SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K/A
AMENDMENT NO. 1 TO
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Month of November, 2001
AMDOCS LIMITED
Suite 5, Tower Hill House Le Bordage
St. Peter Port, Island of Guernsey, GY1 3QT Channel Islands
Amdocs, Inc.
1390 Timberlake Manor Parkway, Chesterfield, Missouri 63017
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F.
FORM 20-F X FORM 40-F
Indicate by check mark whether the registrant by furnishing the information
contained in this form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
YES NO X
This Amendment No. 1 to Report on Form 6-K is being filed in order to
include:
- the unaudited pro forma condensed combined statements of
operations for the twelve months ended September 30, 2001 and
for the three months ended December 31, 2001, in each case
reflecting the acquisition by Amdocs Limited ("Amdocs") from
Nortel Networks Corporation ("Nortel"), on November 28, 2001,
of substantially all of the assets of Nortel's Clarify
business ("Clarify"); and
- the audited financial statements of Clarify Inc. (the
predecessor of Clarify) for the years ended December 31, 1998
and 1999 and the period from January 1, 2000 through March 16,
2000, the audited financial statements of Clarify for the
period from March 17, 2000 through December 31, 2000, and the
unaudited condensed financial statements of Clarify for the
nine months ended September 30, 2001.
The Report on Form 6-K of Amdocs filed on December 12, 2001 is amended by
substituting the text below each of the following headers for the text that
appeared below each such header in the original report on Form 6-K.
FINANCIAL STATEMENTS AND PRO FORMA FINANCIAL INFORMATION
(a) Pro Forma Financial Information.
The unaudited pro forma condensed combined statements of operations for
the twelve months ended September 30, 2001 and for the three months ended
December 31, 2001 are set forth below.
(b) Financial Statements of Business Acquired.
The financial statements of Clarify Inc. (the predecessor of Clarify)
for the years ended December 31, 1998 and 1999 and the period from January 1,
2000 through March 16, 2000 and the financial statements of Clarify for the
period from March 17, 2000 through December 31, 2000 and for the nine months
ended September 30, 2001 are set forth below.
EXHIBITS
EXHIBIT NO. DESCRIPTION
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Deloitte & Touche LLP.
99.1* Amdocs Press Release dated November 28, 2001.
---------
* Previously filed.
1
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The unaudited pro forma condensed combined statements of operations for the
twelve months ended September 30, 2001 and the three months ended December 31,
2001, gives effect to the acquisition from Nortel of substantially all of the
assets of Clarify, which closed on November 28, 2001 (the "Acquisition"), as if
it had occurred on October 1, 2000.
The unaudited pro forma condensed combined statements of operations are
based upon, and should be read in conjunction with, (i) our historical audited
financial statements for the year ended September 30, 2001. (ii) our historical
unaudited financial statements for the three months ended December 31, 2001,
(iii) the historical audited financial statements of Clarify for the year ended
December 31, 2000, and (iv) the historical unaudited financial statements of
Clarify for the nine months ended September 30, 2001.
The aggregate purchase price for Clarify was $203.8 million in cash. The
purchase price is subject to final price adjustments that may result in a
reduction only. In addition, transaction costs were $7.2 million. We accounted
for the Acquisition as a business combination using the purchase method of
accounting, as required by Statements of Financial Accounting Standards No.
141, "Business Combinations." The total purchase price is being allocated to
Clarify's tangible assets and liabilities based on their respective estimated
fair values, on the date the transaction was consummated. We allocated the
excess of the purchase price over the fair value of the net tangible assets
acquired to identifiable intangible assets, including customer arrangements,
core technology, in-process research and development costs, and the remainder to
goodwill. In addition, deferred taxes will be recognized for the difference
between the book and tax basis of certain intangible assets.
We believe that the fair value of the tangible net assets is not materially
different from their historical book value. The allocation of the excess
purchase price over net tangible assets has been determined based on a
preliminary evaluation available at the date of the preparation of the unaudited
pro forma condensed combined financial information. A final determination of
purchase accounting adjustments will be made following the completion of the
evaluation.
