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, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from _________ to _________
COMMISSION FILE NUMBER: 0-24277
CLARUS CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 58-1972600
- ----------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3970 Johns Creek Court
Suwanee, Georgia 30024
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(Address of principal executive offices)
(Zip code)
(770) 291-3900
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(Registrant's telephone number, including area code)
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(Former name, former address and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO _
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
COMMON STOCK, ($.0001 PAR VALUE)
-------------------------------------------------------
11,223,494 SHARES OUTSTANDING AS OF OCTOBER 31, 1999
INDEX
CLARUS CORPORATION
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) - September
30, 1999, and December 31, 1998;
Condensed Consolidated Statements of Operations (unaudited) -
Three months and nine months ended September 30, 1999 and
1998;
Condensed Consolidated Statements of Cash Flows (unaudited) -
Nine months ended September 30, 1999 and 1998;
Notes to Condensed Consolidated Financial Statements (unaudited) -
September 30, 1999
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk - Not Applicable
PART II OTHER INFORMATION
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,
1999 1998
------------------- -------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,882 $ 14,799
Trade accounts receivable, less allowance for doubtful accounts
of $678 and $401 in 1999 and 1998, respectively 9,560 8,998
Prepaid and other current assets 2,018 553
------ ------
Total current assets 17,460 24,350
PROPERTY AND EQUIPMENT - net 4,515 3,454
OTHER ASSETS:
Intangible assets, net of accumulated amortization of $3,266
and $1,967 in 1999 and 1998, respectively 10,737 11,963
Investments 1,168 -0-
Deposits and other long-term assets
146 315
------ ------
Total other assets 12,051 12,278
------ ------
TOTAL ASSETS $ 34,026 $ 40,082
======= ========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
CLARUS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNT)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 7,469 $ 7,426
Deferred revenue 6,566 7,397
Current maturities of long-term debt 2,449 526
------ ------
Total current liabilities 16,484 15,349
NON-CURRENT LIABILITIES:
Deferred revenue 1,754 2,302
Long-term debt, net of current maturities 3 245
Other non-current liabilities 251 75
------ ------
Total liabilities 18,492 17,971
STOCKHOLDERS' EQUITY:
Common Stock, $.0001 par value; 25,000,000 shares authorized in 1999 and
1998; 11,241,476 and 11,002,508 shares issued in 1999 and 1998, respectively 1 1
Additional paid in capital 61,971 61,393
Accumulated deficit (46,002) (38,721)
Warrants 40 40
Treasury stock, at cost (2) (2)
Deferred compensation
(474) (600)
------ ------
Total stockholders' equity 15,534 22,111
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 34,026 $ 40,082
========= =========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
CLARUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------------------- --------------------------------------
1999 1998 1999 1998
REVENUES:
License fees $ 2,259 $ 5,623 $ 10,138 $ 14,066
Services fees 3,896 4,387 13,949 11,277
Maintenance fees 2,601 1,937 7,349 5,351
---------------- ---------------- ----------------- ------------------
Total revenues 8,756 11,947 31,436 30,694
COST OF REVENUES:
License fees 258 960 969 1,525
Services fees 2,992 2,717 9,632 7,223
Maintenance fees 996 925 2,966 2,442
----------------- ----------------- ----------------- -----------------
Total cost of revenues 4,246 4,602 13,567 11,190
OPERATING EXPENSES:
Research and development 2,178 1,630 6,730 4,157
Sales and marketing 4,190 3,029 11,007 8,419
General and administrative 1,505 1,175 4,727 3,723
Depreciation and amortization 967 526 2,800 1,456
Non-cash compensation 42 38 126 842
----------------- ------------------ ------------------ ------------------
Total operating expenses 8,882 6,398 25,390 18,597
OPERATING INCOME (LOSS) (4,372) 947 (7,521) 907
INTEREST INCOME 82 243 310 402
INTEREST EXPENSE 19 51 70 172
MINORITY INTEREST -0- -0- -0- 36
----------------- ------------------ ------------------ ------------------
NET INCOME (LOSS) $ (4,309) $ 1,139 $ (7,281) $ 1,101
================== ================= ================== ==================
Income (loss) per common share:
Basic $ (0.39) $ 0.12 $ (0.66) $ 0.22
Diluted $ (0.39) $ 0.11 $ (0.66) $ 0.13
Weighted average shares outstanding
Basic 11,095 9,123 11,010 5,080
Diluted 11,095 10,039 11,010 8,767
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
CLARUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30
---------------------------------------
1999 1998
---------------- ------------------
OPERATING ACTIVITIES
Net income (loss) $ (7,281) $ 1,101
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation 1,559 826
Amortization 1,299 630
Minority interest in subsidiary -0- 36
Amortization of debt discount -0- 55
Deferred compensation 126 842
