDevitt
------------------------------
James J. McDevitt,
Chief Financial Officer
32