<PAGE>
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 June 30, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
Commission File Number: 0-24277
Clarus Corporation
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(Exact name of registrant as specified in its charter)
Delaware 58-1972600
------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3970 Johns Creek Court
Suwanee, Georgia 30024
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(Address of principal executive offices)
(Zip code)
(770) 291-3900
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(Registrant's telephone number, including area code)
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(Former name, former address and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
- --
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, ($.0001 Par Value)
--------------------------------------------------------
15,343,613 shares outstanding as of July 31, 2000
<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) -
June 30, 2000 and December 31, 1999;
Condensed Consolidated Statements of Operations (unaudited) -
Three and six months ended June 30, 2000 and 1999;
Condensed Consolidated Statements of Cash Flows (unaudited) -
Six months ended June 30, 2000 and 1999;
Notes to Condensed Consolidated Financial Statements (unaudited) -
June 30, 2000
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 2. Changes in Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders
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>
June 30, December 31,
2000 1999
--------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $191,161 $14,127
Marketable securities 16,175 -0-
Trade accounts receivable, less allowance for doubtful accounts
of $672 and $271 in 2000 and 1999, respectively 16,293 10,389
Deferred marketing expense, current 7,081 5,723
Prepaids and other current assets 1,915 1,965
-------- -------
Total current assets 232,625 32,204
PROPERTY AND EQUIPMENT 6,467 4,122
OTHER ASSETS:
Deferred marketing expense 4,453 4,293
Intangible assets, net of accumulated amortization of $1,945 and
$784 in 2000 and 1999, respectively 62,488 6,649
Investments 6,217 1,168
Deposits and other long-term assets 178 127
-------- -------
Total other assets 73,336 12,237
-------- -------
TOTAL ASSETS $312,428 $48,563
======== =======
</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>
June 30, December 31,
2000 1999
--------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 11,964 $ 6,326
Deferred revenue 3,863 3,081
Current maturities of long-term debt 7 6,046
-------- --------
Total current liabilities 15,834 15,453
NONCURRENT LIABILITIES:
Deferred revenue 701 293
Long-term debt, net of current maturities 5,000 -0-
Other non-current liabilities 202 202
-------- --------
Total liabilities 21,737 15,948
STOCKHOLDERS' EQUITY:
Common Stock, $.0001 par value; 100,000,000 shares authorized,
15,395,155 and 11,600,681 shares issued and 15,320,155 and
11,525,681 shares outstanding in 2000 and 1999, respectively 2 1
Additional paid-in capital 367,070 77,008
Accumulated deficit (72,456) (44,122)
Treasury stock, at cost (2) (2)
Foreign currency translation adjustment 8 0
Unrealized gain (loss) on marketable securities 293 0
Deferred compensation (4,224) (270)
-------- --------
Total stockholders' equity 290,691 32,615
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $312,428 $ 48,563
======== ========
</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 Six months ended
June 30 June 30
----------------------- ----------------------
2000 1999 2000 1999
----------- -------- -------- ----------
<S> <C> <C> <C> <C>
REVENUES:
License fees $ 7,845 $ 4,220 $ 13,641 $ 7,879
Services fees 2,240 7,059 3,450 14,801
-------- ------- -------- -------
Total revenues 10,085 11,279 17,091 22,680
COST OF REVENUES:
License fees 59 365 98 711
Services fees 2,527 4,260 4,099 8,610
-------- ------- -------- -------
Total cost of revenues 2,586 4,625 4,197 9,321
OPERATING EXPENSES:
Research and development, exclusive of
noncash expense 5,252 2,358 8,336 4,552
In-process research and development expense 8,300 0 8,300 0
Sales and marketing, exclusive of noncash
expense 8,634 3,444 15,097 6,817
General and administrative, exclusive of
noncash expense 2,369 1,603 4,995 3,222
Depreciation and amortization 1,564 963 2,264 1,833
Noncash research and development expense -0- -0- 826 -0-
Noncash sales and marketing expense 2,017 -0- 3,829 -0-
Noncash general and administrative expense 331 42 1,476 84
-------- ------- -------- -------
Total operating expenses 28,467 8,410 45,123 16,508
OPERATING LOSS (20,968) (1,756) (32,229) (3,149)
GAIN ON SALE OF ERP ASSETS 547 -0- 547 -0-
INTEREST INCOME 3,576 111 4,562 228
INTEREST EXPENSE (58) (24) (1,214) (51)
-------- ------- -------- -------
NET LOSS $(16,903) $(1,669) $(28,334) $(2,972)
======== ======= ======== =======
Loss per common share:
Basic $ (1.16) $ (0.15) $ (2.12) $ (0.27)
Diluted $ (1.16) $ (0.15) $ (2.12) $ (0.27)
Weighted average shares outstanding
Basic 14,538 10,989 13,392 10,968
Diluted 14,538 10,989 13,392 10,968
</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>
Six months ended
June 30
-----------------------------
2000 1999
-------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(28,334) $(2,972)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 2,264 1,873
Amortization of debt discount 982 -0-
In-process research and development 8,300 -0-
Noncash research and development expense 826 -0-
Noncash sales and marketing expense 3,829 -0-
Noncash general and administrative expense 1,476 84
Loss on disposal of property and equipment -0- 52
Gain on sale of financial and human resources software business (547) -0-
Changes in operating assets and liabilities:
Accounts receivable (6,154) (2,250)
Prepaid and other current assets 109 (206)
Deposits and other long-term assets (41) 181
Accounts payable and accrued liabilities 4,321 (499)
Deferred revenue 1,190 (916)
Other non-current liabilities -0- 160
-------- -------
NET CASH USED IN OPERATING ACTIVITIES (11,779) (4,493)
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (33,364) -0-
Purchase of marketable securities (15,632) -0-
Purchases of property and equipment (3,211) (2,037)
Purchases of intangible assets (89) -0-
Net proceeds from sale of ERP assets 1,864 -0-
Purchase of investments in strategic partners (5,049) -0-
-------- -------
NET CASH USED IN INVESTING ACTIVITIES (55,481) (2,037)
FINANCING ACTIVITIES:
Repayments of long-term borrowings (7,021) (309)
Proceeds from long-term borrowings 5,000 -0-
Proceeds from issuance of common stock related to secondary offering 244,427 -0-
Proceeds from issuance of common stock related to options exercised 1,880 112
-------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 244,286 (197)
-------- -------
Effect of exchange rate change on cash 8 -0-
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 177,034 (6,727)
CASH AND CASH EQUIVALENTS, beginning of period 14,127 14,799
-------- -------
CASH AND CASH EQUIVALENTS, end of period $191,161 $ 8,072
======== =======
</TABLE>
6
<PAGE>
<TABLE>
<S> <C> <C>
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 232 $ 51
======== =======
NONCASH TRANSACTIONS:
Issuance of warrants to purchase 50,000 shares of common stock in connection
with marketing agreements at fair value $ 986 $ -0-
======== =======
Issuance of 39,118 shares of common stock in connection with marketing
agreements at fair value $ 4,361 $ -0-
======== =======
Issuance of 1,148,000 shares of common stock in connection with SAI
acquisition $ 30,353 $ -0-
======== =======
Receipt of marketable securities in satisfaction of trade account receivable $ 250 $ -0-
======== =======
</TABLE>
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
7
<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 and subsidiaries (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, 2000. 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, 1999,
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 ("SFAS") No. 128, "Earnings per
Share," using the weighted average number of common shares outstanding. The
diluted net loss per share for the quarter and six-month period ended June 30,
2000 and 1999 does not include the effect of common stock equivalents, as their
effect would be antidilutive.
NOTE 3. SHAREHOLDERS' EQUITY
On March 10, 2000, the Company sold 2,243,000 shares of common stock in a public
offering yielding net proceeds to the Company of approximately $244.4 million.
NOTE 4. INVESTMENTS
The Company has made several investments in strategic partners (privately held
companies). The Company holds less than a 20% interest in these companies and
does not have significant influence over these companies. These investments are
accounted for using the cost method of accounting.
