<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: JANUARY 14, 1999
(DATE OF EARLIEST EVENT REPORTED: NOVEMBER 6, 1998)
----------------
CLARUS CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 0-24277 58-1972600
State or other jurisdiction of (Commission File No.) (IRS Employer
(incorporation or organization) Identification No.)
3950 JOHNS CREEK COURT
SUITE 100
SUWANEE, GEORGIA 30024
(Address of principal executive offices, including zip code)
(770) 291-3900
(Registrant's telephone number, including area code)
(Former name or Former Address if
Changed Since Last Report)
================================================================================
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired
The financial statements of Elekom Corporation for the year ended
December 31, 1997 were included in Clarus' Form S-4 Registration
Statement dated October 15, 1998, File No. 333-63535. The financial
statements of Elekom Corporation for September 30, 1998, are
contained in Exhibit 99.1.
(b) Pro Forma Financial Information
The pro forma financial information for the nine months ended
September 30, 1998 is contained in Exhibit 99.2. The pro forma
financial information for the year ended December 31, 1997 and the
six months ended June 30, 1998 were included in Clarus' Form S-4
Registration Statement dated October 15, 1998, File No. 333-63535.
(c) Exhibits
--------
2.1 Agreement and Plan of Reorganization dated August 31, 1998 by and
between Clarus Corporation, Clarus CSA, Inc. and Elekom
Corporation. Incorporated by reference from Exhibit 2.1 and
Appendix A to the Company's Registration Statement on Form S-4
(File No. 333-63535)).
99.1 Financial Statements of Elekom Corporation
99.2 Pro forma financial information
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CLARUS CORPORATION
Date: January 13, 1999 /s/ William A. Fielder III
-----------------------------------------------
WILLIAM A. FIELDER III
Chief Financial Officer and Treasurer
<PAGE>
EXHIBIT 99.1
ELEKOM CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET (UNAUDITED)
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
<TABLE>
<CAPTION>
AT
SEPTEMBER 30,
1998
-------------
<S> <C>
ASSETS
Cash and cash equivalents........................................ $ 181
Accounts Receivable.............................................. 201
Prepaid expenses................................................. 130
-------
Total current assets........................................... 512
Other assets..................................................... 40
Property and equipment........................................... 491
-------
Total Assets................................................. $ 1,043
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable................................................. $ 263
Accrued payroll and related benefits............................. 131
Notes payable.................................................... 150
Current portion, capital lease obligations....................... 119
Deferred revenue................................................. 249
Other accrued liabilities........................................ 384
-------
Total current liabilities...................................... 1,296
-------
Capital lease obligation, net of current portion................. 33
-------
Commitments and contingencies
Shareholders' equity
Convertible preferred stock:
Series B, $.01 par value; 4,389,945 shares authorized, issued
and outstanding at September 30, 1998........................ 43
Series A, $.01 par value; 917,229 shares authorized, issued
and outstanding at September 30, 1998........................ 9
Common stock, $.01 par value; 9,692,826 shares authorized;
875,923 shares issued and outstanding at September 30, 1998... 10
Additional paid-in capital..................................... 11,128
Deficit accumulated during the development stage............... (11,476)
-------
Total shareholders' equity.................................... (286)
-------
Total liabilities and shareholders' equity................... $ 1,043
=======
</TABLE>
See accompanying notes to unaudited interim financial statements
<PAGE>
ELEKOM CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
(UNAUDITED)
IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1998 1997
---------- -----------
<S> <C> <C>
Sales................................................. $ 430 $ -0-
Cost of sales......................................... 220 -0-
---------- -----------
Gross Profit........................................ 210 -0-
---------- -----------
Operating expenses:
Research and development............................ 1,551 850
Sales and marketing................................. 867 1,120
General and administrative.......................... 752 1,430
Depreciation........................................ 101
---------- -----------
Total operating expenses........................... 3,271 3,400
---------- -----------
Operating loss........................................ (3,061) (3,400)