The pro forma financial results are not intended to be a projection of
future results and are not necessarily indicative of the results that would have
occurred if the business combination had been in effect on the dates presented.
2
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS FOR
THE TWELVE MONTHS ENDED SEPTEMBER 30, 2001
(in thousands, except per share data)
(in U.S. dollars)
AMDOCS CLARIFY PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
----------- ----------- ----------- -----------
Revenue $ 1,533,910 $ 242,153 $ -- $ 1,776,063
Cost of revenue 853,242 80,971 --
934,213
Research and development 105,807 76,052 -- 181,859
Selling, general and administrative 195,592 166,421 -- 362,013
Amortization of goodwill and purchased
intangible assets 219,988 566,492 (566,492)(1)
6,700 (2)
14,448 (3) 241,136
Special charges -- 932,104 (905,000)(4) 27,104
----------- ----------- ----------- -----------
1,374,629 1,822,040 (1,450,344) 1,746,325
----------- ----------- ----------- -----------
Operating income (loss) 159,281 (1,579,887) 1,450,344 29,738
Interest income and other, net 22,286 137 (10,566)(5) 11,857
----------- ----------- ----------- -----------
Income (loss) before income taxes 181,567 (1,579,750) 1,439,778 41,595
Income taxes (tax benefit) 115,181 (44,366) 5,393 (6)
960 (7) 77,168
----------- ----------- ----------- -----------
Net income (loss) $ 66,386 $(1,535,384) $ 1,433,425 $ (35,573)
=========== =========== =========== ===========
Basic earnings (loss) per share $ 0.30 $ (0.16)
=========== ===========
Diluted earnings (loss) per share $ 0.29 $ (0.16)
=========== ===========
Basic weighted average number of shares
outstanding 222,002 222,002
=========== ===========
Diluted weighted average number of shares
outstanding 226,832 222,002
=========== ===========
See Notes to Unaudited Pro Forma Condensed Combined Financial Information for
discussion of adjustments.
3
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS FOR THE THREE
MONTHS ENDED DECEMBER 31, 2001
(in thousands, except per share data)
(in U.S. dollars)
AMDOCS CLARIFY PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
----------- ----------- ----------- -----------
Revenue $ 422,641 $ 20,000 $ -- $ 442,641
Cost of revenue 231,583 9,647 -- 241,230
Research and development 28,557 7,134 -- 35,691
Selling, general and administrative 53,779 11,293 -- 65,072
Amortization of goodwill and purchased
intangible assets 56,782 28,225 (28,225)(1)
1,117 (2)
2,408 (3) 60,307
In-process research and development and
nonrecurring charge 30,711 -- (17,400)(8) 13,311
--------- --------- --------- ---------
401,412 56,299 (42,100) 415,611
--------- --------- --------- ---------
Operating income (loss) 21,229 (36,299) 42,100 27,030
Interest income (expense) and other, net 3,327 (13) (1,090)(5) 2,224
--------- --------- --------- ---------
Income (loss) before income taxes 24,556 (36,312) 41,010 29,254
Income taxes 20,222 (3,190) 279 (6)
160 (7) 17,471
--------- --------- --------- ---------
Net income (loss) $ 4,334 $ (33,122) $ 40,571 $ 11,783
========= ========= ========= =========
Basic earnings per share $ 0.02 $ 0.05
========= =========
Diluted earnings per share $ 0.02 $ 0.05
========= =========
Basic weighted average number of shares
outstanding 222,696 222,696
========= =========
Diluted weighted average number of shares
outstanding 225,090 225,090
========= =========
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements for
discussion of adjustments.
4
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(in thousands, except per share data)
(in U.S. dollars)
Amdocs acquired Clarify on November 28, 2001. Accordingly, Clarify's
operations are included in the historical results of Amdocs from that date. The
amounts presented on the statement of operations for the three months ended
December 31, 2001 represent the historical results of Clarify for the two months
ended November 28, 2001.