Loss on disposal of property and equipment 53 -0-
Changes in operating assets and liabilities:
Accounts receivable (562) (6,867)
Prepaid and other current assets (1,465) 87
Deposits and other long-term assets 169 (63)
Accounts payable and accrued liabilities 43 2,051
Deferred revenue (1,379) (181)
Other non-current liabilities 176 21
---------------- ------------------
NET CASH USED IN OPERATING ACTIVITIES (7,262) (1,462)
INVESTING ACTIVITIES
Purchases of property and equipment (2,673) (1,551)
Equity securities received in connection with a license agreement (1,168) -0-
Increases in intangible assets (73) (709)
Purchase of minority interest in subsidiary -0- (326)
---------------- ------------------
NET CASH USED IN INVESTING ACTIVITIES (3,914) (2,586)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 578 22,081
Proceeds from notes payable and short-term borrowings 2,100 1,645
Repayments of notes payable and short-term borrowings (419) (3,428)
Proceeds from issuance of preferred stock -0- 150
Proceeds from the exercise of warrants -0- 612
Dividends paid to holder of minority interest -0- (241)
---------------- ------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,259 20,819
---------------- ------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (8,917) 16,771
CASH AND CASH EQUIVALENTS, beginning of period 14,799 7,213
---------------- ------------------
CASH AND CASH EQUIVALENTS, end of period $ 5,882 $ 23,984
================ =================
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 70 $ 123
=============== =================
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
CLARUS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Clarus
Corporation (the "Company") have been prepared in accordance with Generally
Accepted Accounting Principles for interim financial information and
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information in notes required by Generally Accepted
Accounting Principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation of the unaudited financial statements for this interim
period have been included. The results of the interim periods are not
necessarily indicative of the results to be obtained for the year ended December
31, 1999. 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, 1998,
filed with the Securities and Exchange Commission.
NOTE 2. EARNINGS PER SHARE
Basic and diluted net income (loss) per share was computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share," using
the weighted average number of common shares outstanding. Diluted net income per
share for the quarter and the nine months ended September 30, 1998, includes the
effect of common stock equivalents, including redeemable convertible preferred
stock.
NOTE 3. REVENUE RECOGNITION
The Company's revenue consists of revenues from the licensing of software and
fees from consulting, implementation, training, and maintenance services.
Effective January 1, 1998, the Company adopted Statement of Position No. 97-2,
"Software Revenue Recognition" ("SOP No. 97-2"). Under SOP No. 97-2, the Company
recognizes software license revenue when the following criteria are met: (i) a
signed and executed contract is obtained, (ii) shipment of the product has
occurred, (iii) the license fee is fixed and determinable, (iv) collectibility
is probable, and (v) remaining obligations under the license agreement are
insignificant.
During the second quarter ended June 30, 1999, the Company entered a license and
support agreement with a customer in exchange for approximately $1,547,000,
consisting of $379,000 in cash and equity securities valued at $1,168,000, for
which we received 350,400 shares of restricted common stock on September 29,
1999. The cash portion is due by December 31, 1999.
During the third quarter ended September 30, 1999, the Company entered a license
and support agreement with a customer in exchange for approximately $855,000,
consisting of $355,000 in cash and consulting services valued at $500,000. These
and other consulting services to be provided by the customer will be utilized by
the Company by September 30, 2000. The Company has also committed to utilizing
an additional $1.0 million in consulting services prior to September 30, 2000.
NOTE 4. SUBSEQUENT EVENT
On October 18, 1999, the Company sold substantially all of its traditional
financial and human resources business for a total of approximately $17 million
to Geac Computer Systems, Inc. and Geac Canada Limited. The accompanying
financial statements include the operations of our ERP and B2B businesses. The
Company did not begin operation of its B2B business until the purchase of ELEKOM
in November of 1998. Total B2B revenue for the quarter and nine months ended
September 30, 1999 was $2.0 million and $6.0 million, respectively. Total B2B
revenue for the same periods ended September 30, 1998 was $186,000 and $192,000,
respectively.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW AND RECENT DEVELOPMENTS
We were incorporated in Delaware in 1991. On May 26, 1998, we completed an
initial public offering of our common stock and sold 2.5 million shares, which
resulted in net proceeds of approximately $22.0 million.