Interest expense...................................... -0- 483
Other income.......................................... 42 (1)
---------- -----------
Loss before income tax expense........................ (3,019) (3,884)
Income tax expense.................................... -0- -0-
---------- -----------
Net loss.............................................. $ (3,019) $ (3,884)
========== ===========
Basic and diluted net loss per common share........... $ (4.11) (77,680.00)
========== ===========
Weighted average number of common shares outstanding.. 734,800 $ 50
========== ===========
Pro forma basic and diluted net loss per common share. $ (0.48)
==========
Pro forma weighted average number of common shares
outstanding.......................................... 6,282,347
==========
</TABLE>
See accompanying notes to unaudited interim financial statements
<PAGE>
ELEKOM CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
(UNAUDITED)
IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
----------------
1998 1997
------- -------
<S> <C> <C>
Cash flows from operating activities
Net loss................................................... $(3,019) $(3,884)
Adjustments to reconcile net loss to net cash used in
operations
Depreciation.............................................. 101 115
Changes in assets and liabilities:
Accounts receivable...................................... (151) 8
Prepaid expenses and other assets........................ (147) 65
Accounts payable......................................... 228 26
Accrued payroll and related benefits..................... (105) 21
Deferred revenue......................................... 199 -0-
Other accrued liabilities................................ 294 (5)
------- -------
Net cash used in operating activities................... (2,600) (3,654)
Cash flows from investing activities
Capital expenditures....................................... (228) (136)
------- -------
Cash flows from financing activities
Borrowings from line of credit............................. 150 -0-
Payment of capital lease obligations....................... (76) (69)
Proceeds from issuance of Series B convertible preferred
stock..................................................... 91 -0-
Proceeds from exercise of stock options.................... 67 -0-
Net borrowing from Egghead, Inc. .......................... -0- 2,520
------- -------
Net cash provided by financing activities............... 232 2,451
------- -------
Net increase (decrease) in cash and cash equivalents......... (2,596) (1,339)
Cash and cash equivalents at beginning of period............. 2,777 1,683
------- -------
Cash and cash equivalents at end of period................... $ 181 $ 344
======= =======
</TABLE>
See accompanying notes to unaudited interim financial statements
<PAGE>
ELEKOM CORPORATION
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
1. BASIC OF PRESENTATION
The balance sheet presented as of September 30, 1998 and for the nine months
ended September 30, 1998 and 1997 has not been audited. In the opinion of
management, the unaudited interim balance sheet, statements of income and of
cash flows include all adjustments consisting solely of normal recurring
adjustments necessary to present fairly the financial position, results of
operations and cash flows as of and for the periods presented of ELEKOM
Corporation (the "Company").
The financial statements of the Company for all periods prior to November 10,
1997 reflect the results of operations, financial position, and cash flows of
ELEKOM as a wholly-owned subsidiary of Egghead and may not be indicative of
actual results of operations and financial position of the Company under other
ownership.
The statement of operations for the six months ended September 30, 1997
reflects certain expense items incurred by Egghead which were allocated to the
Company on a basis which management believes represents a reasonable allocation
of such costs to present ELEKOM as a stand-alone company. These allocations
consist primarily of corporate expenses such as executive and other
compensation, depreciation of corporate assets, rent expense and legal fees and
interest expenses on intercompany borrowings. The corporate expenses have been
allocated based on an estimate of Egghead personnel time dedicated to the
operations and management of ELEKOM. Interest expense has been allocated based
on ELEKOM's estimated borrowing rate (10%) and actual intercompany borrowings.
A summary of these allocation is as follows:
<TABLE>
<CAPTION>
CORPORATE INTEREST
EXPENSE EXPENSE
--------- --------
<S> <C> <C>
Six months ended September 30, 1997......................... $328,000 $439,000
</TABLE>
BUSINESS
The Company was in the development stage as of and for the period from
inception through September 30, 1998. In connection with its development
activities, the Company has incurred costs to incorporate and establish its
business activities as well as the design and development of the Company's
initial product, ELEKOM Procurement, which was available for sale in June 1997.