Set forth below is the preliminary allocation of the preliminary purchase
price:
Purchase price to Nortel $ 203,750
Estimated transaction costs 7,150
---------
Total purchase price $ 210,900
=========
Allocation of total purchase price:
Tangible assets acquired $ 40,237
Liabilities assumed (52,557)
---------
Net tangible assets (12,320)
---------
In-process research and development (*) 17,400
Core technology 13,400
Customer arrangements 34,800
Deferred taxes resulting from the difference between the assigned
value of certain assets and their respective tax bases (2,297)
---------
Net identifiable intangible assets 63,303
---------
Goodwill(**) 159,917
---------
$ 210,900
=========
------------
(*) The amount of $17,400 allocated to in-process research and
development was charged to expense immediately upon the completion
of the transaction.
(**) Under FAS 142, goodwill in connection with the Acquisition will
not be amortized.
(1) Reflects the elimination of Clarify's historical amortization of
acquired intangible assets.
(2) Reflects amortization of $13,400 over 2 years of the core technology
resulting from the valuation at the time of the Acquisition.
(3) Reflects amortization of $34,800 over 3 years of the customer
arrangements resulting from the valuation at the time of the
Acquisition.
5
(4) Reflects the elimination of Clarify's historical nonrecurring charge
related to the write-down of acquired intangible assets.
(5) Reflects the elimination of interest income earned on the cash used for
the Acquisition.
(6) Reflects the elimination of Clarify's historical tax benefit related to
acquired intangible assets and nonrecurring charge.
(7) Reflects release of deferred taxes resulting from the differences
between the values assigned to core technology and customer arrangements
and their respective tax bases.
(8) Reflects elimination of in-process research and development expenses
included in Amdocs' historical financial statements as a result of the
Acquisition which are nonrecurring and attributable to the Acquisition.
6
INDEX TO CLARIFY FINANCIAL STATEMENTS
PAGE
----
Consolidated Balance Sheets for the Years Ended December 31, 1998 and 1997.......................... 8
Consolidated Statements of Income for the Years Ended December 31, 1998,
1997 and 1996.................................................................................. 9
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996............................................................... 10
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998,
1997 and 1996.................................................................................. 11
Notes to Consolidated Financial Statements.......................................................... 12
Report of Independent Accountants................................................................... 22
Independent Auditors' Report........................................................................ 23
Balance Sheets as of December 31, 1999 (Predecessor Company)
and December 31, 2000.......................................................................... 24
Statements of Operations for the Year Ended December 31, 1999
(Predecessor Company), the Period from January 1, 2000 through March 16,
2000 (Predecessor Company) and the Period
from March 17, 2000 Through December 31, 2000.................................................. 25
Statements of Stockholders' Equity/Net Investment for the Year
Ended December 31, 1999 (Predecessor Company), the Period
from January 1, 2000 Through March 16, 2000 (Predecessor Company)
and the Period from March 17, 2000 Through December 31, 2000................................... 26
Statements of Cash Flows for the Year Ended December 31, 1999
(Predecessor Company), the Period from January 1, 2000 through March 16,
2000 (Predecessor Company) and the Period
from March 17, 2000 Through December 31, 2000.................................................. 27
Notes to Financial Statements for the Year Ended
December 31, 1999 (Predecessor Company), the Period from January 1, 2000
through March 16, 2000 (Predecessor Company)
and the Period from March 17, 2000 through December 31, 2000................................... 28
Unaudited Statements of Net Assets as of September 30, 2001 and December 31, 2000................... 41
Unaudited Statements of Operations for the Nine Months Ended September 30, 2001,
the Period From January 1, 2000 Through March 16, 2000 (Predecessor
Company), and the Period From March 17, 2000 Through September 30, 2000........................ 42
Unaudited Statements of Cash Flows for the Nine Months Ended September 30, 2001, the
Period From January 1, 2000 Through March 16, 2000 (Predecessor Company),
and the Period From March 17, 2000 Through September 30, 2000.................................. 43
Notes to Unaudited Financial Statements for the Nine Months Ended September 30, 2001, the
Period From January 1, 2000 Through March 16, 2000 (Predecessor Company),
and the Period From March 17, 2000 Through September 30, 2000.................................. 44
7
CLARIFY INC.
