UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________ .
Commission File Number 0-24277
Clarus Corporation
-------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 58-1972600
- ------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3950 Johns Creek Court, Suite 100
Suwanee, Georgia 30024
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(Address of principal executive offices)
(Zip code)
(770) 291-3900
-------------------------------------------------
(Registrant's telephone number, including area code)
SQL Financials International, Inc.
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(Former name, former address and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO _
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, ($.0001 Par Value)
------------------------------------------
10,605,870 shares outstanding as of November 6, 1998
<PAGE>
INDEX
- -----
CLARUS CORPORATION
PART I FINANCIAL INFORMATION
- ------ ---------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) - September 30,
1998 and December 31, 1997;
Condensed Consolidated Statements of Operations (unaudited-Three
months and nine months ended September 30, 1998 and 1997;
Condensed Consolidated Statements of Cash Flows (unaudited)-Nine
months ended September 30, 1998 and 1997;
Notes to Condensed Consolidated Financial Statements (unaudited) -
September 30, 1998
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk - Not
Applicable
PART II OTHER INFORMATION
- ------- -----------------
Item 1. Legal proceedings.
Item 2. Changes in Securities and Use of Proceeds.
Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
2
<PAGE>
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
CLARUS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in thousands, except share and per share amounts)
September 30, December 31,
1998 1997
----------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 23,984 $ 7,213
Trade accounts receivable, less allowance for
doubtful accounts of $484 and $338 in 1998
and 1997, respectively 10,918 4,050
Prepaid and other current assets 407 494
------ ------
Total current assets 35,309 11,757
PROPERTY AND EQUIPMENT - net 2,227 1,507
OTHER ASSETS:
Intangible assets, net of accumulated
amortization of $1,758 and
$1,127 in 1998 and 1997, respectively 5,843 1,267
Deposits and other long-term assets 215 150
------ ------
Total other assets 6,058 1,417
------ ------
TOTAL ASSETS $ 43,594 $ 14,681
========== ===========
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
3
<PAGE>
Item 1. Financial Statements (continued)
CLARUS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (continued)
(in thousands, except share and per share amount)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Note payable, net of discount of $110 in 1998 $ 990 $ -0-
Accounts payable and accrued liabilities 6,778 4,598
Accounts payable-related party -0- 54
Deferred revenue 6,415 5,717
Current maturities of long-term debt 244 1,841
------ ------
Total current liabilities 14,427 12,210
NONCURRENT LIABILITIES:
Deferred revenue 3,600 4,480
Long-term debt, net of current maturities 310 497
Other non-current liabilities 70 49
------ -----
Total liabilities 18,407 17,236
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY -0- 243
------ ------
REDEEMABLE CONVERTIBLE PREFERRED STOCK: -0- 25,112
STOCKHOLDERS' EQUITY (DEFICIT) (Note 3):
Common Stock, $.0001 par value; 25,000,000 and
9,000,000 shares authorized in 1998 and 1997,
respectively; 9,197,312 and 1,467,160 shares
outstanding in 1998 and 1997, respectively 1 0
Additional paid in capital 51,306 489
Accumulated deficit (26,918) (28,019)
Warrants 1,440 652
Treasury stock, at cost (2) (2)
Note from stockholder 0 (612)
Deferred compensation (640) (418)
-------- --------
Total stockholders' equity (deficit) 25,187 (27,910)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 43,594 $ 14,681
======== ==========
</TABLE>
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4
<PAGE>
Item 1. Financial Statements (continued)
CLARUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
-------------------------- --------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUES:
License fees $ 5,623 $ 4,299 $ 14,066 $ 9,026
Services fees 4,387 2,064 11,277 5,340
Maintenance fees 1,937 1,250 5,351 3,168
----- ----- ----- -----
Total revenues 11,947 7,613 30,694 17,534
COST OF REVENUES:
License fees 960 478 1,525 856
Services fees 2,717 1,366 7,223 3,688
Maintenance fees 925 510 2,442 1,360
----- ------ ------ -----
Total cost of revenues 4,602 2,354 11,190 5,904
OPERATING EXPENSES:
Research and development 1,630 1,481 4,157 5,305
Sales and marketing 3,029 2,354 8,419 6,958
General and administrative 1,175 754 3,723 2,103
Depreciation and amortization 526 352 1,456 1,049
Non-cash compensation 38 13 842 36
----- ----- ------ ------
Total operating expenses 6,398 4,954 18,597 15,451
OPERATING INCOME (LOSS) 947 305 907 (3,821)
INTEREST INCOME 243 1 402 28
INTEREST EXPENSE 51 133 172 251
MINORITY INTEREST -0- 133 36 322
----- ------ ----- -------
NET INCOME (LOSS) $ 1,139 $ 40 $ 1,101 $ (4,366)
===== ====== ===== =======
Income (loss) per common share:
Basic $ 0.12 $ 0.03 $ 0.22 $ (3.15)
Diluted 0.11 $ 0.01 $ 0.13 $ (3.15)
Weighted average shares
outstanding
Basic 9,123 1,390 5,080 1,384
Diluted 10,039 6,595 8,767 1,384
</TABLE>
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5
<PAGE>
Item 1. Financial Statements (continued)
CLARUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30
--------------------------
1998 1997
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1,101 $ (4,366)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,456 1,049
Minority interest in subsidiary 36 322
Amortization of debt discount 55 18
Deferred compensation 842 46
Changes in operating assets and liabilities:
Accounts receivable (6,867) (3,073)
Prepaid and other current assets 87 (110)
Deposits and other long-term assets (63) 28
Accounts payable and accrued liabilities 2,051 1,721
Deferred revenue (181) 1,091
Other noncurrent liabilities 21 (22)
---------- --------
NET CASH USED IN OPERATING ACTIVITIES (1,462) (3,296)
INVESTING ACTIVITIES
Increase of intangible assets (709) (90)
Purchase of minority interest in subsidiary (326) -0-
Additions to property and equipment (1,551) (557)
------------ --------
NET CASH USED IN INVESTING ACTIVITIES (2,586) (647)
FINANCING ACTIVITIES:
Dividends paid to holder of minority interest (241) (190)
Repayment of note receivable from holder of
minority interest -0- 38
Proceeds from notes payable and short term
borrowings 1,645 29,802
Repayments of notes payable and short term
borrowings (3,428) (30,225)
Proceeds from the exercise of warrants 612 10
Proceeds from issuance of common stock, net 22,081 -0-
Proceeds from issuance of preferred stock 150 5,987
--------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 20,819 5,422
------- -----
INCREASE IN CASH AND CASH EQUIVALENTS 16,771 1,479
CASH AND CASH EQUIVALENTS, beginning of period 7,213 3,278
-------- -------
CASH AND CASH EQUIVALENTS, end of period 23,984 $ 4,757
========= =======
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 123 $ 259
========= ===========
</TABLE>
See Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
6
<PAGE>
CLARUS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Clarus
Corporation (the "Company") have been prepared in accordance with Generally
Accepted Accounting Principles for interim financial information and
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information in notes required by Generally Accepted
Accounting Principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation of the unaudited financial statements for this interim
period have been included. The results of the interim periods are not
necessarily indicative of the results to be obtained for the year ended December
31, 1998. These interim financial statements should be read in conjunction with
the Company's audited consolidated financial statements and footnotes thereto
included in i) the Company's Prospectus dated May 26, 1998, filed under Form S-1
(Registration No. 333 - 46685) with the Securities and Exchange Commission, and
ii) the Company's Prospectus dated October 28, 1998, filed under form S-4
(Registration No. 333 - 63535) with the Securities and Exchange Commission.
NOTE 2. EARNINGS PER SHARE
Basic and diluted net income (loss) per share was computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share," using
the weighted average number of common shares outstanding. The diluted net loss
per share for the nine months ended September 30, 1997, does not include the
effect of common stock equivalents, including redeemable convertible preferred
stock, as their effect would be antidilutive. Diluted net income per share for
the quarters ended September 30, 1998 and 1997, and the nine months ended
September 30, 1998, includes the effect of common stock equivalents.
NOTE 3. STOCKHOLDERS' EQUITY
On May 26, 1998, the Company completed its initial public offering of 2.5
million shares of its common stock at an offering price of $10.00 per share (the
"Offering"). The proceeds, net of expenses, from this public offering of
approximately $22.0 million were placed in investment grade cash equivalents.
Immediately prior to the effective date of the Company's Registration Statement
the redeemable convertible preferred stock was converted to common stock.
NOTE 4. ACQUISITION OF MINORITY INTEREST IN THE SERVICES SUBSIDIARY
On February 5, 1998, the Company purchased the 20% interest in SQL Financial
Services, LLC (the "Services Subsidiary") from Technology Ventures, LLC
("Technology Ventures") a related party controlled by Joseph S. McCall, a
director of the Company. In exchange for the 20% interest in the Services
Subsidiary, the Company issued 225,000 shares of common stock to Technology
Ventures and granted Technology Ventures a warrant to purchase an additional
300,000 shares of common stock at a purchase price of $3.67 per share. The
warrant expires on February 5, 2000. In addition, the Company agreed to pay
Technology Ventures the sum of $1.1 million due February 5, 2000, pursuant to a
non-negotiable, non-interest-bearing subordinated promissory note. Technology
Ventures has agreed not to sell any of its shares for a period of 180 days after
the effective date of the Offering. The Company also agreed to pay Technology
Ventures a monthly sum equal to 20% of the net profits of the Services
Subsidiary until the completion of the Company's Initial Public Offering.
The Company as additional purchase price recorded payments made to Technology
Ventures for this 20% of net profits of the Services Subsidiary at the time of
payment.
7
<PAGE>
CLARUS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5. MERGER OF ELEKOM CORPORATION
On November 6, 1998, the Company completed its acquisition of Elekom Corporation
("Elekom") for approximately $15.7 million, consisting of $8.0 million in cash
and approximately 1.39 million shares of the Company's common stock. Elekom was
merged with and into Clarus CSA, Inc., a wholly owned subsidiary of the Company
and the separate existence of Elekom ceased. Immediately following consummation
of the merger, the former holders of Elekom common and preferred stock (the
"Elekom Shareholders") owned approximately 13% of the outstanding common stock
of the Company. The former Elekom Shareholders have agreed not to sell any of
their shares of the Company's common stock for a period ending on August 6,
1999. The Company, as additional purchase price, recorded i) payments of
$500,000 made to fund the operations of Elekom from October 1, 1998, through the
closing date, and ii) expenses of approximately $750,000 to complete the merger.
Approximately $14.0 million of the purchase price was recorded as purchased
in-process research and development. These interim financial statements should
be read in conjunction with the Company's Prospectus dated October 28, 1998,
filed under form S-4 (Registration No. 333-63535) with the Securities and
Exchange Commission.
NOTE 6. LEGAL PROCEEDINGS
The Company is subject to claims and litigation in the ordinary course of
business, including, but not limited to, a lawsuit recently filed against the
Company alleging patent infringement, but does not believe based on its current
assessment of such claims and litigation that any such claim or litigation will
have a material adverse effect on its consolidated financial position.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Clarus Corporation (the "Company") was formed in November 1991 to develop,
market, license and support financial applications. During 1998 and 1997 the
Company introduced a series of additional modules and product enhancements.
Specifically, in the third quarter of 1998 the Company introduced its Corporate
Service Applications, which include E-procurement, a business-to-business buy
side web based solution designed for the acquisition of non-industrial goods and
services; and budgeting. In the first quarter of 1997, the Company introduced
its human resource applications, which included the Personnel, Benefits and
Payroll modules. In 1997, the Company introduced its Financial Statement
Accelerator module, a distributed management reporting solution, and a 32-bit
version of its financial applications (the "Denver Release"), which included two
new modules, Purchasing Control and Solution/Graphical Architect. The Company
intends to release a 32-bit version of its human resources applications by the
end of 1998. The Company currently markets its products in the United States and
Canada through its direct sales force and has licensed its client/server
applications to more than 250 customers in a variety of industry segments,
including insurance, financial services, communications, retail, printing and
publishing, transportation and manufacturing. The Company also offers fee-based
implementation, training and upgrade services and ongoing maintenance and
support of its products for a 12-month renewable term.
On November 6, 1998, the Company completed its acquisition of Elekom Corporation
("Elekom") for approximately $15.7 million, consisting of $8.0 million in cash
and approximately 1.39 million shares of the Company's common stock. Elekom was
merged with and into Clarus CSA, Inc., a wholly owned subsidiary of the Company
and the separate existence of Elekom ceased. Immediately following consummation
of the merger, the former holders of Elekom common and preferred stock (the
"Elekom Shareholders") owned approximately 13% of the outstanding common stock
of the Company. The former Elekom Shareholders have agreed not to sell any of
their shares of the Company's common stock for a period ending on August 6,
1999. The Company, as additional purchase price, recorded i) payments of
$500,000 made to fund the operations of Elekom from October 1, 1998, through the
closing date, and ii) expenses of approximately $750,000 to complete the merger.