As a result, cash requirements have exceeded cash receipts and the Company must
obtain interim financing or additional capital to continue its development,
sales and marketing efforts. Management plans to obtain such financing or
capital during the year; however, there can be no assurance that financing or
capital can be obtained. As a result, even though the accompanying financial
statements have been prepared assuming that the Company will continue as a
going concern, there is substantial doubt about the Company's ability to
continue as a going concern. The accompanying financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
NET LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (FAS 128), Earnings per Share. FAS 128
replaced the previously
<PAGE>
ELEKOM CORPORATION
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS--CONTINUED
reported primary and fully diluted earnings per share with basic and diluted
earnings per share. Basic earnings per share excludes any dilutive effects of
options and convertible securities. Earnings per share for 1996 reflect the
adoption of FAS 128. Net loss per share assuming dilution for the nine months
ended September 30, 1998 and 1997 is equal to net loss per share due to the
fact that the effect of common stock equivalents outstanding during the periods
is anti-dilutive.
Given the changes in ELEKOM's capital structure as a result of the 1997
recapitalization and the changes to be effected as a result of the Merger pro
forma earnings per share is presented. Pro forma earnings per share is
calculated based on the number of shares of common stock and preferred stock
outstanding at September 30, 1998 and has been adjusted to give effect to the
conversion of all shares of preferred stock into common stock that will occur
in connection with the Merger. Stock options outstanding at each period have not
been included in the loss per share calculations as their effect is anti-
dilutive.
<PAGE>
EXHIBIT 99.2
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma condensed combined balance sheet as of
September 30, 1998, was prepared as if the merger occurred on such date. The
following unaudited condensed combined statements of operations give effect to
the merger as of the beginning of the periods presented. The unaudited pro
forma condensed combined statements of operations do not purport to represent
what our results of operations actually would have been if the merger had
occurred as of such date or what such results will be for any future periods.
The unaudited pro forma condensed combined financial statements are derived
from our historical financial statements, those of Elekom and the assumption
and adjustments described in the accompanying notes. We believe that all
adjustments necessary to present fairly such unaudited financial information
have been made. The unaudited pro forma financial data should be read in
conjunction with our consolidated financial statements and the accompanying
notes thereto appearing elsewhere in this Prospectus. The unaudited pro forma
condensed consolidated financial statements do not reflect any cost savings or
other economic efficiencies resulting from the merger.
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
COMPANY ELEKOM ADJUSTMENTS PRO FORMA
-------- -------- ----------- ---------
ASSETS
------
<S> <C> <C> <C> <C>
Current assets:
Cash............................. $ 23,984 $ 181 $ 9,450 (a) $ 14,715
Accounts receivable, net......... 10,918 201 11,119
Prepaid and other current assets. 407 130 537
-------- -------- -------- --------
Total current assets........... 35,309 512 26,371
Property and equipment, net........ 2,227 491 2,718
Other assets:
Intangible assets, net........... 5,843 0 3,378 (b) 9,221
Acquired in process research and
development..................... 0 0 14,000 (b)
(14,000)(b)
Deposits and other long-terms
assets.......................... 215 40 255
-------- -------- -------- --------
Total assets................... $ 43,594 $ 1,043 $ (6,072) $ 38,565
======== ======== ======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS'
EQUITY
-----------------------------
<S> <C> <C> <C> <C>
Current liabilities:
Note payable..................... $ 990 $ 0 $ 990
Accounts payable and accrued
liabilities..................... 6,778 778 7,556
Deferred revenue................. 6,415 249 6,664
Current maturities of long-term
debt and capital lease
obligations..................... 244 269 513
Noncurrent liabilities:
Deferred revenue................. 3,600 0 3,600
Long-term debt and capital lease
obligations, net of current
maturities...................... 310 33 343
Other non-current liabilities.... 70 0 70
-------- -------- -------- --------
Total liabilities.............. 18,407 1,329 19,736
Stockholders' equity:
Convertible preferred stock...... 0 52 (52)(c) 0
Common stock..................... 1 10 1 (d) 2
(10)(c)
Additional paid in capital....... 51,306 11,128 7,641 (d) 58,947
(11,128)(c)