BALANCE SHEETS
(in thousands, except per share data)
YEARS ENDED
DECEMBER 31,
--------------------------
1997 1998
--------------------------
ASSETS:
Current assets:
Cash and cash equivalents $11,956 $31,271
Short-term investments 19,239 25,917
Accounts receivable, net of allowances of
$1,310 in 1997 and $2,757 in 1998 32,854 45,224
Prepaid expenses and other current assets 2,463 2,604
Deferred tax assets 4,133 4,934
------------------------
Total current assets 70,645 109,950
Property and equipment, net 8,611 8,437
Long-term investments 5,167 516
Non-current deferred tax assets 1,559 1,860
Other non-current assets 849 1,837
------------------------
Total assets $86,831 $122,600
========================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 5,047 $ 5,826
Payroll related accruals 6,833 9,589
Other accrued liabilities 4,269 8,800
Income taxes payable 1,851 1,980
Unearned revenue 11,734 25,086
------------------------
Total current liabilities 29,734 51,281
========================
Commitments (Note 6).
Stockholders' equity:
Preferred stock, $.0001 par value, 5,000 shares
authorized; none outstanding
Common stock, $.0001 par value, 55,000 shares
authorized; shares issued and outstanding:
21,335 in 1997 and 22,168 in 1998 2 2
Additional paid-in-capital 51,640 59,127
Accumulated other comprehensive income 28 (602)
Deferred compensation (65) (18)
Retained earnings 5,492 12,810
------------------------
Total stockholders' equity 57,097 71,319
------------------------
Total liabilities and stockholders' equity $86,831 $122,600
========================
The accompanying notes are an integral part of these consolidated financial statements.
8
CLARIFY INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1997 1998
--------------------------------------
Revenues:
License fees $39,139 $59,214 $84,874
Services 17,183 29,003 45,636
--------------------------------------
Total revenues 56,322 88,217 130,510
--------------------------------------
Cost of revenues:
License fees 1,409 2,400 2,424
Services 10,711 18,149 26,165
--------------------------------------
Total cost of revenues 12,120 20,549 28,589
--------------------------------------
Gross margin 44,202 67,668 101,921
Operating expenses:
Product development and engineering 10,384 16,777 20,329
Sales and marketing 20,351 38,054 61,389
General and administrative 4,920 7,903 10,094
Merger costs 1,061 - -
--------------------------------------
Total operating expenses 36,716 62,734 91,812
--------------------------------------
Operating income 7,486 4,934 10,109
Interest income 1,653 1,437 1,536
Interest expense (9) (6) (31)
Other income (expense), net - (127) 2
--------------------------------------
Income before income taxes 9,130 6,238 11,616
Provision for income taxes 940 2,308 4,298
--------------------------------------
Net income $ 8,190 $ 3,930 $ 7,318
======================================
Basic net income per share $ 0.41 $ 0.19 $ 0.34
======================================
Shares used in per share computation-basic 20,143 20,909 21,683
======================================
Diluted net income per share $ 0.38 $ 0.18 $ 0.32
======================================
Shares used in per share computation-diluted 21,768 22,164 22,592
======================================
The accompanying notes are an integral part of these consolidated financial statements.
