Clarus Corp - Quarter Report: 2005 September (Form 10-Q)

		THREE MONTHS						NINE MONTHS
		ENDED SEPTEMBER 30,						ENDED SEPTEMBER 30,
		2005			2004			2005			2004
REVENUES:
Services fees		$	—		$	1,106		$	—		$	1,106
Total revenues			—			1,106			—			1,106
OPERATING EXPENSES:
General and administrative			714			404			2,501			2,329
Transaction expenses			—			1,461			—			1,461
Depreciation			83			86			249			100
Total operating expenses			797			1,951			2,750			3,890
OPERATING LOSS			(797	)		(845	)		(2,750	)		(2,784	)
OTHER INCOME			2			—			—			17
INTEREST INCOME			668			313			1,717			801
NET LOSS		$	(127	)	$	(532	)	$	(1,033	)	$	(1,966	)
Loss per common share:
Basic		$	(0.01	)	$	(0.03	)	$	(0.06	)	$	(0.12	)
Diluted		$	(0.01	)	$	(0.03	)	$	(0.06	)	$	(0.12	)
Weighted average shares outstanding:
Basic			16,310			16,082			16,283			16,082
Diluted			16,310			16,082			16,283			16,082

 

SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

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CLARUS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

 

		NINE MONTHS ENDED SEPTEMBER 30,
		2005			2004
OPERATING ACTIVITIES:
Net loss		$	(1,033	)	$	(1,966	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation on property and equipment			249			100
Amortization of deferred employee compensation			279			426
Amortization of premium and discount on securities, net			(276	)		857
Gain on sale of marketable securities			--			(17	)
Changes in operating assets and liabilities:
Accrued interest receivable, prepaids and other current assets			151			5
Accounts payable and accrued liabilities			(808	)		935
Deferred revenue			--			(1,106	)
Deferred rent			75			78
Deposits and other long-term assets			(1	)		(2	)
NET CASH USED IN OPERATING ACTIVITIES			(1,364	)		(690	)
INVESTING ACTIVITIES:
Purchases of marketable securities			(66,588	)		(55,091	)
Proceeds from sale of marketable securities			--			51,244
Proceeds from maturity of marketable securities			34,620			38,258
Additions to property and equipment			(16	)		(2,518	)
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES			(31,984	)		31,893
FINANCING ACTIVITIES:
Proceeds from the exercises of stock options			844			51
NET CASH PROVIDED BY FINANCING ACTIVITIES			844			51
CHANGE IN CASH AND CASH EQUIVALENTS			(32,504	)		31,254
CASH AND CASH EQUIVALENTS, Beginning of Period			48,377			15,045
CASH AND CASH EQUIVALENTS, End of Period		$	15,873		$	46,299
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Issuance of Restricted Stock		$	--		$	50

 

SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

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CLARUS CORPORATION

 

For computing the fair value of stock-based employee awards, the fair value of each option grant has been estimated as of the date of grant using the Black-Scholes option-pricing model with the following assumptions:

 

		2005		2004
Dividend yield		0.0%		0.0%
Expected volatility		57.0%		62.0%
Risk-free interest rate		4.0%		2.7%
Expected life		Four years		Four years

 

Using these assumptions, the fair value of the stock options granted during the three- and nine-month period ended September 30, 2005, was approximately $21,000 and $144,000, respectively, which would be amortized over the vesting period of the options. The fair value of the stock options granted during the nine-month period ended September 30, 2004, was approximately $148,000, which would be amortized over the vesting period of the options. There were no stock options granted in the three-month period ended September 30, 2004, so the above assumptions are not applicable. The weighted-average grant-date fair value per share of the stock options granted during the nine-month periods ended September 30, 2005 and 2004 were $3.61 and $4.24, respectively.

NOTE 5. RESTRUCTURING AND RELATED COSTS

During 2002 and 2001, the Company's management approved restructuring plans to reorganize and reduce operating costs. During 2003, the Company determined that actual restructuring and related costs would exceed the amount previously provided and recorded an additional restructuring cost of $250,000, comprised of $223,000 for employee separation costs and $27,000 for facility closure and consolidation costs.

During 2004, the Company recorded an additional restructuring charge of $33,000 for facility closure costs. For the period ended September 30, 2005, the Company made no additional restructuring charges. The facility closure costs relate to the abandonment of the Company's leased facilities near Toronto, Canada. Total facility closure and consolidation costs include remaining lease liability and brokerage fees to sublet the abandoned space, net of estimated sublease income. The estimated costs of abandoning these leased facilities, including estimated costs to sublease, were based on market information trend analysis provided by a commercial real estate brokerage firm retained by the Company.

