UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-24277
CLARUS CORPORATION
(Exact name of Registrant as specified in its Charter)
Delaware 58-1972600
(State of Incorporation) (I.R.S. Employer Identification No.)
One Landmark Square
Stamford, Connecticut 06901
(Address of principal office, including zip code)
(203) 428-2000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock,
par value $.0001
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). |X|
The aggregate market value of the voting stock and non-voting common equity held
by non-affiliates of the Registrant at June 30, 2004 was approximately $160.0
million based on $11.50 per share, the closing price of the common stock as
quoted on the Nasdaq National Market.
The number of shares of the Registrant's common stock outstanding at March 1,
2005 was 16,787,814 shares.
DOCUMENT INCORPORATED BY REFERENCE
Portions of our Proxy Statement for the 2005 Annual Meeting of Stockholders to
be filed with the Securities and Exchange Commission within 120 days of the
Registrant's 2004 fiscal year end are incorporated by reference into Part III of
this report.
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 6
ITEM 3. LEGAL PROCEEDINGS 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 6
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 7
ITEM 6. SELECTED FINANCIAL DATA 8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA 18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 39
ITEM 9A. CONTROLS AND PROCEDURES 39
ITEM 9B OTHER INFORMATION 40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 40
ITEM 11. EXECUTIVE COMPENSATION 40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 40
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 40
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 40
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 41
SIGNATURES 44
EXHIBIT INDEX 47
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ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements, including information
about or related to our future results, certain projections and business trends.
Assumptions relating to forward-looking statements involve judgments with
respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control. When
used in this report, the words "estimate," "project," "intend," "believe,"
"expect" and similar expressions are intended to identify forward-looking
statements. Although we believe that our assumptions underlying the
forward-looking statements are reasonable, any or all of the assumptions could
prove inaccurate, and we may not realize the results contemplated by the
forward-looking statements. Management decisions are subjective in many respects
and susceptible to interpretations and periodic revisions based upon actual
experience and business developments, the impact of which may cause us to alter
our business strategy or capital expenditure plans that may, in turn, affect our
results of operations. In light of the significant uncertainties inherent in the
forward-looking information included in this report, you should not regard the
inclusion of such information as our representation that we will achieve any
strategy, objectives or other plans. The forward-looking statements contained in
this report speak only as of the date of this report, and we have no obligation
to update publicly or revise any of these forward-looking statements.
These and other statements, which are not historical facts, are based largely
upon our current expectations and assumptions and are subject to a number of
risks and uncertainties that could cause actual results to differ materially
from those contemplated by such forward-looking statements. These risks and
uncertainties include, among others, our planned effort to redeploy our assets
and use our cash and cash equivalent assets to enhance stockholder value
following the sale of substantially all of our electronic commerce business,
which represented substantially all of our revenue generating operations and
related assets, and the risks and uncertainties set forth in the section headed
"Factors That May Affect Our Future Results" of Part I of this Report and
described in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of Part II of this Report. The Company cannot guarantee
its future performance.
OVERVIEW
Clarus Corporation ("Clarus" or the "Company," which may be referred to as "we,"
"us," or "our") was formerly a provider of e-commerce business solutions until
the sale of substantially all of its operating assets in December 2002. We are
currently seeking to redeploy our cash and cash equivalent assets to enhance
stockholder value and are seeking, analyzing and evaluating potential
acquisition and merger candidates. We were incorporated in Delaware in 1991
under the name SQL Financials, Inc. In August 1998, we changed our name to
Clarus Corporation. Our principal corporate office is located at One Landmark
Square, Stamford, Connecticut 06901 and our telephone number is (203) 428-2000.
BUSINESS
At the 2002 annual meeting of our stockholders held on May 21, 2002, Warren B.
Kanders, Burtt R. Ehrlich and Nicholas Sokolow were elected by our stockholders
to serve on our Board of Directors. Under the leadership of these new directors,
our Board of Directors adopted a strategy of seeking to enhance stockholder
value by pursuing opportunities to redeploy our assets through an acquisition
of, or merger with, an operating business that will serve as a platform company,
using our cash, other non-operating assets (including, to the extent available,
our net operating loss carryforward) and our publicly-traded stock to enhance
future growth. The strategy also sought to reduce significantly our cash
expenditure rate by targeting, to the extent practicable, our overhead expenses
to the amount of our investment income until the completion of an acquisition or
merger. While the Company's expenses have been significantly reduced, management
currently believes that the Company's operating expenses will exceed investment
income during 2005.
As part of our strategy to enhance stockholder value, on December 6, 2002, we
consummated the sale of substantially all of the assets of our electronic
commerce business, which represented substantially all of our revenue generating
operations and related assets, to Epicor Software Corporation ("Epicor"), a
Delaware corporation, for a purchase price of $1.0 million in cash (the "Asset
Sale"). Epicor is traded on the Nasdaq National Market under the symbol "EPIC."
The sale included licensing, support and maintenance activities from our
eProcurement, Sourcing, View (for eProcurement), eTour (for eProcurement),
ClarusNET, and Settlement software products, our customer lists, certain
contracts and certain intellectual property rights related to the purchased
assets, maintenance payments and certain furniture and equipment. In connection
with the sale, we entered into a Transition Services Agreement until March 31,
2003, that allowed Epicor to use a portion of our facility in Suwanee, Georgia
to operate the electronic commerce business that Epicor purchased in the Asset
Sale. Epicor agreed to assume certain of our liabilities, such as executory
obligations arising under certain contracts, agreements and commitments related
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to the transferred assets. We remain responsible for all of our other
liabilities including liabilities under certain contracts, including any
violations of environmental laws and for our obligations related to any of our
indebtedness, employee benefit plans or taxes that are or were due and payable
in connection with the acquired assets on or before the closing date of the
Asset Sale.
Upon the closing of the sale to Epicor, Warren B. Kanders assumed the position
of Executive Chairman of the Board of Directors, Stephen P. Jeffery ceased to
serve as Chief Executive Officer and Chairman of the Board, and James J.
McDevitt ceased to serve as Chief Financial Officer and Corporate Secretary. Mr.
Jeffery agreed to continue to serve on the Board of Directors and serve in a
consulting capacity for a period of three years. In addition, the Board of
Directors appointed Nigel P. Ekern as Chief Administrative Officer to oversee
the operations of Clarus and to assist with our asset redeployment strategy.
On January 1, 2003, we sold the assets related to our Cashbook product, which
were excluded from the Epicor transaction, to an employee group headquartered in
Limerick, Ireland. This completed the sale of nearly all of our active software
operations as part of our strategy to limit operating losses and enable us to
reposition our business in order to enhance stockholder value. In anticipation
of the redeployment of our assets, our cash balances are being held in
short-term, highly rated instruments designed to preserve safety and liquidity
and to exempt us from registration as an investment company under the Investment
Company Act of 1940.
We are currently working to identify suitable merger partners or acquisition
opportunities. Although we are not targeting specific industries for potential
acquisitions, we plan to seek businesses with substantial cash flow, experienced
management teams, and operations in markets offering substantial growth
opportunities. In addition, we believe that our common stock, which has a strong
institutional stockholder base, offers us flexibility as acquisition currency
and will enhance our attractiveness to potential merger or acquisition
candidates. This strategy is, however, subject to certain risks. See "Factors
That May Affect Our Future Results" below.
As previously disclosed in our Report on Form 8-K filed with the Securities and
Exchange Commission on October 4, 2004, The Company's common stock was delisted
from the Nasdaq National Market effective with the open of business on October
5, 2004. The delisting followed a determination by the Nasdaq Listing
Qualifications Panel that the Company was a "public shell" and should be
delisted due to policy concerns raised under Nasdaq Marketplace Rules 4300 and
4300(a)(3). The Company's common stock is now quoted on the Pink Sheets
Electronic Quotation Service under the symbol "CLRS.PK."
At the Company's annual stockholders meeting on July 24, 2003, the stockholders
approved an amendment, (the "Amendment") to our Amended and Restated Certificate
of Incorporation to restrict certain acquisitions of Clarus' securities in order
to help assure the preservation of its net operating loss tax carryforward
("NOL"). Although the transfer restrictions imposed on our securities is
intended to reduce the likelihood of an impermissible ownership change, no
assurance can be given that such restrictions would prevent all transfers that
would result in an impermissible ownership change. The Amendment generally
restricts and requires prior approval of our Board of Directors of direct and
indirect acquisitions of the Company's equity securities if such acquisition
will affect the percentage of our capital stock that is treated as owned by a 5%
stockholder. The restrictions will generally only affect persons trying to
acquire a significant interest in our common stock.
PRIOR BUSINESS
Prior to the sale of substantially all of our operating assets in December 2002,
we developed, marketed and supported Internet-based business-to-business ("B2B")
e-commerce software that automated the procurement, sourcing, and settlement of
goods and services. Our software was designed to help organizations reduce the
costs associated with the purchasing and payment settlement of goods and
services, and help to maximize procurement economies of scale. Our client
services organization provided our customers and strategic partners with
implementation services, training and technical support.
There were several milestones in the evolution of our business prior to the
December 2002 sale. On May 26, 1998, we completed an initial public offering of
our common stock in which we sold 2.5 million shares of common stock at $10.00
per share, resulting in net proceeds to us of approximately $22.0 million. On
October 18, 1999, we sold substantially all of the assets of our financial and
human resources software ("ERP") business to Geac Computer Systems, Inc. and
Geac Canada Limited. In this sale we received approximately $13.9 million. On
March 10, 2000, we sold 2,243,000 shares of common stock in a secondary public
offering at $115.00 per share resulting in net proceeds to us of approximately
$244.4 million.
EMPLOYEES
All of our employees are based in the United States. As of December 31, 2004, we
had a total of seven employees, all of which are located in our Stamford,
Connecticut headquarters. None of our employees are represented by a labor union
or are subject to a collective bargaining agreement. We have not experienced any
work stoppages and consider our relationship with our employees to be good.
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FACTORS THAT MAY AFFECT OUR FUTURE RESULTS
In addition to other information in this annual report on Form 10-K, the
following risk factors should be carefully considered in evaluating our business
because such factors may have a significant impact on our business, operating
results, liquidity and financial condition. However, the risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties not presently known to us or which are currently deemed immaterial
may also impair our financial condition. If any of these risks actually occur,
our financial condition could be materially adversely affected.
RISKS RELATED TO CLARUS
WE CONTINUE TO INCUR OPERATING LOSSES.
As a result of the sale of substantially all of our electronic commerce
business, we will no longer generate revenue previously associated with the
products and contracts comprising our electronic commerce business. We are not
profitable and have incurred an accumulated deficit of $279.7 million from our
inception through December 31, 2004. Our current ability to generate revenues
and to achieve profitability and positive cash flow will depend on our ability
to redeploy our assets and use our cash and cash equivalent assets to reposition
our business whether it is through a merger or acquisition. Our ability to
become profitable will depend, among other things, (i) on our success in
identifying and acquiring a new operating business, (ii) on our development of
new products or services relating to our new operating business, and (iii) on
our success in distributing and marketing our new products or services.
WE MAY BE UNABLE TO REDEPLOY OUR ASSETS SUCCESSFULLY.
As part of our strategy to limit operating losses and enable Clarus to redeploy
its assets and use its cash and cash equivalent assets to enhance stockholder
value, we have sold our electronic commerce business, which represented
substantially all of our revenue-generating operations and related assets. We
are pursuing a strategy of identifying suitable merger partners and acquisition
candidates that will serve as a platform company. Although we are not targeting
specific business industries for potential acquisitions, we plan to seek
businesses with cash flow, experienced management teams, and operations in
markets offering growth opportunities. We may not be successful in acquiring
such a business or in operating any business that we acquire. Failure to
redeploy successfully will result in our inability to become profitable.
Even if we identify an appropriate acquisition opportunity, we may be unable to
negotiate favorable terms for that acquisition. We may be unable to select,
manage or absorb or integrate any future acquisitions successfully. Any
acquisition, even if effectively integrated, may not benefit our stockholders.
Any acquisitions that we attempt or complete may involve a number of unique
risks including: (i) executing successful due diligence; (ii) our exposure to
unforeseen liabilities of acquired companies; and (iii) our ability to integrate
and absorb the acquired company successfully. We may be unable to address these
problems successfully.
WE WILL INCUR SIGNIFICANT COSTS IN CONNECTION WITH OUR EVALUATION OF SUITABLE
MERGER PARTNERS AND ACQUISITION CANDIDATES.
As part of our plan to redeploy our assets, our management is seeking, analyzing
and evaluating potential acquisition and merger candidates. We have incurred and
will continue to incur significant costs, such as due diligence and legal and
other professional fees and expenses, as part of these redeployment efforts. In
2004, we incurred $1.6 million of transaction related expenses during due
diligence and negotiation of potential acquisitions. Notwithstanding these
efforts and expenditures, we cannot give any assurance that we will identify an
appropriate acquisition opportunity in the near term, or at all.
WE WILL LIKELY HAVE NO OPERATING HISTORY IN OUR NEW LINE OF BUSINESS, WHICH IS
YET TO BE DETERMINED, AND THEREFORE WE WILL BE SUBJECT TO THE RISKS INHERENT IN
ESTABLISHING A NEW BUSINESS.
We have not identified what our new line of business will be; therefore, we
cannot fully describe the specific risks presented by such business. It is
likely that we will have had no operating history in the new line of business
and it is possible that the target company may have a limited operating history
in its business. Accordingly, there can be no assurance that our future
operations will generate operating or net income, and as such our success will
be subject to the risks, expenses, problems and delays inherent in establishing
a new line of business for Clarus. The ultimate success of such new business
cannot be assured.
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WE MAY BE UNABLE TO REALIZE THE BENEFITS OF OUR NET OPERATING LOSS ("NOL") AND
TAX CREDIT CARRYFORWARDS.
NOLs may be carried forward to offset federal and state taxable income in future
years and eliminate income taxes otherwise payable on such taxable income,
subject to certain adjustments. Based on current federal corporate income tax
rates, our NOL and other carryforwards could provide a benefit to us, if fully
utilized, of significant future tax savings. However, our ability to use these
tax benefits in future years will depend upon the amount of our otherwise
taxable income. If we do not have sufficient taxable income in future years to
use the tax benefits before they expire, we will lose the benefit of these NOL
carryforwards permanently. Consequently, our ability to use the tax benefits
associated with our substantial NOL will depend significantly on our success in
identifying suitable merger partners and/or acquisition candidates, and once
identified, successfully consummate a merger with and/or acquisition of these
candidates.
Additionally, if we underwent an ownership change, the NOL carryforward
limitations would impose an annual limit on the amount of the taxable income
that may be offset by our NOL generated prior to the ownership change. If an
ownership change were to occur, we may be unable to use a significant portion of
our NOL to offset taxable income. In general, an ownership change occurs when,
as of any testing date, the aggregate of the increase in percentage points of
the total amount of a corporation's stock owned by "5-percent stockholders"
within the meaning of the NOL carryforward limitations whose percentage
ownership of the stock has increased as of such date over the lowest percentage
of the stock owned by each such "5-percent stockholder" at any time during the
three-year period preceding such date is more than 50 percentage points. In
general, persons who own 5% or more of a corporation's stock are "5-percent
stockholders," and all other persons who own less than 5% of a corporation's
stock are treated, together, as a single, public group "5-percent stockholder,"
regardless of whether they own an aggregate of 5% of a corporation's stock.
The amount of NOL and tax credit carryforwards that we have claimed has not been
audited or otherwise validated by the U.S. Internal Revenue Service. The IRS
could challenge our calculation of the amount of our NOL or our determinations
as to when a prior change in ownership occurred and other provisions of the
Internal Revenue Code, may limit our ability to carry forward our NOL to offset
taxable income in future years. If the IRS was successful with respect to any
such challenge, the potential tax benefit of the NOL carryforwards to us could
be substantially reduced.
CERTAIN TRANSFER RESTRICTIONS IMPLEMENTED BY US TO PRESERVE OUR NOL MAY NOT BE
EFFECTIVE OR MAY HAVE SOME UNINTENDED NEGATIVE EFFECTS.