NOTE 5. ACQUISITIONS
On May 31, 2000, the Company acquired all of the outstanding capital stock of
SAI (Ireland) Limited, SAI Recruitment Limited, i2Mobile.com Limited and SAI
America Limited (the "SAI/Rodeo Companies"). The SAI/Rodeo Companies specialize
in electronic payment settlement. The purchase consideration was approximately
$63.1 million, consisting of approximately $30.0 million in cash, 1,148,000
shares of the Company's common stock with a fair value of $ 30.4 million,
assumed options to acquire 163,200 shares of the Company's common stock with an
exercise price of $23.50 (estimated fair value of $1.8 million using the Black-
Scholes option pricing model) and acquisition costs of approximately $900,000.
8
<PAGE>
The acquisition was treated as a purchase for accounting purposes, and
accordingly, the assets and liabilities were recorded based on their preliminary
fair value at the date of acquisition. The Company retained a third-party
valuation firm to assist the Company in its evaluation of developed technologies
and in-process research and development. The third-party evaluated SAI/Rodeo
Companies' developmental products to determine their stage of development, their
expected income generating ability, as well as risk factors associated with
achieving technological feasibility. The Company expensed approximately $8.3
million to in-process research and development in the second quarter of 2000.
The values ascribed to intangible assets and their respective useful lives are
as follows:
Intangible Useful
Asset Life
(in thousands) (in years)
-----------------------------------
Goodwill $49,809 8
Developed technologies 4,100 8
Assembled workforce 450 7
Customer base 100 4
The following unaudited pro forma information presents the results of operations
of the Company as if the acquisition had taken place on January 1, 1999, and
excludes the write-off of purchased research and development of $8.3 million (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Six months ended
June 30
---------------------
2000 1999
------- -------
<S> <C> <C>
Revenues $ 17,973 $24,194
Net loss (32,508) (7,046)
Basic earnings per share:
Net loss per common
share $ (2.24) $ (0.58)
Equivalent number of shares 14,538 12,116
Diluted earnings per share:
Net loss per share $ (2.24) $ (0.58)
Equivalent number of shares 14,540 12,116
</TABLE>
On April 28, 2000, the Company acquired all of the capital stock of iSold.com,
Inc., a Delaware corporation ("iSold"). iSold has developed a software program
that provides auctioning capabilities to its clients. The Company has decided
not to disclose the terms of this acquisition, the effects of which are
immaterial to the Company's financial position.
NOTE 6. COMPREHENSIVE INCOME (LOSS)
SFAS No. 130 "Reporting Comprehensive Income", establishes standards of
reporting and display of comprehensive income and its components of net income
and "Other Comprehensive Income". "Other Comprehensive Income" refers to
revenue, expenses and gains and losses that are not included in net income but
rather are recorded directly in stockholders' equity.
9
<PAGE>
The components of comprehensive income (loss) for the three and six months ended
June 30, 2000 and 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
----------------------- --------------------
2000 1999 2000 1999
--------- ----------- -------- --------
<S> <C> <C> <C> <C>
Net loss $(16,903) $(1,669) $(28,334) $(2,972)
Unrealized gain on marketable
securities 293 0 293 0
Foreign currency translation adjustments 8 0 8 0
-------- ------- -------- -------
Comprehensive loss (16,602) (1,669) (28,033) (2,972)
</TABLE>
NOTE 7. CONVERTIBLE SECURITIES
On March 14, 2000, the Company entered into a securities purchase agreement
with Wachovia Capital Investments, Inc. Wachovia purchased a 4.5% convertible
subordinated promissory note due on March 15, 2005 in the original principal
amount of $5.0 million, which may be converted into shares of common stock of
the Company at a price of $147.20 per share of common stock.
NOTE 8. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current
period presentation.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company develops, markets and supports Internet-based business-to-business
electronic commerce solutions that automate the procurement and management of
operating resources. The Company's multiple solutions provide a framework to
enable Internet-based digital marketplaces, allowing companies to create trading
communities and additional revenue opportunities. The Company's multiple
solutions, based on a free trade model, provide a direct Internet-based
connection between buyer and supplier without requiring transactions to be
executed through a centralized portal. The Company's product line includes
solutions that serve "Market Makers" (businesses utilizing the Internet for the
purpose of facilitating and increasing the efficiency of the distribution
channels of chosen vertical markets) as well as other solutions that best serve
the purchasing processes of business enterprises. The Company also provides
implementation and ongoing customer support services as an integral part of
its complete procurement solutions. To achieve broad market adoption of the
Company's solutions and services, the Company has developed a multi-channel
distribution strategy that includes both a direct sales force and a growing
number of indirect channels, including application service providers, system
integrators and resellers.
Sources of Revenue
The Company's revenue consists of license fees and services fees. License
fees are generated from the licensing of the Company's suite of products.
Services fees are generated from consulting, implementation, training and
maintenance services.
10
<PAGE>
Revenue Recognition
Effective January 1, 1998, the Company adopted Statement of Position ("SOP")
No. 97-2, "Software Revenue Recognition." Under SOP No. 97-2, software
license revenue is recognized when the following criteria are met:
. a signed and executed contract is obtained;
. shipment of the product has occurred;
. the license fee is fixed and determinable;
. collectibility is probable; and
. remaining obligations under the license agreement are insignificant.
Revenues from consulting, implementation and training services are recognized
as the services are performed. Maintenance fees relate to customer maintenance
and support and are included in services fees. Maintenance fees are recognized
ratably over the term of the software support services agreement, which is
typically 12 months. Amounts that have been received in cash or billed but that
do not yet qualify for revenue recognition are reflected as deferred revenues.
Operating Expenses
Cost of license fees includes royalties, software duplication and distribution
costs. The Company recognizes these costs as the applications are shipped. Cost
of services fees includes personnel and related costs incurred to provide
implementation, training, maintenance, ongoing support and upgrade services to
customers and partners. These costs are recognized as they are incurred.
Research and development expenses consist primarily of personnel costs,
consulting fees, and an allocation of facilities costs. The Company accounts for
software development costs under Statement of Financial Accounting Standards No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed." The Company charges research and development costs related
to new products or enhancements to expense as incurred until technological
feasibility is established, after which the remaining costs are capitalized
until the product or enhancement is available for general release to customers.
The Company defines technological feasibility as the point in time at which a
working model of the related product or enhancement exists. Historically, the
costs incurred during the period between the achievement of technological
feasibility and the point at which the product is available for general release
to customers have not been material.
Sales and marketing expenses consist primarily of salaries, commissions and
benefits for business development, sales and marketing personnel and expenses
related to travel, trade show participation, public relations, promotional
activities, and an allocation of facilities costs.
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 has incurred significant costs to develop its business-to-business
e-commerce technology and products and to recruit and train personnel. The
Company believes its success is contingent upon increasing its customer base and
investing in further development of its products and services. This will
require significant expenditures for sales, marketing and research and
development. The Company therefore expects to continue to incur substantial
operating losses for the foreseeable future.
11
<PAGE>
Sale of Human Resources and Financial Software Business
On October 18, 1999, the Company sold all of the assets of its human resources
and financial software ("ERP" business) to Geac Computer Systems, Inc. and Geac
Canada Limited. In this sale, the Company received approximately $13.5 million
in proceeds. See "-Liquidity and Capital Resources."
Limited Operating History
The Company has a limited operating history as an e-commerce business that
makes it difficult to forecast its future operating results. Prior period
results should not be relied on to predict the Company's future performance.
Closing of Follow-On Offering
On March 10, 2000, the Company closed a follow-on offering of our common stock
and received approximately $244.4 million. See "-Liquidity and Capital
Resources."
Acquisitions of SAI/Rodeo and iSold.com
On May 31, 2000, the Company acquired all of the outstanding capital stock of
SAI (Ireland) Limited, SAI Recruitment Limited and its subsidiaries and related
companies, i2Mobile.com Limited and SAI America Limited (the "Companies"). The
SAI/Rodeo Companies specialize in electronic payment settlement. The purchase
consideration was approximately $63.1 million, consisting of approximately $30.0
million in cash, 1,148,000 shares of the Company's common stock with a fair
value of $ 30.4 million, assumed options to acquire 163,200 shares of common
stock with an exercise price of $23.50 (estimated fair value of $1.8 million
using the Black-Scholes option pricing model) and approximately $900,000 in
acquisition costs.