(14,000)(b)
Accumulated deficit.............. (26,918) (11,476) 11,476 (c) (40,918)
Warrants......................... 1,440 0 1,440
Less treasury stock, at cost..... (2) 0 (2)
Deferred compensation............ (640) 0 (640)
-------- -------- -------- --------
Total stockholders' equity..... 25,187 (286) (6,072) 18,829
-------- -------- -------- --------
Total liabilities and
stockholders' equity.......... $ 43,594 $ 1,043 $ (6,072) $ 38,565
======== ======== ======== ========
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO
COMPANY ELEKOM ADJUSTMENTS FORMA
------- --------- ----------- --------
<S> <C> <C> <C> <C>
Revenues:
License fees.................... $13,506 $ 0 $ 13,506
Services fees................... 7,786 17 7,803
Maintenance fees................ 4,696 0 4,696
------- --------- ------- --------
Total revenues................ 25,988 17 26,005
Cost of revenues:
License fees.................... 1,205 0 1,205
Services fees................... 5,339 13 5,352
Maintenance fees................ 1,973 0 1,973
------- --------- ------- --------
Total cost of revenues........ 8,517 13 8,530
Operating expense:
Research and development........ 6,691 1,051 7,742
Sales and marketing............. 9,515 1,388 10,903
General and administrative...... 3,159 1,955 5,114
Depreciation.................... 844 204 1,048
Amortization.................... 562 0 422 (e) 984
Non-cash compensation........... 58 0 58
------- --------- ------- --------
Total operating expenses ..... 20,829 4,598 422 25,849
------- --------- ------- --------
Operating loss.................... (3,358) (4,594) (422) (8,374)
Interest income................... 35 16 (51)(f) 0
Interest expense.................. 309 617 630 (g) 1,556
Minority expense.................. 478 0 478
------- --------- ------- --------
Net loss.......................... $(4,110) $ (5,195) $(1,103) $(10,408)
======= ========= ======= ========
Income (loss) per common shares:
Basic........................... $ (2.97) $(103,892) $ (3.75)
======= ========= ========
Diluted......................... $ (2.97) $(103,892) $ (3.75)
======= ========= ========
Weighted average common shares
outstanding:
Basic........................... 1,386 50 1,390 (d) 2,776
======= ========= ======= ========
Diluted......................... 1,386 50 1,390 (d) 2,776
======= ========= ======= ========
</TABLE>
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
COMPANY ELEKOM ADJUSTMENTS PRO FORMA
------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
License fees........................ $14,066 $ 351 $(125)(h) $14,292
Services fees....................... 11,277 20 11,297
Maintenance fees.................... 5,351 59 5,410
------- ------- ----- -------
Total revenues.................... 30,694 430 (125) 30,999
Cost of revenues:
License fees........................ 1,525 1 (125)(h) 1,401
Services fees....................... 7,223 71 7,294
Maintenance fees.................... 2,442 148 2,590
------- ------- ----- -------
Total cost of revenues............ 11,190 220 (125) 11,285
Operating expense:
Research and development............ 4,157 1,551 5,708
Sales and marketing................. 8,419 867 9,286
General and administrative.......... 3,723 752 4,475
Depreciation and amortization....... 1,456 101 324 (e) 1,881
Non-cash compensation............... 842 0 842
------- ------- ----- -------
Total operating expenses.......... 18,597 3,271 324 22,192
------- ------- ----- -------
Operating income (loss)............... 907 (3,061) 324 (2,478)
Interest income....................... 402 42 (150)(f) 294
Interest expense...................... 172 0 90 (g) 262
Minority expense...................... 36 0 36
------- ------- ----- -------
Net income (loss)..................... $ 1,101 $(3,019) $(564) $(2,482)
======= ======= ===== =======
Income (loss) per common share:
Basic............................... $ 0.22 $ (4.11) $ (0.38)
======= ======= =======
Diluted............................. $ 0.13 $ (4.11) $ (0.38)
======= ======= =======
Weighted average common shares
outstanding:
Basic............................... 5,080 735 1,390 (d) 6,470
======= ======= ===== =======
Diluted............................. 8,767 735 1,390 (d) 6,470
======= ======= ===== =======
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The pro forma condensed combined balance sheet assumes that the merger took
place September 30, 1998, and combines Elekom's unaudited September 30, 1998
condensed balance sheet and our unaudited September 30, 1998 consolidated
condensed balance sheet.
The pro forma combined statements of operations assume the merger took place as
of the beginning of the periods presented and combined Elekom's unaudited
statements of operations for the year and nine month period ended December 31,
1997 and September, 30, 1998, respectively, and our consolidated statement of
operations for the year and nine month period ended December 31, 1997 and
September 30, 1998, respectively.