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The employee separation costs relate to the employees who remained to close down the Suwanee, Georgia office and severance payments made to Mr. Stephen Jeffery, who resigned as the Company’s Chief Executive Officer and Chairman of the Board of Directors after the closing of the sale of the e-commerce business in December 2002.

The following is a reconciliation of the components of the accrual for restructuring and related costs, the amounts charged against the accrual during 2004 and 2005 and the balance of the accrual as of September 30, 2005:

 

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This report contains certain forward-looking statements, including information about or related to our future results, certain projections and business trends. Assumptions relating to forward-looking statements involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. When used in this report, the words "estimate," "project," "intend," "believe," "expect" and similar expressions are intended to identify forward-looking statements. Although we believe that our assumptions underlying the forward-looking statements are reasonable, any or all of the assumptions could prove inaccurate, and we may not realize the results contemplated by the forward-looking statements. Management decisions are subjective in many respects and susceptible to interpretations and periodic revisions based upon actual experience and business developments, the impact of which may cause us to alter our business strategy or capital expenditure plans that may, in turn, affect our results of operations. In light of the significant uncertainties inherent in the forward-looking information included in this report, you should not regard the inclusion of such information as our representation that we will achieve any strategy, objectives or other plans. The forward-looking statements contained in this report speak only as of the date of this report, and we have no obligation to update publicly or revise any of these forward-looking statements.

These and other statements, which are not historical facts, are based largely upon our current expectations and assumptions and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those contemplated by such forward-looking statements. These risks and uncertainties include, among others, our planned effort to redeploy our assets and use our substantial cash and cash equivalent assets to enhance stockholder value following the sale of substantially all of our electronic commerce business, which represented substantially all of our revenue generating operations and related assets, and the risks and uncertainties set forth in the section headed "Factors That May Affect Our Future Results" of Part I of our Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2004 and described below. The Company cannot guarantee its future performance.

OVERVIEW

AS PART OF OUR PREVIOUSLY ANNOUNCED STRATEGY TO LIMIT OPERATING LOSSES AND ENABLE THE COMPANY TO REDEPLOY ITS ASSETS AND USE ITS SUBSTANTIAL CASH AND CASH EQUIVALENT ASSETS TO ENHANCE STOCKHOLDER VALUE, ON DECEMBER 6, 2002, WE SOLD SUBSTANTIALLY ALL OF OUR ELECTRONIC COMMERCE BUSINESS, WHICH REPRESENTED SUBSTANTIALLY ALL OF OUR REVENUE-GENERATING OPERATIONS AND RELATED ASSETS. THE INFORMATION APPEARING BELOW, WHICH RELATES TO PRIOR PERIODS, IS THEREFORE NOT INDICATIVE OF THE RESULTS THAT MAY BE EXPECTED FOR ANY SUBSEQUENT PERIOD. THE THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2005 PRIMARILY REFLECTS, AND FUTURE PERIODS PRIOR TO A REDEPLOYMENT OF OUR ASSETS ARE EXPECTED TO PRIMARILY REFLECT, GENERAL AND ADMINISTRATIVE EXPENSES ASSOCIATED WITH THE CONTINUING ADMINISTRATION OF THE COMPANY AND ITS EFFORTS TO REDEPLOY ITS ASSETS.

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

The Company's discussion of financial condition and results of operations are based on the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting periods. The Company continually evaluates its estimates and assumptions including those related to contingencies and litigation. The Company bases its estimates on historical experience and other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates.

The Company believes the following critical accounting policies include the more significant estimates and assumptions used by management in the preparation of its condensed consolidated financial statements.

The Company accounts for its marketable securities under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Pursuant to the provisions of SFAS No. 115, the Company has classified its marketable securities as available-for-sale. Available-for-sale securities have been recorded at fair value and related unrealized gains and losses have been excluded from earnings and are reported as a separate component of accumulated other comprehensive income (loss) until realized.

 

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SOURCES OF REVENUE

Prior to December 6, 2002 sale of substantially all of the Company's revenue generating operations and assets, the Company’s revenue consisted of license fees and services fees. License fees were generated from the licensing of the Company's suite of software products.

Services fees were generated from consulting, implementation, training, content aggregation and maintenance support services. Following the sale of substantially all of the Company's remaining operating assets, the Company's revenue has consisted solely of the recognition of deferred service fees that are recognized ratably over the maintenance term. The remaining deferred revenue was fully recognized by September 2004. Prior to a redeployment of the Company's assets, the Company's income will consist of interest, dividend and other investment income from short-term investments, which is reported as interest income in the Company's consolidated statement of operations.