On April 28, 2000, the Company acquired all of the capital stock of iSold.com,
Inc., a Delaware corporation ("iSold"). iSold has developed a software program
that provides auctioning capabilities to its clients.
12
<PAGE>
Results of Operations
The following table sets forth certain statement of operations data dividing
revenues between the Company's previous human resources and financial software
business (ERP) and the Company's current e-commerce business for the periods
indicated.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
----------------------------- -----------------------------
2000 1999 2000 1999
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues: e-commerce
License fees $ 7,845 $ 2,025 $ 13,641 $ 3,595
Services fees 2,240 387 3,450 503
-------- ------- -------- -------
Total revenues 10,085 2,412 17,091 4,098
Revenues: ERP
License fees -0- 2,195 -0- 4,284
Services fees -0- 6,672 -0- 14,298
-------- ------- -------- -------
Total revenues -0- 8,867 -0- 18,582
Cost of revenues: e-commerce
License fees 59 1 98 12
Services fees 2,527 427 4,099 789
-------- ------- -------- -------
Total cost of revenues 2,586 428 4,197 801
Cost of revenues: ERP
License fees -0- 364 -0- 699
Services fees -0- 3,833 -0- 7,821
-------- ------- -------- -------
Total cost of revenues -0- 4,197 -0- 8,520
Gross margin on e-commerce license fees 7,786 2,024 13,543 3,583
Gross margin on e-commerce services fees (287) (40) (649) (286)
Gross margin on ERP license fees -0- 1,831 -0- 3,585
Gross margin on ERP services fees -0- 2,839 -0- 6,477
Operating expenses:
Research and development, exclusive
of noncash expense 5,252 2,358 8,336 4,552
In-process research and development expense 8,300 0 8,300 0
Sales and marketing, exclusive of
noncash expense 8,634 3,444 15,097 6,817
General and administrative, exclusive
of noncash expense 2,369 1,603 4,995 3,222
Depreciation and amortization 1,564 963 2,264 1,833
Noncash development expense -0- -0- 826 -0-
Noncash sales and marketing expense 2,017 -0- 3,829 -0-
Noncash general and administrative
expense 331 42 1,476 84
-------- ------- -------- -------
Total operating expenses 28,467 8,410 45,123 16,508
Operating loss (20,968) (1,756) (32,229) (3,149)
Gain on sale of ERP assets 547 -0- 547 -0-
Interest income 3,576 111 4,562 228
Interest expense 58 24 1,214 51
-------- ------- -------- -------
Net loss $(16,903) $(1,669) $(28,334) $(2,972)
======== ======= ======== =======
</TABLE>
13
<PAGE>
Quarter Ended June 30, 2000 and 1999
Revenues
Total Revenues. Total revenues for the quarter ending June 30, 2000
decreased 10.6% to $10.1 million for the quarter ended June 30, 2000 from $11.3
million during the same period in 1999. For the six months ended June 30, 2000,
total revenues decreased 24.6% to $17.1 million from $22.7 million during the
same period in 1999. These decreases in total revenues are primarily
attributable to decreases in services fees, as a result of the sale of the
Company's ERP business in October 1999.
e-commerce License Fees. License fees increased 287.4% to $7.8 million, or
77.8% of total e-commerce revenues, for the quarter ended June 30, 2000 from
$2.0 million, or 84.0% of total e-commerce revenues, in the same period in 1999.
For the six months ended June 30, 2000, license fees increased 279.4% to $13.6
million from $3.6 million during the same period in 1999. The increase in e-
commerce license fees was the result of an increase in the amount of software
licensed.
e-commerce Services Fees. Services fees increased 478.8% to $2.2 million,
for the quarter ended June 30, 2000, from $387,000 for the same period in 1999,
and also increased as a percentage of total e-commerce revenues to 22.2%, for
the period ended June 30, 2000, from 16.0% in the same period in 1999. For the
six months ended June 30, 2000, service fees increased 585.9% to $3.5 million
from $ 503,000 during the same period in 1999. These increases are primarily
attributable to increased demand for the Company's services as a result of the
growth in e-commerce license fees.
ERP License Fees. The Company sold its ERP business in October 1999, and as a
result had no ERP license fees during the periods ended June 30, 2000. ERP
license fees represented $2.2 million , or 52.0% of license fee revenue, during
the quarter ending June 30, 1999. ERP license fees represented $4.3 million, or
54.4% of license fee revenue during the six months ended June 30, 1999.
ERP Services Fees. The Company sold its ERP business in October 1999, and as
a result had no ERP services fees during the periods ended June 30, 2000. ERP
services fees represented $6.7 million, or 94.5% of services fees, during the
period ended June 30, 1999. ERP services service revenue represented $14.3
million, or 96.6% of services fees, during the six months ended June 30, 1999.
Cost of Revenues
Total Cost of Revenues. Cost of revenues decreased 44.1% to $ 2.6 million,
or 25.6% of total revenue, during the quarter ended June 30, 2000 from $4.6
million, or 41.0% of total revenue, during the same period in 1999. Cost of
revenues decreased 55.0% to $4.2 million, or 24.6% of total revenue, from $9.3
million, or 41.1% of total revenue, during the six months ended June 30, 2000.
The decrease both in total and as a percentage of total revenues in both
comparable periods is primarily a result of the change in mix in revenue from
services fees, which historically had a higher cost of revenues, to license
fees.
e-commerce Cost of License Fees. Cost of e-commerce license fees increased
to $59,000 for the quarter ended June 30, 2000 from $1,000 during the same
period in 1999. For the six months ending June 30, 2000, cost of e-commerce
license fees increased to $98,000 from $12,000 during the same period in 1999.
Cost of license fees may vary from period to period depending on the product mix
licensed, but are expected to remain a small percentage of license fees.
e-commerce Cost of Services Fees. Cost of services fees increased 491.8% to
$2.5 million, or 112.8% of total e-commerce services fees, during the quarter
ended June 30, 2000 compared to $427,000, or 110.3% of total e-commerce services
fees, during the same period in 1999. For the six months ended June 30, 2000,
cost of e-commerce services fees increased to $4.1 million from $789,000 during
the same period in 1999. The increase in the cost of e-commerce services fees
was primarily attributable to an increase in personnel and related costs to
provide implementation, training and upgrade services to both customers and
partners.
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ERP Cost of License Fees. The Company sold its ERP business in October 1999,
and as a result had no ERP license fees or ERP cost of license fees during the
periods ended June 30, 2000. During the quarter ended June 30,1999, cost of ERP
license fees totaled $364,000 or 16.6% of ERP license fees. For the six months
ended June 30, 1999, cost of ERP license fees totaled $ 699,000 or 16.3% of ERP
license fees. ERP cost of license fees represented 99.7% of the total cost of
license fees during the quarter ended June 30, 1999 and 98.3% of the total cost
of license fees during the six months ended June 30, 1999.
ERP Cost of Services Fees. The Company sold its ERP business in October 1999,
and as a result had no ERP services fees or ERP cost of services fees during the
period ended June 30, 2000. During the period ended June 30, 1999, ERP cost of
services fees totaled approximately $3.8 million, or 57.4% of ERP services fees.
For the six months ended June 30, 1999, cost of ERP services fees totaled $7.8
million or 54.7% of ERP services fees. ERP cost of services fees represented
90.0% of the total cost of services fees during the quarter ended June 30, 1999,
and 90.8% of total cost of services fees during the six months ended June 30,
1999.
Research and Development Expense, Exclusive of Noncash Expense
Research and development expenses increased 122.7% to approximately $5.3
million, or 52.1% of total revenues, during the quarter ended June 30, 2000 from
$2.4 million, or 20.9% of total revenues, during the same period in 1999.