9
CLARIFY INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
ACCUMULATED RETAINED
COMMON STOCK ADDITIONAL OTHER DEFERRED EARNINGS TOTAL
-------------- PAID-IN COMPREHENSIVE STOCK ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL INCOME COMPENSATION (DEFICIT) TOTAL INCOME
---------------------------------------------------------------------------------------------
Balances, January 1, 1996 19,869 $2 $39,316 $ (5) $ (159) $(7,672) $31,482
Net income 8,190 8,190 $8,190
Other comprehensive income, net of tax
Translation adjustment (61) (61) (61)
------
Total comprehensive income $8,129
======
Exercise of stock options 442 224 224
Employee stock purchases 289 1,845 1,845
Amortization of deferred stock
option compensation 47 47
Forgiveness of notes payable
to stockholders 1,047 1,047
Tax benefit from exercise of
nonqualified stock options 4,171 4,171
--------------------------------------------------------------------------------------------
Balances, December 31, 1996 20,600 2 45,556 (66) (112) 1,565 46,945
Net income 3,930 3,930 $3,930
Other comprehensive income, net of tax
Translation adjustment 72 72 72
Change in unrealized gain on
investment 22 22 22
------
Total comprehensive income $4,024
======
Exercise of stock options 305 436 436
Employee stock purchases 463 3,370 3,370
Amortization of deferred stock option
compensation 47 47
Common stock repurchased for cash (33) (23) (23)
Tax benefit from exercise of
nonqualified stock options 2,301 2,301
Cumulative translation adjustment (3) (3)
--------------------------------------------------------------------------------------------
Balances, December 31, 1997 21,335 2 51,640 28 (65) 5,492 57,097
Net income 7,318 7,318 $7,318
Other comprehensive income, net of tax
Translation adjustment (618) (618) (618)
Change in unrealized gain on
investment (12) (12) (12)
------
Total comprehensive income $6,688
======
Exercise of stock options 369 1,383 1,383
Employee stock purchases 447 4,348 4,348
Amortization of deferred stock
option compensation 47 47
Common stock repurchased for cash (13) (3) (3)
Tax benefit from exercise of
nonqualified stock options 1,621 1,621
Fair value of options for services 138 138
--------------------------------------------------------------------------------
Balances, December 31, 1998 22,168 $2 $59,127 $ (602) $ (18) $12,810 $71,319
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
10
CLARIFY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
--------------------------------
Cash flows from operating activities:
Net income $ 8,190 $ 3,930 $ 7,318
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 1,750 4,666 5,689
Provision for doubtful accounts 596 874 2,285
Deferred income taxes (801) (1,909) (1,101)
Loss on disposal of assets 133 271 --
Other (61) 67 94
Changes in assets and liabilities:
Accounts receivable (11,441) (15,913) (13,570)
Prepaid and other current assets (663) (707) (25)
Accounts payable 2,811 1,157 765
Payroll related accruals 2,777 2,085 2,693
Other accrued liabilities 2,419 3,702 4,530
Unearned revenue 7,462 (955) 12,489
--------------------------------
Net cash provided by (used for)
operating activities 13,172 (2,732) 21,167
--------------------------------
Cash flows from investing activities:
Purchase of property and equipment (8,048) (5,092) (5,521)
Purchase of investments (5,470) (31,483) (21,823)
Sale and maturities of investments 1,995 10,519 19,690
Increase in other assets (758) (9) (972)
--------------------------------
Net cash used for investing activities (21,281) (26,065) (8,626)
--------------------------------
Cash flows from financing activities:
Payments of capital lease obligations (81) -- --
Proceeds from issuance of common stock, net 2,069 6,084 7,487
Borrowings under (payments of) notes payable (215) -- --
--------------------------------
Net cash provided by financing activities 1,773 6,084 7,487
--------------------------------
Net increase in cash and cash equivalents 2,664 (22,713) 20,028
Effect of foreign exchange rate changes on cash -- 192 (713)
Cash and cash equivalents, beginning of year 31,813 34,477 11,956
================================
Cash and cash equivalents, end of year $ 34,477 $ 11,956 $ 31,271
================================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 9 $ 6 $ 31
================================
Cash paid during the year for taxes $ 464 $ 233 $ 3,819
================================
Supplemental disclosure of noncash
investing and financing activities:
Change in unrealized holding gains on investments $ 22 $ (12)
====================
Tax benefit from exercise of nonqualified
stock options $ 4,171 $ 2,301 $ 1,621
================================
Forgiveness of notes payable to stockholders $ 1,047
========
The accompanying notes are an integral part of these consolidated financial statements.