Approximately $14.0 million of the purchase price was recorded as purchased
in-process research and development.
On May 26, 1998, the Company completed an initial public offering of its common
stock in which it sold 2.5 million shares for approximately $22.0 million after
deducting offering expenses and underwriting discounts.
Through 1997 the Company recognized revenue in compliance with Statement of
Position ("SOP") 91-1 "Software Revenue Recognition." Effective January 1, 1998,
the Company adopted SOP 97-2 "Software Revenue Recognition." The adoption of
this SOP has not had a significant impact on the Company's consolidated
financial statements. Revenues from software licenses have been recognized upon
delivery of the product if there are no significant obligations on the part of
the Company following delivery and collection of the related receivable, if any,
is deemed probable by management. Revenues from service fees relate to
implementation, training and upgrade services performed by the Company and have
been recognized as the services are performed. Maintenance fees relate to
customer maintenance and support and have been recognized ratably over the term
of the software support agreement, which is typically 12 months. A majority of
the Company's customers renew the maintenance and support agreements after the
initial term. Revenues that have been prepaid or invoiced, but that do not yet
qualify for recognition under the Company's policies are reflected as deferred
revenue.
Cost of license fees includes royalties and software duplication and
distribution costs. The Company recognizes these costs as the applications are
shipped. Cost of services fees include personnel and related costs incurred to
provide implementation, training and upgrade services to customers. These costs
are recognized as the services are performed. Cost of maintenance fees includes
personnel and related costs incurred to provide the ongoing support and
maintenance of the Company's products. These costs are recognized as incurred.
Research and development expenses consist primarily of personnel costs. The
Company accounts for software development costs under Statement of Financial
Accounting Standards ("SFAS") No. 86 "Accounting For the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed." Research and development
expenses are
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Overview (continued)
charged to expense as incurred until technological feasibility is established,
after which remaining costs are capitalized. The Company defines technological
feasibility as the point in time at which the Company has a working model of the
related product. Historically, the costs incurred during the period between the
achievement of technological feasibility and the point at which the product is
available for general release to customers have not been material. Accordingly,
the Company charges all internal software development costs to expense as
incurred.
Sales and marketing expenses consist primarily of salaries, commissions and
benefits to sales and marketing personnel, travel, trade-show participation,
public relations and other promotional expenses. General and administrative
expenses consist primarily of salaries for financial, administrative and
management personnel and related travel expenses, as well as occupancy,
equipment and other administrative costs.
The Company had net operating loss carryforwards ("NOLs") of approximately $24.5
million at September 30, 1998, which begin expiring in 2007. The Company
established a valuation allowance equal to the NOLs and all other deferred tax
assets. The benefits from these deferred tax assets will be recorded when
realized which will reduce the Company's effective tax rate for future taxable
income, if any. Due to changes in the Company's ownership structure, the
Company's use of its NOLs as of May 26, 1998 of approximately $26.0 million will
be limited to approximately $3.8 million in any given year to offset future
taxes. If the Company does not realize taxable income in excess of the
limitation in future years, certain NOLs will be unrealizable.
Affiliate Relationships
In March 1995 the Company and Technology Ventures, which is controlled by Joseph
S. McCall, formed the Services Subsidiary to provide implementation, training,
and upgrade services exclusively for the Company's customers. On February 5,
1998, Technology Ventures sold its 20% interest in the Services Subsidiary to
the Company. The consideration for the 20% interest was 225,000 shares of the
Company's Common Stock, a warrant to purchase an additional 300,000 shares of
Common Stock at a price of $3.67 per share, and a non-interest bearing
promissory note in the principal amount of $1.1 million. The purchase of the
remaining 20% of the Services Subsidiary was accounted for using the purchase
method of accounting and will result in goodwill in the amount of $4.2 million,
which is being amortized over 15 years. The Company assigned a 15-year
amortization period to the goodwill acquired in the purchase of the 20% interest
in the Services Subsidiary.
In the second quarter of 1998, the Company accelerated the vesting of certain
employee stock options issued in the first quarter of 1998, for approximately
283,000 shares of Common Stock, at an exercise price of between $3.67 per share
and $8.00 per share. As a result of this accelerated vesting, the Company
recognized a non-cash, non-recurring charge of approximately $705,000 during the
quarter ended June 30, 1998, representing the previously remaining unamortized
deferred compensation recorded on these options.
Summary of the Effects of the Merger
The Company anticipates the integration and consolidation of ELEKOM will require
substantial management, financial and other resources. The acquisition of ELEKOM
involves a number of significant risks including potential difficulties in
assimilating the technologies, services and products of ELEKOM or in achieving
the expected synergies and cost reductions, as well as other unanticipated risks
and uncertainties. As a result, there can be no assurance as to the extent to
which the anticipated benefit with respect to the Merger will be realized, or
the timing of any such realization. See the Company Registration Statement
dated October 28, 1998, filed under form S-4 with the Securities and Exchange
Commission.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Overview (continued)
Summary of the Effects of the Merger (continued)
The Merger is expected to lower the net earnings of the Company through 1998 as
a result of a substantial increase in amortization of intangible and other
long-lived assets and various other adjustments resulting from purchase
accounting. The 1997 unaudited pro forma condensed combined net loss before
non-recurring charges would have been approximately $10.2 million, a net loss
which is approximately 149% greater than the Company's actual historical results
for 1997. The Company believes that earnings beyond 1998 should improve as a
result of the web-based, electronic procurement market presence and recognition
afforded the Company as a result of the completion of the Merger. No assurances
can be given as to the amount or timing of such benefit that may actually be
realized or that any such growth may occur.
The Merger will be accounted for as a purchase. Under purchase accounting, the
total purchase cost and fair value of liabilities assumed were allocated to the
tangible and intangible assets of ELEKOM based upon their respective fair values
on November 6, 1998.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations
The following table sets forth certain statement of operations data as a
percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
----------------------- -------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues:
License fees 47.1% 56.5% 45.8% 51.4%
Services fees 36.7 27.1 36.8 30.5
Maintenance fees 16.2 16.4 17.4 18.1
----------------------- -------------------------
Total revenues 100.0 100.0 100.0 100.0
Cost of revenues:
License fees 8.1 6.3 5.0 4.9
Services fees 22.7 17.9 23.5 21.0
Maintenance fees 7.7 6.7 7.9 7.8
----------------------- -------------------------
Total cost of revenues 38.5 30.9 36.4 33.7
Operating expenses:
Research and development 13.7 19.5 13.5 30.3
Sales and marketing 25.4 30.9 27.4 39.6
General and
administrative 9.8 9.9 12.1 12.0
Depreciation and
amortization 4.4 4.6 4.8 6.0
Non-cash compensation 0.3 0.2 2.8 0.2
----------------------- -------------------------
Total expenses 53.6 65.1 60.6 88.1
Operating income (loss) 7.9 4.0 3.0 (21.8)
Interest income 2.0 0.1 1.3 0.2
Interest expense 0.4 1.8 0.6 1.4
Minority interest 0.0 1.8 0.1 1.7
======================= =========================
Net income (loss) 9.5 0.5 3.6 (24.9)
======================= =========================
Gross margin on license fees 82.9 88.9 89.2 90.5
Gross margin on services
fees 38.1 33.8 36.0 30.9
Gross margin on maintenance
fees 52.3 59.2 54.4 57.1
</TABLE>
Quarter and Nine Months Ended September 30, 1998, Compared to Quarter and Nine
Months Ended September 30, 1997.
Revenues
Total Revenues. For the quarter ended September 30, 1998, total revenues
increased 56.9% to $11.9 million from $7.6 million in the comparable period in
1997. For the nine months ended September 30, 1998, total revenues increased
75.1% to $30.7 million from $17.5 million in the comparable period in 1997.
These increases are attributable to substantial increases in license fees,
services fees and maintenance fees.
License Fees. License fees increased 30.8% to $5.6 million, or 47.1% of total
revenues, in the quarter ended September 30, 1998, from $4.3 million, or 56.5%
of total revenues, in the comparable period in 1997. License fees increased
55.8% to $14.1 million, or 45.8% of total revenues, in the nine months ended
September 30, 1998, from $9.0 million, or 51.4%, in the comparable period in
1997. These increases in license fees resulted primarily from
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations (continued)
Quarter and Nine Months Ended September 30, 1998, Compared to Quarter and Nine
Months Ended September 30, 1997 (continued).
Revenues (continued)
License Fees (continued)
increases in the number of licenses sold, reflecting a continuing increase in
the demand for the Company's existing and new applications, and to a lesser
extent, to an increase in the average customer transaction size.
Services Fees. Services fees increased 112.5% to $4.4 million, or 36.7% of total
revenues, in the quarter ended September 30, 1998, from $2.1 million, or 27.1%
of total revenues, in the comparable period in 1997. Services fees increased
111.2% to $11.3 million, or 36.8% of total revenues, in the nine months ended
September 30, 1998, from $5.3 million, or 30.5% of total revenues, in the
comparable period in 1997. These increases in services fees are primarily due to
increased demand for professional services associated with the increase in
number of licenses sold.
Maintenance Fees. Maintenance fees increased 55.0% to $1.9 million, or 16.2% of
total revenues, in the quarter ended September 30, 1998, from $1.3 million, or
16.4% of total revenues, in the comparable period in 1997. Maintenance fees
increased 68.9% to $5.4 million, or 17.4% of total revenues, in the nine months
ended September 30, 1998, from $3.2 million, or 18.1% of total revenues, in the
comparable period in 1997. These increases in maintenance fees were primarily
due to the signing of license agreements with new customers and the renewal of
maintenance with existing customers during the respective periods.
Cost of Revenues
Total Cost of Revenues. Cost of revenues increased 95.5% to $4.6 million, or
38.5% of total revenues, in the quarter ended September 30, 1998, from $2.4
million, or 30.9% of total revenues, in the comparable period in 1997. Cost of
revenues increased 89.5% to $11.2 million, or 36.4% of total revenues, in the
nine months ended September 30, 1998, from $5.9 million, or 33.7% of total
revenues, in the comparable period in 1997. The increases in cost of revenues
were primarily due to an increase in personnel and related expenses and
increased royalty expenses for the respective periods.
Cost of License Fees. Cost of license fees increased 100.8% to $960,000, or
17.1% of total license fees, in the quarter ended September 30, 1998, compared
to $478,000, or 11.1% of total license fees, in the comparable period in 1997.
Cost of license fees increased 78.2% to $1.5 million, or 10.8% of total license
fees, in the nine months ended September 30, 1998, compared to $856,000, or 9.5%
of total license fees, in the comparable period in 1997. The increases in the
cost of license fees, and the increase as a percentage of total license fees,
were primarily attributable to increases in the sale of third-party software
products distributed by the Company.
Cost of Services Fees. Cost of services fees increased 98.9% to $2.7 million, or
61.9% of total services fees, in the quarter ended September 30, 1998, compared
to $1.4 million, or 66.2% of total services fees, in the comparable period in
1997. Cost of services fees increased 95.9% to $7.2 million, or 64.0% of total
services fees, in the nine months ended September 30, 1998, compared to $3.7
million, or 69.1% of total services fees, in the comparable period in 1997.
These increases in the cost of service fees are primarily attributable to an
increase in the personnel and related costs to provide implementation, training
and upgrade services.
13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations (continued)
Quarter and Nine Months Ended September 30, 1998, Compared to Quarter and Nine
Months Ended September 30, 1997 (continued).
Cost of Revenues (continued)
Cost of Services Fees (continued)
The decreases in cost of service fees as a percentage of revenue for the quarter
and nine months ended September 30, 1998, are primarily due to increased hourly
rates charged combined with increased utilization of services personnel.
Cost of Maintenance Fees. Cost of maintenance fees increased 81.4% to $925,000,
or 47.7% of total maintenance fees, in the quarter ended September 30, 1998,
compared to $510,000, or 40.8% of total maintenance fees, in the comparable
period in 1997. Cost of maintenance fees increased 79.6% to $2.4 million, or
45.6% of total maintenance fees, in the nine months ended September 30, 1998,
compared to $1.4 million, or 42.9% of total maintenance fees, in the comparable
period in 1997. These increases in the cost of maintenance fees were primarily
attributable to an increase in the personnel and related costs required to
provide support and maintenance. Cost of maintenance fees as a percentage of
total maintenance fees increased during the respective periods primarily due to
increased investment in personnel to support the maintenance customer base.