Research and development expense increased 83.1% to approximately $8.3 million,
or 48.8% of total revenues, during ths six months ending June 30, 2000 from $4.6
million, or 20.1% of total revenues, during the same period in 1999. Research
and development expenses increased primarily due to increased personnel and
contractor fees related to the development of the Company's e-commerce products.
The Company intends to continue to expend substantial resources in research and
development.
In-Process Research and Development Expense
In-process research and development expense was approximately $8.3 million for
both the quarter ended and the six months ending June 30, 2000. The Company
recorded this expense related to its acquisition of the SAI/Rodeo Companies on
May 31, 2000.
Sales and Marketing Expense, Exclusive of Noncash Expense
Sales and marketing expenses increased 150.7% to $8.6 million, or 85.6% of
total revenues, during the quarter ended June 30, 2000 from $3.4 million, or
30.5% of total revenues, during the same period in 1999. Sales and marketing
expenses increased 121.5% to $15.1 million, or 88.3% of total revenues, during
the six months ending June 30, 2000 from $6.8 million, or 30.1% of total
revenues, during the same period in 1999. The increase was primarily
attributable to the additional sales and marketing personnel and promotional
activities associated with building market awareness of the Company's e-commerce
products. The Company intends to expend substantial resources toward sales and
marketing in the e-commerce area.
General and Administrative Expense, Exclusive of Noncash Expense
General and administrative expenses increased 47.8% to $2.4 million during the
quarter ending June 30, 2000 or 23.5% of total revenue from $1.6 million, or
14.2% of total revenues, during the same period in 1999. General and
administrative expenses increased 55.0% to $5.0 million, or 29.2% of total
revenues, during the six months ending June 30, 2000 from $3.2 million, or 14.2%
of total revenues, during the same period in 1999. The increase in general and
administrative expenses was primarily attributable to increases in personnel,
facilities and related costs. The Company believes its general and
administrative expenses will continue to increase in future periods to
accommodate anticipated growth.
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Depreciation and Amortization Expense
Depreciation and amortization increased to $1.6 million in the period ended
June 30, 2000 from $963,000 in the same period 1999. Depreciation and
amortization increased to $2.3 million in the six months ending June 30, 2000
from $1.8 million in the same period in 1999. The increases in both comparable
periods is primarily the result of the Company's amortization of its intangible
assets associated with acquisitions completed in the second quarter of 2000.
Noncash Research and Development Expense
Noncash research and development expenses of approximately $826,000 were
recognized during the first quarter of 2000. The expenses resulted from the
Company's agreement with a third party to develop certain software that the
Company intends to sell in the future. The agreement required the third party
to reach certain milestones related to the software development in order to
receive warrants to purchase 50,000 shares of the Company' common stock with an
exercise price of $56.78. The third party completed two of the three scheduled
milestones in the first quarter of 2000 and they were granted warrants to
purchase 33,334 shares of common stock. The value of the warrants earned
approximated $826,000 and was computed using the Black-Scholes option pricing
model. The third milestone was not reached by the scheduled due date, and as a
result the warrants to purchase the remaining 16,666 shares of common stock were
forfeited. Warrants to purchase 33,334 shares remain outstanding at June 30,
2000 and expire in the first quarter of 2003.
Noncash Sales and Marketing Expense
During the three and six months ended June 30, 2000, noncash sales and
marketing expenses of approximately $2.0 million and $3.8 million, respectively,
were recognized in connection with sales and marketing agreements signed by the
Company, during the fourth quarter of 1999 and the first quarter of 2000. In
connection with these agreements, the Company issued warrants and shares of
common stock to certain strategic partners, some of whom are also customers, in
exchange for their participation in the Company's sales and marketing efforts.
The Company recorded the value of these warrants and common stock as deferred
sales and marketing expenses, which are being amortized over the life of the
agreements which range from six months to five years.
Noncash General and Administrative Expense
Noncash general and administrative expenses increased to approximately
$331,000, or 3.3% of total revenues, during the second quarter of 2000, from
$42,000, or 0.4% of total revenues, during the same period in 1999. Noncash
general and administrative expenses increased to $1.5 million, or 8.6% of total
revenues, during the six months ended June 30, 2000 from $84,000, or 0.4% of
total revenues, during the same period in 1999. The increases in both the
quarter and the six months ending June 30, 2000 were attributable to the Company
granting 160,000 options to a senior executive during the first quarter of 2000
at an exercise price below the fair market value at the date of grant. Fifteen
percent of these options vested immediately and the remainder vest over four
years. The Company immediately expensed $814,500 associated with the intrinsic
value of the vested options and recorded the intrinsic value of the unvested
options ($5.4 million) as deferred compensation. The Company recognized
compensation expense of approximately $331,000 in the quarter ended June 30,
2000 and $1.5 million during the six months ended June 30, 2000 related to this
arrangement.
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Interest Income
Interest income increased to $3.6 million in the second quarter of 2000, or
35.5% of total revenues from $111,000, or 1.0% of total revenues, in the same
period of 1999. Interest income increased to $4.6 million during the six months
ended June 30, 2000, or 26.7% of total revenues, from $228,000, or 1.0% of
total revenues, in the same period in 1999. The increase in interest income was
due to higher levels of cash available for investment, a direct result of the
Company's follow-on offering in March 2000. The Company expects to continue to
use cash to fund operating losses and, as a result, interest income on available
cash is expected to decline in future quarters.
Interest Expense
Interest expense increased 141.7% to $58,000 in the second quarter of 2000
from $24,000 during the same period in 1999. Interest expense increased 2,280.4%
to $1.2 million during the six months ended June 30, 2000 from $51,000 during
the same period in 1999. The increase for the six months ended June 30, 2000 is
primarily due to higher levels of debt in the first quarter of 2000 as compared
to 1999. This was primarily the result of an interim funding of $7.0 million
received in December 1999. As part of the interim funding agreement, the Company
issued warrants valued at approximately $982,000 using the Black-Scholes option
pricing model as debt discount to be amortized over the life of the financing
agreement. The entire $7.0 million plus interest was paid prior to the end of
the first quarter of 2000. As a result the entire value of the warrants was
amortized in the period ending March 31, 2000.
Income Taxes
As a result of the operating losses incurred since the Company's inception,
no provision or benefit for income taxes was recorded during the quarter and six
months ended June 30, 2000 and 1999, respectively.
Liquidity and Capital Resources
On March 10, 2000, the Company completed a follow-on offering of 2,243,000
shares of common stock at an offering price of $115.00 per share. The
proceeds, net of expenses, from this public offering of approximately $244.4
million were placed in investment grade cash equivalents and marketable
securities. The Company believes the proceeds from this follow-on offering will
be adequate to provide for the Company's capital expenditures and working
capital requirements for the foreseeable future. Although operating activities
may provide cash in certain periods, to the extent the Company experiences
growth in the future, the Company's operating and investing activities will use
significant amounts of cash.
On March 14, 2000, the Company entered into a securities purchase agreement
with Wachovia Capital Investments, Inc. Wachovia purchased a 4.5% convertible
subordinated promissory note in the original principal amount of $5.0 million,
which may be converted into shares of common stock of the Company. The $5.0
million was placed in investment grade cash equivalents.
Cash used in operating activities was approximately $11.8 million during the
six months ended June 30, 2000. The cash used was primarily attributable to the
Company's net loss and to increases in accounts receivable, offset by noncash
items and increases in accounts payable and accrued liabilities, and deferred
revenue. Cash used in operating activities was approximately $4.5 million during
the six months ended June 30, 1999. This was primarily attributable to an
increase in accounts receivable and decreases in accounts payable and accrued
liabilities and deferred revenue.
Cash used for investing activities was approximately $55.5 million during the
six month period ended June 30, 2000. The cash was used for acquisitions,
purchases of investments in strategic partners, marketable securities, and
property and equipment. The cash used for investing activities was partially
offset by proceeds related to the sale of
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ERP assets of approximately $1.9 million. Cash used for investing activities was
approximately $2.0 million during the six month period ended June 30, 1999. Cash
was used to purchase property and equipment during this period.