On July 24, 2003, at our Annual Meeting of Stockholders, our stockholders
approved an amendment (the "Amendment") to our Amended and Restated Certificate
of Incorporation to restrict certain acquisitions of our securities in order to
help assure the preservation of our NOL. The Amendment generally restricts
direct and indirect acquisitions of our equity securities if such acquisition
will affect the percentage of Clarus' capital stock that is treated as owned by
a "5-percent stockholder."
Although the transfer restrictions imposed on our capital stock is intended to
reduce the likelihood of an impermissible ownership change, there is no
guarantee that such restrictions would prevent all transfers that would result
in an impermissible ownership change. The transfer restrictions also will
require any person attempting to acquire a significant interest in us to seek
the approval of our Board of Directors. This may have an "anti-takeover" effect
because our Board of Directors may be able to prevent any future takeover.
Similarly, any limits on the amount of capital stock that a stockholder may own
could have the effect of making it more difficult for stockholders to replace
current management. Additionally, because the transfer restrictions will have
the effect of restricting a stockholder's ability to dispose of or acquire our
common stock, the liquidity and market value of our common stock might suffer.
WE COULD BE REQUIRED TO REGISTER AS AN INVESTMENT COMPANY UNDER THE INVESTMENT
COMPANY ACT OF 1940, WHICH COULD SIGNIFICANTLY LIMIT OUR ABILITY TO OPERATE AND
ACQUIRE AN ESTABLISHED BUSINESS.
The Investment Company Act of 1940 (the "Investment Company Act") requires
registration, as an investment company, for companies that are engaged primarily
in the business of investing, reinvesting, owning, holding or trading
securities. We have sought to qualify for an exclusion from registration
including the exclusion available to a company that does not own "investment
securities" with a value exceeding 40% of the value of its total assets on an
unconsolidated basis, excluding government securities and cash items. This
exclusion, however, could be disadvantageous to us and/or our stockholders. If
we were unable to rely on an exclusion under the Investment Company Act and were
deemed to be an investment company under the Investment Company Act, we would be
forced to comply with substantive requirements of Investment Company Act,
including: (i) limitations on our ability to borrow; (ii) limitations on our
capital structure; (iii) restrictions on acquisitions of interests in associated
companies; (iv) prohibitions on transactions with affiliates; (v) restrictions
on specific investments; (vi) limitations on our ability to issue stock options;
and (vii) compliance with reporting, record keeping, voting, proxy disclosure
and other rules and regulations. Registration as an investment company would
subject us to restrictions that would significantly impair our ability to pursue
4
our fundamental business strategy of acquiring and operating an established
business. In the event the Securities and Exchange Commission or a court took
the position that we were an investment company, our failure to register as an
investment company would not only raise the possibility of an enforcement action
by the Securities and Exchange Commission or an adverse judgment by a court, but
also could threaten the validity of corporate actions and contracts entered into
by us during the period we were deemed to be an unregistered investment company.
Moreover, the Securities and Exchange Commission could seek an enforcement
action against us to the extent we were not in compliance with the Investment
Company Act during any point in time.
FOR FIVE YEARS AFTER THE CLOSING OF THE ASSET SALE TO EPICOR, WE WILL BE
PROHIBITED FROM COMPETING WITH THE ASSETS SOLD TO EPICOR.
The Noncompetition Agreement we entered into with Epicor provides that for a
period of five years after the closing of the Asset Sale (December 6, 2002),
neither we nor any of our affiliated entities are permitted, directly or
indirectly, anywhere in the world: (i) to engage in any business that competes
with the business of developing, marketing and supporting Internet-based
business-to-business, electronic commerce solutions that automate the
procurement, sourcing and settlement of goods and services including through the
eProcurement, Sourcing, View (for eProcurement), eTour (for eProcurement),
ClarusNET, and Settlement software products and all improvements and variations
of these products; (ii) to attempt to persuade any customer or vendor of Epicor
to cease to do business with Epicor or reduce the amount of business being
conducted with Epicor; (iii) to solicit the business of any customer or vendor
of Epicor, if the solicitation could cause a reduction in the amount of business
that Epicor does with the customer or vendor; or (iv) to hire, solicit for
employment or encourage to leave the employment of Epicor any person who was an
employee of Epicor within 90 days before the closing of the Asset Sale.
The prohibitions contained in our Noncompetition Agreement with Epicor will
restrict the business opportunities available to us and therefore may have a
material adverse effect on our ability to successfully redeploy our remaining
assets.
RISKS RELATED TO OUR COMMON STOCK
OUR COMMON STOCK IS NO LONGER LISTED ON THE NASDAQ NATIONAL MARKET
On October 5, 2004, our common stock was delisted from the Nasdaq National
Market. The delisting followed a determination by the Nasdaq Listing
Qualifications Panel that the Company was a "public shell" and should be
delisted due to policy concerns raised under Nasdaq Marketplace Rules 4300 and
4300(a)(3). Additional information concerning the delisting is set forth in the
Company's Report on Form 8-K filed with the Securities and Exchange Commission
on October 4, 2004. The Company's common stock is now quoted on the Pink Sheets
Electronic Quotation Service under the symbol "CLRS.PK." As a result of the
delisting, stockholders may find it more difficult to dispose of, or to obtain
accurate quotations as to the price of, our common stock, the liquidity of our
stock may be reduced, making it difficult for a stockholder to buy or sell our
stock at competitive market prices or at all, we may lose support from
institutional investors and/or market makers that currently buy and sell our
stock and the price of our common stock could decline.
WE ARE VULNERABLE TO VOLATILE MARKET CONDITIONS.
The market prices of our common stock have been highly volatile. The market has
from time to time experienced significant price and volume fluctuations that are
unrelated to the operating performance of particular companies. Please see the
table contained in Item 5 of this Report which sets forth the range of high and
low closing prices of our common stock for the calendar quarters indicated.
WE DO NOT EXPECT TO PAY DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE FUTURE.
Although our stockholders may receive dividends if, as and when declared by our
Board of Directors, we do not intend to pay dividends on our common stock in the
foreseeable future. Therefore, you should not purchase our common stock if you
need immediate or future income by way of dividends from your investment.
OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AUTHORIZES THE ISSUANCE OF
SHARES OF PREFERRED STOCK.
Our Amended and Restated Certificate of Incorporation provides that our Board of
Directors will be authorized to issue from time to time, without further
stockholder approval, up to 5,000,000 shares of preferred stock in one or more
series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each series,
including the dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, including sinking fund provisions, redemption price or
prices, liquidation preferences and the number of shares constituting any series
or designations of any series. Such shares of preferred stock could have
preferences over our common stock with respect to dividends and liquidation
rights. We may issue additional preferred stock in ways, which may delay, defer
5
or prevent a change in control of Clarus without further action by our
stockholders. Such shares of preferred stock may be issued with voting rights
that may adversely affect the voting power of the holders of our common stock by
increasing the number of outstanding shares having voting rights, and by the
creation of class or series voting rights.
WE MAY ISSUE A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK IN THE FUTURE WHICH COULD
CAUSE DILUTION TO NEW INVESTORS AND OTHERWISE ADVERSELY AFFECT OUR STOCK PRICE.
A key element of our growth strategy is to make acquisitions. As part of our
acquisition strategy, we may issue additional shares of common stock as
consideration for such acquisitions. These issuances could be significant. To
the extent that we make acquisitions and issue our shares of common stock as
consideration, your equity interest in us will be diluted. Any such issuance
will also increase the number of outstanding shares of common stock that will be
eligible for sale in the future. Persons receiving shares of our common stock in
connection with these acquisitions may be more likely to sell off their common
stock, which may influence the price of our common stock. In addition, the
potential issuance of additional shares in connection with anticipated
acquisitions could lessen demand for our common stock and result in a lower
price than might otherwise be obtained. We may issue common stock in the future
for other purposes as well, including in connection with financings, for
compensation purposes, in connection with strategic transactions or for other
purposes.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission, and we have an internet
website address at www.claruscorp.com. We make available free of charge on our
internet website address our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Sections 13(a) or 15(d) of the Exchange Act of 1934, a
amended as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC. You may also read and copy any
document we file at the Securities and Exchange Commission's public reference
room located at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the
Securities and Exchange Commission at 1-800-732-0330 for further information on
the operation of such public reference room. You also can request copies of such
documents, upon payment of a duplicating fee, by writing to the Securities and
Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 or obtain
copies of such documents from the Securities and Exchange Commission's website
at http://www.sec.gov.
ITEM 2. PROPERTIES
Our corporate headquarters is currently located in Stamford, Connecticut where
we lease approximately 8,600 square feet for $18,275 per month, pursuant to a
lease, which expires on March 30, 2019.
We also lease approximately 5,200 square feet near Toronto, Canada, at a cost of
approximately $11,000 per month, which prior to October 2001, was used for the
delivery of services as well as research and development. This lease expires in
February 2006. This facility has been sub-leased for approximately $5,000 a
month, pursuant to a sublease, which expires on January 30, 2006.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to nor are any of our properties subject to any pending
legal, administrative or judicial proceedings other than routine litigation
incidental to our business.
A complaint was filed on May 14, 2001 in the United States District Court for
the Northern District of Georgia on behalf of all purchasers of common stock of
the Company during the period beginning December 8, 1999 and ending on October
25, 2000. Generally the complaint alleges that the Company and certain of its
directors and officers made material misrepresentations and omissions in public
filings made with the Securities and Exchange Commission and in certain press
releases and other public statements. The Company agreed to settle the class
action in exchange for a payment of $4.5 million, which was covered by
insurance. The Court approved the final settlement and dismissed the action on
January 6, 2005.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
2004.
6
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock was listed on the Nasdaq National Market System on May 26,
1998, the effective date of our initial public offering, until October 5, 2004,
when our common stock was delisted from the Nasdaq National Market following a
determination by the Nasdaq Listing Qualifications Panel that the Company was a
"public shell" and should be delisted due to policy concerns raised under Nasdaq
Marketplace Rules 4300 and 4300(a)(3). Additional information concerning the
delisting is set forth in the Company's Report on Form 8-K filed with the
Securities and Exchange Commission on October 4, 2004. The Company's common
stock is now quoted on the Pink Sheets Electronic Quotation Service under the
symbol "CLRS.PK".
The following table sets forth, for the indicated periods, the high and low
closing sales prices for our common stock as reported by the NASDAQ prior to
October 5, 2004 and the range of high and low bids for our common stock as
reported by the OTC Bulletin Board or the OTC Pink Sheets Electronic Quotation
Service on and after October 5, 2004. The quotes listed below on and after
October 5, 2004 reflect inter-dealer prices or transactions solely between
market-makers, without retail mark-up, mark-down or commission and may not
represent actual transactions.
High Low
---- ---
Year ended December 31, 2003
First Quarter $ 5.87 $4.92
Second Quarter $ 6.40 $5.05
Third Quarter $ 7.50 $5.95
Fourth Quarter $ 7.76 $6.99
Year ended December 31, 2004
First Quarter $ 9.94 $7.34
Second Quarter $12.33 $9.86
Third Quarter $11.78 $8.28
Fourth Quarter $ 9.30 $7.40
Calendar Year 2005
First Quarter (through March 1, 2005) $ 9.50 $8.50
STOCKHOLDERS
On March 1, 2005, the last reported sales price for our common stock was $8.50
per share. As of March 1, 2005, there were 147 holders of record of our common
stock.
DIVIDENDS
We currently anticipate that we will retain all future earnings for use in our
business and do not anticipate that we will pay any cash dividends in the
foreseeable future. The payment of any future dividends will be at the
discretion of our Board of Directors and will depend upon, among other things,
our results of operations, capital requirements, general business conditions,
contractual restrictions on payment of dividends, if any, legal and regulatory
restrictions on the payment of dividends, and other factors our Board of
Directors deems relevant.
7
ITEM 6. SELECTED FINANCIAL DATA
Our selected financial information set forth below should be read in conjunction
with our consolidated financial statements, including the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of Part II of this Report. The following statement of operations and
balance sheet data have been derived from our audited consolidated financial
statements and should be read in conjunction with those statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of Part II of this Report.
Years ended December 31,
------------------------
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
Statement of Operations Data: (in thousands, except per share data)
- ----------------------------
Revenues:
License fees ............................................ $ 1,106 $ -- $ 2,808 $ 7,807 $ 24,686
Service fees ............................................ -- 130 6,226 9,866 10,327
--------- --------- --------- --------- ---------
Total Revenues ............................... 1,106 130 9,034 17,673 35,013
Cost of Revenues:
License fees ............................................ -- -- 26 211 154
Service fees ............................................ -- -- 5,498 12,921 12,901
--------- --------- --------- --------- ---------
Total Cost of Revenues ....................... -- -- 5,524 13,132 13,055
Operating expenses:
Research and development ................................ -- -- 7,263 16,220 31,114
Sales and marketing ..................................... -- -- 7,938 34,034 43,231
General and administrative .............................. 3,395 4,986 12,574 9,633 10,995
Provision (credit) for doubtful accounts .................. -- 18 (560) 5,537 5,824
Transaction expenses .................................... 1,636 -- -- -- --
Loss on impairment of goodwill and intangible assets .... -- -- 10,360 36,756 --
Loss/(Gain) on sale or disposal of assets ............... -- 36 1,748 (20) (1,347)
Depreciation and amortization ........................... 186 762 4,243 12,212 8,132
--------- --------- --------- --------- ---------
Total Operating Expenses ..................... 5,217 5,802 43,566 114,372 97,949
--------- --------- --------- --------- ---------
Operating Loss ............................................ (4,111) (5,672) (40,056) (109,831) (75,991)
Other income (expense) .................................... 19 169 27 96 (100)
Loss on impairment of marketable securities and investments -- -- -- (16,461) (4,128)
Interest income ........................................... 1,203 1,238 2,441 6,570 10,902
Interest expense, including amortization of debt discount . -- (66) (225) (228) (1,330)
--------- --------- --------- --------- ---------
Net Loss .................................................. $ (2,889) $ (4,331) $ (37,813) $(119,854) $ (70,647)
========= ========= ========= ========== =========
Loss Per Share
Basic ........................................ $ (0.18) $ (0.27) $ (2.42) $ (7.72) $ (4.90)
Diluted ...................................... $ (0.18) $ (0.27) $ (2.42) $ (7.72) $ (4.90)
Weighted Average Common Shares Outstanding
Basic ........................................ 16,092 15,905 15,615 15,530 14,420
Diluted ...................................... 16,092 15,905 15,615 15,530 14,420
Balance Sheet Data: As of December 31,
- ------------------ ------------------
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
Cash and cash equivalents ................................. $ 48,377 $ 15,045 $ 42,225 $ 55,628 $ 118,303
Marketable securities ................................... 35,119 73,685 52,885 65,264 50,209
Total assets .............................................. 86,437 89,445 97,764 145,274 266,904
Long-term debt, net of current portion..................... -- -- -- 5,000 5,000
Total stockholders' equity ................................ 84,854 86,819 89,360 126,328 246,822
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements, including information
about or related to our future results, certain projections and business trends.
Assumptions relating to forward-looking statements involve judgments with
respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control. When
used in this report, the words "estimate," "project," "intend," "believe,"
"expect" and similar expressions are intended to identify forward-looking
statements. Although we believe that our assumptions underlying the
forward-looking statements are reasonable, any or all of the assumptions could
prove inaccurate, and we may not realize the results contemplated by the
forward-looking statements. Management decisions are subjective in many respects
and susceptible to interpretations and periodic revisions based upon actual
experience and business developments, the impact of which may cause us to alter
our business strategy or capital expenditure plans that may, in turn, affect our
results of operations. In light of the significant uncertainties inherent in the
forward-looking information included in this report, you should not regard the
inclusion of such information as our representation that we will achieve any
strategy, objectives or other plans. The forward-looking statements contained in
this report speak only as of the date of this report, and we have no obligation
to update publicly or revise any of these forward-looking statements.