Research and Development
Research and development expenses increased 10.1% to $1.6 million, or 13.7% of
total revenues, in the quarter ended September 30, 1998, from $1.5 million, or
19.5% of total revenues, in the comparable period in 1997. Research and
development expenses decreased 21.6% to $4.2 million, or 13.5% of total
revenues, in the nine months ended September 30, 1998, from $5.3 million, or
30.3% of total revenues, in the comparable period in 1997. Research and
development expenses increased during the quarter ended September 30, 1998,
primarily due to increased personnel costs related to continued development of
the Company's products. Research and development expenses decreased during the
nine months ended September 30, 1998, primarily due to decreased personnel and
contractor fees related to the effort required in 1997 to develop the Denver
Release, which was substantially completed by September 1997. The decreases in
research and development as a percentage of revenue for the periods ended
September 30, 1998, compared to the periods ended September 30, 1997, are
primarily due to the completion of the Denver Release, coupled with the
economies of scale realized through the growth in the Company's revenue. The
Company intends to continue to devote substantial resources toward research and
development efforts.
Sales and Marketing
Sales and marketing expenses increased 28.7% to $3.0 million, or 25.4% of total
revenues, in the quarter ended September 30, 1998, from $2.4 million, or 30.9%
of total revenues, in the comparable period in 1997. Sales and marketing
expenses increased 21.0% to $8.4 million, or 27.4% of total revenues, in the
nine months ended September 30, 1998, from $7.0 million, or 39.6% of total
revenues, in the comparable period in 1997. The increases in sales and marketing
expenses were primarily attributable to the costs associated with additional
sales and marketing personnel and promotional activities. The decreases in sales
and marketing expense, as a percentage of revenues for the respective periods,
reflects the higher productivity derived from the Company's sales force and
marketing efforts.
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations (continued)
Quarter and Nine Months Ended September 30, 1998, Compared to Quarter and Nine
Months Ended September 30, 1997 (continued).
General and Administrative
General and administrative expenses increased 55.8% to $1.2 million, or 9.8% of
total revenues, in the quarter ended September 30, 1998, from $754,000, or 9.9%
of total revenues, in the comparable period in 1997. General and administrative
expenses increased 77.0% to $3.7 million, or 12.1% of total revenues, in the
nine months ended September 30, 1998, from $2.1 million, or 12.0% of total
revenues, in the comparable period in 1997. The increases in general and
administrative expenses were primarily attributable to increases in personnel
and related costs. The Company believes that its general and administrative
expenses will continue to increase in future periods to accommodate anticipated
growth and expenses associated with its responsibilities as a public company.
Depreciation and Amortization
Depreciation of tangible equipment and amortization of intangible assets
increased 49.4% to $526,000, or 4.4% of total revenues, in the quarter ended
September 30, 1998, from $352,000, or 4.6% of total revenues, in the comparable
period in 1997. Depreciation of tangible equipment and amortization of
intangible assets increased 38.8% to $1.5 million, or 4.8% of total revenues, in
the nine months ended September 30, 1998, from $1.0 million, or 6.0% of total
revenues, in the comparable period in 1997. The increases in depreciation and
amortization expense are due to increases in capital expenditures resulting from
the significant growth of the Company combined with increased goodwill resulting
from the acquisition of the minority interest in the Services Subsidiary.
Non-Cash Compensation
Non-cash compensation expense increased to $38,000, or 0.3% of total revenues,
in the quarter ended September 30, 1998, from $13,000, or 0.2% of total
revenues, in the comparable period in 1997. Non-cash compensation expense
increased to $842,000, or 2.8% of total revenues, in the nine months ended
September 30, 1998, from $36,000, or 0.2% of total revenues in the comparable
period in 1997. Increased levels of unamortized deferred non-cash compensation,
relative to certain stock options awarded in the first quarter of 1998, provided
for the increased non-cash compensation expense in the quarter ended September
30, 1998. Additionally, in the second quarter of 1998, the Company accelerated
the vesting of certain employee stock options issued in the first quarter of
1998, for approximately 283,000 shares of Common Stock, at an exercise price of
between $3.67 per share and $8.00 per share. As a result of this accelerated
vesting, the Company recognized a non-cash, non-recurring charge of
approximately $705,000 during the quarter ended June 30, 1998, representing the
previously remaining unamortized deferred compensation recorded on these
options. The recognition of the non-cash, non-recurring charge provided for the
increases in the non-cash compensation expense in the nine months ended
September 30, 1998, when compared to the same period of the prior year.
Other Income
Interest income increased to $243,000 in the quarter ended September 30, 1998,
from $1,000, in the comparable period in 1997. Interest income increased to
$402,000 in the nine months ended September 30, 1998, from $28,000, in the
comparable period in 1997. On May 26, 1998, the Company completed an initial
public offering of its common stock in which it sold 2.5 million shares, which
resulted in net proceeds of approximately $22.0 million. The increases in
interest income were primarily due to the results of the investment of the funds
from the initial public offering.
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations (continued)
Quarter and Nine Months Ended September 30, 1998, Compared to Quarter and Nine
Months Ended September 30, 1997 (continued).
Interest Expense
Interest expense decreased 61.7% to $51,000 in the quarter ended September 30,
1998, from $133,000 in the comparable period in 1997. Interest expense also
decreased 31.5% to $172,000 in the nine months ended September 30, 1998, from
$251,000 in the comparable period in 1997. These decreases are primarily due to
lower average levels of debt in the periods ended September 30, 1998, as
compared to the periods ended September 30, 1997.
Minority Interest
Minority interest decreased 100.0% in the quarter ended September 30, 1998, from
$133,000 in the comparable period in 1997. Minority interest decreased 88.8% to
$36,000 in the nine months ended September 30, 1998, from $322,000 in the
comparable period in 1997. These decreases in minority interest are related to
the purchase of the remaining 20% of the Services Subsidiary on February 5,
1998, which eliminated the minority interest related to the Services Subsidiary.
Income Taxes
As a result of the operating losses incurred since the Company's inception, the
Company has not recorded any provision or benefit for income taxes in the
quarter and nine month periods ended September 30, 1998 and 1997, respectively.
Liquidity and Capital Resources
On May 26, 1998, the Company completed its initial public offering of 2.5
million shares of its Common Stock at an offering price of $10.00 per share.
The proceeds, net of expenses, from this public offering of approximately $22.0
million were placed in investment grade cash equivalents. The Company's working
capital position (deficit) was $20.9 million and $(453,000) at September 30,
1998 and December 31, 1997, respectively. Management believes that current cash
balances and cash flows from operations will be adequate to provide for the
Company's capital expenditures and working capital requirements for the
forseeable future. Although operating activities may provide cash in certain
periods, to the extent the Company experiences growth in the future its
operating and investing activities may use significant cash.
On November 6, 1998, the Company completed the acquisition of Elekom Corporation
("Elekom") for approximately $15.7 million, consisting of $8.0 million in cash
and approximately 1.39 million shares of the Company's common stock. Elekom was
merged with and into Clarus CSA, Inc., a wholly owned subsidiary of the Company
and the separate existence of Elekom ceased. Immediately following consummation
of the merger, the former holders of Elekom common and preferred stock (the
"Elekom Shareholders") owned approximately 13% of the outstanding common stock
of the Company. The former Elekom Shareholders have agreed not to sell any of
their shares of the Company's common stock for a period ending on August 6,
1999. The Company as additional purchase price recorded i) payments of $500,000
made to fund the operations of Elekom from October 1, 1998, through the closing
date, and ii) expenses of approximately $750,000 to complete the merger.
Approximately $14.0 million of the purchase price was recorded as purchased
in-process research and development.
Cash used in operating activities was approximately $1.5 million and $3.3
million during the nine months ended September 30, 1998 and 1997, respectively.
Cash used by operations during the nine months ended September 30,
16
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources (continued)
1998, was primarily attributable to an increase in accounts receivable,
partially offset by an increase in accounts payable and accrued liabilities.
Cash used by operations during the nine months ended September 30, 1997, was
primarily attributable to an increase in accounts receivable, partially offset
by increases in deferred revenues and accounts payable and accrued liabilities.
Cash used in investing activities was approximately $2.6 million and $647,000
during the nine months ended September 30, 1998 and 1997, respectively. The cash
used in investing activities during the nine months ended September 30, 1998,
was primarily attributable to purchases of computer equipment and software and
an increase in intangible assets and costs related to the acquisition of
Elekom. The cash used in investing activities during the nine months ended
September 30, 1997, was primarily attributable to purchases of computer
equipment and software.
Cash provided by financing activities was approximately $20.8 million and $5.4
million during the nine months ended September 30, 1998 and 1997, respectively.
The cash provided by financing activities during the nine months ended September
30, 1998, was primarily attributable to the Company's initial public offering
effective May 26, 1998, for net proceeds of approximately $22.0 million. The
cash provided by financing activities during the nine months ended September 30,
1997, was primarily attributable to proceeds from the issuance of preferred
stock of approximately $6.0 million, and notes payable and short term borrowings
of approximately $29.8 million; offset by payments on notes payable and short
term borrowings of approximately $30.2 million.
In March 1997, the Company entered into a loan agreement and a master leasing
agreement for an equipment line of credit in the amount of $1.0 million (the
"Equipment Line") with a leasing company. The Equipment Line bears interest at
rates negotiated with each loan or lease schedule (generally 22.0% to 22.5%) and
is collateralized by all of the equipment purchased with the proceeds thereof.
As of September 30, 1998, the principal balance on the Equipment Line payable
was $515,000.
The Company has a revolving working capital line of credit and equipment
facility with Silicon Valley Bank. Borrowings outstanding under the line are
limited to the lesser of $3.0 million or 80% of accounts receivable. Interest on
the revolving credit facility is at prime rate and on the equipment facility at
prime plus 0.5% and is collateralized by all of the assets of the Company. The
line of credit and equipment term facility with Silicon Valley Bank will expire
on April 29, 1999. As of September 30, 1998, the Company had no outstanding
balance and had $3.5 million available for future borrowings under this
agreement.
The Company had available NOL's of approximately $24.5 million as of September
30, 1998, to reduce future income tax liabilities. These NOL's expire from 2007
through 2012 and are subject to review and possible adjustment by the
appropriate taxing authorities. Pursuant to the Tax Reform Act of 1986, the
utilization of NOL's for tax purposes may be subject to an annual limitation if
a cumulative change of ownership of more than 50% occurs over a three-year
period. As a result of this limitation, the Company will be limited to the use
of its NOL's in any given year. The Company had net deferred tax assets of
approximately $9.4 million at September 30, 1998, comprised primarily of net
operating loss carryforwards. The Company has fully reserved for these deferred
tax assets.
Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act
This quarterly report on Form 10-Q contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. When used
in this report, the words "believes," "expects," "anticipates," "estimates" and
similar words and expressions are generally intended to identify forward-looking
statements. Statements that describe the Company's future strategic plans,
goals, or objectives are also forward-looking statements. Readers of this report
are cautioned that any forward-looking statements, including those regarding the
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act (continued)
intent, belief or current expectations of the Company or management, are not
guarantees of future performance, results or events and involve risks and
uncertainties, and that actual results and events may differ materially from
those in the forward-looking statements as a result of various factors
including, but not limited to, (i) general economic conditions in the markets in
which the Company operates, (ii) competitive pressures in the markets in which
the Company operates, (iii) the effect of future legislation or regulatory
changes on the Company's operations and (iv) other factors described from time
to time in the Company's filings with the Securities and Exchange Commission.
The forward-looking statements included in this report are made only as of the
date hereof. The Company undertakes no obligation to update such forward-looking
statements to reflect subsequent events or circumstances.
Impact of Year 2000
The Company has designed and tested the most current versions of its products to
be Year 2000 compliant. There can be no assurances that the Company's current
products do not contain undetected errors or defects associated with Year 2000
date functions that may result in material costs to the Company. Some
commentators have stated that a significant amount of litigation will arise out
of Year 2000 compliance issues, and the Company is aware of a growing number of
lawsuits against other software vendors. Because of the unprecedented nature of
such litigation, it is uncertain whether or to what extent the Company may be
affected by it.
The Company is in the process of determining the extent to which third-party
licensed software distributed by the Company is Year 2000 compliant, as well as
the impact of any non-compliance on the Company and its customers.