11
CLARIFY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS OF THE COMPANY
Clarify, Inc. (the "Company"), a Delaware corporation, was founded in August
1990 to develop, market, and support adaptable client/server application
software designed to address the external and internal service, support, and
product quality needs of today's global enterprises. The Company markets its
software and services primarily through its direct sales organization.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPALS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated. The functional currency for the majority of
the Company's foreign operations is the applicable local currency. The
translation from the applicable foreign currency to U.S. dollars is performed
for balance sheet accounts using current exchange rates in effect at the
balance sheet date and for revenue and expense accounts using the weighted
average exchange rate during the period. Adjustments resulting from such
translation are reflected in accumulated other comprehensive income. Gains or
losses resulting from foreign currency transactions are included in the results
of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS
The Company considers cash and all highly liquid investments purchased with an
original or remaining maturity of less than three months at the date of
purchase to be cash equivalents. Short-term and long-term investments are
classified as available-for-sale and are carried at fair market value.
Unrealized holding gains and losses on such investments are reported, net of
related taxes, as a part of accumulated other comprehensive income in a
separate component of stockholders' equity. Realized gains and losses on sales
of such investments are reported in earnings and computed using the specific
identification cost method.
The amounts reported for cash equivalents, accounts receivables and other
financial instruments are considered to approximate fair values based upon
comparable market information available at the respective balance sheet dates.
The financial instruments that potentially subject the Company to
concentrations of credit risk comprise principally cash, investments and trade
accounts receivable. Cash and cash equivalents and investments are, for the
most part, custodied with three major financial institutions. Deposits held
with banks may exceed the amount of insurance provided on such deposits. These
deposits may generally be redeemed upon demand and, therefore, bear minimal
risk. The Company's customer base is dispersed across many different geographic
areas throughout the United States, Europe, and Asia and consists principally of
companies in the networking equipment, high-end software, telecommunications,
and computer systems industries. The Company performs ongoing credit
evaluations of its customers and maintains an allowance for potential credit
losses. Collateral, such as letters of credit and bank guarantees, is generally
not required.
In the normal course of business, the Company has exposures to foreign
currency fluctuations arising from foreign currency sales and purchases and
intercompany transactions, among other things. The Company uses foreign
exchange forward contracts to limit its exposure to foreign exchange losses
arising from foreign currency payables and receivables. The Company evaluates
its net exposure therefrom and enters into forward contracts to hedge the net
exposure over a specified amount. These contracts are executed with
credit-worthy financial institutions and are denominated in currencies of major
industrial nations. Gains and losses on these contracts serve as hedges in that
they offset fluctuations that would otherwise impact the Company's financial
results. Costs associated with entering into such contracts are generally
amortized over the life of the instruments and are not material to the
Company's financial results.
12
At December 31, 1998, the Company had foreign currency forward contracts
outstanding to hedge foreign currency intercompany accounts receivable and
accounts payable. These contracts typically have 30-day maturities and are
intended to reduce exposure to foreign currency exchange risk. The total
aggregate fair value of and the net unrealized loss on foreign exchange
contracts were $10.3 million and $0.2 million, respectively.
REVENUE RECOGNITION
The Company's revenue is derived from primarily two sources, across many
industries: (i) product license revenue, derived primarily from product sales
to customers, including large scale enterprises; and (ii) service and support
revenue, derived primarily from providing software updates, support, training,
and consulting services to customers.
The Company adopted the provisions of Statement of Position (SOP) 97-2
"Software Revenue Recognition", as amended by SOP 98-4 "Deferral of the
Effective Date of Certain Provisions of SOP 97-2", effective January 1, 1998.