Cash provided by financing activities was approximately $244.3 million during
the six month period ended June 30, 2000, and the cash used by financing
activities was approximately $197,000 during the six months ended June 30, 1999.
The cash provided by financing activities during the period ended June 30, 2000
was primarily attributable to proceeds from the sale of 2,243,000 shares of
common stock for approximately $244.4 million, the issuance of long-term debt of
$5.0 million, and partially offset by the repayment of $7.0 million in interim
funding provided by Transamerica Business Credit Corp., Silicon Valley Bank and
Sand Hill Capital II, L.P.
On October 18, 1999, the Company sold its human resources and financial
software business to Geac Computer Systems, Inc. and Geac Canada Limited. The
Company received approximately $13.5 million in proceeds. A gain of $9.4
million was recorded in 1999, with an additional gain of approximately $547,000
recorded in the second quarter of 2000, following the escrow settlement.
The Company had net operating loss carryforwards of approximately $57.0
million at June 30, 2000, which will expire at various dates through 2019. The
Company established a valuation allowance equal to the net operating losses and
all other deferred tax assets. The Company will record the income tax benefits
from these deferred tax assets when it becomes more likely than not they will be
realized, which will reduce the Company's effective tax rate in future periods.
Section 382 of the Internal Revenue Code may limit the Company's ability to
benefit from certain net operating loss carryforwards, because the Company had
an ownership change of more than 50%, as defined in Section 382. The Company may
not realize certain net operating loss carryforwards in future years due to this
limitation.
During the first six months of 2000, the Company issued warrants and
approximately 39,000 shares of the Company's common stock to certain strategic
partners, some of whom are also customers, in exchange for their participation
in the Company's sales and marketing efforts. The Company recorded the fair
value of these warrants and common stock as deferred sales and marketing expense
of approximately $986,000 and $4.4 million, respectively. Deferred sales and
marketing expenses will be amortized over the term of the sales and marketing
agreements which range from six months to five years.
During 1999, the Company entered into an agreement with a third party to
develop certain software that it intends to sell in the future. The third party
was to be compensated for these services with warrants to purchase 50,000 shares
of the Company's common stock at an exercise price of $56.78 per share. The
agreement requires the third party to reach certain milestones related to the
software development in order to earn the warrants. The third party completed
two of the three scheduled milestones in the first quarter of 2000 and they were
granted warrants to purchase 33,334 shares of the Company's common stock. The
Company recorded the issuance of the warrants at the time they were earned by
the third party and the warrants were valued at approximately $826,000 based on
the fair value of the warrants on the date of the grant using the Black-Scholes
option pricing model. The third milestone was not reached by the scheduled due
date, and as a result the warrants to purchase the remaining 16,666 shares of
the Company's common stock were forfeited.
During 1999, the Company entered into a reseller agreement that allows the
reseller to license its products in a certain territory. The Company will
receive royalty amounts from the reseller if certain minimum revenue
requirements are met by the reseller. The Company will recognize these license
fees as the products are licensed to end users. Additionally, the reseller has
the ability to earn warrants to purchase up to 150,000 shares of the Company's
common stock if certain revenue targets are met. The Company will record the
issuance of the warrants at the time they are earned by the reseller based on
the fair value of the warrant on the date they are earned. During the first six
months of 2000, the reseller did not license any of the Company's products.
Accordingly, no warrants were granted related to the reseller agreement.
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New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This Statement was amended in June 2000 by Statement No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
Statement No. 138 will be effective for the Company beginning January 2001. The
new Statement requires all derivatives to be recorded on the balance sheet at
fair value and establishes accounting treatment for three types of hedges:
hedges of changes in the fair value of assets, liabilities, or firm commitments:
hedges of the variable cash flows of forecasted transactions; and hedges of
foreign currency exposures of net investments in foreign operations. To date,
the Company has not invested in derivative instruments nor participated in
hedging activities and, therefore, does not anticipate there will be a material
impact on the results of operations or financial position from Statements No.
133 or No. 138.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101") and amended it in March and June 2000. We are required to adopt the
provisions of SAB 101 in the fourth quarter of 2000. We are currently reviewing
the provisions of SAB 101 and have not fully assessed the impact of its
adoption. While SAB 101 does not supersede the software industry-specific
revenue recognition guidance, with which we believe we comply with, the SEC
Staff has recently informally indicated its views related to SAB 101 that may
change current interpretations of software revenue recognition requirements.
Such SEC interpretations could result in many software companies, including us,
recording a cumulative effect of a change in accounting principles.
Risk Factors
In addition to other information in this quarterly report on Form 10-Q,
the following risk factors should be carefully considered in evaluating us and
our business because such factors currently may have a significant impact on our
business, operating results and financial condition. As a result of the risk
factors set forth below, actual results could differ materially from those
projected in any forward-looking statements.
We may not effectively implement our business strategy.
Our future performance will depend in part on successfully developing,
introducing and gaining market acceptance of our product suite, which is
designed to automate the procurement and management of operating resources. On
October 18, 1999, we sold substantially all of the assets of our financial and
human resources software business to Geac Computer Systems, Inc. and Geac Canada
Limited. Our financial and human resources software business had historically
been our primary business. We began marketing our Clarus eProcurement solution
in the second quarter of 1998. If we do not successfully implement our business-
to-business e-commerce growth strategy, our business will suffer materially and
adversely.
Our solutions may not achieve significant market acceptance without a critical
mass of large buying organizations and their suppliers.
Unless a critical mass of large buying organizations and their suppliers
join our SupplierUniverse network, our solutions may not achieve widespread
market acceptance, and our business would be seriously harmed. The
implementation of our product suite by large buying organizations can be
complex, time consuming and expensive. In many cases, these organizations must
change established business practices and conduct business in new ways. Our
ability to attract additional customers for our product suite will depend on
using our existing customers as referenceable accounts. As a result, our
operating resource solutions may not achieve significant market acceptance.
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If a sufficient and increasing number of suppliers fail to join our
SupplierUniverse network, our network will be less attractive to buyers and
other suppliers. To provide buyers on our SupplierUniverse network an organized
means of accessing operating resources, we rely on suppliers to maintain web-
based catalogs, indexing services and other content aggregation tools. Our
inability to access and index these catalogs and services would result in our
customers having fewer products and services available to them through our
solutions, which would adversely affect the perceived usefulness of our
SupplierUniverse network.
We expect our product line to appeal to early stage companies, which
exposes us to higher than normal credit risk.
Our product line supports Internet-based business-to-business electronic
commerce solutions that automate the procurement and management of operating
resources. As a result of this functionality many early stage businesses, in
addition to many companies with traditional business models, are interested in
acquiring our products in the future. Many early stage companies acquire their
funding periodically based upon investor's perception of their progress and
likelihood of success. Typically, they do not have internal operations
sufficient to generate cash which would guarantee their ongoing viability. While
we evaluate the ability to pay of all potential customers, if an increasing
number of our customers fail in their operations and are unable to continue to
pay amounts due under our license agreement, we will experience material and
adverse financial losses related to these sales.
If our zero capital subscription-based model is unsuccessful, the market may
adopt our products at a slower rate than anticipated, and our business may
suffer materially.
We offer a zero capital subscription-based payment method to our customers.
This model is unproven and represents a significant departure from the fee-based
software licensing strategies that we and our competitors have traditionally
employed. If we do not successfully develop and support our zero capital
subscription-based model, the market may adopt our products at a slower rate
than anticipated, and our business may suffer materially. As of June 30, 2000,
we have no zero capital subscribers.
We may not generate the substantial additional revenues necessary to become
profitable and anticipate that we will continue to incur losses.
We have incurred significant net losses in each year since our formation,
primarily related to our former enterprise resource planning business. In
addition, we have incurred losses related to the development of our electronic
procurement business. We expect that we will continue to incur losses.
As we expand our international sales and marketing activities, our business will
be more susceptible to numerous risks associated with international operations.