Additionally, in the event relational database management systems used with the
Company's software are not Year 2000 compliant, there can be no assurance that
Company's customers will be able to continue to use the Company's products. The
Company does not currently believe that the effects of any Year 2000
non-compliance in the Company's installed base of software will result in a
material adverse impact on the Company's business or financial condition.
However, the Company's investigation with respect to third-party software is in
its preliminary stages, and no assurance can be given that the Company will not
be exposed to potential claims resulting from system problems associated with
the century change or that such claims would not have a material adverse effect
on the Company's business, financial condition or results of operations.
With respect to its internal systems, the Company is taking steps to prepare its
systems for the Year 2000 date change. The Company expects to substantially
complete inventory efforts during the first quarter of calendar year 1999, with
remediation and testing to continue through the third quarter of 1999. Although
the Company does not believe that it will incur any material costs or experience
material disruptions in its business associated with preparing its internal
systems for the Year 2000, there can be no assurances that the Company will not
experience unanticipated negative consequences and/or material costs caused by
undetected errors or defects in the technology used in its internal systems. The
Company is currently unable to estimate the most reasonably likely worst case
effects of the year 2000 and does not currently have a contingency plan in place
for any such unanticipated negative effects.
The Company is currently unable to estimate whether it is exposed to significant
risk of being adversely affected by Year 2000 noncompliance by third parties.
The Company is contacting third parties with which it has material
relationships, including its material customers, to attempt to determine their
preparedness with respect to Year 2000 issues and to analyze the risks to the
Company in the event any such third parties experience significant business
interruptions as result of Year 2000 noncompliance. The Company expects to
complete this review and analysis and to determine the need for contingency
planning in this regard by June 30, 1999.
18
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The Company filed a Form S-1 Registration Statement (Registration
No. 333-63535) in connection with its initial public offering that
was effective on May 26, 1998. On November 6, 1998, the Company used
approximately $8.0 million of the proceeds from its initial public
offering as a portion of the purchase price of Elekom Corporation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Agreement and Plan of Reorganization dated August 31, 1998,
by and among Clarus Corporation, Clarus CSA, Inc. and Elekom
Corporation (Incorporated by reference from Exhibit 2.1 and
Appendix A of the Company's Registration Statement on Form
S-4 (Registration No. 333-63535)).
2.2 Escrow and Minority Investment Agreement by and between the
Registrant and and Elekom Corporation and US Bank Trust
National Association (Incorporated by reference from Exhibit
2.2 to the Company's Registration Statement on Form S-4
(Registration No. 333-63535)).
4.1 Specimen Stock Certificate (Incorporated by reference from
Exhibit 4.2 to the Company's Registration Statement on Form
S-4 (Registration No. 333-63535)).
4.2 Voting Agreement by and among the Registrant and certain
shareholders of Elekom Corporation (Incorporated by reference
from Exhibit 4.3 to the Company's Registration Statement on
Form S-4 (Registration No. 333-63535)).
4.3 Registration Rights Agreement by and between the Registrant
and certain shareholders of Elekom Corporation.
4.4 Escrow and Indemnity Agreement by and among the Registrant,
Elekom Corporation and certain shareholders of Elekom
Corporation.
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K on September 4, 1998,
to report that it had entered into an Agreement and Plan of
Reorganization with Elekom Corporation.
19
<PAGE>
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CLARUS CORPORATION
(Registrant)
Date: November 16, 1998 By: /s/William A. Fielder, III
---------------- ---------------------------------------
William A. Fielder, III
Chief Financial Officer and Treasurer
20
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement"), dated as of
November 6, 1998, is entered into by and between CLARUS CORPORATION, a Delaware
corporation, formerly known as SQL Financials International, Inc. (the
"Company"), and each of the parties listed under "Shareholders" on the signature
page hereto (each signatory individually a "Shareholder" and collectively the
"Shareholders"), each with offices at the addresses listed under such
Shareholder's name on Schedule I hereto.
RECITALS:
The Company and Elekom Corporation, a Washington corporation
("Elekom"), have entered into an Agreement and Plan of Reorganization dated
August 31, 1998 (the "Reorganization Agreement"), that provides for the merger
of Elekom into a wholly owned subsidiary of the Company in a forward triangular
merger, and for all of the outstanding capital stock of Elekom to be converted,
in part, into 1,391,305 shares of common stock of the Company, $.0001 par
value (the "Common Stock"), and in connection therewith the Shareholders are to
receive certain registration rights in respect of the Common Stock. The
execution of this Agreement is a condition to the Closing under the
Reorganization Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual
terms and provisions of this Agreement, the sufficiency of which is hereby
acknowledged, the parties hereby agree as follows:
1. Definitions. For purposes of this Agreement, the following terms
shall have the following respective meanings:
(1) "Commission" shall mean the Securities and Exchange Commission
or any other federal agency at the time administering the Securities Act or the
Exchange Act;
(2) "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, or any similar federal statute enacted hereafter, and the rules and
regulations of the Commission thereunder, all as the same shall be in effect
from time to time;
(3) "Holder" shall mean a Shareholder if such Shareholder holds
Registrable Securities and any other person holding Registrable Securities to
whom these registration rights have been transferred pursuant to Section 16 of
this Agreement; provided however, that any person who acquires any of the
Registrable Securities in a distribution pursuant to a sale under Rule 144 under
the Securities Act shall not be considered a Holder.
<PAGE>
(4) The terms "register," "registered" and "registration" refer to
a registration effected by preparing and filing a Registration Statement in
compliance with the Securities Act and the declaration or ordering of
effectiveness of such Registration Statement by the Commission;
(5) "Registration Expenses" shall mean all expenses (except for
"Selling Expenses" as defined below) incurred by the Company in complying with
Section 2 of this Agreement, including, without limitation, all registration and
filing fees, printing expenses and reasonable fees and disbursements of counsel
for the Company and, subject to Section 3, the reasonable fees and disbursements
of one counsel to the selling shareholders.
(6) "Registrable Securities" shall mean (i) shares of Common
Stock issued pursuant to the Reorganization Agreement, and (ii) any Common Stock
issued upon any stock split, stock dividend or other distribution with respect
to, or in exchange or in replacement of, the foregoing;
(7) "Registration Statement" shall mean a registration statement on
Form S-1 or Form S-3 filed by the Company with the Commission for a public
offering and sale of securities of the Company;
(8) "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute enacted hereafter, and the rules and
regulations of the Commission thereunder, all as the same shall be in effect
from time to time;
(9) "Selling Expenses" shall mean all underwriting discounts and
selling commissions applicable to the sale of shares of Common Stock pursuant to
Section 2 and all fees and disbursements of counsel for the Holders not included
in Registration Expenses; and
(10) All other capitalized terms used herein but not otherwise
defined shall have the meanings ascribed to them in the Reorganization
Agreement.
2. Piggyback Registrations.
(1) If at any time or from time to time prior to the second
anniversary of the date hereof the Company shall determine to register any of
its Common Stock, for its own account or for the account of any of its
shareholders (other than the Holders), other than a registration relating solely
to employee benefit plans, or a registration relating solely to a Commission
Rule 145 transaction or any rule adopted by the Commission in substitution
therefor or in amendment thereto, or a registration on any registration form
which does not include substantially the same information as would be required
to be included in a Registration Statement covering the sale of Registrable
Securities, the Company will:
2
<PAGE>
(1) promptly give to each Holder written notice thereof (which
shall include a list of the jurisdictions in which the Company intends to
attempt to qualify such securities under the applicable Blue Sky or other state
securities laws); and
(2) include in such registration (and any related qualification
under Blue Sky laws or other compliance), and in any underwriting involved
therein, all of the Registrable Securities specified in a written request or
requests received by the Company within twenty (20) days after the giving of
such written notice by the Company, by any Holder or Holders, subject to the
limitations set forth in Section 2(b).
(2) If the registration of which the Company gives notice is for a
registered public offering involving an underwritten public offering, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 2(a)(i). In such event the right of any Holder to
registration pursuant to this Section 2 shall be conditioned upon such Holder's
participation in such underwritten public offering and the inclusion of such
Holder's Registrable Securities in the underwritten public offering to the
extent provided herein. All Holders proposing to distribute their securities
through such underwritten public offering shall (together with the Company and
the other Holders distributing their securities through such underwritten public
offering) enter into an underwriting agreement in customary form with the
underwriter or underwriters selected for such underwritten public offering by
the Company. Notwithstanding any other provision of this Section 2, if the
underwriter determines that marketing factors require a limitation of the number
of shares to be sold, all shares to be sold by the Company shall be included in
such offering before any Registrable Securities are so included, and further,
the underwriter otherwise may limit the number of Registrable Securities to be
included in the registration and underwritten public offering. The Company shall
so advise all Holders (except those Holders who have not elected to distribute
any of their Registrable Securities through such underwritten public offering)
and the number of shares of Registrable Securities, securities of the Company
that are "Registrable Securities" as defined in that certain Stock Purchase
Agreement, dated September 26, 1997, by and among SQL Financials International,
Inc. and the parties listed in Schedule A thereto (the "Purchase Agreement")
(the "Preferred Stock") and Management Stock (as defined in the Purchase
Agreement) that may be included in the Registration and underwritten public
offering shall be allocated among such Holders and holders of Preferred Stock
and Management Stock in proportion, as nearly as practicable, to the respective
amounts of Registrable Securities and shares of Preferred Stock and Management
Stock owned by them at the time of filing the Registration Statement. No
Registrable Securities excluded from the underwritten public offering by reason
of the underwriter's marketing limitation shall be included in such
registration. If the terms of any such underwritten public offering differ
materially from the terms (including range of offering price) previously
communicated to any Holder, such Holder may elect to withdraw therefrom by
written notice to the Company and the underwriter, which notice, to be
effective, must be received by the Company at least two (2) business days before
the anticipated effective date of the Registration Statement. The Registrable
Securities and/or other securities so withdrawn from such underwritten public
offering shall also be withdrawn from such registration; provided, however, that
if by the withdrawal of such Registrable Securities a greater number of
Registrable Securities held by other selling Holders may be included in such
registration
3
<PAGE>
(up to the maximum of any limitation imposed by the underwriters) then the
Company shall include in such registration in place of such withdrawn
Registrable Securities such additional Registrable Securities held by other
selling Holders whose Registrable Securities were excluded pursuant to
limitation by the underwriter pursuant to this Section 2(b) in the same
proportion as such Registrable Securities were excluded pursuant to such
underwriter limitation (with no more Registrable Securities being so included
than were withdrawn). In the event that the contemplated sale does not involve
an underwritten public offering and a determination that the inclusion of the
Registrable Securities adversely affects the marketing of the shares shall be
made by the Board of Directors of the Company in its good faith discretion, then
no Registrable Securities are required hereby to be included in the contemplated
sale.
(3) The Company may at any time withdraw or abandon any Registration
Statement which triggers the provisions of this Section 2 without any liability
to the Holders.
3. Expenses of Registration. All Registration Expenses incurred in
connection with any registration, qualification and compliance pursuant to
Section 2 shall be borne by the Company. All Selling Expenses incurred in
connection with any such registration shall be borne by the selling Holders on a
pro rata basis. If, notwithstanding this Agreement, applicable authorities in
any state wherein Registrable Securities are to be sold require an allocation of
Registration Expenses, each Holder agrees to pay its apportioned share thereof.
4. Registration Procedures. In the case of each registration,
qualification or compliance effected by the Company pursuant to this Agreement,
the Company will keep each Holder advised in writing as to the initiation of
each registration, qualification and compliance and as to the completion
thereof. At its expense the Company will:
(1) prepare and file with the Commission a Registration Statement
with respect to such Registrable Securities, and use its best efforts in good
faith to cause such Registration Statement to become and remain effective as
provided herein;
(2) prepare and file with the Commission such amendments and
supplements to such Registration Statement and the prospectus included in such
Registration Statement as may be necessary or advisable to comply in all
material respects with the provisions of the Securities Act with respect to the
disposition of all securities covered by such Registration Statement or as may
be necessary to keep such Registration Statement effective and current, but for
no longer than nine (9) months subsequent to the effective date of such
registration;
(3) furnish to each seller of Registrable Securities such number of
copies of such Registration Statement, each amendment and supplement thereto (in
each case including all exhibits thereto), the prospectus included in such
Registration Statement (including each preliminary prospectus), and such other
documents as any such seller may reasonably request in order to facilitate the
disposition of the Registrable Securities held by such seller;
4
<PAGE>
(4) enter into such customary agreements and take all such other
action in connection therewith as any Holder may reasonably request in order to
expedite or facilitate the disposition of such Registrable Securities;
(5) use its best efforts in good faith to register and qualify the
Registrable Securities covered by such Registration Statement under such
securities or Blue Sky laws of such jurisdictions as any selling Holder on
behalf of itself or any other selling Holder shall reasonably request and do any
and all such other acts and things as may be reasonably necessary or advisable
to enable such selling Holder to consummate the disposition in such
jurisdictions of the Registrable Securities held by such selling Holder;
provided, however that the Company shall not be required in connection therewith
to qualify to do business or file a general consent to service of process in any
such jurisdiction; and
(6) furnish to each prospective selling Holder a signed
counterpart, addressed to the prospective selling Holders, of (i) an opinion of
counsel for the Company, dated the effective date of the Registration Statement,
and, to the extent available to selling stockholders from the independent
auditors of the Company, (ii) a "comfort" letter signed by the independent
public accountants who have certified the Company's financial statements
included in the Registration Statement, covering substantially the same matters
with respect to the Registration Statement (and the prospectus included therein)
and (in the case of the "comfort" letter) with respect to events subsequent to
the date of the financial statements, as are customarily covered (at the time of
such registration) in opinions of issuer's counsel and in "comfort" letters
delivered to the underwriters in underwritten public offerings of securities;
provided, that the requirements of this paragraph (f) shall apply only to
Holders which are including at least 50,000 shares (such number to be
appropriately adjusted in the event of stock splits, stock combinations, stock
dividends or similar recapitalizations) of Registrable Securities in such
registration.