SOP 97-2 supersedes SOP 91-1 "Software Revenue Recognition", and delineates the
accounting for software product and maintenance revenue. Under SOP 97-2, the
Company recognizes product revenue upon shipment if a signed contract exists,
the fee is fixed and determinable and collection of resulting receivables is
probable. In 1997 and 1996, the Company's revenue recognition policy was the
same as set forth above.
For contracts with multiple obligations (e.g. deliverable and
undeliverable products, maintenance, and other services), the Company allocates
revenue to each component of the contract based on objective evidence of its
fair value, which is specific to the Company, or for products not being sold
separately, the price established by management. The Company recognizes revenue
allocated to undelivered products when the criteria for product revenue set
forth above are met. The Company recognizes revenue allocated to maintenance
fees for ongoing customer support and product updates ratably over the period
of the maintenance contract. Payments for maintenance fees are generally made
in advance and are non-refundable. For revenue allocated to training and
consulting services, the Company recognizes revenue as the related services are
performed.
COMPREHENSIVE INCOME
In accordance with Statement of Financial Accounting Standards (SFAS) No. 130
"Reporting Comprehensive Income", the Company has elected to display the total
nonowner changes in equity as "Accumulated Other Comprehensive Income" on the
Consolidated Balance Sheets and in the Consolidated Statements of Stockholders'
Equity. Comprehensive income is the change in equity of a business enterprise
resulting from transactions from nonowner sources. The components of
accumulated other comprehensive income for the two years ended December 31,
1998 are as follows (in thousands):
1997 1998
----------------
Unrealized net holding gain on investments $ 22 $ 10
Cumulative translation adjustment 6 (612)
---------------
Accumulated other comprehensive income $ 28 $(602)
===============
EARNINGS PER SHARE
The Company calculates earnings per share in accordance with the requirements
of Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share". Basic earnings per share is computed based on the weighted average
number of shares outstanding during the period. Diluted earnings per share is
computed based on the weighted average number of shares outstanding during the
period increased by the effect of dilutive stock options and stock purchase
contracts, using the treasury stock method.
The following table presents information necessary to calculate basic and
diluted earnings per common and common equivalent share (in thousands):
1996 1997 1998
---------------------------
Weighted average shares outstanding-Basic 20,143 20,909 21,683
Dilutive common stock equivalents 1,625 1,255 909
---------------------------
Weighted average shares and equivalents-Diluted 21,768 22,164 22,592
===========================
Net income for basic and diluted earnings per share computation $ 8,190 $ 3,930 $ 7,318
===========================
13
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets
(generally three to five years). Assets under capital leases and leasehold
improvements are amortized over the lesser of their useful lives or the term
of the lease. Upon disposal, the assets and related accumulated depreciation
are removed from the Company's accounts, and the resulting gains or losses are
reflected in the statement of income.
INCOME TAXES
Deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The Company is required to adjust its
deferred tax liabilities in the period when tax rates or the provisions of the
income tax laws change. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized.
PRODUCT DEVELOPMENT AND ENGINEERING EXPENDITURES
Costs related to research, design and development of products are charged to
product development and engineering expenses as incurred. Software development
costs are capitalized beginning when a product's technological feasibility has
been established and ending when a product is available for general release to
customers. Generally, the Company's products are released soon after
technological feasibility has been established. As a result, costs subsequent
to achieving technological feasibility have not been significant and all
software development cost have therefore been expensed.
ADVERTISING COSTS
Advertising costs are expensed as incurred and totaled $258,000, $690,000, and
$972,000 during the years ended December 31, 1996, 1997, and 1998, respectively.
STOCK SPLIT
On September 18, 1996, the Company's Board of Directors authorized a two-for-one
stock split payable in the form of a dividend of one additional share of the
Company's common stock for each share owned by stockholders of record on
September 30, 1996. All share and per share information in the accompanying
financial statements has been restated to give retroactive recognition to the
stock split for all periods presented.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123 (SFAS 123) "Accounting for
Stock-Based Compensation," encourages but does not require companies to record
compensation cost for stock-based compensation plans at fair value. The Company
has chosen to continue to account for employee stock options using the
intrinsic value method prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees." Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Management has not yet evaluated the effects of this change on its operations.