To be successful, we believe we must expand our international operations
and hire additional international personnel. As a result, we expect to commit
significant resources to expand our international sales and marketing
activities. We are subject to a number of risks associated with international
business activities. These risks generally include:
. currency exchange rate fluctuations;
. seasonal fluctuations in purchasing patterns;
. unexpected changes in regulatory requirements;
. tariffs, export controls and other trade barriers;
. longer accounts receivable payment cycles and difficulties in collecting
accounts receivable;
. difficulties in managing and staffing international operations;
. potentially adverse tax consequences, including restrictions on the
repatriation of earnings;
. the burdens of complying with a wide variety of foreign laws; and
. political instability.
We have limited experience in marketing, selling and supporting our
products and services in foreign countries. We do not have experience developing
foreign language versions of our products.
We intend to expand the geographic scope of our customer base and
operations. We opened our first international sales office in the United
Kingdom during the first quarter of 2000 and acquired the SAI/Rodeo Companies
which have significant operations in Ireland in the second quarter of 2000.
Significant fluctuations in our quarterly and annual operating results may
adversely affect the market price of our common stock.
We believe that our quarterly and annual operating results are likely to
fluctuate significantly in the future, and our results of operations may fall
below the expectations of securities analysts and investors. If this occurs or
if market analysts perceive that it will occur, the market value of our common
stock could decrease substantially.
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Because the percentage of our revenues represented by maintenance services is
smaller than that of many software companies with a longer history of
operations, we do not have a significant recurring revenue stream that could
lessen the effect of quarterly fluctuations in operating results. Our expense
levels are based in part on our expectations of future orders and sales. Many
factors may cause significant fluctuations in our quarterly and annual operating
results, including:
. changes in the demand for our products;
. the timing, composition and size of orders from our customers;
. customer spending patterns and budgetary resources;
. our success in generating new customers;
. the timing of introductions of or enhancements to our products;
. changes in our pricing policies or those of our competitors;
. our ability to anticipate and adapt effectively to developing markets
and rapidly changing technologies;
. our ability to attract, retain and motivate qualified personnel,
particularly within our sales and marketing and research and development
organizations;
. the publication of opinions or reports about us, our products, our
competitors or their products;
. unforeseen events affecting business-to-business e-commerce;
. changes in general economic conditions;
. actions taken by our competitors, including new product introductions
and enhancements;
. our ability to scale our network and operations to support large numbers
of customers, suppliers and transactions;
. our success in maintaining and enhancing existing relationships and
developing new relationships with strategic partners, including
application service providers, systems integrators, resellers, value-
added trading communities and other partners; and
. our ability to control costs.
Competition from other electronic procurement providers may reduce demand for
our products and cause us to reduce the price of our products.
The market for Internet-based procurement applications, and e-commerce
technology generally, is rapidly evolving and intensely competitive. We may not
compete effectively in our markets. Competitive pressure may result in our
reducing the price of our products, which would negatively affect our revenues
and operating margins. If we are unable to compete effectively in our markets,
our business, results of operations and financial condition would be materially
and adversely affected.
In targeting the e-commerce market, we must compete with electronic
procurement providers such as Ariba and Commerce One. We also anticipate
competition from some of the large enterprise resource planning software
vendors, such as Oracle and SAP, which have announced business-to-business
electronic procurement solutions. A number of companies, including International
Business Machines, have stated an interest in electronic procurement. In
addition, we believe we will experience increased competition from travel and
expense software companies, such as Concur and Extensity. These companies have
significantly greater financial, technical and marketing resources and brand
recognition than we have.
In addition, some of our competitors have well-established relationships
with our potential customers and have extensive knowledge of our industry.
Others have established or may establish cooperative relationships among
themselves or with third parties to increase the appeal of their products. We
also expect that competition will increase as a result of industry
consolidation. For these reasons, and given the relatively low barriers to entry
and relatively high availability of capital in today's markets, new competitors
will likely emerge in our markets and may rapidly acquire significant market
share.
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Market adoption of our solutions will be impeded if we do not continue to
establish and maintain strategic relationships.
Our success depends in part on the ability of our strategic partners to
expand market adoption of our solutions. If we are unable to maintain our
existing strategic partnerships or enter into new partnerships, we may need to
devote substantially more resources to direct sales of our products and
services. We would also lose anticipated customer introductions and co-marketing
benefits.
We rely, and expect to rely increasingly, on a number of third-party
application service providers to host our solutions. If we are unable to
establish and maintain effective, long-term relationships with our application
service providers, or if these providers do not meet our customers' needs or
expectations, our business would be seriously harmed. In addition, we lose a
significant amount of control over our solution when we engage application
service providers, and we cannot adequately control the level and quality of
their service. By relying on third-party application service providers, we are
wholly reliant on their information technology infrastructure, including the
maintenance of their computers and communication equipment. An unexpected
natural disaster or failure or disruption of an application service provider's
infrastructure would have a material adverse effect on our business.
If the demand for our solutions continues to increase, we will need to
develop relationships with additional third-party application service providers
to provide these services. Our competitors have or may develop relationships
with these third parties and, as a result, these third parties may be more
likely to recommend competitors' products and services rather than ours.
Many of our strategic partners have multiple strategic relationships, and
they may not regard us as important to their businesses. In addition, our
strategic partners may terminate their relationships with us, pursue other
partnerships or relationships or attempt to develop or acquire products or
services that compete with our solutions. Further, our existing strategic
relationships may interfere with our ability to enter into other desirable
strategic relationships. A significant number of our new Clarus eProcurement
sales and Clarus eMarket sales have occurred through referrals from Microsoft,
but Microsoft is not obligated to refer any potential customers to us, and it
may enter into strategic relationships with other providers of electronic
procurement applications.
We expect to depend on our Clarus eProcurement and Clarus eMarket products for a
significant portion of our revenues for the foreseeable future.
We anticipate that revenues from our Clarus eProcurement and Clarus eMarket
products and related services will continue to represent substantially all of
our revenues for the foreseeable future. As a result, a decline in the price of,
profitability of or demand for our Clarus eProcurement and Clarus eMarket
products would seriously harm our business. Our Clarus eMarket solution was
introduced in the second quarter of 2000.
Clarus eProcurement and eMarket may perform inadequately in a high volume
environment.
Any failure by our principal products, Clarus eProcurement and Clarus
eMarket, to perform adequately in a high volume environment could materially and
adversely affect the market for Clarus eProcurement and Clarus eMarket and our
business, results of operations and financial condition. Specifically, Clarus
eProcurement was designed for use in environments that include numerous users,
large amounts of catalog and other data and potentially high peak transaction
volumes. Clarus eProcurement and the third party software and hardware on which
it depends may not operate as designed when deployed in these environments.
Defects in our products could delay market adoption of our solutions or cause us
to commit significant resources to remedial efforts.
We could lose revenues as a result of software errors or other product
defects. As a result of their complexity, software products may contain
undetected errors or failures when first introduced or as new versions are
released. Despite our testing of our software products and their use by current
customers, errors may appear in new applications after commercial shipping
begins. If we discover errors, we may not be able to correct them.
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Errors and failures in our products could result in the loss of customers and
market share or delay in market adoption of our applications, and alleviating
these errors and failures could require us to expend significant capital and
other resources. The consequences of these errors and failures could materially
and adversely affect our business, results of operations and financial
condition. Because we do not maintain product liability insurance, a product
liability claim could materially and adversely affect our business, results of
operations and financial condition. Provisions in our license agreements may not
effectively protect us from product liability claims.
Any acquisitions that we attempt or make could prove difficult to integrate or
require a substantial commitment of management time and other resources.
As part of our business strategy, we may seek to acquire or invest in
additional businesses, products or technologies that may complement or expand
our business. If we identify an appropriate acquisition opportunity, we may not
be able to negotiate the terms of that acquisition successfully, finance it, or
integrate it into our existing business and operations. We have completed only
three acquisitions to date. We may not be able to select, manage or absorb any
future acquisitions successfully, particularly acquisitions of large companies.