On November 6, 1998, we acquired ELEKOM Corporation, ("ELEKOM"), in a merger for
approximately $15.7 million, consisting of $8.0 million cash and approximately
1.4 million shares of our common stock. We recorded, as additional purchase
price, (i) payments of $500,000 made to fund the operations of ELEKOM from
October 1, 1998, through the closing date, and (ii) expenses of approximately
$1.0 million to complete the merger. We also recorded $10.5 million of the
purchase price as purchased in-process research and development during the
fourth quarter of 1998.
On October 18, 1999, we sold substantially all of our traditional financial and
human resources software ("ERP") business for a total of approximately $17
million to Geac Computer Systems, Inc. and Geac Canada Limited, (collectively,
"Geac"). From the transaction with Geac (the "Geac Transaction"), we received
approximately $14.2 million in proceeds, which is net of $2.9 million held in
escrow. We used approximately $2.1 million of our proceeds to repay all of our
indebtedness under our credit facility with Silicon Valley Bank, and
approximately $300,000 to repay all of our indebtedness under our equipment
loan. See "-Liquidity and Capital Resources."
Geac acquired the products, manufacturing assets, intellectual property and
employees of our ERP business. Since the closing of the sale to Geac, we have
focused exclusively on our business plans for delivering business-to-business
electronic commerce ("B2B") products. The financial information for the quarters
ended September 30, 1999 and September 30, 1998, and the nine months ended
September 30, 1999 and September 30, 1998, include our ERP business that was
sold to Geac on October 18, 1999.
BUSINESS SUMMARY
We develop, market, and support B2B applications. Our applications enable
organizations to gain and improve control of operational resources, the
non-production goods and services that are vital to the operations of every
company, by leveraging Web commerce technology to connect large populations of
frontline employees.
Our Clarus (TM) Commerce line of products is a Web-based class of systems that
analysts have termed Business Resource Management. Our entire Clarus (TM) line
of products is based on a flexible, open architecture, which allows for the
leverage of leading commerce technologies and industry standards, such as the
Microsoft Commerce platform, Biztalk, and XML.
We offer electronic commerce solutions and applications that allow companies to
leverage the technology of the Internet to automate business processes and
proactively manage business resources. Our solutions are designed to provide a
closed-loop management process that enables companies to plan, control, and
analyze their operational resources in a real-time manner. Our solutions are
designed to provide open enterprise integration by employing a message-based
integration layer between our operational resource systems, our analysis and
control systems, and traditional enterprise resource planning solutions. Our
solutions are also designed with Clarus View, a personalized real-time view of
the business operating environment that facilitates proactive control.
In addition, we provide dedicated implementation services as an integral part of
our solution, and believe that these services result in a high level of customer
satisfaction, strong customer references, and long-term relationships. We
provide ongoing support services to assist customers in maintaining and updating
their systems, training their employees, and adding functionality as the
customers' businesses grow and their requirements change.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
BUSINESS SUMMARY (CONTINUED)
We license our products and services through multiple partnership and
co-marketing arrangements and a direct sales force in the United States and
Canada. Our flagship product, Clarus eProcurement, is being used at more than 23
sites for customers, including Mastercard International, Metlife, First Data
Corporation, and Parsons Brinckerhoff, with planned deployment to more than
130,000 employees.
ACCOUNTING TREATMENT
Our revenue consists of revenues from the licensing of software and fees from
consulting, implementation, training, and maintenance services. Effective
January 1, 1998, we adopted Statement of Position No. 97-2, "Software Revenue
Recognition" ("SOP No. 97-2"). Paragraphs 11 and 12 of SOP No. 97-2 were amended
by Statement of Position No. 98-9, "Software Revenue Recognition, With Respect
to Certain Transactions" ("SOP No. 98-9"). SOP No. 98-9 requires recognition of
revenue using the "residual method" when: (i) there is vendor-specific objective
evidence of the fair values of all undelivered elements in a multiple-element
arrangement that is not accounted for using long-term contract accounting, (ii)
vendor-specific objective evidence of fair value does not exist for one or more
of the delivered elements in the arrangement, and (iii) all revenue-recognition
criteria in SOP No. 97-2 other than the requirement for vendor-specific
objective evidence of the fair value of each delivered element of the
arrangement are satisfied. SOP No. 98-9 was effective for transactions entered
into after March 15, 1999. Under SOP No. 97-2, we recognize software license
revenue when the following criteria are met: (i) a signed and executed contract
is obtained, (ii) shipment of the product has occurred, (iii) the license fee is
fixed and determinable, (iv) collectibility is probable, and (v) remaining
obligations under the license agreement are insignificant.