OPERATING EXPENSES

General and administrative expenses consist primarily of personnel-related expenses for financial, administrative and management personnel, fees for professional services, occupancy charges, insurance and board of director fees. Occupancy charges include rent, utilities and maintenance services.

RESTRUCTURING AND RELATED COSTS

See "Restructuring and Related Costs" Note 5 of the Notes to the Unaudited Condensed Consolidated Financial Statements.

RESULTS OF OPERATIONS - COMPARISON OF THE THREE- AND NINE-MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

On December 6, 2002, the Company completed the disposition of substantially all its operating assets, and the Company is now evaluating alternative ways to redeploy its assets into new businesses. The discussion below is therefore not meaningful to an understanding of future revenue, earnings, operations, business or prospects of the Company following such a redeployment of its assets.

GENERAL AND ADMINISTRATIVE

General and administrative expenses increased to $0.7 million during the quarter ended September 30, 2005, compared to $0.4 million during the quarter ended September 30, 2004. General and administrative expenses increased to $2.5 million during the nine-month period ended September 30, 2005 compared to $2.3 million during the same period in 2004. This trend is consistent with management's stated strategy to maintain our expenditure rate, to the extent practicable, near the level of our investment income until the completion of an acquisition or merger in connection with our asset redeployment strategy. General and administrative expenses include salaries and employee benefits, franchise taxes, rent, insurance, legal, accounting and other professional fees as well as public company expenses such as transfer agent fees and expenses. The increase in general and administrative expense for the three and nine months ended September 30, 2005, compared to the same periods last year, primarily was attributable to the write off of marketing expenses in 2004 and the recognition of deferred compensation expense for the restricted stock issued to Warren B. Kanders in April of 2003.

TRANSACTION EXPENSES

In the third quarter of 2004, the Company recognized $1.5 million in transaction expenses arising out of negotiations relating to a previously announced acquisition that terminated in September 2004 without the consummation of the acquisition. Transaction expenses recognized in the quarter ended September 30, 2004 represent legal, accounting, appraisal and other related fees and expenses. There were no comparable expenses during the quarter ended September 30, 2005.

DEPRECIATION

Depreciation decreased slightly to $83,000 in the three months ended September 30, 2005, compared to $86,000 in the same period ended September 30, 2004. Depreciation increased to $249,000 in the nine months ended September 30, 2005, compared to $100,000 in the same period ended September 30, 2004. The increase is primarily attributable to the Company initiating occupancy of its new corporate headquarters in June 2004 triggering the depreciation of the leasehold improvements.

OTHER INCOME

For the quarter ended September 30, 2005, the Company recorded a gain of $2,000 from foreign currency fluctuations compared to same period in 2004, when the Company had no gains or losses. During the nine months ended September 30, 2005, the Company recorded a net loss of less than $200 from foreign currency fluctuations as compared to the nine months ended September 30, 2004 when the Company recorded a gain of $17,000 from the sale of marketable securities.

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INTEREST INCOME

Interest income increased to $668,000 in the quarter ended September 30, 2005 from $313,000, in the same period of 2004. For the nine-month period ended September 30, 2005, interest income increased to $1.7 million from $0.8 million during the same period of 2004. The increase in interest income was due to an increase in interest rates received on our cash and cash equivalents and marketable securities.

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 quarters ended September 30, 2005 and 2004, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Cash used by operating activities was approximately $1.4 million during the nine-month period ended September 30, 2005. This was primarily attributable to the Company's net loss, a decrease in accounts payable and accrued liabilities and accrued interest receivable, prepaid and other current assets, offset by an increase in deferred rent, and non-cash items. Cash used in operating activities was approximately $0.7 million during the nine-month period ended September 30, 2004. This was primarily attributable to the Company's net loss, a decrease in deferred revenue, accrued interest receivable, prepaids and other current assets, offset by an increase in accounts payable and accrued liabilities, deferred rent and non-cash items.

Cash used by investing activities was approximately $32.0 million during the nine-month period ended September 30, 2005. The cash was used primarily for the purchase of marketable securities partially offset from the maturity of marketable securities. Cash provided by investing activities was approximately $31.9 million during the nine-month period ended September 30, 2004. The cash was provided primarily from the sale and maturity of marketable securities partially offset by the purchase of marketable securities, and an increase in construction costs associated with the leasehold improvements at our corporate headquarters in Stamford, Connecticut.

Cash provided by financing activities was approximately $0.8 million during the nine-month period ended September 30, 2005, compared to $51,000 during the same period of 2004. The cash provided by financing activities during the nine-month period ended September 30, 2005 and 2004, respectively, was attributable to proceeds from the exercise of stock options.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not hold derivative financial investments, derivative commodity investments, engage in foreign currency hedging or other transactions that expose us to material market risk.