All material transactions between us and Elekom during the periods presented
have been eliminated as a pro forma adjustment.
There are no material differences between our accounting policies and those of
Elekom.
The pro forma combined provision for income taxes may not represent the amounts
that would have resulted had we and Elekom filed consolidated income tax
returns during the periods presented.
NOTE 2. PRO FORMA ADJUSTMENTS
The pro forma adjustments are based on our estimates of the value of the
tangible and identifiable intangible assets acquired. A valuation of the
tangible and identifiable intangible assets acquired has been conducted by an
independent third-party appraisal company.
As a part of the merger, we committed to fund the operations of Elekom for each
two week period beginning October 1, 1998. Bi-weekly funding of $250,000 was
provided until November 6, 1998. The bi-weekly funding was considered
additional purchase consideration. Furthermore, Elekom's working capital may be
substantially less at Closing compared to Elekom's historical working capital
included in the accompanying unaudited pro forma condensed combined balance
sheet as of September 30, 1998. A decrease in the working capital would result
in a reallocation of the purchase price and would result in increases in values
assigned to identifiable intangible assets compared to those presented in the
accompanying pro forma condensed combined financial statements as of September
30, 1998.
Under purchase accounting, the total acquisition cost was allocated to Elekom's
assets and liabilities based on their relative fair values. The final
allocations may be different from the results reflected herein. Our analysis,
based on an independent appraisal, resulted in an allocation of $14.0 million
in in-process acquired research and development which, under generally accepted
accounting principles, was expensed immediately after the merger was completed.
The accompanying pro forma condensed combined statements of operations exclude
the effects of the charge due in its nonrecurring nature.
(a) Represents the cash consideration of $8.0 million; the estimated
acquisition expenses of approximately $950,000 related to the merger; and
the $500,000 funded by us to Elekom from October 1, 1998 to November 6,
1998.
<PAGE>
(b) Represents estimated valuation of tangible and intangible assets,
including purchased in-process technology, resulting from the preliminary
allocation of the purchase price. Valuation of the intangible assets
acquired was conducted by an independent third-party appraisal company and
consists of purchased in-process research and development, trademarks and
trade-names, skilled workforce and favorable lease terms. In the
accompanying unaudited pro forma condensed combined financial statements,
the purchase price exceeded amounts allocated to tangible and intangible
assets acquired less liabilities assumed by approximately $2.8 million.
The table below is a summary of the estimated amounts allocated to the long-
lived assets acquired (dollars in thousands):
<TABLE>
<CAPTION>
VALUE ASSIGNED
BALANCE SHEET CATEGORY TO ASSETS ACQUIRED
---------------------- ------------------
<S> <C>
Property and equipment.................................. $ 491
Purchased in-process research and development........... 14,000
Intangible assets:
Market presence and recognition....................... 2,773
Skilled workforce..................................... 520
Favorable lease terms................................. 55
Trademarks and trade-names............................ 30
</TABLE>
The merger was accounted for as a purchase in accordance with Accounting
Principles Board Opinion No. 16, "Business Combinations." The intangible assets
of approximately $3.4 million noted above will be amortized over periods
ranging from 3 months to 10 years. Based on the independent third-party
appraisal, approximately $14.0 million of the purchase price represents
purchased in-process technology that has not yet reached technological
feasibility and has no alternative future use. This amount will be expensed as
a non-recurring, non-tax deductible charge upon consummation of the
acquisition. This amount has been reflected as a reduction to stockholders'
equity and has not been included in the pro forma combined statements of
operations due to its non-recurring nature.
The existence of purchased research and development was determined by a third-
party independent appraisal identifying computer software code under
development by Elekom since 1995. The value was determined by estimating the
remaining costs to develop the purchased in-process technology into a
commercially viable product, estimating the resulting net cash flows from the
project and discounting the net cash flows back to its present value.
The nature of the efforts to develop the purchased research and development
into a commercially viable product principally relates to the completion of all
planning, programming and testing activities that are necessary to establish
that the product can be produced to meet its design specifications including
functions, features and technical performance requirements. The efforts to
develop the purchased in-process technology also include determining the
compatibility and interoperability with other applications. The estimated
remaining costs to be incurred to develop the purchased in-process research and
development into a commercially viable product is approximately $2.0 million.
