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 March 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
COMMISSION FILE NUMBER: 0-24277
CLARUS CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 58-1972600
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3970 Johns Creek Court
Suwanee, Georgia 30024
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(Address of principal executive offices)
(Zip code)
(770) 291-3900
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(Registrant's telephone number, including area code)
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(Former name, former address and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
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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)
10,947,425 SHARES OUTSTANDING AS OF MARCH 31, 1999
<PAGE>
INDEX
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CLARUS CORPORATION
PART I FINANCIAL INFORMATION
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) -
March 31, 1999 and December 31, 1998;
Condensed Consolidated Statements of Operations (unaudited) -
Three months ended March 31, 1999 and 1998;
Condensed Consolidated Statements of Cash Flows (unaudited) -
Three months ended March 31, 1999 and 1998;
Notes to Condensed Consolidated Financial Statements
(unaudited) - March 31, 1999
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk -
Not Applicable
PART II OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
2
<PAGE>
PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
CLARUS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,418 $ 14,799
Trade accounts receivable, less allowance for doubtful
accounts of $434 and $401 in 1999 and 1998, respectively 10,974 8,998
Prepaid and other current assets
729 553
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Total current assets 22,121 24,350
PROPERTY AND EQUIPMENT - net 4,430 3,454
OTHER ASSETS:
Intangible assets, net of accumulated amortization of
$2,397 and $1,967 in 1999 and 1998, respectively 11,583 11,963
Deposits and other long-term assets
175 315
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Total other assets
11,758 12,278
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TOTAL ASSETS $ 38,309 $ 40,082
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</TABLE>
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>
MARCH 31, DECEMBER 31,
1999 1998
---------------- ---------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 6,632 $ 7,426
Deferred revenue 7,826 7,397
Current maturities of long-term debt
445 526
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Total current liabilities 14,903 15,349
NONCURRENT LIABILITIES:
Deferred revenue 2,208 2,302
Long-term debt, net of current maturities 98 245
Other non-current liabilities
219 75
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Total liabilities 17,428 17,971
STOCKHOLDERS' EQUITY:
Common Stock, $.0001 par value; 25,000,000 shares authorized in
1999 and 1998; 11,022,425 and 11,002,508 shares outstanding in
1999 and 1998, respectively 1 1
Additional paid in capital 61,424 61,393
Accumulated deficit (40,024) (38,721)
Warrants 40 40
Treasury stock, at cost (2) (2)
Deferred compensation (558) (600)
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Total stockholders' equity 20,881 22,111
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 38,309 $ 40,082
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</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
MARCH 31
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1999 1998
<S> <C> <C>
REVENUES:
License fees $ 3,659 $ 3,630
Services fees 5,502 3,052
Maintenance fees 2,240 1,599
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Total revenues 11,401 8,281
COST OF REVENUES:
License fees 346 260
Services fees 3,319 2,131
Maintenance fees 1,031 681
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Total cost of revenues 4,696 3,072
OPERATING EXPENSES:
Research and development 2,194 1,143
Sales and marketing 3,373 2,487
General and administrative 1,619 1,357
Depreciation and amortization 871 404
Non-cash compensation 42 53
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Total operating expenses 8,099 5,444
OPERATING LOSS (1,394) (235)
INTEREST INCOME 117 30
INTEREST EXPENSE 26 60
MINORITY INTEREST -0- 36
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NET LOSS $ (1,303) $ (301)
=========== ==========
Loss per common share:
Basic $ (0.12) $ (0.20)
Diluted $ (0.12) $ (0.20)
Weighted average shares outstanding
Basic 10,947 1,539
Diluted 10,947 1,539
</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>
THREE MONTHS ENDED
MARCH 31
--------------------------------
1999 1998
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<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,303) $ (301)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 887 390
Minority interest in subsidiary -0- 36
Amortization of debt discount -0- 14
Deferred compensation 42 53
Loss on disposal of property and equipment 26 -0-
Changes in operating assets and liabilities:
Accounts receivable (1,976) 643
Prepaid and other current assets (176) (201)
Deposits and other long-term assets 140 (28)
Accounts payable and accrued liabilities (794) (361)
Deferred revenue 335 (1,362)
Other non-current liabilities 144 8
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NET CASH USED IN OPERATING ACTIVITIES (2,675) (1,109)
INVESTING ACTIVITIES
Purchases of property and equipment (1,509) (515)
Purchases of intangible assets -0- (150)
Purchase of minority interest in subsidiary -0- (62)
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NET CASH USED IN INVESTING ACTIVITIES (1,509) (727)
FINANCING ACTIVITIES:
Repayments of long-term borrowings (228) (118)
Proceeds from issuance of redeemable convertible preferred stock -0- 150
Proceeds from issuance of common stock 31 12
Dividends paid to holder of minority interest -0- (241)
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NET CASH USED IN FINANCING ACTIVITIES (197) (197)
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DECREASE IN CASH AND CASH EQUIVALENTS (4,381) (2,033)
CASH AND CASH EQUIVALENTS, beginning of period
14,799 7,213
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CASH AND CASH EQUIVALENTS, end of period $ 10,418 $ 5,180
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 26 $ 60
============ ============
</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, 1999. These interim financial statements should be read in conjunction with
the Company's audited consolidated financial statements and footnotes thereto
included in the Company's Form 10-K for the fiscal year ended December 31, 1998,
filed with the Securities and Exchange Commission.