Further, the negotiation of potential acquisitions, as well as the integration
of an acquired business, would divert management time and other resources. We
may use a substantial portion of our available cash to make an acquisition. On
the other hand, if we make acquisitions through an exchange of our securities,
our stockholders could suffer dilution. In addition, any particular acquisition,
even if successfully completed, may not ultimately benefit our business.
Financial impact of acquisition
Our results of operations were negatively impacted by the accounting
treatment for our acquisition of the SAI/Rodeo Companies in the second quarter
of 2000. We recognized a write-off of acquired in-process research and
amortization expense related to our second quarter of 2000 acquisition.
Amortization of this acquisition will adversely affect our results of operations
through 2008. The amounts allocated under purchase accounting to developed
technology and in-process research and development in the acquisition involve
valuation estimations of future revenues, expenses, operating profit, and cash
flows. The actual revenues, expenses, operating profits, and cash flows from the
acquired technology recognized in the future may vary materially from such
estimates. If the in-process research and development product is not
successfully developed, our sales and profitability may be adversely affected in
future periods. Additionally, the value of other intangible assets acquired may
become impaired.
An increase in the length of our sales cycle may contribute to fluctuations in
our operating results.
As our products and competing products become increasingly sophisticated
and complex, the length of our sales cycle is likely to increase. The loss or
delay of orders due to increased sales and evaluation cycles could materially
and adversely affect our business, results of operations and financial condition
and, in particular, could contribute to significant fluctuations in our
quarterly operating results. A customer's decision to license and implement our
solutions may present significant enterprise-wide implications for the customer
and involve a substantial commitment of its management and resources. The period
of time between initial customer contact and the purchase commitment typically
ranges from four to nine months for our applications. Our sales cycle could
extend beyond current levels as a result of lengthy evaluation and approval
processes that typically accompany major initiatives or capital expenditures or
other delays over which we have little or no control.
Our success depends on the continued use of Microsoft technologies or other
technologies that operate with our products.
Our products operate with, or are based on, Microsoft's proprietary
products. If businesses do not continue to adopt these technologies as
anticipated, or if they adopt alternative technologies that we do not support,
we may incur significant costs in redesigning our products or lose market share.
Our customers may be unable to use our products if they experience significant
problems with Microsoft technologies that are not corrected.
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The failure to maintain, support or update software licensed from third parties
could materially and adversely affect our products' performance or cause product
shipment delays.
We have entered into license agreements with third-party licensors for
products that enhance our products, are used as tools with our products, are
licensed as products complementary to ours or are integrated with our products.
If these licenses terminate or if any of these licensors fail to adequately
maintain, support or update their products, we could be required to delay the
shipment of our products until we could identify and license software offered by
alternative sources. Product shipment delays could materially and adversely
affect our business, operating results and financial condition, and replacement
licenses could prove costly. We may be unable to obtain additional product
licenses on commercially reasonable terms. Additionally, our inability to
maintain compatibility with new technologies could impact our customers' use of
our products.
If we are unable to manage our internal resources, we may incur increased
administrative costs and be unable to capitalize on revenue opportunities.
The growth of our e-commerce business coupled with the rapid evolution of
our market has strained, and may continue to strain, our administrative,
operational and financial resources and internal systems, procedures and
controls. Our inability to manage our internal resources effectively could
increase administrative costs and distract management. If our management is
distracted, we may not be able to capitalize on opportunities to increase
revenues.
Our success depends on our continuing ability to attract, hire, train and retain
a substantial number of highly skilled managerial, technical, sales, marketing
and customer support personnel.
Competition for qualified personnel is intense, and we may fail to retain our
key employees or to attract or retain other highly qualified personnel. In
particular, there is a shortage of, and significant competition for, research
and development and sales personnel. Even if we are able to attract qualified
personnel, new hires frequently require extensive training before they achieve
desired levels of productivity. If we are unable to hire or fail to retain
competent personnel, our business, results of operations and financial condition
could be materially and adversely affected. We do not maintain life insurance
policies on any of our employees.
Illegal use of our proprietary technology could result in substantial litigation
costs and divert management resources.
Our success will depend significantly on internally developed proprietary
intellectual property and intellectual property licensed from others. We rely on
a combination of copyright, trademark and trade secret laws, as well as on
confidentiality procedures and licensing arrangements, to establish and protect
our proprietary rights in our products. We have no patents or patent
applications pending, and existing trade secret and copyright laws provide only
limited protection of our proprietary rights. We have applied for registration
of our trademarks. We enter into license agreements with our customers that give
the customer the non-exclusive right to use the object code version of our
products. These license agreements prohibit the customer from disclosing object
code to third parties or reverse-engineering our products and disclosing our
confidential information. Despite our efforts to protect our products'
proprietary rights, unauthorized parties may attempt to copy aspects of our
products or to obtain and use information that we regard as proprietary. Third
parties may also independently develop products similar to ours.
Litigation may be necessary to enforce our intellectual property rights, to
protect our trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
resources and could harm our business, operating results and financial
condition.
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Claims against us regarding our proprietary technology could require us to pay
licensing or royalty fees or to modify or discontinue our products.
Any claim that our products infringe on the intellectual property rights of
others could materially and adversely affect our business, results of operations
and financial condition. Because knowledge of a third party's patent rights is
not required for a determination of patent infringement and because the United
States Patent and Trademark Office is issuing new patents on an ongoing basis,
infringement claims against us are a continuing risk. Infringement claims
against us could cause product release delays, require us to redesign our
products or require us to enter into royalty or license agreements. These
agreements may be unavailable on acceptable terms. Litigation, regardless of the
outcome, could result in substantial cost, divert management attention and delay
or reduce customer purchases. Claims of infringement are becoming increasingly
common as the software industry matures and as courts apply expanded legal
protections to software products. Third parties may assert infringement claims
against us regarding our proprietary technology and intellectual property
licensed from others. Generally, third- party software licensors indemnify us
from claims of infringement. However, licensors may be unable to indemnify us
fully for such claims, if at all.
If a court determines that one of our products violates a third party's
patent or other intellectual property rights, there is a material risk that the
revenue from the sale of the infringing product will be significantly reduced or
eliminated, as we may have to:
. pay licensing fees or royalties to continue selling the product;
. incur substantial expense to modify the product so that the third party's
patent or other intellectual property rights no longer apply to the
product; or
. stop selling the product.
In addition, if a court finds that one of our products infringes a third
party's patent or other intellectual property rights, then we may be liable to
that third party for actual damages and attorneys' fees. If a court finds that
we willfully infringed on a third party's patent, the third party may be able to
recover treble damages, plus attorneys' fees and costs.
A compromise of the encryption technology employed in our solutions could reduce
customer and market confidence in our products or result in claims against us.
A significant barrier to Internet-based commerce is the secure exchange of
valued and confidential information over public networks. Any compromise of our
security technology could result in reduced customer and market confidence in
our products and in customer or third party claims against us. This could
materially and adversely affect our business, financial condition and operating
results. Clarus eProcurement relies on encryption technology to provide the
security and authentication necessary to protect the exchange of valuable and
confidential information. Advances in computer capabilities, discoveries in the
field of cryptography or other events or developments may result in a compromise
of the encryption methods we employ in Clarus eProcurement and Clarus eMarkets
to protect transaction data.
Our success depends upon market acceptance of e-commerce as a reliable method
for corporate procurement and other commercial transactions.
Market acceptance of e-commerce generally, and the Internet specifically,
as a forum for corporate procurement is uncertain and subject to a number of
risks. The success of our suite of business-to-business e-commerce applications,
including Clarus eProcurement and Clarus eMarkets, depends upon the development
and expansion of the market for Internet-based software applications, in
particular e-commerce applications. This market is new and rapidly evolving.
Many significant issues relating to commercial use of the Internet, including
security, reliability, cost, ease of use, quality of service and government
regulation, remain unresolved and could delay or prevent Internet growth. If
widespread use of the Internet for commercial transactions does not develop or
if the Internet otherwise does not develop as an effective forum for corporate
procurement, the demand for our product suite and our overall business,
operating results and financial condition will be materially and adversely
affected.