These and other statements, which are not historical facts, are based largely
upon our current expectations and assumptions and are subject to a number of
risks and uncertainties that could cause actual results to differ materially
from those contemplated by such forward-looking statements. These risks and
uncertainties include, among others, our planned effort to redeploy our assets
and use our substantial cash and cash equivalent assets to enhance stockholder
value following the sale of substantially all of our electronic commerce
business, which represented substantially all of our revenue generating
operations and related assets, and the risks and uncertainties set forth in the
section headed "Factors That May Affect Our Future Results" of Part I of this
Report and described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of Part II of this Report. The Company
cannot guarantee its future performance.
OVERVIEW
AS PART OF OUR PREVIOUSLY ANNOUNCED STRATEGY TO LIMIT OPERATING LOSSES AND
ENABLE THE COMPANY TO REDEPLOY ITS ASSETS AND USE ITS SUBSTANTIAL CASH AND CASH
EQUIVALENT ASSETS TO ENHANCE STOCKHOLDER VALUE, ON DECEMBER 6, 2002 WE SOLD
SUBSTANTIALLY ALL OF OUR ELECTRONIC COMMERCE BUSINESS, WHICH REPRESENTED
SUBSTANTIALLY ALL OF OUR REVENUE-GENERATING OPERATIONS AND RELATED ASSETS. THE
INFORMATION APPEARING BELOW, WHICH RELATES TO PRIOR PERIODS, IS THEREFORE NOT
INDICATIVE OF THE RESULTS THAT MAY BE EXPECTED FOR ANY SUBSEQUENT PERIODS. THE
YEAR ENDED DECEMBER 31, 2004 PRIMARILY REFLECTS, AND FUTURE PERIODS PRIOR TO A
REDEPLOYMENT OF OUR ASSETS ARE EXPECTED TO PRIMARILY REFLECT, GENERAL AND
ADMINISTRATIVE EXPENSES AND TRANSACTION EXPENSES ASSOCIATED WITH THE CONTINUING
ADMINISTRATION OF THE COMPANY AND ITS EFFORTS TO REDEPLOY ITS ASSETS.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
The Company's discussion of financial condition and results of operations is
based on the consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these consolidated financial statements require
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent liabilities at the date of
the consolidated financial statements. Estimates also affect the reported
amounts of revenues and expenses during the reporting periods. The Company
continually evaluates its estimates and assumptions including those related to
revenue recognition, allowance for doubtful accounts, impairment of long-lived
assets, impairment of investments, and contingencies and litigation. The Company
bases its estimates on historical experience and other assumptions that are
believed to be reasonable under the circumstances. Actual results could differ
from these estimates.
The Company believes the following critical accounting policies include the more
significant estimates and assumptions used by management in the preparation of
its consolidated financial statements. Our accounting policies are more fully
described in Note 1 of our consolidated financial statements.
- - The Company has recognized revenue in connection with its prior business from
two primary sources, software licenses and services. Revenue from software
licensing and services fees is recognized in accordance with Statement of
Position ("SOP") 97-2, "Software Revenue Recognition", and SOP 98-9, "Software
Revenue Recognition with Respect to Certain Transactions" and related
interpretations. The Company recognized software license revenue when: (1)
persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the
fee is fixed or determinable; and (4) collectibility is probable.
9
- - The Company accounts for its marketable securities under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". Pursuant to the provisions
of SFAS No. 115, the Company has classified its marketable securities as
available-for-sale. Available-for-sale securities have been recorded at fair
value and related unrealized gains and losses have been excluded from earnings
and are reported as a separate component of accumulated other comprehensive
income (loss) until realized.
- - The Company maintains allowances for doubtful accounts based on expected
losses resulting from the inability of the Company's customers to make required
payments. The Company recorded a provision for doubtful accounts of $18,000
during the year ended December 31, 2003. The Company recorded a reversal of the
provision for doubtful accounts of ($560,000) during the year ended December 31,
2002.
- - The Company had significant long-lived assets, primarily intangibles, as a
result of acquisitions completed during 2000. During 2002, the Company evaluated
the carrying value of its long-lived assets, including intangibles, according to
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets" and SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". Prior to 2002, the Company periodically
evaluated the carrying value of its long-lived assets, including intangibles,
according to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." The Company recorded impairment
charges on goodwill of $6.8 million and $36.8 million in 2002 and 2001,
respectively, and impairment charges on intangible assets of $3.5 million in
2002.
STOCK OPTION EXCHANGE PROGRAM
On April 9, 2001, the Company announced a voluntary stock option exchange
program for its employees. Under the program, employees were given the
opportunity to cancel outstanding stock options previously granted to them on or
after November 1, 1999, in exchange for an equal number of new options to be
granted at a future date. The exercise price of the new options was equal to the
fair market value of the Company's common stock on the date of grant. During the
first phase of the program 366,174 options with a weighted average exercise
price of $30.55 per share were canceled and new options to purchase 263,920
shares with an exercise price of $3.49 per share were granted on November 9,
2001. During the second phase of the program 273,188 options with a weighted
average exercise price of $43.87 per share were canceled and new options to
purchase 198,052 shares with an exercise price of $4.10 per share were granted
on February 11, 2002. Employees who participated in the first exchange were not
eligible for the second exchange. The exchange program was designed to comply
with Financial Accounting Standards Board ("FASB") Interpretation No. 44
"Accounting for Certain Transactions Involving Stock Compensation" and did not
result in any additional compensation charges or variable accounting with
respect to the new grants. Members of the Company's Board of Directors and its
executive officers were not eligible to participate in the exchange program.
SOURCES OF REVENUE
Prior to the December 6, 2002 sale of substantially all of the Company's revenue
generating operations and assets, the Company's revenue consisted of license
fees and services fees. License fees were generated from the licensing of the
Company's suite of software products. Services fees were generated from
consulting, implementation, training, content aggregation and maintenance
support services. Following the sale of substantially all of the Company's
operating assets, the Company's revenue has consisted solely of the recognition
of deferred service fees that are recognized ratably over the maintenance term.
The remaining deferred revenue was fully recognized by September 2004. Prior to
a redeployment of the Company's assets, the Company's principal income will
consist of interest, dividend and other investment income from short-term
investments, which is reported as interest income in the Company's statement of
operations.
REVENUE RECOGNITION
Prior to the December 6, 2002 sale of substantially all of the Company's revenue
generating operations and assets, the Company recognized revenue from two
primary sources, software licenses and services. Revenue from software licensing
and services fees was recognized in accordance with SOP 97-2, "Software Revenue
Recognition", and SOP 98-9, "Software Revenue Recognition with Respect to
Certain Transactions" and related interpretations. The Company recognizes
software license revenue when: (1) persuasive evidence of an arrangement exists;
(2) delivery has occurred; (3) the fee is fixed or determinable; and (4)
collectibility is probable.
COST OF REVENUES AND OPERATING EXPENSES
Cost of license fees includes royalties and software duplication and
distribution costs. The Company recognized these costs as the applications were
shipped.
10
Cost of services fees includes personnel related expenses and third-party
consulting fees incurred to provide implementation, training, maintenance,
content aggregation, and upgrade services to customers and partners. These costs
were recognized as they were incurred for time and material arrangements and are
recognized using the percentage of completion method for fixed price
arrangements.
Prior to December 6, 2002, research and development expenses consisted primarily
of personnel related expenses and third-party consulting fees. The Company
accounts for software development costs under Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed". The Company charged research and development
costs related to new products or enhancements to expense as incurred until
technological feasibility was established, after which the remaining costs were
capitalized until the product or enhancement is available for general release to
customers. The Company defines technological feasibility as the point in time at
which a working model of the related product or enhancement exists.
Historically, the costs incurred during the period between the achievement of
technological feasibility and the point at which the product is available for
general release to customers have not been material.
Sales and marketing expenses consisted primarily of personnel related expenses,
including sales commissions and bonuses, expenses related to travel, customer
meetings, trade show participation, public relations, promotional activities,
regional sales offices, and advertising.
General and administrative expenses consist primarily of personnel related
expenses for financial, administrative and management personnel, fees for
professional services, board of director fees and the provision for doubtful
accounts.
Transaction expenses consist primarily of professional fees and expenses related
to due diligence, negotiation and documentation of acquisition, financing and
related agreements.
RESTRUCTURING AND RELATED COSTS
During 2002 and 2001, the Company's management approved restructuring plans to
reorganize and reduce operating costs. Restructuring and related charges of $4.2
million were expensed in 2001 to align better the Company's cost structure with
projected revenue. The charges were comprised of $3.0 million for employee
separation and related costs for 181 employees and $1.2 million for facility
closure and consolidation costs.
During the first quarter of 2002, the Company determined that amounts previously
charged during 2001 of approximately $202,000 that related to employee
separation and related charges were no longer required and this amount was
credited to sales and marketing expense in the accompanying consolidated
statement of operations during 2002. Restructuring and related charges of $8.6
million were expensed during 2002. The charges for 2002 were comprised of $4.6
million for employee separation and related costs for 183 employees and $4.0
million for facility closures and consolidation costs.
During 2003, the Company determined that actual restructuring and related
charges were in excess of the amounts provided for in 2002 and recorded
additional restructuring charges of $250,000. This amount was charged to general
and administrative costs in the accompanying consolidated statement of
operations during 2003. The charges for 2003 were comprised of $223,000 for
employee separation costs and $27,000 for facility closure and consolidation
costs.
During 2004, the Company recorded an additional restructuring charge of $33,000
for facility closure costs. The increase was the result of significant
fluctuations in exchange rates and increased rent expense.
The facility closures and consolidation costs for 2001 and 2002 relate to the
abandonment of the Company's leased facilities in Suwanee, Georgia; Limerick,
Ireland; Maidenhead, England; and near Toronto, Canada. Total facilities closure
and consolidation costs include remaining lease liabilities, construction costs
and brokerage fees to sublet the abandoned space, net of estimated sublease
income. The estimated costs of abandoning these leased facilities, including
estimated costs to sublease, were based on market information trend analysis
provided by a commercial real estate brokerage firm retained by the Company. The
Company incurred a charge in the fourth quarter 2002 of $2.1 million for
facility closure and consolidation costs as a result of the termination of its
lease for the facility in Suwanee, Georgia.
The following is a reconciliation of the components of the accrual for
restructuring and related costs, the amounts charged against the accrual during
2004, 2003 and 2002 and the balance of the accrual as of December 31, 2004 (in
thousands):
11
Employee Facility
Separation Closing Total Restructuring
Costs Costs and Related Costs
--------- --------- -------------------
Balance at December 31, 2001 $ 680 $ 1,209 $ 1,889
Accruals during 2002 4,645 3,905 8,550
Expenditures during 2002 4,196 4,977 9,173
Credits in 2002 202 -- 202
--------- --------- ---------
Balance at December 31, 2002 927 137 1,064
Accruals during 2003 223 27 250
Expenditures during 2003 1,025 59 1,084
--------- --------- ---------
Balance at December 31, 2003 125 105 230
Accruals during 2004 -- 33 33
Expenditures during 2004 125 65 190
--------- --------- ---------
Balance at December 31, 2004 $ -- $ 73 $ 73
========= ========= =========
COMPARISON OF RESULTS OF OPERATIONS BETWEEN THE YEARS ENDED DECEMBER 31, 2004
AND 2003
On December 6, 2002, the Company completed the disposition of substantially all
its operating assets, and the Company is now evaluating alternative ways to
redeploy its assets into new businesses. The discussion below is therefore not
meaningful to an understanding of future revenue, earnings, operations, business
or prospects of the Company following such a redeployment of its assets.
REVENUES
Total revenues increased to $1.1 million in 2004 compared to $0.1 million in
2003. This increase is entirely due to deferred license fee revenue recognized
in the third quarter of 2004. Following the sale of substantially all of the
Company's remaining operating assets, the Company's revenue was from the
recognition of deferred service fees that were recognized ratably over the
maintenance term.
COST OF REVENUES
The Company did not have any cost of revenues in 2004 or 2003, since all revenue
was the recognition of deferred revenue related to maintenance arrangements.
RESEARCH AND DEVELOPMENT
The Company did not have any research and development costs in 2004 or 2003.
SALES AND MARKETING
The Company did not have any sales and marketing costs in 2004 or 2003.
GENERAL AND ADMINISTRATIVE EXPENSE
During the year ended December 31, 2004, general and administrative expenses
were reduced to $3.4 million compared to $5.0 million in 2003. This trend is
consistent with management's stated strategy to reduce our expenditure rate to
the extent practicable, to levels of our investment income until the completion
of an acquisition or merger. General and administrative expenses include
salaries and employee benefits, rent, insurance, legal, accounting and other
professional fees as well as public company expenses such as transfer agent and
listing fees and expenses.
12
TRANSACTION EXPENSES
In the third quarter of 2004, the Company recognized $1.5 million in transaction
expenses arising out of negotiations relating to an acquisition that terminated
in September 2004 without the consummation of the acquisition. The Company
incurred an additional $0.1 million of transaction expenses during the fourth
quarter of 2004. Transaction expenses represent the costs incurred during due
diligence and negotiation of potential acquisitions, such as legal, accounting,
appraisal and other professional fees and related expenses. Comparable
transaction expenses incurred during the year ended December 31, 2003 were
immaterial and were not broken out of general and administrative expenses.
LOSS/(GAIN) ON SALE OR DISPOSAL OF ASSETS
During the year ended December 31, 2004, the Company did not incur a loss or
gain from the sale or disposal of assets compared to 2003 when the Company
recorded a loss on the sale or disposal of assets of $36,000.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense in 2004 declined to $0.2 million compared
to $0.8 million in 2003, a reduction of 75%. The decline is primarily
attributable to the sale of substantially all of the Company's operating assets
in the fourth quarter of 2002, resulting in lower depreciation and amortization
on property and equipment coupled with the write off of intangibles assets with
definite lives during 2002. As a result of this write off of assets during 2002,
there was no amortization expense on intangible assets in 2004 and 2003.
INTEREST INCOME
Interest income remained stable at $1.2 million for the year ended December 31,
2004 compared to $1.2 million in 2003. The negligible change in interest income
was due to lower levels of cash, cash equivalents and marketable securities
available for investment in 2004, offset by an increase in interest rates during
2004, that resulted in slightly higher rates of return on investments.
INTEREST EXPENSE
Interest expense in 2004 was zero compared to an expense of $66,000 in 2003, a
decline of 100%, due to the repayment of $5.0 million of indebtedness that
resulted in the interest expense in 2003.
INCOME TAXES
As a result of the operating losses incurred since the Company's inception, no
provision or benefit for income taxes was recorded in 2004 or in 2003.
COMPARISON OF RESULTS OF OPERATIONS BETWEEN THE YEARS ENDED DECEMBER 31, 2003
AND 2002
On December 6, 2002, the Company completed the disposition of substantially all
its operating assets, and the Company is now evaluating alternative ways to
redeploy its assets into new businesses. The discussion below is therefore not
meaningful to an understanding of future revenue, earnings, operations, business
or prospects of the Company following such a redeployment of its assets.
REVENUES
Total revenues declined to $0.1 million in 2003 compared to $9.0 million in
2002. This decline is entirely due to the sale of substantially all of the
Company's operating assets in December 2002.
COST OF REVENUES
The Company did not have any significant cost of revenues in 2003, since all
2003 revenue was the recognition of deferred revenue related to maintenance
arrangements. This compares favorably with 5.5 million expensed in 2002.
RESEARCH AND DEVELOPMENT
The Company did not have any research and development costs in 2003. This
compares favorably with over $7.3 million expensed in 2002.
13
SALES AND MARKETING
The Company did not have any sales and marketing costs in 2003. This compares
favorably with over $7.9 million expensed in 2002.
GENERAL AND ADMINISTRATIVE EXPENSE
During the year ended December 31, 2003, general and administrative expenses
were reduced to $5.0 million compared to $12.6 million in 2002. This trend is
consistent with management's stated strategy to reduce our expenditure rate to
the extent practicable, to levels of our investment income until the completion
of an acquisition or merger. General and administrative expenses include
salaries and employee benefits, rent, insurance, legal, accounting and other
professional fees as well as public company expenses such as transfer agent and
listing fees and expenses.