Notwithstanding the foregoing provisions of this Section 4, (1) the
Holders of Registrable Securities included in any Registration Statement will
not (until further notice) effect sales thereof after receipt of telegraphic or
written notice from the Company to suspend sales to permit the Company to
correct or update such Registration Statement or prospectus; but the obligations
of the Company with respect to maintaining any Registration Statement current
and effective shall be extended by a period of days equal to the period such
suspension is in effect; and (2) at the end of any period during which the
Company is obligated to keep any Registration Statement current and effective as
provided by this Section 4 (and any extensions thereof required by the preceding
paragraph (1) of this Section 4), the Holders of Registrable Securities included
in such Registration Statement shall discontinue sales of shares pursuant to
such Registration Statement upon notice from the Company of its intention to
remove from registration the shares covered by such Registration Statement which
remain unsold, and such Holders shall notify the Company of the number of shares
registered which remain unsold promptly after receipt of such notice from the
Company.
5
<PAGE>
5. Indemnification.
(1) The Company will indemnify each Holder, each of the officers,
directors and partners of such Holder, and each person controlling such Holder,
if Registrable Securities held by such Holder are included in the securities
with respect to which registration, qualification or compliance has been
effected pursuant to this Agreement, and each underwriter of such Registrable
Securities, if any, and each person who controls such underwriter, against all
claims, losses, damages and liabilities (or actions in respect thereof) arising
out of or based on (i) any untrue statement (or alleged untrue statement) of a
material fact contained in any prospectus, offering circular or other similar
document (including any related Registration Statement, notification or the
like) incident to any such registration, qualification or compliance, or based
on any omission (or alleged omission) to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading
in the light of the circumstances under which they were made, or (ii) any
violation by the Company of any federal, state or common law rule or regulation
applicable to the Company and relating to action or inaction required of the
Company in connection with any such registration, qualification or compliance,
and will reimburse such Holder, each of the officers, directors and partners of
such Holder, and each person controlling such Holder, such underwriter and each
person who controls such underwriter, for any legal and any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability or action, provided that the Company will not be
liable to a Holder or underwriter in any such case to the extent that such
claim, loss, damage, liability or expense arises out of or is based on (i) any
untrue statement or omission made in reliance upon and in conformance with
written information furnished to the Company by or on behalf of such Holder or
underwriter and which was furnished specifically for the purpose of being used
therein or (ii) a failure by any Holder to deliver a final prospectus to its
transferee if any material change has been made to the preliminary prospectus.
(2) Each Holder will, if Registrable Securities held by such Holder
are included in the securities as to which such registration, qualification or
compliance is being effected, indemnify the Company, each of its directors and
officers, each underwriter, if any, of the Company's securities covered by such
registration, qualification or compliance, each person who controls the Company
or such underwriter within the meaning of the Securities Act, and each other
Holder, each of the officers, directors and partners of each such other Holder
and each person controlling such other Holder, against all claims, losses,
damages and liabilities (or actions in respect thereof) arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any such Registration Statement, prospectus, offering circular or
other similar document, or any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances under which they were
made, and will reimburse the Company, such other Holders, such directors,
officers, partners, persons, underwriters or control persons for any legal or
any other expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability or action, in each case to the
extent, but only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such Registration
Statement,
6
<PAGE>
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
such Holder and which was furnished specifically for the purpose of being used
therein; provided, however, that the liability of such Holder under this Section
5(b) shall be limited to an amount equal to the proceeds to such Holder of
Registrable Securities sold as contemplated herein.
(3) Each party entitled to indemnification under this Section 5
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party, at such party's expense, to assume the defense of
any such claim or any litigation resulting therefrom, provided that counsel for
the Indemnifying Party, who shall conduct the defense of such claim or
litigation, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense (except for the payment of fees, costs and
expenses provided for below), and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Agreement, unless such failure
to give notice shall materially adversely affect the Indemnifying Party in the
defense of any such claim or any such litigation. No Indemnifying Party, in the
defense of any such claim or litigation shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such Indemnified Party of a release from all liability
in respect to such claim or litigation. Notwithstanding the election of the
Indemnifying Party to assume the defense of any such claim or litigation, the
Indemnified Party shall have the right to employ separate counsel and to
participate in the defense of such claim or litigation, and the Indemnifying
Party shall bear the reasonable fees, costs and expenses of such separate
counsel if (i) the use of the counsel chosen by the Indemnifying Party to
represent the Indemnified Party would present such counsel with a conflict of
interest; (ii) the defendants in, or targets of, any such claim or litigation
include both the Indemnified Party and the Indemnifying Party and the
Indemnified Party shall have reasonably concluded that there may be legal
defenses available to it or to other Indemnified Parties which are different
from or additional to those available to the Indemnifying Party (in which case
the Indemnifying Party shall not have the right to direct the defense of such
action on behalf of the Indemnified Party); (iii) in the exercise of the
Indemnified Party's reasonable judgment, the Indemnifying Party shall not have
employed satisfactory counsel to represent the Indemnified Party within a
reasonable time after notice of the institution of such claim or litigation; or
(iv) the Indemnifying Party shall authorize the Indemnified Party to employ
separate counsel at the expense of the Indemnifying Party. The Indemnified Party
shall not settle any such claim or litigation without the consent of the
Indemnifying Party.
(4) Notwithstanding the foregoing provisions of this Section 5, if
a registration is subject to a firm commitment underwriting, neither the Company
nor a Holder including Registrable Securities in the registration shall be
required to indemnify any other party to a greater extent than the obligation of
the Company or such Holder to the underwriters pursuant to the underwriting
agreement pertaining to such registration.
7
<PAGE>
6. Information by Holder. The Holder or Holders of Registrable
Securities included in any registration shall furnish to the Company in writing
such information regarding such Holder or Holders and the distribution proposed
by such Holder or Holders as the Company may reasonably request in writing and
as shall be required in connection with any registration, qualification or
compliance referred to in this Agreement.
7. Term. The obligations of the Company under Section 2 of this
Agreement shall terminate on the second anniversary of the date hereof.
8. Market "Stand-off" Agreement. The Holders, if requested by the
Company and an underwriter of the Company's securities, shall agree not to sell
or otherwise transfer or dispose of any common stock (or other securities) of
the Company (other than securities of the Company acquired in the open market)
held by Holders during the 30-day periods following the effective date of a
Registration Statement of the Company filed under the Securities Act provided,
that such 30-day periods shall only apply to a Registration Statement filed with
respect to an underwritten public offering by the Company; and provided,
further, that all Holders holding more than two percent of the outstanding
common stock and all officers and directors of the Company enter into similar
agreements. Such agreement shall be in writing in form satisfactory to the
Company and such underwriter. The Company may impose stop-transfer instructions
with respect to the shares (or securities) subject to the foregoing restriction
until the end of such 30-day periods.
9. Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given unless the Company has obtained the written consent of Holders
of at least a majority of the outstanding Registrable Securities, voting
together as a single class.
10. Notices. All notices, demands and other communications made
hereunder shall be in writing and shall be given either by personal delivery, by
nationally recognized overnight courier (with charges prepaid) or by telecopy
(with telephone confirmation), and shall be deemed to have been given or made
when personally delivered, the day following the date deposited with such
overnight courier service or when transmitted to telecopy machine and confirmed
by telephone, addressed to the respective parties at the following addresses (or
such other address for a party as shall be specified by like notice):
If to a Shareholder:
To each Shareholder at the address and/or fax number set forth
on Schedule I of this Agreement, and with copies to counsel,
if any, indicated on Schedule I.
8
<PAGE>
If to the Company:
Clarus Corporation, formerly known as
SQL Financials International, Inc.
3950 Johns Creek Court
Suite 100
Suwanee, Georgia 30024
Attention: Stephen P. Jeffery, President and CEO
Facsimile: (770) 291-8573
With a copy (which shall not constitute notice) to:
Womble Carlyle Sandridge & Rice, PLLC
1275 Peachtree Street, N.E.
Suite 700
Atlanta, Georgia 30309
Attention: G. Donald Johnson, Esq.
Facsimile: (404) 888-7490
11. Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
12. Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
13. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Georgia.
14. Severability. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions contained herein shall not be affected or impaired thereby.
15. Entire Agreement. This Agreement is intended by the parties as
a final expression of their agreement and intended to be a complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the subject matter contained herein. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein with respect to the registration rights granted by the Company with
respect to the Common
9
<PAGE>
Stock. This Agreement supersedes all prior agreements and understandings between
the parties with respect to such subject matter.
16. Transfer or Assignment. Except as otherwise provided herein,
this Agreement shall be binding upon and inure to the benefit of the parties and
their successors and permitted assigns. The rights granted to the Shareholders
by the Company under this Agreement may not be transferred or assigned to any
transferee or assignee of any Registrable Securities except that such rights may
be transferred or assigned to transferees who are affiliates of the
Shareholders, so long as such transferee holds at least 1% of the outstanding
capital stock of the Company and agrees in writing with the Company to hold such
stock subject to the provisions of this Agreement.
17. Parties Benefitted. Nothing in this Agreement, express or
implied, is intended to confer upon any third party any rights, remedies,
obligations or liabilities.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Registration Rights Agreement to be signed by its duly authorized officer as of
the date first above written.
CLARUS CORPORATION, F/K/A
SQL FINANCIALS INTERNATIONAL, INC
By: /s/ Arthur G. Walsh, Jr.
--------------------------
Name: Arthur G. Walsh, Jr.
Title: Secretary
SHAREHOLDERS:
/s/ Norman H. Behar
-------------------------------------
NORMAN BEHAR
EGGHEAD.COM, INC.
By: /s/ G. Orban
----------------------
Name: George P. Orban
Title: CEO
10
<PAGE>
HUMMER WINBLAD VENTURE PARTNERS
By: /s/ John Hummer
----------------------------
Name: John Hummer
Title: Partner
HUMMER WINBLAD TECHNOLOGIES FUND
By: /s/ John Hummer
------------------------------
Name: John Hummer
Title: Partner
OLYMPIC VENTURE PARTNERS IV LP
By: OVMC IV, LLC, Its GP
------------------------------
By: /s/ Gerard H. Langeler
------------------------------
Name: Gerard H. Langeler
Title: Its Managing Member
OVP IV ENTREPRENEURS FUND
OVMC IV, LLC. Its GP
By: /s/ Gerard H. Langeler
-------------------------------
Name: Gerard H. Langeler
Title: Its Managing Member
LAZARUS FAMILY INVESTMENTS, LLC
By: /s/ Jonathon D. Lazarus
----------------------------------
Name: Jonathon D. Lazarus
Title: Manager
11
<PAGE>
SCHEDULE I
Shareholders: Counsel:
Norman Behar
6052 Upland Terrace South
Seattle, WA 98118
Egghead.Com, Inc.