NOTE 2. EARNINGS PER SHARE
Basic and diluted net income (loss) per share was computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share," using
the weighted average number of common shares outstanding. The diluted net loss
per share for the three month periods ended March 31, 1999 and 1998, does not
include the effect of common stock equivalents, including redeemable convertible
preferred stock, as their effect would be antidilutive.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Clarus Corporation develops, markets, licenses, and supports Web-based
applications for managing operational resources together with financial and
human resources applications for mid- to large-sized companies. Our applications
create high lifetime value by delivering sophisticated functionality, while
substantially reducing the time required for implementation, maintenance, and
upgrades.
During 1998, we introduced a series of modules and product enhancements.
Specifically, in the third quarter of 1998, we introduced our Web-commerce
applications, which include E-Procurement, a business-to-business buy-side
Web-based solution designed for the acquisition of non-industrial goods and
services, Clarus Budget, and a 32-bit version of our human resources
applications.
We currently market our products in the United States and Canada through a
direct sales force, and we have licensed our applications to more than 289
customers in a variety of industry segments, including insurance, financial
services, communications, retail, printing and publishing, transportation, and
manufacturing. We also offer fee-based implementation, training and upgrade
services, and ongoing maintenance and support of our products for a 12-month to
three-year renewable term.
On November 6, 1998, we completed the acquisition of ELEKOM Corporation
("ELEKOM") for approximately $15.7 million, consisting of $8.0 million in cash
and approximately 1.4 million shares of our common stock. ELEKOM was merged with
and into Clarus CSA, Inc., a wholly owned subsidiary of ours, and the separate
existence of ELEKOM ceased (the "Merger"). Immediately following consummation of
the Merger, the former holders of ELEKOM common and preferred stock (the "ELEKOM
Shareholders") owned approximately 13% of our outstanding common stock. Certain
former ELEKOM Shareholders have agreed not to sell any of their shares of our
common stock for a period ending on August 6, 1999. We recorded, as additional
purchase price, (i) payments of $500,000 made to fund the operations of ELEKOM
from October 1, 1998, through the closing date, and (ii) expenses of
approximately $1.0 million to complete the merger. We also recorded $10.5
million of the purchase price as purchased in-process research and development.
On May 26, 1998, we completed an initial public offering of our common stock in
which we sold 2.5 million shares for approximately $22.0 million after deducting
offering expenses and underwriting discounts.
Our revenue consists of revenues from the licensing of software and fees from
consulting, implementation, training, and maintenance services. Effective
January 1, 1998, we adopted SOP No. 97-2, "Software Revenue Recognition," that
supersedes SOP No. 91-1, "Software Revenue Recognition." Under SOP No. 97-2, we
recognize software license revenue when the following criteria are met:
o a signed and executed contract is obtained,
o shipment of the product has occurred,
o the license fee is fixed and determinable,
o collectibility is probable, and
o remaining obligations under the license agreement are insignificant.