<PAGE>
The resulting net cash flows from the project is based on management's
estimates of revenues, cost of sales, research and development costs, selling,
general and administrative costs, and income taxes from the project. These
estimates are based on the following assumptions:
. The estimated revenues project a compounded annual revenue growth rate
of approximately 48% from 1999-2002. Estimated revenue for 1999 is
projected to be $5.3 million, compared to virtually no revenue in 1998.
Estimated total revenues from the purchased research and development
peaks in the year 2002 and declines rapidly in 2003-2005 as other new
products are expected to enter the market. These projections are based
on management's estimates of market size and growth, expected trends in
technology and the nature and expected timing of new product
introductions by Elekom and its competitors. These estimates also
include growth related to our utilizing certain Elekom technologies in
conjunction with our products, marketing and distributing the resulting
products through our direct sales force enhancing the market's response
to Elekom's products by providing incremental financial support and
stability.
. The estimated cost of sales as a percentage of revenues is expected to
be 5%. This percentage is somewhat lower than the annual cost of license
fees percentage for us due to the lower royalty rates on certain third-
party software used by Elekom compared to our third-party software.
. The estimated research and development expenses were based on the
estimated time associated with the remaining cost to develop the in-
process research and development. Research and development expenses
represent 33% of revenue in 1999 due to the anticipated release of the
product in 1999.
. Sales and marketing and general administrative expenses in the early
years are expected to more closely approximate 1998 expense structure.
Sales and marketing expenses are expected to benefit from the savings as
a result of the distribution of the Elekom product through our direct
sales force as well as through consolidated marketing and advertising
campaigns.
. Income tax expense is estimated using a 38% tax rate, consistent with
our anticipated tax rate.
Discounting the net cash flows back to their present values is based on the
present value discount rate. The present value discount rate used in the
analysis represents the weighted average cost of capital (WACC) for Elekom plus
2%. The WACC calculation produces the average required rate of return of an
investment in an operating enterprise, based on various required rates of
return from investment in various areas of that enterprise. The WACC assumed
for Elekom, as a corporate business enterprise, is approximately 25%.
Therefore, the discount rate is higher than the WACC due to the inherent
uncertainties in the estimates described above including the uncertainty
surrounding the successful development of the purchased in-process technology,
the useful life of such technology, the profitability levels of such technology
and the uncertainty of technological advances that are unknown at this time.
If this project is not successfully developed, the sales and profitability of
the combined company may be adversely affected in future periods. Additionally,
the value of other intangible assets acquired
<PAGE>
may become impaired. We expect to begin to benefit from the purchased in-
process technology in the second quarter of 1999.
Intangible assets of $3.4 million are comprised of market presence and
recognition of approximately $2.8 million, skilled workforce of $520,000,
favorable lease terms of $55,000, and trademarks and trade-names of $30,000,
which have estimated useful lives of 10 years, 6 years, 2 years and three
months, respectively.
The estimated annual amortization charge to operations related to intangible
assets approximates $422,000. This charge is reflected in the pro forma
combined statement of operations.
(c) Represents adjustments to reflect the elimination of convertible preferred
stock, common stock, additional paid in capital and accumulated deficit account
balances of Elekom.
(d) Represents the issuance of 1,391,305 shares of our common stock valued at
$5.50, the minimum Closing Price of our common stock for which 1,391,305 shares
of common stock were issued pursuant to the Agreement, as consideration for the
merger.
(e) Adjustment to reflect the amortization expense of identifiable intangible
assets acquired as a result of the merger. The acquired identifiable intangible
assets will be amortized over periods ranging from 3 months to 10 years.
(f) Adjustment to eliminate certain interest income as available cash balances
would have provided funding for the cash portion of the purchase consideration.
(g) Adjustment to interest expense for incremental debt required to fund the
cash portion of the purchase consideration in excess of the average cash
balances available for the periods presented.
(h) Adjustment to eliminate revenue recognized by Elekom and royalty expense
recognized by us for business transacted between us and Elekom.