LOSS ON IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS
As a result of a change in the Company's strategic direction during the second
quarter of 2002, the Company determined that the carrying value of the remaining
goodwill and intangible assets exceeded fair value. As a result, the Company
recorded an additional impairment charge to goodwill of $6.9 million and an
impairment charge to intangible assets of $3.5 million during the year ended
December 31, 2002, that reduced the cost basis of goodwill and intangible assets
to zero. The total impairment was $10.4 million. There was no comparative
impairment charge in 2003.
LOSS/(GAIN) ON SALE OR DISPOSAL OF ASSETS
During 2003, the Company recorded a loss on the sale or disposal of assets of
$36,000.
In 2002, the Company sold its e-commerce software business to Epicor Software
Corporation for approximately $1.0 million. The Company recorded a gain during
the fourth quarter of 2002 on the sale of this business of approximately
$514,000 that has been included in gain on sale or disposal of assets in the
accompanying statement of operations for the year ended December 31, 2002. Also
in 2002, the Company recorded a loss on the disposal of property and equipment
of $2.3 million. The loss on the disposal of assets during the year ended
December 31, 2002 is primarily attributable to the write down of assets located
in the Suwanee, Limerick and Maidenhead offices.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense in 2003 declined to $0.8 million compared
to $4.2 million in 2002 a reduction of 81%. The decline in the expense primarily
is attributable to the sale of substantially all of the Company's operating
assets in the fourth quarter of 2002, resulting in lower depreciation and
amortization on property and equipment coupled with the write off of intangible
assets with definite lives during 2002. As a result of this write off of assets
during 2002, there was no amortization expense on intangible assets in 2003. The
Company recorded $455,000 of amortization expense relating to intangible assets
with definite lives in 2002.
INTEREST INCOME
Interest income decreased to $1.2 million or approximately 50% for the year
ended December 31, 2003 compared to $2.4 million in 2002. The decrease in
interest income was due to lower levels of cash, cash equivalents and marketable
securities available for investment in 2003 coupled with lower interest rates
during 2003 that resulted in lower rates of return on investments.
INTEREST EXPENSE
Interest expense in 2003 was $66,000 compared to an expense of $225,000 in 2002,
a decline of 71%, due to the repayment of $5.0 million of indebtedness that
resulted in the interest expense in 2002.
INCOME TAXES
As a result of the operating losses incurred since the Company's inception, no
provision or benefit for income taxes was recorded in 2003 or in 2002.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased to $48.4 million at December
31, 2004 from $15.0 million at December 31, 2003 due to a shift in the
composition of the investment portfolio to investments with shorter duration
14
that are characterized as cash equivalents instead of marketable securities
under the accounting principles generally accepted in the United States of
America. The overall combined decrease of $5.2 million in cash and cash
equivalents and marketable securities is primarily due to liquidation of
investments required to fund operating activities, leasehold improvements and
transaction related expenses.
Cash used in operating activities was approximately $2.1 million during 2004.
The cash used was primarily attributable to the Company's net loss. Cash used in
operating activities was approximately $2.9 million during 2003. The cash used
was primarily attributable to the Company's net loss and to decreases in
accounts payable and accrued liabilities, deferred revenue, accounts receivable
and prepaid and other current assets. The trend in cash used in operating
activities is consistent with management's stated strategy, following the sale
of substantially all of the Company's operating assets in December 2002, to
reduce our cash expenditure rate by targeting, to the extent practicable, our
overhead expenses to the amount of our investment income until the completion of
an acquisition or merger. While the Company's expenses have been significantly
reduced, management currently believes that the Company's operating expense will
exceed its investment income in 2005.
Cash provided by investing activities was approximately $35.0 million during
2004. The cash was provided by sale and maturity of marketable securities
partially offset by the purchase of investments and marketable securities. Cash
used by investing activities was approximately $21.0 million during 2003. The
cash was used for purchases of investment and marketable securities, partially
offset by the sale and maturity of marketable securities.
Cash provided by financing activities during 2004 was attributable to stock
option exercises. Cash provided by financing activities was approximately $0.5
million during 2004 compared to cash used by financing of $3.3 million during
2003. The cash used by financing activities in 2003 was attributed to the
repayment of the Company's outstanding indebtedness of $5.0 million, offset in
part by proceeds from the exercise of stock options.
For the periods ended December 31, 2004 and 2003, the Company had no trade
accounts receivables.
On December 6, 2002, the Company granted options to purchase 1,250,000 shares of
common stock to three senior executives. 450,000 of these options were issued
with an exercise price of $5.35 per share, 400,000 were issued with an exercise
price of $7.50 per share and 400,000 were issued with an exercise price of
$10.00 per share. The options issued at $5.35 per share were issued at less than
the fair market value on that date of $5.45 and will result in compensation
charges of $65,000 recognized over the vesting period. Twenty percent of the
options vest annually over five years on the anniversary of the date of grant.
At December 31, 2004, the Company has net operating loss, capital loss, research
and experimentation credit and alternative minimum tax credit carryforwards for
U.S. federal income tax purposes of approximately $226.7 million, $15.2 million,
$1.3 million and $53,000, respectively, which expire in varying amounts
beginning in the year 2009. The Company's ability to benefit from certain net
operating loss and tax credit carryforwards is limited under section 382 of the
Internal Revenue Code due to a prior ownership change of greater than 50%.
Accordingly, approximately $212.8 million of the $226.7 million of U.S. net
operating loss carryforward is available currently to offset taxable income that
the Company may recognize in the future.
CONTRACTUAL OBLIGATIONS
The following summarizes the Company's contractual obligations and commercial
commitments at December 31, 2004 with initial or remaining terms of one or more
years, and the effect such obligations are expected to have on our liquidity and
cash flow in future periods: (in thousands)
Contractual Obligations Payment Due By Period
(in thousands) ---------------------
Total 1 Year 2-3 Years 4-5 Years After 5 Years
------ ------ ------ ------ ------
Operating Leases $3,731 $ 475 $ 815 $ 845 $1,596
------ ------ ------ ------ ------
Total $3,731 $ 475 $ 815 $ 845 $1,596
====== ====== ====== ====== ======
The Company does not have commercial commitments under capital leases, lines of
credit, stand-by lines of credit, guaranties, stand-by repurchase obligations or
other such arrangements, other than the stand-by letter of credit described
below.
The Company does not engage in any transactions or have relationships or other
arrangements with unconsolidated entities. These include special purpose and
similar entities or other off-balance sheet arrangements. The Company also does
not engage in energy, weather or other commodity-based contracts.
Our corporate headquarters is currently located in Stamford, Connecticut where
we lease approximately 8,600 square feet for $18,275 a month, pursuant to a
lease, which expires on March 31, 2019.
15
In September 2003, the Company and Kanders & Company, an entity owned and
controlled by the Company's Executive Chairman, Warren B. Kanders, entered into
a 15-year lease with a five-year renewal option, as co-tenants to lease
approximately 11,500 square feet in Stamford, Connecticut. The Company and
Kanders & Company have initially agreed to allocate the total lease payments of
$24,438 per month on the basis of Kanders & Company renting 2,900 square feet
initially for $6,163 per month, and the Company renting 8,600 square feet
initially for $18,275 per month, which are subject to increase during the term
of the lease. The lease provides the co-tenants with an option to terminate the
lease in years eight and ten in consideration for a termination payment. The
Company and Kanders & Company agreed to pay for their proportionate share of the
build-out construction costs, fixtures, equipment and furnishings related to
preparation of the space. In connection with the lease, the Company obtained a
stand-by letter of credit in the amount of $850,000 to secure lease obligations
for the Stamford facility. The bank that issued the letter of credit holds an
$850,000 deposit against the letter of credit. Kanders & Company reimburses the
Company for a pro rata portion of the approximately $5,000 annual cost of the
letter of credit.
We also lease approximately 5,200 square feet near Toronto, Canada, at a cost of
approximately $11,000 per month, which was used for the delivery of services as
well as research and development through October 2001. This lease expires in
February 2006. This facility has been sub-leased for approximately $5,000 a
month, pursuant to a sublease, which expires on January 30, 2006. The cost, net
of the estimated sublease income, has been included in general and
administrative expense in the accompanying statement of operations in 2002.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003 and revised in December 2003, the FASB issued FIN 46,
"Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51 and an amendment to FIN 46 entitled FASB Interpretation
No. 46 (revised December 2003), Consolidation of Variable Interest Entities
("FIN 46R"). FIN 46R requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity investors in
the entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support form other parties.
FIN 46R will be applied by us to those entities that are considered variable
interest entities as of March 31, 2004. We do not expect that the adoption of
FIN 46R will have a material effect on our consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123R"). This statement requires that the compensation cost
relating to share-based payment transactions be recognized in the financial
statements. Compensation cost is to be measure based on the estimated fair value
of the equity-based compensation awards issued as of the grant date. The related
compensation expense will be based on the estimated number of awards expected to
vest and will be recognized over the requisite service period (often the vesting
period) for each grant. The statement requires the use of assumptions and
judgments about future events and some on the inputs to the valuation models
will require considerable judgment by management. SFAS No. 123R replaces FASB
Statement No. 123 ("SFAS No. 123"), "Accounting for Share-Based Compensation,"
and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees."
The provisions of SFAS No. 123R are required to be applied by public companies
as of the first interim or annual reporting period that begins after June 15,
2005 (as of July 1, 2005 for the Company). The Company intends to continue
applying APB Opinion No. 25 to equity-based compensation awards until the
effective date of SFAS No. 123R. At the effective date of SFAS No. 123R, the
Company expects to use the modified prospective application transition method
without restatement of prior interim periods in the year of adoption. This will
result in the Company recognizing compensation cost based on the requirements of
SFAS No. 123R for all equity-based compensation awards issued after July 1,
2005. For all equity-based compensation awards that are unvested as of July 1,
2005, compensation cost will be recognized for the unamortized portion of
compensation cost not previously included in the SFAS No. 123 pro forma footnote
disclosure. The Company is currently evaluating the impact that adoption of the
SFAS No. 123R may have on its results of operations or financial position and
expects that the adoption may have a material effect on the Company's results of
operations depending on the level and form of future equity-based compensation
awards issued.
QUARTERLY DATA
The following table sets forth selected quarterly data for the years ended
December 31, 2004 and 2003 (in thousands, except per share data). The operating
results are not indicative of results for any future period.
16
2004
----
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Revenues ..................... $ -- $ -- $ 1,106 $ --
Operating loss ............... (723) (1,216) (845) (1,327)
Net loss ..................... (471) (963) (532) (923)
Net loss per share:
Basic .................... $ (0.03) $ (0.06) $ (0.03) $ (0.06)
Diluted .................. $ (0.03) $ (0.06) $ (0.03) $ (0.06)
2003
----
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Revenues ..................... $ 53 $ 25 $ 25 $ 27
Operating loss ............... (2,666) (1,497) (775) (734)
Net loss ..................... (2,412) (1,042) (672) (205)
Net loss per share:
Basic .................... $ (0.15) $ (0.07) $ (0.04) $ (0.01)
Diluted .................. $ (0.15) $ (0.07) $ (0.04) $ (0.01)
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not hold derivative financial investments, derivative commodity
investments, engage in foreign currency hedging or other transactions that
expose us to material market risk.
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
CLARUS CORPORATION AND SUBSIDIARIES
Index to Financial Statements
Page
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements............... 19
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial
Reporting.......................................................................... ....................... 20
Consolidated Balance Sheets--December 31, 2004 and 2003.................................................... 21
Consolidated Statements of Operations--Years Ended December 31, 2004, 2003 and 2002........................ 22
Consolidated Statements of Stockholders' Equity and Comprehensive Loss--Years Ended December 31, 2004, 2003
and 2002 .................................................................................................. 23
Consolidated Statements of Cash Flows--Years Ended December 31, 2004, 2003 and 2002........................ 25
Notes to Consolidated Financial Statements................................................................. 26
18
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Clarus Corporation:
We have audited the accompanying consolidated balance sheets of Clarus
Corporation and subsidiaries ("Clarus") as of December 31, 2004 and 2003, and
the related consolidated statements of operations, stockholders' equity and
comprehensive loss, and cash flows for each of the years in the three-year
period ended December 31, 2004. These consolidated financial statements are the
responsibility of Clarus' management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Clarus Corporation
and subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Clarus'
internal control over financial reporting as of December 31, 2004, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission, and our report
dated March 14, 2005, expressed an unqualified opinion on management's
assessment of, and the effective operation of, internal control over financial
reporting.
/s/ KPMG LLP
- ---------------------
Stamford, Connecticut
March 14, 2005
19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Clarus Corporation:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting in Item 9A,
that Clarus Corporation and subsidiaries ("Clarus") maintained effective
internal control over financial reporting as of December 31, 2004, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission ("COSO").
Clarus' management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of Clarus' internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Clarus maintained effective
internal control over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on criteria established in Internal
Control - Integrated Framework issued by the COSO. Also, in our opinion, Clarus
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal
Control - Integrated Framework issued by the COSO.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Clarus Corporation and subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of operations, stockholders' equity and
comprehensive loss, and cash flows for each of the years in the three-year
period ended December 31, 2004, and our report dated March 14, 2005 expressed
and unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
- ---------------------
Stamford, Connecticut
March 14, 2005
20
CLARUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
(In Thousands, Except Share and Per Share Amounts)
ASSETS
2004 2003
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents ................................................. $ 48,377 $ 15,045
Marketable securities ..................................................... 35,119 73,685
Interest receivable ....................................................... 350 507
Prepaids and other current assets ......................................... 182 132
--------- ---------
Total current assets ................................................... 84,028 89,369
--------- ---------
PROPERTY AND EQUIPMENT, NET ................................................... 2,367 38
--------- ---------
OTHER ASSETS:
Deposits and other long-term assets ....................................... 42 38
--------- ---------
Total assets ........................................................... $ 86,437 $ 89,445
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities .................................. $ 1,468 $ 1,520
Deferred revenue .......................................................... -- 1,106
--------- ---------
Total current liabilities .............................................. 1,468 2,626
--------- ---------
Deferred rent ............................................................. 115 --
Total liabilities ...................................................... 1,583 2,626
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value; 5,000,000 shares authorized; none issued -- --
Common stock, $.0001 par value; 100,000,000 shares authorized;
16,734,947 and 16,649,048 shares issued and
16,659,947 and 16,574,048 outstanding in 2004 and 2003, respectively . 2 2
Additional paid-in capital ................................................ 368,385 367,031
Accumulated deficit ....................................................... (279,656) (276,767)
Less treasury stock, 75,000 shares at cost ................................ (2) (2)
Accumulated other comprehensive income (loss) ............................. (130) (17)
Deferred compensation ..................................................... (3,745) (3,428)
--------- ---------
Total stockholders' equity ............................................. 84,854 86,819
--------- ---------
Total liabilities and stockholders' equity ............................. $ 86,437 $ 89,445
========= =========
See accompanying notes to consolidated financial statements.