Revenues from software licenses have been recognized upon delivery of our
product if there are no significant obligations on our part following delivery,
and collection of the related receivable, if any, is deemed probable by
management. Revenues from services fees relate to implementation, training, and
upgrade services performed by us and have been recognized as the services are
performed. Maintenance fees relate to customer maintenance and support and have
been recognized rateably over the term of the software support agreement, which
is typically
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OVERVIEW (CONTINUED)
12 months. A majority of our customers renew the maintenance and support
agreements after the initial term. Revenues that have been prepaid or invoiced,
but that do not yet qualify for recognition under our policies, are reflected as
deferred revenue.
Cost of license fees includes royalties and software duplication and
distribution costs. We recognize these costs as the applications are shipped.
Cost of services fees include personnel and related costs incurred to provide
implementation, training, and upgrade services to customers. These costs are
recognized as the services are performed. Cost of maintenance fees includes
personnel and related costs incurred to provide the ongoing support and
maintenance of our products. These costs are recognized as incurred.
Research and development expenses consist primarily of personnel costs. We
account for software development costs under Statement of Financial Accounting
Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed." Research and development expenses are
charged to expense as incurred until technological feasibility is established,
after which remaining costs are capitalized. We define technological feasibility
as the point in time at which we have a working model of the related product.
Historically, the costs incurred during the period between the achievement of
technological feasibility and the point at which the product is available for
general release to customers have not been material. Accordingly, we charge all
internal software development costs to expense as incurred.
Sales and marketing expenses consist primarily of salaries, commissions, and
benefits to sales and marketing personnel, travel, trade-show participation,
public relations, and other promotional expenses. General and administrative
expenses consist primarily of salaries for financial, administrative and
management personnel, and related travel expenses, as well as occupancy,
equipment, and other administrative costs.
We had net operating loss carryforwards ("NOL's") of approximately $27.6 million
at March 31, 1999, which begin expiring in 2007. We established a valuation
allowance equal to the NOL's and all other deferred tax assets. The benefits
from these deferred tax assets will be recorded when realized, which will reduce
our effective tax rate for future taxable income, if any. Our ability to benefit
from certain NOL carryforwards is limited under Section 382 of the Internal
Revenue Code, as we are deemed to have had an ownership change of more than 50%,
as defined. Accordingly, certain NOL's may not be realizable in future years due
to the limitation.
AFFILIATE RELATIONSHIPS
In March 1995, we, along with Technology Ventures, L.L.C. ("Technology
Ventures"), which is controlled by Joseph S. McCall, a former director of ours,
formed Clarus Professional Services, L.L.C. (formerly SQL Financial Services,
L.L.C.; the "Services Subsidiary") to provide implementation, training, and
upgrade services exclusively for our customers. On February 5, 1998, Technology
Ventures sold its 20% interest in the Services Subsidiary to us in exchange for
225,000 shares of our common stock, a warrant to purchase an additional 300,000
shares of our common stock at a price of $3.67 per share, and a non-interest
bearing promissory note in the principal amount of $1.1 million. The purchase of
the remaining 20% of the Services Subsidiary was accounted for using the
purchase method of accounting and resulted in goodwill in the amount of $4.2
million, which is being amortized over 15 years.
9
<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
MARCH 31
------------------------------
1999 1998
<S> <C> <C>
Revenues:
License fees 32.1% 43.8%
Services fees 48.3 36.9
Maintenance fees 19.6 19.3
------------------------------
Total revenues 100.0 100.0
Cost of revenues:
License fees 3.0 3.2
Services fees 29.1 25.7
Maintenance fees 9.0 8.2
------------------------------
Total cost of revenues 41.1 37.1
Operating expenses:
Research and development 19.2 13.8
Sales and marketing 29.6 30.0
General and administrative 14.2 16.4
Depreciation and amortization 7.6 4.9
Non-cash compensation 0.4 0.6
------------------------------
Total expenses 71.0 65.7
Operating loss (12.1) (2.8)
Interest income 1.0 0.3
Interest expense 0.2 0.7
Minority interest 0.0 0.4
------------------------------
Net loss (11.3) (3.6)
==============================
Gross margin on license fees 90.5 92.8
Gross margin on services fees 39.7 30.2
Gross margin on maintenance fees 54.0 57.4
</TABLE>
QUARTER ENDED MARCH 31, 1999, COMPARED TO QUARTER ENDED MARCH 31, 1998.