Revenues from software licenses have been recognized upon delivery of our
product if there are no significant obligations on our part following delivery,
and collection of the related receivable, if any, is deemed probable by
management. Revenues from services fees relate to implementation, training, and
upgrade services performed by us and have been recognized as the services are
performed. Maintenance fees relate to customer maintenance and support and have
been recognized rateably over the term of the software support agreement, which
is typically 12 months. A majority of our customers renew the maintenance and
support agreements after the initial term. Revenues that have been prepaid or
invoiced, but that do not yet qualify for recognition under our policies, are
reflected as deferred revenue.
Cost of license fees includes royalties, and software duplication and
distribution costs. We recognize these costs as the applications are shipped.
Cost of services fees include personnel and related costs incurred to provide
implementation, training and upgrade services to customers. These costs are
recognized as the services are performed. Cost of maintenance fees includes
personnel and related costs incurred to provide the ongoing support and
maintenance of our products. These costs are recognized as incurred.
Research and development expenses consist primarily of personnel costs. We
account for software development costs under Statement of Financial Accounting
Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed." Research and development expenses are
charged to expense as incurred until technological feasibility is established,
after which remaining costs are capitalized. We define technological feasibility
as the point in time at which we have a working model of the related product.
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. Accordingly, we charge all
internal software development costs to expense as incurred.
Sales and marketing expenses consist primarily of salaries, commissions, and
benefits to sales and marketing personnel, travel, trade-show participation,
public relations, and other promotional expenses. General and administrative
expenses consist primarily of salaries for financial, administrative and
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
ACCOUNTING TREATMENT (CONTINUED)
management personnel, and related travel expenses, as well as occupancy,
equipment, and other administrative costs.
We had net operating loss carryforwards ("NOL's") of approximately $33.6 million
at September 30, 1999, which begin expiring in 2007. We established a valuation
allowance equal to the NOL's and all other deferred tax assets. The benefits
from these deferred tax assets will be recorded when realized, which will reduce
our effective tax rate for future taxable income, if any. Our ability to benefit
from certain NOL carryforwards is limited under Section 382 of the Internal
Revenue Code, as we are deemed to have had an ownership change of more than 50%,
as defined. Accordingly, certain NOL's may not be realizable in future years due
to the limitation.
AFFILIATE RELATIONSHIPS
In March 1995, we, along with Technology Ventures, L.L.C. ("Technology
Ventures"), which is controlled by Joseph S. McCall, a former director of ours,
formed Clarus Professional Services, L.L.C. (formerly SQL Financial Services,
L.L.C.; the "Services Subsidiary") to provide implementation, training and
upgrade services exclusively for our customers. On February 5, 1998, Technology
Ventures sold its 20% interest in the Services Subsidiary to us in exchange for
225,000 shares of our common stock, a warrant to purchase an additional 300,000
shares of our common stock at a price of $3.67 per share, and a non-interest
bearing promissory note in the principal amount of $1.1 million. The purchase of
the remaining 20% of the Services Subsidiary was accounted for using the
purchase method of accounting and resulted in goodwill in the amount of $4.2
million, which is being amortized over 15 years. In May 1999, Clarus
Professional Services, L.L.C. merged with and into Clarus Corporation.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of total revenues for the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------------------- ------------------------------------
1999 1998 1999 1998
Revenues:
License fees 25.8 % 47.1 % 32.2 % 45.8 %
Services fees 44.5 36.7 44.4 36.8
Maintenance fees 29.7 16.2 23.4 17.4
---------------------------------- ------------------------------------
Total revenues 100.0 100.0 100.0 100.0
Cost of revenues:
License fees 2.9 8.1 3.1 5.0
Services fees 34.2 22.7 30.6 23.5
Maintenance fees 11.4 7.7 9.4 7.9
---------------------------------- ------------------------------------
Total cost of revenues 48.5 38.5 43.1 36.4
Operating expenses:
Research and development 24.9 13.7 21.4 13.5
Sales and marketing 47.9 25.4 35.0 27.4
General and administrative 17.2 9.8 15.0 12.1
Depreciation and amortization 11.0 4.4 8.9 4.8
Non-cash compensation 0.5 0.3 0.4 2.8
---------------------------------- ------------------------------------
Total expenses 101.5 53.6 80.7 60.6
Operating income (loss) (50.0) 7.9 (23.8) 3.0
Interest income 0.9 2.0 1.0 1.3
Interest expense 0.2 0.4 0.2 0.6
Minority interest 0.0 0.0 0.0 0.1
================================== ====================================
Net income (loss) (49.3) 9.5 (23.0) 3.6
================================== ====================================
Gross margin on license fees 88.6 82.9 90.4 89.2
Gross margin on services fees 23.2 38.1 30.9 36.0
Gross margin on maintenance fees 61.7 52.3 59.6 54.4
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998
REVENUES
TOTAL REVENUES. For the quarter ended September 30, 1999, total revenues
decreased 26.7% to $8.7 million from $11.9 million in the comparable period in
1998. For the nine months ended September 30, 1999, total revenues increased
2.4% to $31.4 million from $30.7 million in the comparable period in 1998. The
decrease for the quarter was primarily attributable to a decrease in license
fees. The increase for the nine months was attributable to increases in services
fees and maintenance fees.