21
CLARUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2004, 2003 and 2002
(In Thousands, Except Per Share Amounts)
2004 2003 2002
-------- -------- --------
REVENUES:
License fees ....................................... $ 1,106 $ -- $ 2,808
Services fees ...................................... -- 130 6,226
-------- -------- --------
Total revenues .................................. 1,106 130 9,034
COST OF REVENUES:
License fees ...................................... -- -- 26
Services fees ..................................... -- -- 5,498
-------- -------- --------
Total cost of revenues .......................... -- -- 5,524
OPERATING EXPENSES:
Research and development ........................... -- -- 7,263
Sales and marketing ................................ -- -- 7,938
General and administrative ......................... 3,395 4,986 12,574
Provision/(credit) for doubtful accounts ........... -- 18 (560)
Transaction expenses ............................... 1,636 -- --
Loss on impairment of goodwill and intangible assets -- -- 10,360
Loss on sale or disposal of assets ................. -- 36 1,748
Depreciation and amortization ...................... 186 762 4,243
-------- -------- --------
Total operating expenses ........................ 5,217 5,802 43,566
-------- -------- --------
OPERATING LOSS ......................................... (4,111) (5,672) (40,056)
OTHER INCOME .......................................... 19 169 27
INTEREST INCOME ....................................... 1,203 1,238 2,441
INTEREST EXPENSE ...................................... -- (66) (225)
-------- -------- --------
NET LOSS ............................................... $ (2,889) $ (4,331) $(37,813)
======== ======== ========
NET LOSS PER SHARE
Basic $ (0.18) $ (0.27) $ (2.42)
Diluted $ (0.18) $ (0.27) $ (2.42)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 16,092 15,905 15,615
Diluted 16,092 15,905 15,615
See accompanying notes to consolidated financial statements
22
CLARUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE LOSS
Years Ended December 31, 2004, 2003 and 2002
(In Thousands)
Treasury Accumulated
Common Stock Additional Stock Other
------------------- Paid-In Accumulated ----------------- Comprehensive
Shares Amount Capital Deficit Shares Amount Income (loss)
------- ------- ---------- ----------- ------ ------- -------------
BALANCES December 31,2001 .............. 15,639 $ 2 $ 360,670 $(234,623) (75) $ (2) $ 281
Exercise of stock options ........... 113 -- 400 -- -- -- --
Issuance of shares under
employee stock purchase plans .... 19 -- 119 -- -- -- --
Retirement of shares related
to the termination of
marketing agreement .............. (8) -- (39) -- -- -- --
Modification to stock options ....... -- -- 500 -- -- -- --
Issuance of stock options with
exercise prices below fair
market value ..................... -- -- 65 -- -- -- --
Net loss ............................ -- -- -- (37,813) -- -- --
Increase in foreign currency
translation adjustment ........... -- -- -- -- -- -- 10
Decrease in unrealized gain on
marketable securities ............ -- -- -- -- -- -- (145)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES, December 31, 2002 ............ 15,763 2 361,715 (272,436) (75) (2) 146
Exercise of stock options ........... 384 -- 1,656 -- -- -- --
Issuance of restricted shares,
net of amortization .............. 500 -- 3,650 -- -- -- --
Issuance of shares under
employee stock purchase plan ..... 2 -- 10 -- -- -- --
Net loss ............................ -- -- -- (4,331) -- -- --
Decrease in foreign currency
translation adjustment ........... -- -- -- -- -- -- (78)
Decrease in unrealized gain on
marketable securities ............ -- -- -- -- -- -- (85)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES, December 31, 2003 ............ 16,649 2 367,031 (276,767) (75) (2) (17)
Exercise of stock options ........... 86 -- 454 -- -- -- --
Issuance of restricted shares,
net of amortization .............. -- -- 900 -- -- -- --
Net loss ............................ -- -- -- (2,889) -- -- --
Decrease in unrealized gain on
marketable securities ............ -- -- -- -- -- -- (113)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES, December 31, 2004 ............ 16,735 $ 2 $ 368,385 $(279,656) (75) $ (2) $ (130)
====================================================================================================================================
See accompanying notes to consolidated financial statements.
23
CLARUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE LOSS (Cont.)
Years Ended December 31, 2004, 2003 and 2002
(In Thousands)
Total
Deferred Stockholders' Comprehensive
Compensation Equity Loss
------------ ------------ --------------
BALANCES, December 31, 2001 ............ $ -- $ 126,328 $--
Exercise of stock options ........... -- 400 --
Issuance of shares under
employee stock purchase plans .... -- 119 --
Retirement of shares related
to the termination of
marketing agreement .............. -- (39) --
Modification to stock options ....... -- 500 --
Issuance of stock options with
exercise prices below fair
market value ..................... (65) -- --
Net loss ............................ -- (37,813) (37,813)
Increase in foreign currency
translation adjustment ........... -- 10 10
Decrease in unrealized gain on
marketable securities ............ -- (145) (145)
---------
Total comprehensive loss ............ (37,948)
- ------------------------------------------------------------------------- =========
BALANCES, December 31,2002 ............. (65) 89,360 --
Exercise of stock options ........... -- 1,656 --
Issuance of restricted shares,
net of amortization .............. (3,363) 287 --
Issuance of shares under
employee stock purchase plan ..... -- 10 --
Net loss ............................ -- (4,331) (4,331)
Decrease in foreign currency
translation adjustment ........... -- (78) (78)
Decrease in unrealized gain on
marketable securities ............ -- (85) (85)
---------
Total comprehensive loss ............ (4,494)
- ------------------------------------------------------------------------- =========
BALANCES, December 31, 2003 ............ (3,428) 86,819 --
Exercise of stock options ........... -- 454 --
Issuance of restricted shares,
net of amortization .............. (317) 583 --
Net loss ............................ -- (2,889) (2,889)
Decrease in unrealized gain on
marketable securities ............ -- (113) (113)
---------
Total comprehensive loss .............. $ (3,002)
- ------------------------------------------------------------------------- =========
BALANCES, December 31,2004 ............. $ (3,745) $ 84,854
=========================================================================
See accompanying notes to consolidated financial statements.
24
CLARUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2004, 2003 and 2002
(In Thousands, Except Share Amounts)
2004 2003 2002
--------- --------- ---------
OPERATING ACTIVITIES:
Net loss .................................................................. $ (2,889) $ (4,331) $ (37,813)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of property and equipment ................. 186 762 3,788
Amortization of intangible assets ....................................... -- -- 455
Loss on impairment of intangible assets ................................. -- -- 10,360
Amortization of premium and discount on securities, net ................. 982 -- --
Gain on sale of marketable securities and other ......................... (17) -- (15)
Provision/(credit) for doubtful accounts ................................ -- 18 (560)
Noncash sales and marketing expense ..................................... -- -- 450
Noncash charge due to modification of stock options ..................... -- -- 500
Amortization of deferred employee compensation plans .................... 583 287 --
Gain on sale of e-commerce assets to Epicor ............................. -- -- (514)
Loss on sale or disposal of property and equipment ...................... -- 36 2,262
Changes in operating assets and liabilities:
Accounts receivable ................................................... -- 449 2,618
Interest receivable, prepaids and other current assets ................ 107 623 1,203
Assets held for sale .................................................. -- 48 --
Deposits and other long-term assets ................................... (4) 30 420
Accounts payable and accrued liabilities .............................. (52) (416) (4,539)
Deferred revenue ...................................................... (1,106) (142) (5,738)
Deferred rent ......................................................... 115 -- --
Liabilities to be assumed ............................................. -- (220) --
Other long-term liabilities ........................................... -- -- (265)
--------- --------- ---------
Net cash used in operating activities ................................ (2,095) (2,856) (27,388)
--------- --------- ---------
INVESTING ACTIVITIES:
Purchase of marketable securities ....................................... (59,754) (117,881) (123,611)
Proceeds from the sale and maturity of marketable securities ............ 97,242 96,918 135,860
Purchase of property and equipment ...................................... (2,515) (38) (182)
Proceeds from sale of investment ........................................ -- -- 200
Proceeds from sale of operating assets .................................. -- -- 1,000
Proceeds from sale of property and equipment ............................ -- 11 189
--------- --------- ---------
Net cash (used in) provided by investing activities .................. 34,973 (20,990) 13,456
FINANCING ACTIVITIES:
Proceeds from the exercise of stock options ............................. 454 1,656 400
Proceeds from issuance of common stock related to employee stock
purchase plans .................................................... -- 10 119
Repayment of long-term debt ............................................. -- (5,000) --
--------- --------- ---------
Net cash (used in) provided by financing activities .................. 454 (3,334) 519
--------- --------- ---------
Effect of exchange rate change on cash .................................... -- -- 10
CHANGE IN CASH AND CASH EQUIVALENTS ....................................... 33,332 (27,180) (13,403)
CASH AND CASH EQUIVALENTS, beginning of year .............................. 15,045 42,225 55,628
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year .................................... $ 48,377 $ 15,045 $ 42,225
========= ========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest .................................................... $ -- $ -- $ 225
========= ========= =========
NONCASH TRANSACTIONS:
Retirement of 7,500 shares related to the termination of a sales and
marketing agreement ..................................................... $ -- $ -- $ 39
Grant of Restricted Stock ................................................. $ 50 $ 2,680 $ --
See accompanying notes to consolidated financial statements.
25
CLARUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Clarus Corporation, a Delaware corporation, and its subsidiaries, (the
"Company") prior to the sale of substantially all of its operating assets in
December 2002, developed, marketed, and supported Internet-based
business-to-business electronic commerce solutions that automated the
procurement and management of operating resources.
During 2002, the Company adopted a strategic plan to sell or abandon all active
software operations and redeploy company capital to enhance stockholder value.
On December 6, 2002, the Company sold substantially all of its software
operations (comprised of the eProcurement, Sourcing and Settlement product
lines) to Epicor Software Corporation for $1.0 million in cash. Separately, on
January 1, 2003, the Company sold the assets related to the Cashbook product,
which were excluded from the Epicor transaction, to an employee group
headquartered in Limerick, Ireland. Therefore, as of December 31, 2002, the
Company has discontinued or abandoned substantially all software operations.
All of the revenues, cost of revenues and a substantial amount of the operating
expenses in the accompanying consolidated statements of operations, relate to
the divested products discussed above as well as other discontinued products.
The Company is not expected to recognize any significant amounts of revenue,
costs of revenue or incur operating expenses related to the Company's software
operations in the future.
Management now consists of four corporate executive officers and a support staff
of three, all of whom are located in Stamford, Connecticut. Management is now
engaged in analyzing and evaluating potential acquisition and merger candidates
as part of its strategy to redeploy its cash and cash equivalent assets to
enhance stockholder value.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All intercompany transactions and balances have
been eliminated. The Company's subsidiaries include Clarus International, Inc.,
Clarus eMEA Ltd., Clarus CSA, Inc., Clarus CSA, Inc. (Ireland), SAI America
Limited, SAI Recruitment Limited, i2Mobile.com Limited, SAI America LLC,
Software Architects International, LLC, and REDEO Technologies, Inc.
USE OF ESTIMATES
The preparation of these financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements. Estimates also affect the reported amounts of revenues and
expenses during the reporting periods. The Company regularly evaluates its
estimates and assumptions including those related to revenue recognition,
allowance for doubtful accounts, impairment of long-lived assets, impairment of
investments, and contingencies and litigation. The Company bases its estimates
on historical experience and other assumptions that are believed to be
reasonable under the circumstances. Actual results could differ from these
estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. The Company had
approximately $48.4 million and $15.0 million in cash and cash equivalents
included in the accompanying consolidated balance sheets for the years ended
December 31, 2004 and 2003, respectively.
MARKETABLE SECURITIES
Marketable securities at December 31, 2004 consist of government notes and
bonds. For the period ended December 31, 2003, marketable securities consisted
of government notes and bonds, commercial paper, certificates of deposit and
corporate debt. The Company accounts for its marketable securities under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". Pursuant to
the provisions of SFAS No. 115, the Company has classified its marketable
securities as available-for-sale. Available-for-sale securities have been
recorded at fair value and related unrealized gains and losses have been
excluded from earnings and are reported as a separate component of accumulated
other comprehensive income (loss) until realized.
26
CREDIT AND CUSTOMER CONCENTRATIONS
As of December 31, 2004 and 2003, the Company had no trade accounts receivables.
During 2004 and 2003, no revenue was derived from international markets. During
2002, 45.2% of the Company's revenue was derived from international markets, and
29.9% was derived from one customer in the United Kingdom.
PROPERTY AND EQUIPMENT
Property and equipment consists of furniture and fixtures, computers and other
office equipment, purchased software and leasehold improvements. These assets
are depreciated on a straight-line basis over periods ranging from one to eight
years. Leasehold improvements are amortized over the shorter of the useful life
or the term of the lease. During 2002, the Company abandoned certain assets
located at its principal facilities in Suwanee, Georgia, and its offices in
Maidenhead, England and Limerick, Ireland. These fixed asset amounts and the
related accumulated depreciation were written off, resulting in an impairment
charge of $2.1 million that is included in the loss on sale or disposal of
assets in the accompanying consolidated statement of operations for the year
ended December 31, 2002.
Property and equipment are summarized as follows (in thousands):
December 31, Useful Life
---------------------- -----------
2004 2003 (in years)
---- ---- ----------
Computers and equipment ....................... $ 190 $ 52 1 - 5
Furniture and fixtures ........................ 488 35 1 - 7
Leasehold improvements ........................ 1,944 34 8
------- -------
2,622 121
Less: accumulated depreciation and amortization (255) (83)
------- -------
Property and equipment, net ............... $ 2,367 $ 38
======= =======
Depreciation and amortization expense related to property and equipment totaled
$186,000, $762,000, and $3.8 million for the years ended December 31, 2004, 2003
and 2002, respectively.
INVESTMENTS
Prior to 2002, the Company made several equity investments in privately held
companies. The Company's equity ownership in these entities ranged from 2.5% to
12.5%. These investments were accounted for using the cost method of accounting.
The Company did not recognize any material income from these companies during
2004, 2003 or 2002. The Company continues to retain ownership interest in
several of the companies although they have been written down to a zero cost
basis in the Company's consolidated balance sheet at December 31, 2004 and 2003,
respectively.
GOODWILL AND OTHER INTANGIBLE ASSETS
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually. SFAS 142 also requires that intangible assets with estimable useful
lives be amortized over their respective estimated useful lives to their
estimated residual values and reviewed for impairment in accordance with SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets".
The Company adopted SFAS 142 effective January 1, 2002. Upon adoption, the
Company tested goodwill for impairment at January 1, 2002 according to the
provisions of SFAS 142, which resulted in no impairment required as a cumulative
effect of accounting change. As a result of a change in the Company's strategic
direction during the second quarter of 2002, the Company tested goodwill and
intangible assets with definite lives for impairment according to the provisions
of SFAS 142 and SFAS 144, respectively, which resulted in an impairment of $6.8
million of goodwill and $3.5 million of intangible assets with definite lives.
No balances for goodwill or intangible assets remained as of December 31, 2004
and 2003, respectively.
Prior to their impairment, intangible assets were being amortized on a
straight-line basis over periods ranging from three to ten years. Amortization
expense related to these intangible assets amounted to $0, $0 and $0.5 million
in 2004, 2003 and 2002, respectively.
27
LONG-LIVED ASSETS
On January 1, 2002 the Company adopted the provisions of SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144
provides a single accounting model for the impairment or disposal of long-lived
assets. SFAS 144 also changes the criteria for classifying an asset as held for
sale; and broadens the scope of businesses to be disposed of that qualify for
reporting as discontinued operations and changes the timing of recognizing
losses on such operations. The adoption of SFAS 144 did not have a significant
impact on the Company's consolidated financial statements.
In accordance with SFAS 144, long-lived assets, such as property, plant, and
equipment, and purchased intangibles subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to estimated undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed
of are separately presented in the balance sheet and reported at the lower of
the carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposed group classified as held
for sale are presented separately in the appropriate asset and liability
sections of the balance sheet.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities include the following as of December
31, 2004 and 2003 (in thousands):
2003 2004
------ ------
Accounts payable ................................. $ 218 $ 432
Accrued compensation, benefits and commissions ... 172 187
Restructuring accruals ........................... 73 230
Accrued professional services .................... 595 336
Accrued franchise taxes .......................... 365 180
Other ............................................ 45 155
------ ------
$1,468 $1,520
====== ======
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company uses financial instruments in the normal course of its business. The
carrying values of cash and cash equivalents, accounts payable and long-term
debt approximates fair value. Marketable securities are carried at market value.
The fair value of the Company's investments in privately held companies is not
readily available. The Company believes the fair values of these investments
approximated their respective carrying values at December 31, 2004 and 2003.
REVENUE
The Company historically recognized revenue from two primary sources, software
licenses and services. Revenue from software licensing and services fees is
recognized in accordance with Statement of Position ("SOP") 97-2, "Software
Revenue Recognition", and SOP 98-9, "Software Revenue Recognition with Respect
to Certain Transactions" and related interpretations. The Company recognizes
software license revenue when: (1) persuasive evidence of an arrangement exists;
(2) delivery has occurred; (3) the fee is fixed or determinable; and (4)
collectibility is probable.