REVENUES
TOTAL REVENUES. For the quarter ended March 31, 1999, total revenues increased
37.7% to $11.4 million from $8.3 million in the comparable period in 1998. These
increases were attributable to a substantial increase in services fees and
maintenance fees.
LICENSE FEES. License fees were $3.7 million, or 32.1% of total revenues, in the
quarter ended March 31, 1999, up slightly from $3.6 million, or 43.8% of total
revenues, in the comparable period in 1998. The increase in license fees
resulted from sales of Clarus Commerce products, a result of our successful
introduction of Web-based solutions, which were offset by a decrease in the
number of licenses sold for our traditional product line. This trend reflects
the demand for our new Clarus Commerce solutions, and to a lesser extent, an
increase in the average
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
QUARTER ENDED MARCH 31, 1999, COMPARED TO QUARTER ENDED MARCH 31, 1998
(CONTINUED).
REVENUES (CONTINUED)
LICENSE FEES (CONTINUED)
customer transaction size for Clarus Commerce products when compared to the
average transaction size for our traditional products.
SERVICES FEES. Services fees increased 80.3% to $5.5 million, or 48.3% of total
revenues, in the quarter ended March 31, 1999, from $3.1 million, or 36.9% of
total revenues, in the comparable period in 1998. This increase in services fees
was primarily due to continued growth in the demand for professional services.
MAINTENANCE FEES. Maintenance fees increased 40.1% to $2.2 million, or 19.6% of
total revenues, in the quarter ended March 31, 1999, from $1.6 million, or 19.3%
of total revenues, in the comparable period in 1998. This increase in
maintenance fees was primarily due to the signing of license agreements with new
customers and the renewal of maintenance with existing customers.
COST OF REVENUES
TOTAL COST OF REVENUES. Cost of revenues increased 52.9% to $4.7 million, or
41.1% of total revenues, in the quarter ended March 31, 1999, from $3.1 million,
or 37.1% of total revenues, in the comparable period in 1998. The increases in
the cost of revenues were primarily due to an increase in personnel and related
expenses and increased royalty expenses.
COST OF LICENSE FEES. Cost of license fees increased 33.1% to $346,000, or 9.5%
of total license fees, in the quarter ended March 31, 1999, compared to
$260,000, or 7.2% of total license fees, in the comparable period in 1998. The
increase 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.
COST OF SERVICES FEES. Cost of services fees increased 55.7% to $3.3 million, or
60.3% of total services fees, in the quarter ended March 31, 1999, compared to
$2.1 million, or 69.8% of total services fees, in the comparable period in 1998.
This increase in the cost of services fees were primarily attributable to an
increase in the personnel and related costs to provide implementation, training,
and upgrade services. The decrease in cost of services fees as a percentage of
revenue for the quarter ended March 31, 1999, was primarily due to increased
hourly rates charged combined with increased utilization of services personnel.
COST OF MAINTENANCE FEES. Cost of maintenance fees increased 51.4% to $1.0
million, or 46.0% of total maintenance fees, in the quarter ended March 31,
1999, compared to $681,000, or 42.6% of total maintenance fees, in the
comparable period in 1998. This increase in the cost of maintenance fees was
primarily attributable to an increase in the personnel and related costs
required to provide support and maintenance. Cost of maintenance fees as a
percentage of total maintenance fees increased primarily due to increased
personnel costs to support the maintenance customer base.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 92.0% to $2.2 million, or 19.2% of
total revenues, in the quarter ended March 31, 1999, from $1.1 million, or 13.8%
of total revenues, in the comparable period in 1998. Research and development
expenses increased during the quarter ended March 31, 1999, primarily due to
increased personnel costs related to continued development of our products.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
QUARTER ENDED MARCH 31, 1999, COMPARED TO QUARTER ENDED MARCH 31, 1998
(CONTINUED).