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If the market for Internet-based procurement applications fails to develop
or develops more slowly than we anticipate or if our Internet-based products or
new Internet-based products we may develop do not achieve market acceptance, our
business, operating results and financial condition could be materially and
adversely affected. The adoption of the Internet for corporate procurement and
other commercial transactions requires accepting new ways of transacting
business. In particular, enterprises with established patterns of purchasing
goods and services that have already invested substantial resources in other
means of conducting business and exchanging information may be particularly
reluctant to adopt a new strategy that may make some of their existing personnel
and infrastructure obsolete. Also, the security and privacy concerns of existing
and potential users of Internet-based products and services may impede the
growth of online business generally and the market's acceptance of our products
and services in particular. A functioning market for these products may not
emerge or be sustained.
The market for business-to-business e-commerce solutions is characterized by
rapid technological change, and our failure to introduce enhancements to our
products in a timely manner could render our products obsolete and unmarketable.
The market for e-commerce applications is characterized by rapid
technological change, frequent introductions of new and enhanced products and
changes in customer demands. In attempting to satisfy this market's demands, we
may incur substantial costs that may not result in increased revenues due to the
short life cycles for business-to-business e-commerce solutions. Because of the
potentially rapid changes in the e-commerce applications market, the life cycle
of our products is difficult to estimate. Products, capabilities or technologies
others develop may render our products or technologies obsolete or
noncompetitive and shorten the life cycles of our products. Satisfying the
increasingly sophisticated needs of our customers requires developing and
introducing enhancements to our products and technologies in a timely manner
that keeps pace with technological developments, emerging industry standards and
customer requirements while keeping our products priced competitively. Our
failure to develop and introduce new or enhanced e-commerce products that
compete with other available products could materially and adversely affect our
business, results of operations and financial condition.
Failure to expand Internet infrastructure could limit our growth.
Our ability to increase the speed and scope of our services to customers is
limited by and depends on the speed and reliability of both the Internet and our
customers' internal networks. As a result, the emergence and growth of the
market for our services depends on improvements being made to the entire
Internet infrastructure as well as to our individual customers' networking
infrastructures. The recent growth in Internet traffic has caused frequent
periods of decreased performance. If the Internet's infrastructure is unable to
support the rapid growth of Internet usage, its performance and reliability may
decline, and overall Internet usage could grow more slowly or decline. If
Internet reliability and performance declines, or if necessary improvements do
not increase the Internet's capacity for increased traffic, our customers will
be hindered in their use of our solutions, and our business, operating results
and financial condition could suffer.
Future governmental regulations could materially and adversely affect our
business and e-commerce generally.
We are not subject to direct regulation by any government agency, other
than under regulations applicable to businesses generally, and few laws or
regulations specifically address commerce on the Internet. In view of the
increasing use and growth of the Internet, however, the federal government or
state governments may adopt laws and regulations covering issues such as user
privacy, property ownership, libel, pricing and characteristics and quality of
products and services. We could incur substantial costs in complying with these
laws and regulations, and the potential exposure to statutory liability for
information carried on or disseminated through our application systems could
force us to discontinue some or all of our services. These eventualities could
adversely affect our business operating results and financial condition. The
adoption of any laws or regulations covering these issues also could slow the
growth of e-commerce generally, which would also adversely affect our business,
operating results or financial condition. Additionally, one or more states may
impose sales tax collection obligations on out-of-state companies that engage in
or facilitate e-commerce. The collection of sales tax in connection with e-
commerce could impact the growth of e-commerce and could adversely affect sales
of our e-commerce products.
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Legislation limiting further levels of encryption technology may adversely
affect our sales.
As a result of customer demand, it is possible that Clarus eProcurement and
Clarus eMarkets will be required to incorporate additional encryption
technology. The United States government regulates the exportation of this
technology. Export regulations, either in their current form or as they may be
subsequently enacted, may further limit the levels of encryption or
authentication technology that we are able to use in our software and our
ability to distribute our products outside the United States. Any revocation or
modification of our export authority, unlawful exportation or use of our
software or adoption of new legislation or regulations relating to exportation
or use of software and encryption technology could materially and adversely
affect our sales prospects and, potentially, our business, financial condition
and operating results as a whole.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On May 31, 2000, the Company issued 1,148,000 shares of common stock in
connection with the acquisition of SAI (Ireland) Limited, SAI Recruitment
Limited, i2Mobile.com Limited and SAI America Limited.
These shares were not registered under the Securities Act of 1933 but were
issued in reliance on the exemption from registration contained in Section 4(2)
of the Securities Act of 1933.
Item 4. Submission of Matters to a Vote of Security Holders
The following proposals were submitted to our stockholders at our annual
stockholders meeting on June 13, 2000.
1. The proposal to elect Donald House as a Class II Director to serve until the
2003 annual stockholders' meeting. This proposal was approved with
12,017,859 shares or 85% voting for the proposal and 22,854 shares or .16%
withholding authority.
2. The proposal to elect Tench Coxe as a Class II Director to serve until the
2003 annual stockholders' meeting. This proposal was approved with
12,017,859 shares or 85% voting for the proposal and 22,854 shares or .16%
withholding authority.
3. The proposal to amend our Amended Certificate of Incorporation to increase
the number of authorized shares of common stock from 25,000,000 to
100,000,000. This proposal was approved with 9,006,619 shares or 63.7%
voting for the proposal, 2,759,708 shares or 19.5% voting against the
proposal and 274,386 shares or 1.9% abstaining from the proposal.
4. The proposal to amend and restate our 1998 Stock Incentive Plan to increase
the number of shares of common stock available for grant thereunder from
1,500,000 to 3,000,000 shares. This proposal was approved with 3,458,176
shares or 76% of the votes cast voting for the proposal, 2,319,806 shares or
38.7% of the votes cast voting against the proposal and 281,367 shares or
4.7% of the votes cast abstaining from the proposal.
5. The proposal to adopt an employee stock purchase plan. This proposal was
approved with 5,641,458 shares or 93% of the votes cast voting for the
proposal, 141,465 shares or 2.3% of the votes cast voting against the
proposal and 276,426 shares or 4.5% of the votes cast abstaining from the
proposal.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Stock Purchase Agreement dated May 31, 2000 by and among Clarus
Corporation, SAI (Ireland) Limited, SAI Recruitment Limited,
i2Mobile.com Limited, SAI America Limited (the "Companies") and
the shareholders of the Companies (Incorporated by reference from
Exhibit 2.1 of the Company's Form 8-K filed on June 13, 2000).
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4.1 Amendment to Amended and Restated Certificate of Incorporation
10.1 Patent License Agreement (Incorporated by reference from Exhibit
10.1 of the Company's Form 8-K filed on June 13, 2000).
10.2 Amended and Restated Stock Incentive Plan
10.3 Employee Stock Purchase Plan
10.4 Global Employee Stock Purchase Plan
10.5 Form of Nonqualified Stock Option Agreement
10.6 Stock Incentive Plan of Software Architects International,
Limited (Incorporated by reference from Exhibit 2.2 of the
Company's Form 8-K filed on June 13, 2000)
10.7 2000 Declaration of Amendment to Software Architects
International Limited Stock Incentive Plan (Incorporated by
reference from Exhibit 2.3 of the Company's Form 8-K filed on
June 13, 2000).
10.8 Employment Agreement between the Company and Stephen P. Jeffery.
10.9 Employment Agreement between the Company and Mark D. Gagne.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On June 12, 2000, the Company filed a current report on Form 8-K to
report that on June 6, 2000, Arthur Andersen LLP's appointment as
principal accountants was terminated and KPMG LLP was appointed as
principal accountants.
On June 13, 2000, the Company filed a current report on Form 8-K
to report that it had acquired all of the outstanding capital stock of
SAI (Ireland) Limited, SAI Recruiting Limited, i2Mobile.com Limited
and SAI America Limited pursuant to a Stock Purchase Agreement dated
May 31, 2000.
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: August 14, 2000 /s/ Mark D. Gagne
------------------------------
Chief Operating Officer and
Chief Financial Officer
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