LICENSE FEES. License fees decreased 59.8% to $2.2 million, or 25.8% of total
revenues, in the quarter ended September 30, 1999, from $5.6 million, or 47.1%
of total revenues, in the comparable period in 1998. License fees decreased
27.9% to $10.1 million, or 32.2% of total revenues, in the nine months ended
September 30, 1999, from $14.1 million, or 45.8%, in the comparable period in
1998. The decrease in
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO QUARTER AND NINE
MONTHS ENDED SEPTEMBER 30, 1998 (CONTINUED)
REVENUES (CONTINUED)
LICENSE FEES (CONTINUED)
license fees resulted from a decrease in the number of ERP products licensed,
partially offset by increased sales of our B2B products. The increased sales of
our B2B products reflects the demand for our solutions combined with an increase
in the average customer transaction size for B2B products when compared to the
average transaction size for our ERP products.
SERVICES FEES. Services fees decreased 11.2% to $3.9 million, or 44.5% of total
revenues, in the quarter ended September 30, 1999, from $4.4 million, or 36.7%
of total revenues, in the comparable period in 1998. Services fees increased
23.7% to $13.9 million, or 44.4% of total revenues, in the nine months ended
September 30, 1999, from $11.3 million, or 36.8% of total revenues, in the
comparable period in 1998. The decrease in services fees was primarily due to
the lower levels of software licenses sold in the periods preceding the quarter
ended September 30, 1999, as compared to the level of licenses sold in the
period preceding the quarter ended September 30, 1998. The increase in services
fees was attributable to a higher level of ERP products licensed in the six to
nine months preceding September 30, 1999 compared to the six to nine months
preceding September 30, 1998.
MAINTENANCE FEES. Maintenance fees increased 34.3% to $2.6 million, or 29.7% of
total revenues, in the quarter ended September 30, 1999, from $1.9 million, or
16.2% of total revenues, in the comparable period in 1998. Maintenance fees
increased 37.3% to $7.3 million, or 23.4% of total revenues, in the nine months
ended September 30, 1999, from $5.4 million, or 17.4% of total revenues, in the
comparable period in 1998. This increase in maintenance fees was primarily due
to the signing of license agreements with new customers and the renewal of
maintenance agreements with existing customers.
COST OF REVENUES
TOTAL COST OF REVENUES. Cost of revenues decreased 7.7% to $4.2 million, or
48.5% of total revenues, in the quarter ended September 30, 1999, from $4.6
million, or 38.5% of total revenues, in the comparable period in 1998. Cost of
revenues increased 21.2% to $13.6 million, or 43.1% of total revenues, in the
nine months ended September 30, 1999, from $11.2 million, or 36.4% of total
revenues, in the comparable period in 1998. The decrease in the cost of
revenues for the quarter were primarily due to decreased royalty expenses. The
increase in the cost of revenues for nine months was primarily due to an
increase in personnel and related expenses.
COST OF LICENSE FEES. Cost of license fees decreased 73.1% to $258,000, or 11.4%
of total license fees, in the quarter ended September 30, 1999, compared to
$960,000, or 17.1% of total license fees, in the comparable period in 1998. Cost
of license fees decreased 36.5% to $969,000, or 9.6% of total license fees, in
the nine months ended September 30, 1999, compared to $1.5 million, or 10.8% of
total license fees, in the comparable period in 1998. The decrease in the cost
of license fees, and the decrease as a percentage of total license fees, were
primarily attributable to a decrease in the sale of third-party software
products distributed. Royalties decreased in part as a result of the ELEKOM
acquisition. Royalties paid to ELEKOM, as a third party, are included in the
1998 numbers.