SALES AND MARKETING
Sales and marketing expenses increased 35.6% to $3.4 million, or 29.6% of total
revenues, in the quarter ended March 31, 1999, from $2.5 million, or 30.0% of
total revenues, in the comparable period in 1998. The increase in sales and
marketing expenses was primarily attributable to the costs associated with
additional sales and marketing personnel and promotional activities.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 19.3% to $1.6 million, or 14.2% of
total revenues, in the quarter ended March 31, 1999, from $1.4 million, or 16.4%
of total revenues, in the comparable period in 1998. The increase in general and
administrative expenses was primarily attributable to increases in personnel and
related costs.
DEPRECIATION AND AMORTIZATION
Depreciation of tangible equipment and amortization of intangible assets
increased 115.6% to $871,000, or 7.6% of total revenues, in the quarter ended
March 31, 1999, from $404,000, or 4.9% of total revenues, in the comparable
period in 1998. The increase in depreciation and amortization expense was due to
an increase in goodwill resulting from the acquisition of ELEKOM Corporation in
the fourth quarter of 1998.
OTHER INCOME
Interest income increased to $117,000 in the quarter ended March 31, 1999, from
$30,000, in the comparable period in 1998. The increase in interest income was
primarily due to additional cash available for investment in the quarter ended
March 31, 1999.
INCOME TAXES
As a result of the operating losses incurred since our inception, we have not
recorded any provision or benefit for income taxes in the quarter ended March
31, 1999 and 1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
On May 26, 1998, we completed our initial public offering of 2.5 million shares
of our common stock at an offering price of $10.00 per share. The proceeds, net
of expenses, from this public offering of approximately $22.0 million were
placed in investment grade cash equivalents. Our working capital position was
$7.2 million and $9.0 million at March 31, 1999 and December 31, 1998,
respectively. We believe that current cash balances and cash flows from
operations will be adequate to provide for our capital expenditures and working
capital requirements for the forseeable future. Although operating activities
may provide cash in certain periods, to the extent we experience growth in the
future, our operating and investing activities may use significant cash.
On November 6, 1998, we completed the acquisition of ELEKOM for approximately
$15.7 million, consisting of $8.0 million in cash and approximately 1.4 million
shares of our common stock. ELEKOM was merged with and into Clarus CSA, Inc.,
our wholly owned subsidiary and the separate existence of ELEKOM ceased.
Immediately following consummation of the Merger, the former ELEKOM Shareholders
owned approximately 13% of our outstanding common stock. The former ELEKOM
Shareholders have agreed not to sell any of
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
their shares of our common stock for a period ending on August 6, 1999. As
additional purchase price, we 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 $1.0 million to complete the merger. Approximately
$10.5 million of the purchase price was recorded as purchased in-process
research and development.
Cash used in operating activities was approximately $2.7 million and $1.1
million during the quarter ended March 31, 1999 and 1998, respectively. Cash
used by operations during the quarter ended March 31, 1999, was primarily
attributable to an increase in accounts receivable, and a decrease in accounts
payable and accrued liabilities. Cash used by operations during the quarter
ended March 31, 1998, was primarily attributable to a decrease in deferred
revenue, partially offset by a decrease in accounts receivable.
Cash used in investing activities was approximately $1.5 million and $727,000
during the three months ended March 31, 1999 and 1998, respectively. The cash
used in investing activities during the quarter ended March 31, 1999 and 1998,
was primarily attributable to the purchases of computer equipment and software.
Cash used by financing activities was approximately $197,000 during each of the
three month periods ended March 31, 1999 and 1998. The cash used by financing
activities during the three months ended March 31, 1999, was primarily
attributable to the repayment of long-term borrowings. The cash used by
financing activities during the three months ended March 31, 1998, was primarily
attributable to payment of dividends and the repayment of long-term borrowings,
offset by proceeds from the issuance of preferred stock.
In March 1997, we entered into a loan agreement and a master leasing agreement
for an equipment line of credit in the amount of $1.0 million (the "Equipment
Line") with a leasing company. The Equipment Line bears interest at rates
negotiated with each loan or lease schedule (generally 22.0% to 22.5%) and is
collateralized by all of the equipment purchased with the proceeds thereof. As
of March 31, 1999, the principal balance on the Equipment Line payable was
$437,000.