SOP No. 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair values of the elements. The fair value of an element must be based
on evidence that is specific to the vendor. License fee revenue allocated to
software products generally is recognized upon delivery of the products or
deferred and recognized in future periods to the extent that an arrangement
includes one or more elements to be delivered at a future date and for which
fair values have not been established. Revenue allocated to maintenance is
recognized ratably over the maintenance term, which is typically 12 months and
revenue allocated to training and other service elements is recognized as the
services are performed.
Under SOP No. 98-9, if evidence of fair value does not exist for all elements of
a license agreement and post-contract customer support is the only undelivered
element, then all revenue for the license arrangement is recognized ratably over
the term of the agreement as license revenue. If evidence of fair value of all
undelivered elements exists but evidence does not exist for one or more
delivered elements, then revenue is recognized using the residual method. Under
the residual method, the fair value of the undelivered elements is deferred and
the remaining portion of the arrangement fee is recognized as revenue. The
Company uses the residual method since it does not have fair value of license
fees. Revenue from hosted software agreements are recognized ratably over the
term of the hosting arrangements. Revenue from sales to resellers is recognized
on a sell-through basis.
28
In November 2001, the Emerging Issues Task Force ("EITF") issued EITF 01-14,
"Income Statement Characterization of Reimbursements Received for
`Out-of-Pocket' Expenses Incurred", stating that reimbursements received for
out-of-pocket expenses should be characterized as revenue. The Company adopted
this consensus effective January 1, 2002. Historically the Company has not
reflected such reimbursements as revenue in its consolidated statements of
operations. Upon adoption of this consensus, comparative financial statements
for prior periods were reclassified to provide consistent presentation. The
adoption of this consensus did not have any impact on the Company's financial
position or results of operations, however, the Company's services fees revenue
and cost of services fees revenue increased by an equal amount as a result of
the gross-up of revenues and expenses for reimbursable expenses. For the fiscal
year ended December 31, 2002 the Company recorded services fees revenue and cost
of services fees revenue from out-of-pocket expenses of approximately $206,000.
STOCK-BASED COMPENSATION PLAN
The Company has an employee stock option plan, which is described more fully in
Note 10. In December 2002, the Financial Accounting Standards Board ("FASB")
issued Statement No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure" which amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a change to the
fair based-value method of accounting for stock-based employee compensation. In
addition, SFAS No.148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. As permitted by SFAS 148 and SFAS
123, the Company has elected to follow the guidance of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" in
measuring and recognizing its stock-based transactions with employees. As such,
compensation expense is measured on the date of grant only if the current market
price on the date of the grant of the underlying stock exceeds the exercise
price. Such compensation expense is recorded on a straight-line basis over the
related vesting period.
The following table shows what the effect on net loss and earnings per share if
the fair value method of accounting had been applied. For purposes of this pro
forma disclosure, the estimated fair value of an option utilizing the
Black-Scholes option pricing model is assumed to be amortized to expense over
the option's vesting periods (in thousands, except per share amounts):
2004 2003 2002
---------- ---------- ----------
Net loss, as reported ................................................ $ (2,889) $ (4,331) $ (37,813)
Add stock-based employee compensation expense included in reported
net loss, .......................................................... 584 287 500
Deduct total stock-based employee compensation expense determined
under fair-value based method for all awards ....................... (2,613) (5,049) (1,913)
---------- ---------- ----------
Pro forma net loss ................................................... $ (4,918) $ (9,093) $ (39,226)
========== ========== ==========
Earnings per Share:
Basic - as reported ................................................ $ (0.18) $ (0.27) $ (2.42)
Basic - pro forma .................................................. $ (0.31) $ (0.57) $ (2.51)
Diluted - as reported .............................................. $ (0.18) $ (0.27) $ (2.42)
Diluted - pro forma ................................................ $ (0.31) $ (0.57) $ (2.51)
========== ========== ==========
Refer to Note 10 to the consolidated financial statements for assumptions used
in the Black-Scholes option pricing model.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
income tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred income tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred income tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
29
NET LOSS PER SHARE
Basic and diluted net loss per share was computed in accordance with SFAS No.
128, "Earnings Per Share," using the weighted average number of common shares
outstanding. The diluted net loss per share for the years ended December 31,
2004, 2003 and 2002 excludes incremental shares calculated using the treasury
stock method, assumed from the conversion of stock options due to the net loss
for the years ended December 31, 2004, 2003 and 2002. The potential effects of
excluded incremental shares are as follows (in thousands):
2004 2003 2002
----- ----- -----
Effect of shares issuable under stock option plan 616 202 107
Effect of shares issuable under
Restricted stock awards 504 28 --
----- ----- -----
Total effect of potential incremental shares 1,120 230 107
===== ===== =====
At December 31, 2004, 1,561,617 options were excluded in the computation of
diluted earnings per share due to the net loss for the year ended December 31,
2004 and 400,000 options were excluded in the computation of diluted earnings
per share because the options' exercise prices were greater than the average
market share price of the common shares.
At December 31, 2003, 1,283,867 options were excluded in the computation of
diluted earnings per share due to the net loss for the year ended December 31,
2003 and 815,000 options were excluded in the computation of diluted earnings
per share because the options' exercise prices were greater than the average
market share price of the common shares.
At December 31, 2002, 326,034 options were excluded in the computation of
diluted earnings per share due to the net loss for the year ended December 31,
2002 and 2,528,872 options were excluded in the computation of diluted earnings
per share because the options' exercise prices were greater than the average
market share price of the common shares.
COMPREHENSIVE INCOME (LOSS)
The Company utilizes SFAS No. 130, "Reporting Comprehensive Income". SFAS No.
130 establishes standards for reporting and presentation of comprehensive income
(loss) and its components in a full set of financial statements. Comprehensive
income (loss) primarily consists of net income (loss), foreign currency
translation adjustments, and unrealized gains and losses from available-for-sale
marketable securities and is presented in the consolidated statements of
stockholders' equity as comprehensive income (loss).
SEGMENT AND GEOGRAPHIC INFORMATION
In accordance with the provisions of SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information", the Company has determined that
during 2004, 2003, and 2002 the Company operated in one principal business
segment, e-commerce software solutions, across domestic and international
markets.
Geographic revenue and the carrying value of property and equipment as of and
for the years ended December 31, 2004, 2003 and 2002 were as follows:
(in thousands) 2004 2003 2002
------ ------ ------
Revenue:
United States $ -- $ 130 $4,954
England -- -- 2,702
Italy -- -- 319
Other international 1,106 -- 1,059
------ ------ ------
Total $1,106 $ 130 $9,034
====== ====== ======
Property and equipment:
United States $2,367 $ 38 $ 809
International -- -- --
------ ------ ------
Total $2,367 $ 38 $ 809
====== ====== ======
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123R"). This statement required that the compensation cost
relating to share-based payment transactions be recognized in the financial
statements. Compensation cost is to be measure based on the estimated fair value
of the equity-based compensation awards issued as of the grant date. The related
compensation expense will be based on the estimated number of awards expected to
30
vest and will be recognized over the requisite service period (often the vesting
period) for each grant. The statement requires the use of assumptions and
judgments about future events and some on the inputs to the valuation models
will require considerable judgment by management. SFAS No. 123R replaces FASB
Statement No. 123 ("SFAS No. 123"), "Accounting for Share-Based Compensation,"
and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees."
The provisions of SFAS No. 123R are required to be applied by public companies
as of the first interim or annual reporting period that begins after June 15,
2005 (as of July 1, 2005 for the Company). The Company intends to continue
applying APB Opinion No. 25 to equity-based compensation awards until the
effective date of SFAS No. 123R. At the effective date of SFAS No. 123R, the
Company expects to use the modified prospective application transition method
without restatement of prior interim periods in the year of adoption. This will
result in the company recognizing compensation cost based on the requirements of
SFAS No. 123R for all equity-based compensation awards issued after July 1,
2005. For all equity-based compensation awards that are unvested as of July 1,
2005, compensation cost will be recognized for the unamortized portion of
compensation cost not previously included in the SFAS No. 123 pro forma footnote
disclosure. The Company is currently evaluating the impact that adoption of the
SFAS No. 123R may have on its results of operations or financial position and
expects that the adoption may have a material effect on the Company's results of
operations depending on the level and form of future equity-based compensation
awards issued.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the current
year presentation.
2. MARKETABLE SECURITIES
As of December 31, 2004, and 2003, those investments with an original maturity
of three months or less are classified as cash equivalents and those investments
with original maturities beyond three months are classified as marketable
securities. Pursuant to the provisions of SFAS No. 115, the Company has
classified all of its marketable securities as available-for-sale.
At December 31, 2004, marketable securities consisted of government notes and
bonds with a fair market value of $35.1 million. The amortized cost of
marketable securities at December 31, 2004 was $35.2 million with an unrealized
loss of $130,000.
The maturities of all securities are less than 18 months at December 31, 2004.
$26.9 million mature in less than 12 months and $8.2 million mature between 12
and 18 months. The Company had no sales of marketable securities for the year
ended December 31, 2003.
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and fair value of these available-for-sale marketable securities by major
security type and class of security at December 31, 2003 were as follows (in
thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Holding Gains Holding Losses Value
---------- ---------- ---------- ----------
Commercial paper ............. $ 2,195 $ -- $ -- $ 2,195
Corporate notes and bonds .... 10,123 4 (28) 10,099
Government notes and bonds ... 61,384 8 (1) 61,391
---------- ---------- ---------- ----------
Total ......... $ 73,702 $ 12 $ (29) $ 73,685
========== ========== ========== ==========
The Company had $15,000 of realized gains and had no realized losses from sales
of marketable securities included in the accompanying consolidated statements of
operations for the year ended December 31, 2002. The Company received
approximately $15.0 million in proceeds from these sales.
3. ACQUISITIONS AND DISPOSITIONS
SALE OF OPERATING ASSETS
On December 6, 2002, the Company sold its e-commerce software business to Epicor
Software Corporation for $1.0 million. Approximately $200,000 of the purchase
price was placed in escrow and is included in cash and cash equivalents in the
accompanying consolidated balance sheet at December 31, 2003. The escrowed funds
were released in February 2004. The Company recorded a gain in 2002 on the sale
of the business of approximately $514,000. On January 1, 2003, the Company sold
its Cashbook product to an employee group in Limerick, Ireland recognizing a
gain of approximately $157,000 during the first quarter of 2003.
31
4. RELATED-PARTY TRANSACTIONS
In September 2003, the Company and Kanders & Company, an entity owned and
controlled by the Company's Executive Chairman, Warren B. Kanders, entered into
a 15-year lease with a five-year renewal option, as co-tenants to lease
approximately 11,500 square feet in Stamford, Connecticut. The Company and
Kanders & Company have initially agreed to allocate the total lease payments of
$24,438 per month on the basis of Kanders & Company renting 2,900 square feet
initially for $6,163 per month, and the Company renting 8,600 square feet
initially for $18,275 per month, which are subject to increases during the term
of the lease. Rent expense is recognized on a straight line basis. The lease
provides the co-tenants with an option to terminate the lease in years eight and
ten in consideration for a termination payment. The Company and Kanders &
Company agreed to pay for their proportionate share of the build-out
construction costs, fixtures, equipment and furnishings related to preparation
of the space. In connection with the lease, the Company obtained a stand-by
letter of credit in the amount of $850,000 to secure lease obligations for the
Stamford facility. Kanders & Company reimburses the Company for a pro rata
portion of the approximately $5,000 annual cost of the letter of credit.
During the year ended December 31, 2004, the Company expensed approximately
$31,000, for payments to Kanders Aviation LLC, an affiliate of the Company's
Executive Chairman, Warren B. Kanders, relating to aircraft travel by directors
and officers of the Company for potential redeployment transactions. As of
December 31, 2004, the Company had outstanding a net receivable of less than
$150 from Kanders & Company resulting from an outstanding payable by the Company
to Kanders Aviation LLC of $23,921 and an outstanding payable by Kanders &
Company to the Company of $24,054. The amount due to Kanders Aviation LLC is
included in accounts payable and accrued liabilities in the accompanying
consolidated balance sheet and the amount due from Kanders & Company is included
in prepaids and other current assets in the accompanying consolidated balance
sheet. The outstanding amounts were paid in February 2005.
The Company provides certain telecommunication, administrative and other office
services as well as accounting and bookkeeping services to Kanders & Company
that are reimbursed by Kanders & Company. Such services aggregated $43,000
during the year ended December 31, 2004.
After the closing of the sale of the e-commerce software business in December
2002, Steven Jeffery, resigned as the Company's Chief Executive Officer and
Chairman of the Board of Directors. Under Mr. Jeffery's employment agreement, he
was entitled to receive a severance payment equal to one year's salary of
$250,000, payable over one year. In addition, Mr. Jeffery entered into a
three-year consulting agreement with the Company and received total
consideration of $250,000 payable over two years. At December 31, 2004, no
balance remained outstanding to Mr. Jeffery under these severance arrangements.
In the opinion of management, the rates, terms and considerations of the
transactions with the related parties described above are at least as favorable
as those we could have obtained in arms length negotiations or otherwise are at
prevailing market prices and terms.
5. RESTRUCTURING AND RELATED COSTS
During 2002 and 2001, the Company's management approved restructuring plans to
reorganize and reduce operating costs. Restructuring and related charges of $4.2
million were expensed in 2001 to align better the Company's cost structure with
projected revenue. The charges were comprised of $3.0 million for employee
separation and related costs for 181 employees and $1.2 million for facility
closure and consolidation costs.
During the first quarter of 2002, the Company determined that amounts previously
charged during 2001 of approximately $202,000 that related to employee
separation and related charges were no longer required and this amount was
credited to sales and marketing expense in the accompanying consolidated
statement of operations during 2002.
Additional restructuring and related charges of $8.6 million were expensed
during 2002. The charges for 2002 were comprised of $4.6 million for employee
separation and related costs for 183 employees and $4.0 million for facility
closures and consolidation costs.
During 2003, the Company determined that actual restructuring and related
charges were in excess of amounts provided for in 2002 and recorded additional
restructuring charges of $250,000. This amount was expensed to general and
administrative costs in the accompanying consolidated statement of operations
during 2003. The charges for 2003 were comprised of $223,000 for employee
separation costs and $27,000 for facility closure and consolidation costs.
The facility closures and consolidation costs for 2001 and 2002 relate to the
abandonment of the Company's leased facilities in Suwanee, Georgia; Limerick,
Ireland; Maidenhead, England; and near Toronto, Canada. Total facility closures
and consolidation costs include remaining lease liabilities, construction costs
and brokerage fees to sublet the abandoned space offset by estimated sublease
income. The estimated costs of abandoning these leased facilities, including
32
estimated costs to sublease, were based on market information trend analysis
provided by a commercial real estate brokerage firm retained by the Company. The
Company incurred a charge in the fourth quarter 2002 of $2.1 million for
facility closures and consolidation costs as a result of the termination of its
lease for its principal facility in Suwanee, Georgia.