COST OF SERVICES FEES. Cost of services fees increased 10.1% to $3.0 million, or
76.8% of total services fees, in the quarter ended September 30, 1999, compared
to $2.7 million, or 61.9% of total services fees, in the comparable period in
1998. Cost of services fees increased 33.4% to $9.6 million, or 69.1% of total
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO QUARTER AND NINE
MONTHS ENDED SEPTEMBER 30, 1998 (CONTINUED)
COST OF REVENUES (CONTINUED)
COST OF SERVICES FEES (CONTINUED)
services fees, in the nine months ended September 30, 1999, compared to $7.2
million, or 64.0% of total services fees, in the comparable period in 1998. This
increase in the cost of services fees was primarily attributable to an increase
in the personnel and related costs to provide implementation, training, and
upgrade services. The increase in cost of services fees as a percentage of
revenue for the quarter and nine months ended September 30, 1999, was primarily
due to decreased utilization of services personnel, and costs involved in
developing the new commerce business.
COST OF MAINTENANCE FEES. Cost of maintenance fees increased 7.7% to $996,000,
or 38.3% of total maintenance fees, in the quarter ended September 30, 1999,
compared to $925,000, or 47.7% of total maintenance fees, in the comparable
period in 1998. Cost of maintenance fees increased 21.5% to $3.0 million, or
40.4% of total maintenance fees, in the nine months ended September 30, 1999,
compared to $2.4 million, or 45.6% of total maintenance fees, in the comparable
period in 1998. This increase in the cost of maintenance fees was primarily
attributable to an increase in the personnel and related costs required to
provide support and maintenance. Cost of maintenance fees as a percentage of
total maintenance fees decreased primarily due to higher utilization of
personnel to support the maintenance customer base.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 33.6% to $2.2 million, or 24.9% of
total revenues, in the quarter ended September 30, 1999, from $1.6 million, or
13.7% of total revenues, in the comparable period in 1998. Research and
development expenses increased 61.9% to $6.7 million, or 21.4% of total
revenues, in the nine months ended September 30, 1999, from $4.2 million, or
13.5% of total revenues, in the comparable period in 1998. Research and
development expenses increased during the quarter and nine months ended
September 30, 1999, primarily due to increased personnel costs related to the
development of our B2B products.
SALES AND MARKETING
Sales and marketing expenses increased 38.3% to $4.2 million, or 47.9% of total
revenues, in the quarter ended September 30, 1999, from $3.0 million, or 25.4%
of total revenues, in the comparable period in 1998. Sales and marketing
expenses increased 30.7% to $11.0 million, or 35.0% of total revenues, in the
nine months ended September 30, 1999, from $8.4 million, or 27.4% of total
revenues, in the comparable period in 1998. The increase in sales and marketing
expenses was primarily attributable to the costs associated with additional
sales and marketing personnel and promotional activities related to our B2B
products.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 28.1% to $1.5 million, or 17.2% of
total revenues, in the quarter ended September 30, 1999, from $1.2 million, or
9.8% of total revenues, in the comparable period in 1998. General and
administrative expenses increased 27.0% to $4.7 million, or 15.0% of total
revenues, in the nine months ended September 30, 1999, from $3.7 million, or
12.1% of total revenues, in the
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO QUARTER AND NINE
MONTHS ENDED SEPTEMBER 30, 1998 (CONTINUED)
GENERAL AND ADMINISTRATIVE (CONTINUED)
comparable period in 1998. The increase in general and administrative expenses
was primarily attributable to increases in personnel and related costs.
DEPRECIATION AND AMORTIZATION
Depreciation of tangible equipment and amortization of intangible assets
increased 83.8% to $967,000, or 11.0% of total revenues, in the quarter ended
September 30, 1999, from $526,000, or 4.4% of total revenues, in the comparable
period in 1998. Depreciation of tangible equipment and amortization of
intangible assets increased 92.3% to $2.8 million, or 8.9% of total revenues, in
the nine months ended September 30, 1999, from $1.5 million, or 4.8% of total
revenues, in the comparable period in 1998. The increase in depreciation and
amortization expense was due to an increase in goodwill resulting from the
acquisition of ELEKOM Corporation in the fourth quarter of 1998, as well as
increases in capital expenditures.
NON-CASH COMPENSATION
Non-cash compensation expense increased to $42,000, or 0.5% of total revenues,
in the quarter ended September 30, 1999, from $38,000, or 0.3% of total
revenues, in the comparable period in 1998. Non-cash compensation expense
decreased to $126,000, or 0.4% of total revenues, in the nine months ended
September 30, 1999, from $842,000, or 2.8% of total revenues, in the comparable
period in 1998. The decrease in non-cash compensation is largely due to the
recognition of a one-time charge in the second quarter of 1998 of approximately
$705,000 when the Company accelerated the vesting of certain employee stock
options issued in the first quarter of 1998. This charge represented the
previously remaining unamortized deferred compensation recorded on these
options. The Company expects to recognize a one-time charge of approximately
$700,000 in the fourth quarter of 1999 related to the accelerated vesting of
certain employee stock options as a result of the Geac Transaction.