22705 East Mission
Liberty Lake, WA 99019
Hummer Winblad Venture Partners
Two South Park, 2nd Floor
San Francisco, CA 94107
Fax: (415)979-9601
Hummer Winblad Technologies Fund
Two South Park, 2nd Floor
San Francisco, CA 94107
Fax: (415) 979-9601
Olympic Venture Partners IV
2420 Carillon Point
Kirkland, WA 98033
Fax: (425) 889-0152
OVP IV Entrepreneurs Fund
2420 Carillon Point
Kirkland, WA 98033
Fax: (425) 889-0152
Lazarus Family Investments LLC
One Mercer Plaza
2835 82nd Ave. SE
Mercer Island, WA 98040
12
<PAGE>
Fax: (206) 230-8803
13
ESCROW AND INDEMNITY AGREEMENT
THIS ESCROW AND INDEMNITY AGREEMENT (the "Agreement") is made this 6th
day of November, 1998, by and among Clarus Corporation, formerly known as SQL
Financials International, Inc., a Delaware corporation ("SFI"), Elekom
Corporation ("Elekom"), the undersigned former holders of preferred stock of
Elekom as shown on Schedule 1 hereto (collectively the "Preferred Shareholders"
and individually a "Preferred Shareholder"), and NationsBank, N.A. (the "Escrow
Agent").
W I T N E S S E T H :
WHEREAS, SFI has entered into an Agreement and Plan of Reorganization
dated as of August 31, 1998 (the "Merger Agreement") with Elekom Corporation, a
Washington corporation ("Elekom") pursuant to which SFI has acquired all of the
stock and going business of Elekom pursuant to a forward triangular merger (the
"Merger"); and
WHEREAS, pursuant to the Merger Agreement, Elekom has agreed to place $2.5
million of the cash proceeds of the Merger to its shareholders (the
"Shareholders") in an escrow account to secure its obligations under Article IX
of the Merger Agreement; and
WHEREAS, the Preferred Shareholders owned shares of preferred stock of
Elekom and the Preferred Shareholders acknowledge and agree that the Merger and
the payment of the merger consideration to the Preferred Shareholders by SFI is
a direct and substantial benefit to the Preferred Shareholders; and
WHEREAS, as a material inducement to SFI to enter into the Merger
Agreement and consummate the Merger, Elekom has agreed to cause each of the
Preferred Shareholders to enter into this Agreement providing for
indemnification of SFI for the obligations of Elekom under the Merger Agreement
to the extent such obligations exceed the amount of the Escrow Funds (as defined
below); and
NOW, THEREFORE, for and in consideration of the mutual agreements
contained herein and other good and valuable consideration, the receipt and
legal sufficiency of which are hereby acknowledged by each party, the parties
hereto agree as follows:
1. Definitions. For purposes of this Agreement, the following terms
have the meanings indicated below:
"Contesting Direction" means a written direction from the representative
of the Shareholders appointed pursuant to Section 9 of this Agreement (the
"Shareholder Representative"), which direction contests an SFI Direction in
whole or in part and specifies the amount contested and the amount, if any, not
contested. Each Contesting Direction must be delivered to the Escrow Agent in
the manner set forth in Section 16 hereof, and copies of such direction must be
delivered in like manner to SFI.
"Escrow Funds" has the meaning ascribed to such term in Section 2 hereof.
<PAGE>
"Escrow Termination Date" means April 30, 2000.
"Estimated Indemnified Amount" means a good-faith estimate by SFI of an
Indemnified Amount.
"SFI Direction" means a written direction from SFI specifying that a claim
referred to in Article IX of the Merger Agreement and covered by a particular
Notice of Claim has been made, and further specifying the aggregate Indemnified
Amount. Each SFI Direction must be delivered to the Escrow Agent in the manner
set forth in Section 16 hereof, and copies of such direction must be delivered
in like manner to the Shareholder Representative.
"Indemnification Holdback" has the meaning ascribed to such term in
Section 4.1 hereof.
"Indemnified Amount," with respect to any Notice of Claim, means the
aggregate amount of indemnification determined to be due to SFI pursuant to
Article IX of the Merger Agreement.
"Joint Direction" means a written direction relating to (i) a Notice of
Claim, (ii) the investment of the Escrow Funds, or (iii) removal of the Escrow
Agent in accordance with Section 15 hereof, in each case executed by SFI and the
Shareholder Representative, and delivered to the Escrow Agent in the manner set
forth in Section 16 hereof.
"Notice of Claim" means a written notice from SFI delivered to the Escrow
Agent and the Shareholder Representative in the manner set forth in Section 16
hereof on or before the Escrow Termination Date, specifying that facts exist
which may give rise to an indemnifiable claim under Article IX of the Merger
Agreement, also specifying the Estimated Indemnified Amount and describing in
reasonable detail the nature of the matter or matters covered by the Notice of
Claim and the Estimated Indemnified Amount.
2. Establishment of Escrow. On the date hereof, concurrently with the
closing of the Merger, SFI has deposited with Escrow Agent the sum of US Two
Million Five Hundred Thousand Dollars ($2,500,000.00) in immediately available
funds (the "Escrow Funds"), which sum Escrow Agent hereby accepts and agrees to
hold for Shareholders in escrow subject to the terms of this Escrow Agreement
(the "Escrow"). Escrow Agent hereby confirms to SFI, Shareholders and the
Preferred Shareholders receipt by Escrow Agent of the Escrow Funds. The Escrow
Funds represent a portion of the merger consideration paid to the Shareholders
in the Merger and has been withheld from the cash consideration received by such
Shareholders pursuant to the terms of Section 1.5 of the Merger Agreement in
order to secure the obligations of Elekom pursuant to Article IX of the Merger
Agreement.
3. Investment of the Funds. During the period specified in this Agreement,
the Escrow Agent shall hold the Escrow Funds (i) in an interest-bearing account
or other investment vehicle specified by Elekom, with a maturity no greater than
thirty (30) days and which is backed by the United States Government or such
financial institutions insured by the Federal Deposit Insurance Corporation,
having a net worth of not less than US One Hundred Million Dollars
($100,000,000) or (ii) in such other account or investment as may be specified
in a Joint Direction. The payments of interest on such account and other
distributions thereon shall be
<PAGE>
added to and become a part of the Escrow Funds. Any and all interest which may
be earned and received on the Escrow Funds shall be for the account of the
Shareholders and shall not constitute part of the Escrow Funds.
4. Administration of Escrow Funds
4.1 Claims Against Escrow Funds
If, on or before the Escrow Termination Date, the Escrow Agent receives a
Notice of Claim from SFI, then, in each instance in which such a Notice of Claim
is received, the Escrow Agent shall, from and after its receipt of that Notice
of Claim, hold the portion of the Escrow Funds equal to the Estimated
Indemnified Amount or the remainder of the Escrow Funds should it be less than
the Estimated Indemnified Amount (the "Indemnification Holdback") until such
time (whether before or after the Escrow Termination Date) as the conditions of
Section 4.2 hereof have been complied with as to such Notice of Claim.
4.2 Distributions
4.2.1 Distributions on Joint Direction
If at any time, or from time to time, prior to, or on the Escrow
Termination Date, the Escrow Agent receives a Joint Direction regarding a Notice
of Claim, the Escrow Agent shall comply with such Joint Direction.
4.2.2 Distribution on SFI Direction
(a) If at any time, or from time to time, prior to, or on the Escrow
Termination Date, the Escrow Agent receives an SFI Direction, and if the Escrow
Agent does not within 30 days after the date of its receipt of that SFI
Direction receive a related Contesting Direction, then the Escrow Agent shall,
within 3 business days after such 30th day and after confirmation with SFI of
the amount, pay to SFI the Indemnified Amount, as specified in the SFI
Direction, or the remainder of the Escrow Funds should it be less than the
Indemnified Amount.
(b) If the Escrow Agent does receive a Contesting Direction within such
30-day period, then it shall (i) within 10 days of the receipt of such
Contesting Notice, distribute to SFI such portion of the Indemnified Amount
which is not disputed in the Contesting Direction (or the remainder of the
Escrow Funds should it be less than such undisputed portion of the Indemnified
Amount) and (ii) continue to hold any Indemnification Holdback amount necessary
to cover any disputed portion of the Indemnified Amount until such time as the
Escrow Agent receives either a Joint Direction, or a notice from SFI or the
Shareholder Representative directing the Escrow Agent with respect to the
disbursement, release or any other disposition of the amount of the
Indemnification Holdback accompanied by a copy of the final order, judgment or
decree from a court of competent jurisdiction with respect to such claim, and
the Escrow Agent has received an opinion of legal counsel (the reasonable fees
and cost for which shall be an additional Loss hereunder) acceptable to the
Escrow Agent that as to such order, judgment or decree all rights of appeal have
expired or been waived. Within 5 days of the receipt by the Escrow Agent of such
<PAGE>
Joint Direction or such notice and legal opinion contemplated by the immediately
preceding sentence, the Escrow Agent shall distribute to SFI or the Shareholder
Representative (as specified in such Joint Direction or such notice) the
Indemnified Amount specified in such Joint Direction or the amount contemplated
by such notice, as the case may be, or the remainder of the Escrow Funds should
it be less.
4.2.3 Distributions on Escrow Termination Date
On the Escrow Termination Date, without further notice or request, the
Escrow Agent shall distribute to the Shareholder Representative on behalf of the
Shareholders of Elekom in the manner set forth in Section 4.3 hereof any amounts
remaining in the Escrow Funds which are not subject to Indemnification Holdback.
Amounts remaining in the Escrow Funds which are subject to Indemnification
Holdback will be distributed when the conditions of Section 4.2.2 hereof are
satisfied.
4.4 Distributions to the Shareholder Representative and SFI
In the event that the Escrow Agent is required to distribute any part of
the Escrow Funds to the Shareholder Representative or SFI, the Escrow Agent will
make payment, by issuance of its check, delivered by first class or overnight
mail address set forth in Section 16 hereof, representing an amount equal to the
total amount then to be distributed from the Escrow Funds.
5. Indemnification.
Indemnification. Subject to the requirements, limitations, and exclusions
and further provisions in Article IX of the Merger Agreement and this Agreement,
Elekom shall to the extent of the Escrow Funds, and the Preferred Shareholders
listed on Schedule 9.1 to the Merger Agreement (the Company, together with the
Preferred Shareholders are the "Indemnitors") shall severally in proportion to
the percentages set forth on Schedule 9.1 to the Merger Agreement, indemnify,
defend and hold harmless SFI and its officers, directors and affiliates (the
"SFI Indemnitees") from, against, and with respect to any and all action or
cause of action, loss, damage, claim, obligation, liability, penalty, fine, cost
and expense (including without limitation reasonable attorneys' and consultants'
fees and costs and expenses incurred in investigating, preparing, defending
against or prosecuting any litigation, claim, proceeding, demand or request for
action by any governmental or administrative entity), of any kind or character
(a "Loss") arising out of or in connection with any of the following:
(a) any breach of any of the representations or warranties of Elekom
contained in or made pursuant to the Merger Agreement or any of the
representations and warranties of the respective Preferred Shareholder in
any other Elekom Agreement (defined in the Merger Agreement);
(b) any failure by Elekom or the respective Preferred Shareholder to
perform or observe, or to have performed or observed, in full, any
covenant, agreement or condition to be performed or observed by it
pursuant to the Merger Agreement or any Elekom Agreement;
<PAGE>
(c) any breach by Elekom of any representation set forth in Section
2.14 in the Merger Agreement (an "IP Claim");
(d) any claim by a Shareholder relating to the allocation by Elekom
of the cash and stock consideration to be received by each Shareholder in
connection with the Merger;
(e) any amount that shall have been paid by SFI to Shareholders in
respect of shares of Elekom with respect to which dissenters' rights have
been perfected that shall be in excess of the amount of the value, as of
the closing date of the Merger, of the consideration such Shareholders
would have received for such shares in the Merger if they had not
exercised dissenters' rights plus any fees and expenses incurred by SFI
Indemnitees in connection with defense of such dissenters' rights claim.
Notwithstanding anything herein to the contrary, the liability of the Preferred
Shareholders hereunder will not be greater than the liability of Elekom under
Article IX of the Merger Agreement.
6. Notice of Claim. Any SFI Indemnitee seeking to be indemnified pursuant
to Section 5 hereof shall, within fifteen (15) days following discovery of a
Loss (or 5 days if the SFI Indemnitee has been served with a lawsuit or other
proceeding), notify the Shareholder Representative with a Notice of Claim. Each
SFI Indemnitee will serve such Notice of Claim prior to initiating any court
action seeking to enforce any such right to indemnification. The SFI Indemnitee
shall provide to the Shareholder Representative as promptly as practicable
thereafter all information and documentation reasonably requested by the
Shareholder Representative to verify the claim for indemnification asserted.