We have a revolving working capital line of credit and equipment facility with
Silicon Valley Bank. Borrowings outstanding under the line are limited to the
lesser of $3.0 million or 80% of accounts receivable. Borrowings outstanding
under the equipment facility are limited to $1.0 million. Interest on the
revolving credit facility is at prime rate and on the equipment facility at
prime plus 0.5% and is collateralized by all of our assets. The line of credit
and equipment term facility with Silicon Valley Bank will expire on May 31,
1999. As of March 31, 1999, we had no outstanding balance and had $3.7 million
available for future borrowings under this agreement.
We had net operating loss carryforwards ("NOL's") of approximately $27.6 million
at March 31, 1999, which begin expiring in 2007. We established a valuation
allowance equal to the NOL's and all other deferred tax assets. The benefits
from these deferred tax assets will be recorded when realized, which will reduce
our effective tax rate for future taxable income, if any. Our ability to benefit
from certain NOL carryforwards is limited under Section 382 of the Internal
Revenue Code, as we are deemed to have had an ownership change of more than 50%,
as defined. Accordingly, certain NOL's may not be realizable in future years due
to the limitation.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT
This quarterly report on Form 10-Q contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act 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.
13
<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)
Statements that describe our future strategic plans, goals, or objectives are
also forward-looking statements. Readers of this report are cautioned that any
forward-looking statements, including those regarding our intent, belief or
current expectations, are not guarantees of future performance, results or
events and involve risks and uncertainties, and that actual results and events
may differ materially from those in the forward-looking statements as a result
of various factors including, but not limited to, (i) general economic
conditions in the markets in which we operate, (ii) competitive pressures in the
markets in which we operate, (iii) the effect of future legislation or
regulatory changes on our operations and (iv) other factors described from time
to time in our filings with the Securities and Exchange Commission. The
forward-looking statements included in this report are made only as of the date
hereof. We undertake no obligation to update such forward-looking statements to
reflect subsequent events or circumstances.
IMPACT OF YEAR 2000
We have designed and tested the most current versions of our products to be Year
2000 compliant. Our current products may contain undetected errors or defects
associated with Year 2000 date functions that may result in material costs to
us. Some commentators have stated that a significant amount of litigation will
arise out of Year 2000 compliance issues, and we are aware of a growing number
of lawsuits against other software vendors. Because of the unprecedented nature
of such litigation, it is uncertain whether or to what extent we may be affected
by it.
We are in the process of determining the extent to which third-party licensed
software distributed by us is Year 2000 compliant, as well as the impact of any
non-compliance on us and our customers.
Additionally, in the event relational database management systems used with our
software are not Year 2000 compliant, our customers may not be able to continue
to use our products. We do not currently believe that the effects of any Year
2000 non-compliance in our installed base of software will result in a material
adverse impact on our business or financial condition. However, we may be
exposed to potential claims resulting from system problems associated with the
century change. Such claims would not have a material adverse effect on our
business, financial condition, or results of operations.
With respect to our internal systems, we are taking steps to prepare our systems
for the Year 2000 date change. We have substantially completed our inventory
efforts. We expect remediation and testing efforts to continue through the third
quarter of 1999. We estimate that costs for Year 2000 compliance efforts will
not exceed $150,000. We do not believe that we will incur any material costs or
experience material disruptions in our business associated with preparing our
internal systems for the Year 2000. However, unanticipated negative consequences
and/or material costs caused by undetected errors or defects in the technology
used in our internal systems could be experienced. We are currently unable to
estimate the most reasonably likley worst-case effects of the Year 2000. We are
currently preparing contingency plans for any such unanticipated negative
effects.
We are currently unable to estimate whether we are exposed to significant risk
of being adversely affected by Year 2000 non-compliance by third parties. We are
contacting third parties with which we have material relationships, including
our material customers, to attempt to determine their preparedness with respect
to Year 2000 issues and to analyze the risks to us in the event any such third
parties experience significant business interruptions as result of Year 2000
non-compliance. We expect to complete this review and analysis and to determine
the need for contingency planning in this regard by June 30, 1999.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K - None
15
<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: May 14, 1999 By: /s/William A. Fielder, III
------------ ------------------------------------
William A. Fielder, III
Chief Financial Officer and Treasurer
16
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