The following is a reconciliation of the components of the accrual for
restructuring and related costs, the amounts charged against the accrual during
2004, 2003 and 2002 and the balance of the accrual as of December 31, 2004 (in
thousands):
Employee Facility
Separation Closing Total Restructuring
Costs Costs and Related Costs
--------- --------- -------------------
Balance at December 31, 2001 $ 680 $ 1,209 $ 1,889
Accruals during 2002 4,645 3,905 8,550
Expenditures during 2002 4,196 4,977 9,173
Credits in 2002 202 -- 202
---------- ---------- ----------
Balance at December 31, 2002 927 137 1,064
Accruals during 2003 223 27 250
Expenditures during 2003 1,025 59 1,084
---------- ---------- ----------
Balance at December 31, 2003 125 105 230
Accruals during 2004 -- 33 33
Expenditures during 2004 125 65 190
---------- ---------- ----------
Balance at December 31, 2004 $ -- $ 73 $ 73
========== ========== ==========
For the years ended December 31, 2004, 2003 and 2002, the restructuring and
related costs were classified in the Company's consolidated statements of
operations as follows (in thousands):
YEAR ENDED
DECEMBER 31,
-------------------------------------------
2004 2003 2002
------ ------ ------
Cost of revenues - services fees $ -- $ -- $ 858
Research and development -- -- 1,291
Sales and marketing -- -- 1,242
General and administrative 33 250 5,159
------ ------ ------
Total $ 33 $ 250 $8,550
====== ====== ======
6. INCOME TAXES
For financial reporting purposes, losses from continuing operations before
income taxes includes the following components (in thousands):
YEAR ENDED
DECEMBER 31,
-------------------------------------------
2004 2003 2002
------- ------- -------
Pre-Tax Loss:
United States $ (2,889) $ (4,331) $(25,770)
Foreign -- -- (12,043)
------- -------- --------
$ (2,889) $ (4,331) $(37,813)
======== ======== ========
The Company files a consolidated income tax return with its wholly owned
subsidiaries. The components of the income tax expense (benefit) for each of the
years in the three-year period ended December 31, 2004 are as follows (in
thousands):
33
YEAR ENDED
DECEMBER 31,
----------------------------------------------
2004 2003 2002
-------- -------- --------
Current:
Federal $ -- $ -- $ --
State -- -- --
Foreign -- -- --
-------- -------- --------
-- -- --
-------- -------- --------
Deferred:
Federal (30,455) (3,492) 579
State (7,251) (513) 164
Foreign 441 5,962 (2,026)
-------- -------- --------
(37,265) 1,957 (1,283)
Increase/(Decrease) in valuation allowance for
deferred income taxes 37,265 (1,957) 1,283
-------- -------- --------
$ -- $ -- $ --
======== ======== ========
The following is a summary of the items that caused recorded income taxes to
differ from income taxes computed using the statutory federal income tax rate of
34% for the years ended December 31, 2004, 2003 and 2002:
YEAR ENDED
DECEMBER 31,
-------------------------------------------
2004 2003 2002
------- ------- -------
Computed "expected" income tax expense (benefit) (34.0)% (34.0)% (34.0)%
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal income taxes (5.0) (7.7) 0.3
Benefit of prior year NOL adjustments (1,265.9) (54.2) --
Nondeductible goodwill -- -- 9.6
Income tax effect attributable to foreign operations 15.3 135.6 2.6
Nondeductible expired/cancelled warrants and options -- 3.3 16.8
Increase in valuation allowance and other items 1,289.6 (43.0) 4.7
------- ------- -------
Income tax expense (benefit) -- -- --
======= ======= =======
Deferred income tax assets and liabilities are determined based on the
difference between the financial reporting carrying amounts and tax bases of
existing assets and liabilities and operating loss and tax credit carryforwards.
Significant components of the Company's existing deferred income tax assets and
liabilities as of December 31, 2004 and 2003 are as follows (in thousands):
YEAR ENDED
DECEMBER 31,
---------------------------
2004 2003
-------- --------
Deferred income tax assets:
Net operating loss, capital loss and research & $ 94,943 $ 57,454
experimentation credit carryforwards
Depreciation and amortization (446) 3
Non-cash compensation 339 112
Accrued liabilities 42 44
Reserves for investments 1,728 1,728
-------- --------
Net deferred income tax assets before valuation allowance 96,606 59,341
Valuation allowance for deferred income tax assets (96,606) (59,341)
-------- --------
Net deferred income tax assets $ -- $ --
======== ========
Net operating loss carryforwards at December 31, 2004 increased significantly
due to the write off for tax purposes of significant investments in foreign
subsidiaries in Ireland and the United Kingdom, whose losses had previously been
reflected in our financial statements for prior periods.
34
The net change in the valuation allowance for deferred income tax assets for
2004 was an increase of $37.3 million as compared to a decrease of $2.0 million
in 2003 and an increase in 2002 of $1.3 million. In assessing the realizability
of deferred income tax assets, management considers whether it is more likely
than not that some portion or all of the deferred income tax assets will not be
realized. The ultimate realization of deferred income tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred income tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Management has provided a
valuation allowance against deferred income tax assets at December 31, 2004,
because the ultimate realization of those benefits and assets does not meet the
more likely than not criteria.
At December 31, 2004, the Company has net operating loss, capital loss, research
and experimentation credit and alternative minimum tax credit carryforwards for
U.S. federal income tax purposes of approximately $226.7 million, $15.2 million,
$1.3 million and $53,000, respectively, which expire in varying amounts
beginning in the year 2009.
The Company's ability to benefit from certain net operating loss and tax credit
carryforwards is limited under section 382 of the Internal Revenue Code due to a
prior ownership change of greater than 50%. Accordingly, approximately $212.8
million of the $226.7 million of U.S. net operating loss carryforward is
available currently to offset taxable income that the Company may recognize in
the future.
7. DEBT
As of December 31, 2004 and 2003, the Company has no debt outstanding.
8. ROYALTY AGREEMENTS
The Company was previously a party to royalty and other original equipment
manufacturer agreements for certain of its applications. The Company incurred a
total of approximately $0, $0 and $24,000, in royalty expense for the years
ended December 31, 2004, 2003, and 2002, respectively, pursuant to these
agreements. The royalty fees paid are included in cost of revenues-license fees
in the accompanying consolidated statements of operations. Epicor Corporation
assumed all outstanding royalty agreements in connection with the sale of the
Company's e-commerce software business on December 6, 2002.
9. EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) Plan (the "Plan"), a defined contribution plan
covering substantially all employees of the Company. Under the Plan's deferred
compensation arrangement, eligible employees who elect to participate in the
Plan may contribute between 2% and 20% of eligible compensation, as defined, to
the Plan. The Company, at its discretion, may elect to provide for either a
matching contribution or discretionary profit-sharing contribution or both. The
Company made matching contributions of approximately $6,000, $2,000 and $55,000
in 2004, 2003 and 2002, respectively.
On June 13, 2000, the Company adopted the Clarus Corporation Employee Stock
Purchase Plan (the "U.S. Plan") and the Global Employee Stock Purchase Plan (the
"Global Plan") (collectively, the "Plans"), which offers employees the right to
purchase shares of the Company's common stock at 85% of the market price, as
defined. Under the Plans, full-time employees, except persons owning 5% or more
of the Company's common stock, are eligible to participate after 90 days of
employment. Employees may contribute up to 15% of their annual salary toward the
Purchase Plan. A maximum of 1,000,000 shares of common stock may be purchased
under the Plans. Common stock is purchased directly from the Company on behalf
of the participants. During the years ended December 31, 2004, 2003 and 2002,
zero, 2,349 and 18,548 shares were purchased for the benefit of the participants
under the Plans, respectively. As of December 31, 2004, there were no
participants in either the U.S. or Global Plans.
10. STOCK INCENTIVE PLANS
The Company had a stock option plan for employees, consultants, and other
individual contributors to the Company, which enabled the Company to grant up to
approximately 1.6 million qualified and nonqualified incentive stock options
(the "1992 Plan"). The plan terminated in November 2002, but 107,867 stock
options awarded under the plan are vested and eligible to be exercised at
December 31, 2004.
The Company adopted the 1998 Stock Incentive Plan (the "1998 Plan") in 1998.
Under the 1998 Plan, the Board of Directors has the flexibility to determine the
type and amount of awards to be granted to eligible participants, who must be
employees of the Company or its subsidiaries or consultants to the Company. The
1998 Plan provides for grants of incentive stock options, nonqualified stock
options, restricted stock awards, stock appreciation rights, and restricted
units. During 2000, the Board of Directors and stockholders adopted an
amendment, which increased the number of shares authorized and reserved for
35
issuance from 1.5 million shares to 3.0 million shares. The aggregate number of
shares of common stock that may be granted through awards under the 1998 Plan to
any employee in any calendar year may not exceed 200,000 shares. The 1998 Plan
will continue in effect until February 2008 unless terminated sooner.
Upon the acquisition of the SAI/Redeo Companies on May 31, 2000, the Company
assumed the Stock Incentive Plan of Software Architects International, Limited
(the "SAI Plan"), and the options outstanding. The SAI Plan enabled the Company
to grant up to 750,000 nonqualified stock options. The Company could grant
options to eligible participants who had to be employees of the Company or its
subsidiaries or consultants, but not directors or officers of the Company.
On April 9, 2001, the Company announced a voluntary stock option exchange
program for its employees. Under the program, employees were given the
opportunity to cancel outstanding stock options previously granted to them on or
after November 1, 1999 in exchange for an equal number of new options to be
granted at a future date. The exercise price of the new options was equal to the
fair market value of the Company's common stock on the date of grant. During the
first phase of the program, 366,174 options with a weighted average exercise
price of $30.55 per share were canceled and new options to purchase 263,920
shares with an exercise price of $3.49 per share were issued on November 9,
2001. During the second phase of the program, 273,188 options with a weighted
average exercise price of $43.87 per share were canceled and new options to
purchase 198,052 shares with an exercise price of $4.10 per share were issued on
February 11, 2002. Employees who participated in the first exchange were not
eligible for the second exchange. The exchange program was designed to comply
with Financial Accounting Standards Board ("FASB") Interpretation No. 44
"Accounting for Certain Transactions Involving Stock Compensation" and did not
result in any additional compensation charges or variable accounting. Members of
the Company's Board of Directors and its executive officers were not eligible to
participate in the exchange program.
In December 2002, the Company granted options to purchase a total of 1,250,000
shares of common stock to three senior executives. 450,000 of these options were
issued with an exercise price of $5.35 per share, 400,000 were issued with an
exercise price of $7.50 per share and 400,000 were issued with an exercise price
of $10.00 per share. A portion of the options issued at $5.35 per share were
issued at less than the fair market value on the date of grant. The Company
recorded deferred compensation of $65,000 to be recognized over the vesting
period of five years.
In December 2002, the Company made an election to accelerate vesting of
substantially all of the Company's outstanding stock options in connection with
the acquisition by Epicor Software Corporation of the e-commerce assets of the
Company. This resulted in a non-cash stock compensation charge of approximately
$500,000 during 2002.
In April 2003, the Company granted 500,000 shares of restricted stock to Warren
B. Kanders, the Executive Chairman of the Board. The shares vest in ten years or
earlier upon satisfaction of various conditions including performance based
conditions relating to the price of the Company's common stock. Deferred
compensation of $2.7 million was recorded at the date of grant representing the
fair value of the shares and adjusted as of December 31, 2004 to $3.6 million to
account for the increase in fair market value from grant date through December
31, 2004. During the years ended December 31, 2004 and 2003, $513,750 and
$274,000, respectively, were amortized to compensation expense for this award.
At December 31, 2004, these shares were excluded from the computation of diluted
earnings per share due to the net loss for the year ended December 31, 2004.
The Company recorded total non-cash stock compensation expense of approximately
$0.6 million, $0.3 million and $0.5 million for the years ended December 31,
2004, 2003 and 2002, respectively.
Total options available for grant under all plans as of December 31, 2004 were
842,116.
36
A summary of changes in outstanding options during the three years ended
December 31, 2004 is as follows:
Weighted
Range of Average
Exercise Exercise
Shares Prices Price
----------- ------------ ------------
December 31, 2001........................................... 3,241,126 $1.00-$128.13 $12.06
Granted................................................ 2,238,882 $3.76-$ 10.00 $ 6.40
Canceled............................................... (2,512,447) $1.00-$128.13 $12.13
Exercised.............................................. (112,655) $1.00-$ 5.17 $ 3.51
-----------
December 31, 2002........................................... 2,854,906 $1.00-$ 82.56 $ 7.76
Granted................................................ 5,000 $7.30-$ 7.30 $ 7.30
Canceled............................................... (377,047) $3.49-$ 82.56 $16.69
Exercised.............................................. (383,992) $1.00-$ 6.13 $ 4.31
-----------
December 31, 2003........................................... 2,098,867 $3.67-$ 10.00 $6.77
===========
Granted................................................ 40,000 $8.60- $ 9.00 $ 8.65
Canceled............................................... (80,000) $5.35- $ 8.60 $ 5.76
Exercised.............................................. (85,899) $3.67- $ 7.63 $ 5.29
Prior Period Adjustments............................... (11,351) $3.49- $68.38 $ 9.95
------------
December 31, 2004........................................... 1,961,617 $4.83- $ 10.00 $ 6.93
===========
Vested and exercisable at December 31, 2004................. 1,117,754 $ 6.55
===========
Vested and exercisable at December 31, 2003................. 864,392 $ 6.22
===========
Vested and exercisable at December 31, 2002................. 1,158,508 $ 8.56
===========
For SFAS No. 123 purposes, the fair value of each option grant has been
estimated as of the date of grant using the Black-Scholes option-pricing model
with the following assumptions:
2004 2003 2002
---- ---- ----
Dividend yield........................... 0% 0% 0%
Expected volatility...................... 57% 62% 76%
Risk-free interest rate.................. 2.55% 2.86% 2.63%-4.43%
Expected life............................ Four years Four years Four years
Using these assumptions, the fair value of the stock options granted during the
years ended December 31, 2004, 2003, and 2002, were approximately $40,000,
$18,000 and $6.4 million, respectively, which would be amortized over the
vesting period of the options. The weighted-average grant-date fair values of
the stock options granted during the years ended December 31, 2004, 2003 and
2002, were $4.22, $3.50 and $2.86, respectively.
The following table summarizes the exercise price range, weighted average
exercise price, and remaining contractual lives by significant ranges for
options outstanding and exercisable as of December 31, 2004:
Outstanding Exercisable
------------------------------------------------------- -------------------------------------------
Weighted
Number Weighted Average Number Weighted
Exercise of Shares Average Remaining of Shares Average
Price Outstanding at Exercise Contractual Exercisable at Exercise
Range December 31, 2004 Price Life (Years) December 31, 2004 Price
------ ----------------- -------- ------------- ----------------- -------
$ 4.83 - $ 9.00 1,561,617 $ 6.14 6.2 957,754 $ 5.97
$10.00 - $10.00 400,000 $10.00 8.0 160,000 $10.00
---------- ---------
1,961,617 $6.93 6.6 1,117,754 $ 6.55
========== =========
37
11. STOCKHOLDERS' EQUITY
COMMON STOCK
The sales and marketing agreement signed with one strategic partner also
required cash payments of $300,000 in each of the last two years of the related
agreement. The Company recorded the fair value of the common stock and the
expected cash payments as deferred sales and marketing costs during 2000. During
2001, the Company terminated the sales and marketing agreement with this
strategic partner resulting in a write-off of the remaining deferred sales and
marketing costs of $1.4 million. Also, as a result of the termination, the
Company is no longer required to make cash payments of $300,000 for the last two
years of the agreement.
The Company recorded non-cash sales and marketing expense, including the
write-off discussed above, of approximately $0, $0, and $0.4 million during
2004, 2003 and 2002, respectively, related to these agreements.
WARRANTS
During 1999, the Company issued warrants to purchase 225,000 shares of the
Company's common stock at exercise prices ranging from $10.00 to $53.75 per
share, which expired in December 2002. These warrants were issued to certain
strategic partners, who were also customers, in exchange for the agreement to be
party to a sales and marketing agreement between the Company and the strategic
partner to provide various sales and marketing efforts on behalf of the Company.
The total fair market value of the warrants was approximately $11.9 million,
which was recorded as additional paid-in capital and deferred sales and
marketing costs at the date of issuance. The Company recorded non-cash sales and
marketing expense of approximately $4.3 million related to these agreements
during the year ended December 31, 2001. These warrants were fully amortized as
of December 31, 2001 and expired in December 2002. The Company did not recognize
any revenue from these customers during 2004, 2003 or 2002.
The Company previously granted 25,000 warrants to a strategic partner in return
for completion of predetermined sales and marketing milestones. The exercise
price of these warrants was $53.75 per share and the warrants expired on October
31, 2003.