OTHER INCOME
Interest income decreased to $82,000 in the quarter ended September 30, 1999,
from $243,000, in the comparable period in 1998. Interest income decreased to
$310,000 in the nine months ended September 30, 1999, from $402,000, in the
comparable period in 1998. The decrease in interest income was primarily due to
a reduction in the average level of cash available for investment.
INTEREST EXPENSE
Interest expense decreased 62.7% to $19,000 in the quarter ended September 30,
1999, from $51,000 in the comparable period in 1998. Interest expense decreased
59.3% to $70,000 in the nine months ended September 30, 1999, from $172,000, in
the comparable period in 1998. This decrease was primarily due to lower average
levels of debt in the quarter and nine months ended September 30, 1999, as
compared to the same periods in 1998.
INCOME TAXES
As a result of the operating losses incurred since our inception, we have not
recorded any provision or benefit for income taxes in the quarters and nine
months ended September 30, 1999 and 1998, respectively.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO QUARTER AND NINE
MONTHS ENDED SEPTEMBER 30, 1998 (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
On May 26, 1998, we completed our initial public offering of 2.5 million shares
of our common stock at an offering price of $10.00 per share. The proceeds, net
of expenses, from this public offering of approximately $22.0 million were
placed in investment grade cash equivalents. Our working capital position was
$1.0 million and $9.0 million at September 30, 1999 and December 31, 1998,
respectively. We believe that current cash balances and cash flows from
operations will be adequate to provide for our capital expenditures and working
capital requirements for the foreseeable future. Although operating activities
may provide cash in certain periods, to the extent we experience growth in the
future, our operating and investing activities will use significant cash.
Cash used in operating activities was approximately $7.3 million and $1.5
million during the nine months ended September 30, 1999 and 1998, respectively.
Cash used by operations during the nine months ended September 30, 1999, was
primarily attributable to increases in accounts receivable and prepaid and other
current assets, and a decrease in deferred revenue. Cash used by operations
during the nine months ended September 30, 1998, was primarily attributable to
an increase in accounts receivable, partially offset by an increase in accounts
payable and accrued liabilities.
Cash used in investing activities was approximately $3.9 million and $2.6
million during the nine months ended September 30, 1999 and 1998, respectively.
The cash used in investing activities during the nine months ended September 30,
1999 was primarily attributable to the purchase of computer equipment and
software and equity securities acquired as consideration for entering a software
license and support agreement in the second quarter of 1999. The cash used in
investing activities during the nine months ended September 30, 1998, was
primarily attributable to the purchases of computer equipment and software.
Cash provided by financing activities was approximately $2.2 million during the
nine-month period ended September 30, 1999, and the cash provided by financing
activities was approximately $20.8 million for the nine-month period ended
September 30, 1998. The cash provided by financing activities during the nine
months ended September 30, 1999, was primarily attributable to proceeds from the
working capital line of credit with Silicon Valley Bank. The cash provided by
financing activities during the nine months ended September 30, 1998, was
primarily attributable to the Company's initial public offering effective May
26, 1998, for net proceeds of approximately $22.0 million.
In March 1997, we entered into a loan agreement and a master leasing agreement
for an equipment line of credit in the amount of $1.0 million (the "Equipment
Line") with a leasing company. The Equipment Line bears interest at rates
negotiated with each loan or lease schedule (generally 22.0% to 22.5%) and is
collateralized by all of the equipment purchased with the proceeds thereof. As
of September 30, 1999, the principal balance on the Equipment Line payable was
$290,000, which was paid off in connection with the Geac Transaction.
We have a revolving working capital line of credit and equipment facility with
Silicon Valley Bank. Borrowings outstanding under the line are limited to the
lesser of $8.0 million or 80% of accounts receivable. Borrowings outstanding
under the equipment facility are limited to $1.0 million. Interest on the
revolving credit facility is at prime rate and on the equipment facility at
prime plus 1.0% and is collateralized by all of our assets. The line of credit
and equipment term facility with Silicon Valley Bank was renewed in May of 1999
and will expire in June of 2000. As of September 30, 1999, the equipment
15
INTEREST ON ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO QUARTER AND NINE
MONTHS ENDED SEPTEMBER 30, 1998 (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
facility had no outstanding balance and the credit facility had a principal
balance outstanding of $2.1 million, which was paid off in connection with the
Geac Transaction. We are currently renegotiating the terms of our credit
facility with Silicon Valley Bank consistent with the requirements for our
continuing operations.