Following receipt of such notice (i) the Preferred Shareholders will then have
the opportunity to discuss with the SFI Indemnitees the steps the Preferred
Shareholders plan to take to mitigate any alleged Loss (defined in Section 5)
SFI may have suffered and (ii) prior to SFI initiating such court action, the
Preferred Shareholders will be given a reasonable period of time (not to exceed
30 days following receipt of such notice without the written agreement of SFI to
cure completely the events giving rise to such alleged Losses (if such events
are capable of being cured completely); provided, however, that Elekom and the
Preferred Shareholders shall remain liable, to the extent set forth in the
Merger Agreement, for Losses actually incurred. The procedures set forth in
Section 7 shall govern Third-Party Claims.
7. Defense. If a claim by a third party (a "Third Party Claim") is made
against an SFI Indemnitee arising out of a matter for which the SFI Indemnitee
is entitled to be indemnified pursuant to Section 5 hereof, the Preferred
Shareholders may elect to assume the defense or the prosecution thereof. The
Preferred Shareholders shall have 30 days (which shall be shortened to 15 days
in the case of a commenced lawsuit or proceeding) after receipt of a Notice of
Claim to undertake to conduct and control, through counsel of their own choosing
as designated by the Shareholder Representative and at their sole risk and
expense, the good faith settlement or defense of such claim, and the SFI
Indemnitee(s) shall cooperate fully with the Preferred Shareholders in
connection therewith; provided that the SFI Indemnitee(s) shall be entitled to
participate in such settlement or defense through counsel chosen by it, provided
that the fees and expenses of such counsel shall be borne by the SFI
Indemnitee(s); and provided further that the
<PAGE>
Preferred Shareholders can only assume the defense if (a) the amount of the
Third Party Claim does not exceed the amount of the Escrow Funds held hereunder
or (b) the Preferred Shareholders provide commercially reasonable evidence that
the Preferred Shareholders will have sufficient financial resources to defend
the claim and satisfy their indemnification obligations. During the interim the
SFI Indemnitee shall use its best efforts to take all action (not including
settlement) reasonably necessary to protect against further damage or loss with
respect to the alleged Loss. The Preferred Shareholders shall obtain the written
consent of the SFI Indemnitee prior to ceasing to defend, settling or otherwise
disposing of such claim if as a result thereof the SFI Indemnitee would become
subject to injunctive, declaratory or other equitable relief or the business of
the SFI Indemnitee would be materially adversely affected in any manner. Whether
or not the Preferred Shareholders choose so to defend or prosecute such claim,
all the parties hereto shall cooperate in the defense or prosecution thereof and
shall furnish such records, information and testimony and shall attend such
conferences, discovery proceedings and trials as may be reasonably requested in
connection therewith. Such cooperation shall include the retention and the
provision of records and information which are reasonably relevant to such Third
Party Claim, and making employees available on a mutually convenient basis to
provide additional information. The Preferred Shareholders shall not be liable
for any settlement of any such claim effected without their prior written
consent, which shall not be unreasonably withheld. However, if the Preferred
Shareholders, fail to defend such claim within the time period necessary to
preserve the rights and defense of the SFI Indemnitee, the SFI Indemnitee will
have the right to undertake the defense, compromise or settlement of such claim
on behalf of and for the account and risk of the Preferred Shareholders, subject
to the right of the Preferred Shareholders to assume the defense of such claim
at any time within the 30-day time period after receiving Notice of Claim .
If a claim is based on any suit or proceeding by a third party for
infringement which gives rise to an IP Claim (defined in Section 5) resulting in
SFI's use of the Software (defined in Section 2.14 of the Merger Agreement)
being enjoined or otherwise restricted, the Preferred Shareholders, if the
Preferred Shareholders elect through the Shareholder Representative to assume
defense of such proceeding after receiving notice hereunder, shall be entitled
at their sole expense to do any of the following: (i) procure for SFI, Clarus
CSA, Inc. and their licensees the unrestricted right to continue using the
Software, (ii) modify the Software so that it becomes noninfringing, (iii)
settle the third party's infringement claim in a manner that gives SFI, Clarus
CSA, Inc. and their licensees the unrestricted rights to the software being
enjoined or otherwise restricted, or (iv) pay the indemnified party's claim as
provided in this Agreement, provided that any settlement under this sentence
shall require SFI's prior written approval which shall not be unreasonably
withheld. SFI shall comply with any settlement or court order made in connection
with such proceeding in the foregoing sentence provided that such compliance by
SFI shall not limit the Preferred Shareholder's indemnification obligations
hereunder. No Preferred Shareholder shall be liable for any settlement of any
such claim effected without its prior written consent, which shall not be
unreasonably withheld. Before any claim may be brought against any of the
Preferred Shareholders hereunder, or under the Merger Agreement, all the Escrow
Funds shall be used first to pay any claims made under Article IX of the Merger
Agreement or this Agreement, and SFI hereby authorizes the Preferred
Shareholders to settle such claims without consent of SFI to the extent the
Escrow Funds will fully satisfy such claim. Preferred
<PAGE>
Shareholders may also settle any claim for which they are liable hereunder
without consent of SFI so long as the payment or performance does not either (y)
exhaust the Escrow Funds or (y) exceed the maximum liability amounts set forth
below. Settlements requiring performance or payment in excess of the maximum
liability amounts shall require SFI's prior written consent.
8. Limitations.
The obligations of Elekom or any Preferred Shareholder to indemnify any
SFI Indemnitees pursuant to Article IX of the Merger Agreement shall accrue only
after and to the extent the aggregate dollar amount of Losses incurred by an
Indemnified Party for all matters indemnifiable thereunder exceeds One Hundred
Thousand Dollars (US $100,000) (the "Basket"), and then Indemnitors shall be
only liable for such Losses in excess of $100,000. In addition, no single Loss
in an amount of less than $10,000 may be applied to the Basket until such
threshold amount is reached, and thereafter, single claims of less than $10,000
must be aggregated so that no claim is made for an amount of less than $10,000
singly or in the aggregate. The obligations of the Indemnitors to indemnify the
SFI Indemnitees under this Agreement shall not exceed the $2,500,000 placed in
escrow hereunder for claims for indemnification other than (a) IP Claims, which
are addressed below, or (b) claims for indemnification related to a breach of
the representations contained in Section 2.1 of the Merger Agreement.
Notwithstanding anything in this Agreement to the contrary, the aggregate
maximum liability of the Indemnitors, for IP Claims shall not exceed (i) Twelve
Million Five Hundred Thousand Dollars ($12,500,000) for any IP Claims plus the
remaining amount of the Escrow Funds and no IP Claims may be made after the
expiration of the one (1) year period following the Closing Date of the Merger.
This Agreement and Article IX of the Merger Agreement set forth the sole
and exclusive remedy of an SFI Indemnitee for breaches of any representation,
warranty, or covenant under the Merger Agreement absent fraud or securities law
violations.
The maximum liability for claims for breach of the representation and
warranty in Section 2.1 in the Merger Agreement is the purchase price (cash paid
by SFI to Elekom's Shareholders at closing of the Merger plus the market value
of the shares transferred by SFI at closing of the Merger to the Elekom's
Shareholders), minus the amount of the cash transferred to SFI from the Escrow
Funds pursuant to this Agreement, further reduced by the aggregate amount paid
by Elekom and the Preferred Shareholders in connection with all claims for
breach of the representations and warranties made under Sections 2.14, 2.19, and
2.23(b) of the Merger Agreement. The maximum liability for claims for breach of
the representations or warranties in Sections 2.19, and 2.23(b) of the Merger
Agreement is equal to the purchase price (cash paid by SFI to Elekom's
shareholders at closing plus the market value of the shares transferred by SFI
at Closing to the Elekom's shareholders), minus the amount of the cash
transferred to SFI from the Escrow Funds, further reduced by the aggregate
amount paid by Elekom and Preferred Shareholders in connection with all claims
for breach of the representations and warranties made under Sections 2.1 or
2.14.
Notwithstanding anything in this Agreement to the contrary, no Preferred
Shareholders will have any liability for any claim that the Software infringes
the rights of a third party to the extent the claims arise from modification of
the Software by SFI after the Closing of the Merger
<PAGE>
or to the extent the infringement claim arises out of a combination of the
Software with a program, product or material not transferred to SFI's subsidiary
as of the Closing of the Merger. In no event (except as specifically provided
below) will any Preferred Shareholder have any liability for indirect,
incidental, exemplary, or consequential damages whatsoever (including, without
limitation, damages for loss of profits, loss of data or other business
information) or cover arising under the Merger Agreement, even if the Preferred
Shareholder has been advised of the possibility of such damages; provided,
however, that although this sentence excludes claims for the lost profits, it
does not limit the liability of any Preferred Shareholder hereunder to an SFI
Indemnitee for indirect, incidental, exemplary or consequential damages to the
extent such damages, including lost profits, are included in a claim by a third
party against the SFI Indemnitee or arise as a result of such third party claim
that the Software is infringing, or claim of ownership rights in the Software
(excluding Third Party Software), and to the extent indemnification under the
Merger Agreement covers such third party claims. Notwithstanding the foregoing,
an SFI Indemnitee shall have the right to recover for direct out-of-pocket
expenses, including its direct, demonstrable internal costs (without overhead)
and/or external costs paid by such SFI Indemnitee to remediate any Loss, whether
or not such Loss arises in connection with a Third Party Claim.
9. Casahl Litigation. Elekom will endeavor to seek an indemnification of
the SFI and the Shareholders from Egghead.com, Inc. ("Egghead.com") covering the
claims in the litigation commenced by Elekom and Egghead Software, Inc. (now
known as Egghead.com) under Case No. 987331 pending in the Superior Court of
California for the County of San Francisco (the "Casahl Litigation"). Before
taking any action against the Preferred Shareholders (other than Egghead.com)
with respect to any Loss arising from the Casahl Litigation, SFI and Clarus CSA,
Inc. each agree to use their reasonable best efforts to enforce the following
with respect to the Casahl Litigation:
(a) The Separation Agreement, dated November 10, 1997, between
Egghead Software, Inc., now know as Egghead.com, Inc. and Elekom;
(b) Any reaffirmation by Egghead.com of the obligation in the last
sentence of Section 4.02(a) of the Separation Agreement (in favor of
Elekom, Clarus CSA, Inc. or SFI);
(c) Any other agreement with Egghead.com in which it agrees to
defend, indemnify, and hold harmless Elekom, its past, present and future,
successor and assigns, officers and directors, common shareholders
(specifically excluding past Shareholder Egghead.com and specifically
including future common shareholder Parent), the Preferred Shareholders
(other than Egghead.com), agents, and employees, to the extent Elekom,
Clarus CSA, Inc., or SFI is made a beneficiary of such agreement , from
and against any cost, expense, loss, liability whatsoever arising in
connection with the Casahl Litigation.
If, after notice to Egghead.com by SFI and Clarus CSA, Inc., Egghead.com fails
or refuses to honor its indemnity, or other obligations to Elekom, its past,
present and future, successors and assigns, officers and directors, agents,
employees, and, after the Effective Time, SFI, then to the
<PAGE>
extent Elekom or an SFI Indemnitee suffers a Loss as a result of the Casahl
Litigation notwithstanding any of the above, then in such event each of the
Preferred Shareholders identified on Schedule 9.6 to the Merger Agreement (other
than Egghead.com), severally in proportion which they bear to each other
excluding Egghead.com based on the percentage set forth in Schedule 9.6 to the
Merger Agreement, agree to defend, indemnify, and hold harmless an SFI
Indemnitee from and against any cost, expense, loss or liability resulting from
the Casahl Litigation. The indemnity obligations set forth in this Section 9 are
in addition to Section 5 and are not subject to the limitations set forth in
Section 8. Except as set forth in Section 10(a), payments made hereunder this
Section 9 by a Preferred Shareholder shall not be reimbursed from Escrow Funds
nor count toward the maximum liability of Elekom or a Preferred Shareholder. In
the event that a Preferred Shareholder fails to pay any amount due hereunder,
such amount may be withdrawn from the Escrow Funds by an SFI Indemnitee to the
extent of that Preferred Shareholder's proportionate share in the Escrow Funds
after giving effect to Section 10(b) of this Agreement.
10. Disbursements at Escrow Termination Date.
(a) Fees or Expenses of Preferred Shareholder. After April 30, 2000,
all fees, expenses and costs of any kind (including, without limitation,
attorneys' fees and costs) incurred by any Preferred Shareholder in defense of
any claim indemnified hereunder shall be reimbursed from the remaining Escrow
Funds before any such funds are distributed to Shareholders.
(b) Distributions on Account of Common Shareholdings of Elekom.
After making the distributions described in Section 10(a), holders of Elekom's
Common Shares as of the date of the Closing of the Merger Agreement will receive
a distribution of the proportionate share of the Escrow Funds, which they would
have received from the Escrow Funds in the event no Notice of Claim had been
asserted by any SFI Indemnitee hereunder asserting a claim to the Escrow Funds.