During 2000, the Company awarded 33,334 warrants to a third party software
developer in exchange for services. The exercise price of the 33,334 warrants
was $56.78 per share and the warrants expired on March 31, 2003. The fair market
value of the warrants on the date of grant was $424,000 and was recorded as
additional paid-in capital and non-cash research and development expense during
2000.
12. COMMITMENTS AND CONTINGENCIES
LEASES
The Company rents certain office space, under noncancelable operating leases.
Rents charged to expense were approximately $0.3 million, $0.2 million and $1.2
million for the years ended December 31, 2004, 2003, and 2002, respectively.
Future minimum lease payments for the next five years and thereafter under
noncancelable operating leases with remaining terms greater than one year as of
December 31, 2004, are as follows (in thousands):
Gross Rental Sub-Lease
Obligations Income
----------- ------
Year ending December 31,
2005 474 140
2006 413 104
2007 403 101
2008 420 105
2009 425 106
Thereafter 1,596 399
------ ----
Total $3,731 $955
======= =====
Our corporate headquarters is currently located in Stamford, Connecticut where
we lease approximately 8,600 square feet for $18,275 a month, pursuant to a
lease, which expires on March 31, 2019.
38
We also lease approximately 5,200 square feet near Toronto, Canada, at a cost of
approximately $11,000 per month, which was used for the delivery of services as
well as research and development through October 2001. This lease expires in
February 2006. This facility has been sub-leased for approximately $5,000 a
month, pursuant to a sublease, which expires on January 30, 2006. The cost, net
of the estimated sublease income has been included in general and administrative
expense in the accompanying consolidated statement of operations in 2002.
INDEMNIFICATION
The Company has agreed to indemnify Epicor Software Corporation, as part of the
sale of the Company's e-commerce business, for the conduct of this business
prior to December 6, 2002. Additionally, the Company had historically
indemnified its customers against damages and costs resulting from claims of
patent, copyright, or trademark infringement associated with use of the software
in its software licensing agreements.
The Company has not made any accruals or payments under such indemnifications.
However, the Company continues to monitor the conditions that are subject to the
indemnifications to identify whether it is probable that a loss has occurred,
and would recognize any such losses under the indemnifications when those losses
are reasonably estimable.
LITIGATION
We are not a party to nor are any of our properties subject to any pending
legal, administrative or judicial proceedings other than routine litigation
incidental to our business.
A complaint was filed on May 14, 2001 in the United States District Court for
the Northern District of Georgia on behalf of all purchasers of common stock of
the Company during the period beginning December 8, 1999 and ending on October
25, 2000. Generally the complaint alleges that the Company and certain of its
directors and officers made material misrepresentations and omissions in public
filings made with the Securities and Exchange Commission and in certain press
releases and other public statements. The Company agreed to settle the class
action in exchange for a payment of $4.5 million, which was covered by
insurance. The Court approved the final settlement and dismissed the action on
January 6, 2005.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company's management carried out an evaluation, under the supervision and
with the participation of the Company's Chief Administrative Officer and
Controller, its principal executive officer and principal financial officer,
respectively of the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act") as
of December 31, 2004, pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, the Company's Chief Administrative Officer and Controller concluded
that the Company's disclosure controls and procedures as of December 31, 2004
are effective.
Management's Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act. The Company's internal control over
financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with accounting principles generally
accepted in the United States of America ("GAAP"). The Company's internal
control over financial reporting includes those policies and procedures that:
o pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the Company;
o provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with GAAP, and that
receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and
o provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that could
have a material effect on the financial statements.
39
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As required by Section 404 of the Sarbanes-Oxley Act of 2002, management
assessed the effectiveness of the Company's internal control over financial
reporting as of December 31, 2004. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO") in Internal Control-Integrated Framework.
Based on our assessment and those criteria, management concluded that the
Company maintained effective internal control over financial reporting as of
December 31, 2004.
The Company's independent registered public accounting firm, KPMG LLP, has
audited management's assessment of the Company's internal control over financial
reporting as of December 31, 2004.
Changes in Internal Control Over Financial Reporting
No changes in the Company's internal control over financial reporting have come
to management's attention during the fourth quarter ended December 31, 2004
evaluation that have materially affected, or are reasonably likely to materially
affect the Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption "Election of Directors" in our Proxy
Statement used in connection with our 2005 Annual Meeting of Stockholders, is
incorporated herein by reference.
The Company has adopted a code of ethics that applies to its Chief
Administrative Officer and Controller, its principal executive officer and
principal financial officer, and to all of its other officers, directors and
employees. The code of ethics may be accessed at www.claruscorp.com, our
Internet website, at the tab "Corporate Governance". The Company intends to
disclose future amendments to, or waivers from, certain provisions of its code
of ethics, if any, on the above website within five business days following the
date of such amendment or waiver.
Other information required by Item 10, including information regarding
directors, membership and function of the audit committee, including the
financial expertise of its members, and Section 16(a) compliance, appearing
under the captions "Election of Directors", "Information Regarding Board of
Directors and Committees" and "Other Matters" in our Proxy Statement used in
connection with our 2005 Annual Meeting of Stockholders, is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" in our
Proxy Statement used in connection with our 2005 Annual Meeting of Stockholders,
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Principal Stockholders" in our
Proxy Statement used in connection with our 2005 Annual Meeting of Stockholders,
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and Related
Transactions" in our Proxy Statement used in connection with our 2005 Annual
Meeting of Stockholders, is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information set forth under the caption "Principal Accountant Fees and
Services" in our Proxy Statement used in connection with our 2005 Annual Meeting
of Stockholders, is incorporated herein by reference.
40
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Financial Statements, Financial Statement Schedules and Exhibits
(a) Financial Statements
(1) The following financial statements are filed with this report
on the following pages indicated:
Page
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements................ 19
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting........ 20
Consolidated Balance Sheets--December 31, 2004 and 2003..................................................... 21
Consolidated Statements of Operations--Years Ended December 31, 2004, 2003 and 2002......................... 22
Consolidated Statements of Stockholders' Equity and Comprehensive Loss--Years Ended December 31, 2004,
2003 and 2002............................................................................................... 23
Consolidated Statements of Cash Flows--Years Ended December 31, 2004, 2003 and 2002......................... 25
Notes to Consolidated Financial Statements.................................................................. 26
(2) The following additional financial statement schedule and
report of independent registered public accounting firm are
furnished herewith pursuant to the requirements of Form 10-K:
Schedule II Valuation and Qualifying Accounts............................................................... 46
(3) The following Exhibits are hereby filed as part of this Annual
Report on Form 10-K:
Exhibit
Number Exhibit
3.1 Amended and Restated Certificate of Incorporation of the Company
(Incorporated by reference from Exhibit 3.3 to the Company's Form
S-1 Registration Statement (File No. 333- 46685)).
3.2 Amendment to Amended and Restated Certificate of Incorporation
(incorporated by reference from Exhibit 9.1 to the Company's 10-Q
filed on August 14, 2000).
3.3 Amendment to Amended and Restated Certificate of Incorporation of
the Company (incorporated by reference from Exhibit 3.1 to the
Company's Current Report on Form 8-K, filed on July 31, 2003).
3.4 Amended and Restated Bylaws of the Company (incorporated by
reference from Exhibit 3.2 to the Company's Registration Statement
on Form S-4 (File No. 333-63535)).
3.5 Amendment No. 1 to the Amended and Restated Bylaws of the Company.
(filed as Exhibit 3.4 to Company's Annual Report on Form 10-K,
filed with the Securities and Exchange Commission on March 31,
2003 and incorporated herein by reference).
4.1 See Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5 for provisions of the
Amended and Restated Certificate of Incorporation and Amended and
Restated Bylaws of the Company defining rights of the holders of
Common Stock of the Company.
4.2 Specimen Stock Certificate (incorporated by reference from Exhibit
9.1 to Company's Registration Statement on Form S-1 (File No.
333-46685)).
4.3 Restricted Stock Agreement dated as of April 11, 2003 between the
Company and Warren B. Kanders (incorporated by reference from
Exhibit 4.1 to the Company's Form 10-Q filed on May 15, 2003). *
41
10.1 Asset Purchase Agreement, dated as of October 17, 2002, between
Epicor Software Corporation and the Company (incorporated by
reference from Exhibit 2.1 to the Company's Form 8-K filed on
October 18, 2002).
10.2 Bill of Sale and Assumption Agreement, dated as of December 6,
2002, between Epicor Software Corporation and the Company
(incorporated by reference from Exhibit 2.2 to the Company's (Form
8-K filed on October 18, 2002).
10.3 Trademark Assignment dated as of December 6, 2002, by the Company
in favor of Epicor Software Corporation, (incorporated by
reference from Exhibit 2.3 to the Company's Form 8-K filed on
October 18, 2002).
10.4 Patent Assignment, dated as of December 6, 2002, between Epicor
Software Corporation and the Company (incorporated by reference
from Exhibit 2.4 to the Company's Form 8-K filed on October 18,
2002).
10.5 Noncompetition Agreement, dated as of December 6, 2002, between
Epicor Software Corporation and the Company (incorporated by
reference from Exhibit 2.5 to the Company's Form 8-K filed on
October 18, 2002).
10.6 Transition Services Agreement, dated as of December 6, 2002,
between Epicor Software Corporation and the Company (incorporated
by reference from Exhibit 2.7 to the Company's Form 8-K filed on
October 18, 2002).
10.7 Form of Indemnification Agreement for Directors and Executive
Officers of the Company, (incorporated by reference as Exhibit
10.1 of the Company's Form 8-K filed on December 23, 2002).
10.8 Employment Agreement, dated as of December 6, 2002, between the
Company and Warren B. Kanders (incorporated by reference from
Exhibit 10.2 to the Company's Form 8-K filed on December 23,
2002).*
10.9 Employment Agreement, dated as of December 6, 2002, between the
Company and Nigel P. Ekern. (incorporated by reference from
Exhibit 10.3 to the Company's Form 8-K filed on December 23,
2002).*
10.10 Consulting Agreement, dated as of December 6, 2002, between the
Company and Stephen P. Jeffery (incorporated by reference from
Exhibit 10.4 to the Company's Form 8-K filed on December 23,
2002).*
10.11 Amended and Restated Stock Incentive Plan (incorporated by
reference from Exhibit 10.2 to the Company's Form 10-Q filed on
August 14, 2000). *
10.12 Employee Stock Purchase Plan (incorporated by reference from
Exhibit 10.3 to the Company's Form 10-Q filed on August 14, 2000).
*
10.13 Global Employee Stock Purchase Plan (incorporated by reference
from Exhibit 10.4 to the Company's Form 10-Q filed on August 14,
2000). *
42
10.14 Form of Nonqualified Stock Option Agreement (incorporated by
reference from Exhibit 10.5 to the Company's Form 10-Q filed on
August 14, 2000). *
10.15 Stock Incentive Plan of Software Architects International, Limited
(incorporated by reference from Exhibit 2.2 to the Company's Form
8-K filed on June 13, 2000). *
10.16 2000 Declaration of Amendment to Software Architects International
Limited Stock Incentive Plan (incorporated by reference from
Exhibit 2.3 to the Company's Form 8-K filed on June 13, 2000). *
10.17 1992 Stock Option Plan, effective November 22, 1992 (incorporated
by reference from Exhibit 10.2 to Company's Registration on Form
S-1 (File No. 333-46685)). *
10.18 Amendment to 1992 Stock Option Plan (incorporated by reference
from Exhibit 10.2 to the Company's Form 10-K filed on March 30,
2000). *
10.19 Lease dated as of September 23, 2003 between Reckson Operating
Partnership, L.P., the Company, and Kanders & Company, Inc.
(incorporated by reference from Exhibit 10.1 to the Company's 10-Q
filed on November 12, 2003).
10.20 Transportation Services Agreement dated as of December 18, 2003
between Kanders Aviation, LLC and the Company (incorporated by
reference from Exhibit 10.23 to the Company's 10-K filed on March
11, 2004).
21.1 List of Subsidiaries.
23.1 Consent of Independent Registered Public Accounting Firm.
31.1 Certification of Principal Executive Officer, as required by Rule
13a-14(a) of the Securities Exchange Act of 1934.
31.2 Certification of Principal Financial Officer, as required by Rule
13a-14(a) of the Securities Exchange Act of 1934.
32.1 Certification of Principal Executive Officer, as required by Rule
13a-14(b) of the Securities Exchange Act of 1934.
32.2 Certification of Principal Financial Officer, as required by Rule
13a-14(b) of the Securities Exchange
Act of 1934
* Management contract or compensatory plan or arrangement.
(b) The exhibits are listed in Item 15. (a)(3) above.
(c) The financial statement schedules are listed in Item 15. (a)(2)
above.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CLARUS CORPORATION
Date: March 15, 2005
By: /s/ Nigel P. Ekern
----------------------------
Nigel P. Ekern
Chief Administrative Officer
Signature Title Date
--------- ----- ----
/s/ Nigel P. Ekern March 15, 2005
- ----------------------------- Chief Administrative Officer --------------------
Nigel P. Ekern (principal executive officer)
/s/ Susan Luckfield March 15, 2005
- ----------------------------- Controller --------------------
Susan Luckfield (principal financial officer)
/s/ Warren B. Kanders Executive Chairman of the Board of March 15, 2005
- ----------------------------- Directors --------------------
Warren B. Kanders
/s/ Stephen P. Jeffery Director March 15, 2005
- ----------------------------- --------------------
Stephen P. Jeffery
/s/ Donald L. House Director March 15, 2005
- ----------------------------- --------------------
Donald L. House
/s/ Burtt R. Ehrlich Director March 15, 2005
- ----------------------------- --------------------
Burtt R. Ehrlich
/s/ Nicholas Sokolow Director March 15, 2005
- ----------------------------- --------------------
Nicholas Sokolow
44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Clarus Corporation:
Under date of March 14, 2005, we reported on the consolidated balance sheets of
Clarus Corporation and subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of operations, stockholders' equity and
comprehensive loss, and cash flows for each of the years in the three-year
period ended December 31, 2004, which are included in the Clarus Corporation
2004 Annual Report on Form 10-K. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
financial statement schedule as listed in the accompanying index. This financial
statement schedule is the responsibility of Clarus Corporation's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG
Stamford, Connecticut
March 14, 2005
45
Schedule II
Valuation and Qualifying Accounts
Clarus Corporation and Subsidiaries
For the years ended December 31, 2004,
2003 and 2002 Allowance for Doubtful
Accounts, Valuation Allowance for Deferred
Income Tax Assets and Restructuring and Related Charges
Charged
Balance at (Credited) to Balance at
Beginning of Costs and End of
Period Expenses Deductions (a) Period
------------ ------------- -------------- ----------
Allowance for Doubtful Accounts
2002 $636,000 $(560,000) $(510,000) $586,000
2003 586,000 18,000 604,000 --
2004 -- -- -- --
Valuation Allowance for Deferred Income Tax Assets
2002 $60,015,000 $1,283,000 $ -- $61,298,000
2003 61,298,000 (1,957,000) -- 59,341,000
2004 59,341,000 37,265,000 -- 96,606,000
Restructuring Accruals
2002 $1,889,000 $8,550,000 $9,375,000 $1,064,000
2003 1,064,000 250,000 1,084,000 230,000
2004 230,000 33,000 190,000 73,000
(a) Deductions related to the allowance for doubtful accounts represent the
write-off of uncollectible accounts receivable balances against the
allowance for doubtful accounts, net of recoveries. Deductions related to
restructuring and related accruals represent cash payments.
46
EXHIBIT INDEX
Number Exhibit
------ -------
21.1 List of Subsidiaries.
23.1 Consent of Independent Registered Public Accounting Firm.
31.1 Certification of Principal Executive Officer, as required by Rule
13a-14(a) of the Securities Exchange Act of 1934.
31.2 Certification of Principal Financial Officer, as required by Rule
13a-14(a) of the Securities Exchange Act of 1934.
32.1 Certification of Principal Executive Officer, as required by Rule
13a-14(b) of the Securities Exchange Act of 1934.
32.2 Certification of Principal Financial Officer, as required by Rule
13a-14(b) of the Securities Exchange Act of 1934
47