On October 18, 1999, we closed the Geac Transaction and sold our ERP business
for approximately $17 million. We received approximately $14.2 million in
proceeds, which is net of $2.9 million held in escrow. We used approximately
$2.1 million of our proceeds to repay all of our indebtedness under our credit
facility with Silicon Valley Bank, and approximately $300,000 to repay all of
our indebtedness under our equipment loan. In connection with the Geac
Transaction, Geac placed $2.9 million of the total $17.1 million purchase price
in escrow for six months to secure potential purchase price reductions and
indemnification obligations.
We had net operating loss carryforwards ("NOL's") of approximately $33.6 million
at September 30, 1999, which begin expiring in 2007. We established a valuation
allowance equal to the NOL's and all other deferred tax assets. The benefits
from these deferred tax assets will be recorded when realized, which will reduce
our effective tax rate for future taxable income, if any. Our ability to benefit
from certain NOL carryforwards is limited under Section 382 of the Internal
Revenue Code, as we are deemed to have had an ownership change of more than 50%,
as defined. Accordingly, certain NOL's may not be realizable in future years due
to the limitation.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT
This quarterly report on Form 10-Q contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act. When used in this
report, the words "believes," "expects," "anticipates," "estimates" and similar
words and expressions are generally intended to identify forward-looking
statements. Statements that describe our future strategic plans, goals, or
objectives are also forward-looking statements. Readers of this report are
cautioned that any forward-looking statements, including those regarding our
intent, belief or current expectations, are not guarantees of future
performance, results or events and involve risks and uncertainties, and that
actual results and events may differ materially from those in the
forward-looking statements as a result of various factors including, but not
limited to, (i) general economic conditions in the markets in which we operate,
(ii) competitive pressures in the markets in which we operate, (iii) the effect
of future legislation or regulatory changes on our operations, (iv) the demand
for our products, and (v) other factors described from time to time in our
filings with the Securities and Exchange Commission. The forward-looking
statements included in this report are made only as of the date hereof. We
undertake no obligation to update such forward-looking statements to reflect
subsequent events or circumstances.
IMPACT OF YEAR 2000
Our current products may contain undetected errors or defects associated with
Year 2000 date functions that may result in material costs to us. Some
commentators have stated that a significant amount of litigation will arise out
of Year 2000 compliance issues, and we are aware of a growing number of lawsuits
against other software vendors. Because of the unprecedented nature of such
litigation, it is uncertain whether or to what extent we may be affected by it.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO QUARTER AND NINE
MONTHS ENDED SEPTEMBER 30, 1998 (CONTINUED)
IMPACT OF YEAR 2000 (CONTINUED)
If the relational database management systems used with our software are not
Year 2000 compliant, our customers may not be able to continue to use our
products. However, we may be exposed to potential claims resulting from system
problems associated with the century change.
With respect to our internal systems, we are taking steps to prepare our systems
for the Year 2000 date change. Remediation of our systems is 99% complete with
the remainder of our systems to be remediated in early November. We currently
estimate that costs for Year 2000 compliance efforts will be approximately
$300,000. We do not believe that we will incur any material costs or experience
material disruptions in our business associated with preparing our internal
systems for the Year 2000. However, unanticipated negative consequences and/or
material costs caused by undetected errors or defects in the technology used in
our internal systems could be experienced. We are currently unable to estimate
the most reasonably likely worst-case effects of the Year 2000. Due to the
recent sale of the ERP business to Geac, we are re-evaluating and preparing
contingency plans for the commerce business for any such unanticipated negative
effects. We expect these plans to be completed by the end of November 1999.
We have contacted all third parties with whom we have material relationships. We
do not believe that we will incur any material costs or experience significant
business interruptions as result of Year 2000 non-compliance by third parties.
However, unanticipated negative consequences and/or material costs caused by
undetected errors or defects in the technology used by our material third
parties could be experienced. We are currently preparing contingency plans for
any such unanticipated negative effects. These contingency plans will be
completed by the end of November 1999.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed the following Form 8-Ks in the quarter ended
September 30, 1999:
(i) On August 31, 1999, the Company filed a Form 8-K to
report the execution of an asset purchase agreement and
related agreements with Geac Computer Systems, Inc. and
Geac Canada Limited.
(ii) On September 21, 1999, the Company filed a Form 8-K/A to
amend certain pro forma financial information in
connection with the sale of certain assets to Geac
Computer System, Inc. and Geac Canada Limited.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CLARUS CORPORATION
(Registrant)
Date: November 9, 1999 By: /s/Arthur G. Walsh, Jr.
---------------- -----------------------------
Arthur G. Walsh, Jr.
Chief Financial Officer and Secretary
18