(c) Distributions on Account of Preferred Shareholdings of Elekom.
After making the distributions described in section 10(b), holders of Elekom's
Preferred Shares as of the date of the Closing of the Merger Agreement will
receive a distribution of the remaining funds in the Escrow Funds in the
proportions set forth on Schedule 9.1 to the Merger Agreement.
11. Appointment of Shareholder Representative. Elekom and the Shareholders
hereby appoint John Hummer, or his designated successor agreeable to Preferred
Shareholders holding more than fifty percent (50%) of the potential liability
set forth on Exhibit A, to serve as Shareholder Representative for all purposes
pertaining to this Agreement, who shall be authorized to make all decisions and
elections of the Shareholders hereunder and agree that the SFI Indemnitees shall
be entitled to rely on all actions, decisions, and notice of the Shareholder
Representative. The Shareholder Representative has been appointed by Elekom and
the Shareholders as their attorney-in-fact, for the giving and receipt on their
behalf of all notices, instructions and deliveries and for the taking on their
behalf of all other actions under this Agreement and the Merger Agreement, to
serve in such capacity until such time as SFI and the Escrow Agent have received
joint written notice from all Shareholders that they have appointed a
<PAGE>
new Shareholders Representative. Accordingly, except as otherwise set forth
herein and the Merger Agreement, the Shareholder Representative has unlimited
authority and power to act on behalf of the Shareholders with respect to this
Agreement and the disposition, settlement or other handling of all claims,
rights or obligations arising hereunder, provided such actions by the
Shareholder Representative are taken in good faith in the exercise of reasonable
judgment. Except as otherwise set forth herein, the Shareholder shall be bound
by all actions taken by the Shareholder Representative in connection with this
Agreement, and the Escrow Agent, Elekom and SFI shall be entitled to rely on any
action or decision of the Shareholder Representative in accordance herewith. The
Shareholder Representative shall be entitled to reimbursement out of the
remaining amount of Escrow Funds on the Escrow Termination Date, prior to
distribution of such funds, for any reasonable out-of-pocket expenses incurred
by the Shareholder Representative in connection with the performance of the
representation duties under this Agreement or the Merger Agreement, including,
without limitation, legal fees and expenses. No bond shall be required of the
Shareholders Representative, and the Shareholders Representative shall not
receive compensation for his or her services. The Shareholder Representative
shall not be liable for any act done or omitted hereunder as Shareholder
Representative while acting in good faith and in the exercise of reasonable
judgment. The Shareholders on whose behalf the Escrow Funds were contributed to
the Escrow shall severally indemnify the Shareholders Representative and hold
the Shareholders Representative harmless against any loss, liability or expense
incurred without gross negligence or bad faith on the part of the Shareholders
Representative and arising out of or in connection with the acceptance or
administration of the Shareholders Representative's duties hereunder, including
the reasonable fees and expenses of any legal counsel retained by the
Shareholders Representative in connection with his representation of
Shareholders.
12. Remedies. The SFI Indemnitees need not exhaust any other remedies that
may be available to them but may proceed directly in accordance with the
provisions of this Agreement; provided, that SFI Indemnitees must first pursue
recourse to the Escrow Funds before asserting any claim against any Preferred
Shareholder based on Article IX of the Merger Agreement. The SFI Indemnitees may
institute claims against the Escrow Funds and in satisfaction thereof may
recover Escrow Funds, in accordance with the terms of the Merger Agreement and
this Agreement, without making any other claims directly against the
Shareholders and without rescinding or attempting to rescind the transactions
consummated pursuant to the Merger Agreement. The assertion of any single claim
for indemnification hereunder will not bar the SFI Indemnitees from asserting
other claims hereunder. All rights and remedies provided to the SFI Indemnitees
hereunder shall be cumulative and shall be in addition to any other rights or
remedies available to such party at law, in equity, by contract or otherwise.
13. Fees and Expenses. Escrow Agent shall be entitled to its customary
fees for its services hereunder, and to reimbursement of all out-of-pocket
expenses incurred, including reasonable attorney's fees, which fees and expenses
shall be borne by SFI.
14. Limited Duties; Indemnification. Escrow Agent shall have no
responsibilities to SFI or the Shareholders except those specifically set forth
herein, and, in performing any of its duties under this Agreement, or upon the
claimed failure to perform its duties hereunder, the
<PAGE>
Escrow Agent shall not be liable for any acts taken or omitted to be taken by it
except for its own gross negligence or willful misconduct. Accordingly, the
Escrow Agent shall be entitled to rely conclusively on any notice, authorization
or other document delivered to it hereunder and believed by it to be genuine,
and may, at its discretion, obtain the advice of counsel with respect to any
matter relating hereto and shall not incur any liability with respect to (i) any
action taken or omitted to be taken in good faith upon advice of its counsel, or
(ii) any action taken or omitted to be taken in reliance upon any such notice,
authorization or other document believed to be genuine. Escrow Agent shall not
be under any obligation to institute legal proceedings of any kind with respect
hereto, and SFI and the Preferred Shareholders hereby jointly and severally
agree to hold Escrow Agent harmless in respect of any claim, suit or proceeding
based upon this Agreement or any act taken or not taken by Escrow Agent
hereunder, other than with respect to Escrow Agent's gross negligence or willful
misconduct. Provided, however, in the event of any dispute regarding the proper
distribution of the Escrow Funds, Escrow Agent shall be entitled to file an
interpleader action to tender the Escrow Funds into the registry or custody of
any court of competent jurisdiction, whereupon the Escrow Agent shall be
discharged from any further duty hereunder. The provisions of this Section shall
survive any resignation of the Escrow Agent or the termination of this
Agreement.
15. Removal and Resignation. Escrow Agent agrees that SFI and the
Shareholders may, by their agreement, at any time remove Escrow Agent as escrow
agent hereunder, and substitute another person or entity as escrow agent, in
which event Escrow Agent shall, upon receipt of a Joint Direction requesting
such removal, account for and deliver to such substituted escrow agent all
amounts held in the Escrow, and Escrow Agent shall thereafter be discharged from
its duties hereunder. Escrow Agent may resign from serving as escrow agent
hereunder by written notice to such effect given to SFI and the Shareholder
Representative, whereupon SFI and the Shareholder Representative shall agree
upon a successor escrow agent and shall so notify Escrow Agent, which shall then
account for and deliver to such successor all amounts held in the Escrow, and
such resignation shall thereupon be effective. If no successor escrow agent is
agreed upon within a reasonable time after such notice is given, the Escrow
Agent shall be entitled to tender into the registry or custody of any court of
competent jurisdiction the Escrow Funds, together with such legal proceedings as
the Escrow Agent deems appropriate, and thereupon the Escrow Agent shall be
discharged from all further duties hereunder.
16. Notices. All notices, demands and other communications required or
permitted hereunder shall be in writing and may be telexed or telecopied, which
shall be followed forthwith by letter, and such notice, request, demand or other
communication shall be deemed to have been received on the next business day
following dispatch and acknowledgment of receipt by the recipient's telex or
telecopy machine. In addition, notices hereunder may be delivered by hand, in
which event the notice shall be deemed effective when delivered, or by overnight
courier, in which event the notice shall be deemed to have been received on the
next business day following delivery to such courier. Notices, requests, demands
and other communications may not be given by regular or certified mail. All
notices and other communications under this Agreement shall be given to the
parties hereto at the following addresses:(or such other address for a party as
shall be specified by like notice):
<PAGE>
If to Company:
Elekom Corporation
Pacific First Plaza, Eighth Floor
155 - 108th Avenue
Bellevue, Washington 98004
Attention: Norman Behar, President and CEO
Facsimile: (425) 990-3075
With a copy (which shall not constitute notice) to:
Perkins Coie LLP
411 - 108th Avenue N.E.
Suite 1800
Bellevue, Washington 98004-5584
Attention: Kurt Becker
Facsimile: (425) 453-7350
If to SFI:
Clarus Corporation, formerly known as SQL Financials
International, Inc.
3950 Johns Creek Court
Suite 100
Swan, Georgia 30024
Attention: Stephen P. Jeffery, President and CEO
Facsimile: (770) 291-8573
With a copy (which shall not constitute notice) to:
Womble Carlyle Sandridge & Rice, PLLC
1275 Peachtree Street, N.E.
Suite 700
Atlanta, Georgia 30309
Attention: G. Donald Johnson, Esq.
Facsimile: (404) 888-7490
(b) If to the Shareholder Representative:
John Hummer
Hummer Winblad Venture Partners
2 South Park, 2nd Floor
San Francisco, CA 94107
Attention: John Hummer
Facsimile No.: (415) 979-9601
<PAGE>
with a copy to:
Kurt Becker
Perkins Coie LLP
Suite 1800, 411 - 108th Ave. N.E
Bellevue, WA 98004-5584
Attention: Kurt Becker
Facsimile No.: (425) 453-6980
(c) If to Escrow Agent:
Nations Bank, N.A.
Peachtree Street, N.E.
19th Floor
Atlanta, Georgia 30308
Attention: Sherry Siegwarth
Facsimile No.: (404) 607-6343
Any party hereto may change its address specified for notices herein by
designating a new address by notice in accordance with this Section 16.
17. Interpretation. This Agreement and Article IX of the Merger Agreement
are to be read together. To the extent of any inconsistency between this
Agreement and Article IX of the Merger Agreement, the terms and provisions of
Article IX of the Merger Agreement shall control.
18. Tax Reporting. For purposes of tax reporting, all income earned on the
funds in the Escrow shall be deemed to have been earned for the account of the
party to whom the funds are disbursed, and Escrow Agent is authorized to act
accordingly.
19. Successors and Assigns. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
assigns.
20. Governing Law and Jurisdiction. This Agreement shall be governed by
and construed according to the laws of the State of Washington, without regard
to any rules regarding choice of law. The exclusive jurisdiction for any action
by any SFI Indemnitee against Shareholders, Preferred Shareholders, or with
respect to the Escrow Funds shall be the state and federal courts situated in
Hennepin County, Minnesota.
21. Defined Terms. Capitalized terms not otherwise defined herein shall
have the meaning ascribed to such term in the Merger Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
ELEKOM CORPORATION CLARUS CORPORATION, formerly
known SQL Financials International, Inc.
By: /s/ Norman H. Behar By: /s/ Arthur G. Walsh, Jr.
------------------------ ---------------------------
Name: Norman Behar Name: Arthur G. Walsh, Jr.
Title: President and CEO Title: Secretary
ESCROW AGENT:
NATIONSBANK, N.A.
By: /s/ Melinda M. Bergbom
-----------------------------
Name: Melinda M. Bergbom
Title: Senior Vice President
PREFERRED SHAREHOLDERS:
/s/ Norman H. Behar
----------------------------------------
NORMAN BEHAR
EGGHEAD.COM, INC.
By: /s/ G. Orban
-------------------------
Name: George P. Orban
Title: CEO
<PAGE>
HUMMER WINBLAD VENTURE PARTNERS
By: /s/ John Hummer
-----------------------
Name: John Hummer
Title: Partner
HUMMER WINBLAD TECHNOLOGIES FUND
By: /s/ John Hummer
------------------------
Name: John Hummer
Title: Partner
OLYMPIC VENTURE PARTNERS IV L.P.
By: OVMC IV, L.L.C., Its GP
---------------------------
By: /s/ Gerard H. Langeler
---------------------------
Name: Gerard H. Langeler
Title: Its Managing Member
OVP IV ENTREPRENEURS FUND
By: OVMC IV, LLC, Its GP
-------------------------
By: /s/ Gerard H. Langeler
-------------------------
Name: Gerard H. Langeler
Title: Its Managing Member
LAZARUS FAMILY INVESTMENTS, LLC
By: /s/ Jonathon D. Lazarus
--------------------------
Name: Jonathon D. Lazarus
Title: Manager
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 23,984
<SECURITIES> 0
<RECEIVABLES> 11,402
<ALLOWANCES> 484
<INVENTORY> 0
<CURRENT-ASSETS> 35,309
<PP&E> 4,693
<DEPRECIATION> 2,466
<TOTAL-ASSETS> 43,594
<CURRENT-LIABILITIES> 14,427
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 25,186
<TOTAL-LIABILITY-AND-EQUITY> 43,594
<SALES> 0
<TOTAL-REVENUES> 11,947
<CGS> 0
<TOTAL-COSTS> 4,602
<OTHER-EXPENSES> 6,398
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<INCOME-PRETAX> 1,139
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