SFAS No. 133 will be effective for the Company's fiscal year 2000. Management
believes that this statement will not have a significant impact on the Company.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the current
year presentation. Such reclassifications had no impact on net income or
stockholders' equity for any year presented.
14
3. BUSINESS COMBINATION
In April 1996, the Company acquired Metropolis Software, inc. (Metropolis), a
sales force automation software provider. The Company issued approximately
663,000 shares of its common stock in exchange for substantially all of the
outstanding capital stock of Metropolis. The Company also assumed stock options
that converted into options to purchase approximately 77,000 shares of the
Company's common stock. The business combination was accounted for as a pooling
of interests and the consolidated financial statements have been restated as if
Metropolis had been combined for all periods presented.
Revenues and net income (loss) of the separate and combined companies are
as follows (in thousands):
Three months ended March 31, 1996
Revenues:
The Company $ 7,784
Metropolis 1,170
-------
Combined $ 8,954
=======
Net Income (loss)
The Company $ 959
Metropolis (91)
-------
Combined $ 868
=======
4. INVESTMENTS
Investments at December 31, 1997 and 1998 are summarized below (in
thousands):
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------------------------------------------------
December 31, 1997:
State and municipal securities $ 19,346 $ 20 $ - $ 19,366
US Gov't. Agency securities 4,038 2 - 4,040
Corporate debt securities 1,000 - - 1,000
-------- ---- ---- --------
$ 24,384 $ 22 $ - $ 24,406
======== ==== ==== ========
December 31, 1998:
State and municipal securities $ 22,160 $ 10 $ (2) $ 22,168
US Gov't. Agency securities 2,063 2 - 2,065
Corporate debt securities 2,200 - - 2,200
-------- ---- ---- --------
$ 26,423 $ 12 $ (2) $ 26,433
======== ==== ==== ========
At December 31, 1998, investments with maturity dates of 90 days or less
totaled $20.5 million, investments with maturity dates ranging from 91 days to
one year totaled $5.4 million, and investments with maturity dates ranging from
one to three years totaled $0.5 million.
15
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
Years Ended December 31. 1997 1998
------------------------
Leasehold improvements $ 2,242 $ 2,395
Equipment 9,710 13,077
Furniture and fixtures 2,750 3,278
Purchased software 967 2,203
------------------------
15,669 20,953
Less accumulated depreciation (7,058) (12,516)
Property and equipment, net $ 8,611 $ 8,437
========================
6. COMMITMENTS
The Company leases its principal operating facility and off-site sales
offices under operating leases expiring no later than 2006. Future minimum
lease payments under these leases, as of December 31, 1998, are as follows (in
thousands):
1999 $ 5,753
2000 7,533
2001 7,436
2002 7,134
2003 7,224
Thereafter 18,905
--------
$ 53,985
========
Rent expense was approximately $1,773,000, $4,150,000 and $4,790,000 in
1996, 1997 and 1998, respectively.
7. STOCKHOLDERS' EQUITY
STOCKHOLDER RIGHTS PLAN
In June 1997, the Company's Board of Directors adopted a Stockholder Rights
Plan (the "Rights Plan") in which preferred stock purchase rights were
distributed as a dividend at the rate of one Right for each share of common
stock held as of the close of business on June 30, 1997. The Company adopted
the plan to guard against partial tender offers and other abusive tactics that
might be used in an attempt to gain control of the Company without paying all
stockholders a fair price for their shares. The Rights Plan, which expires on
June 13, 2007, will not prevent takeovers, but is designed to deter coercive
takeover tactics and to encourage anyone attempting to acquire the Company to
first negotiate with the Board.
16
Each Right will entitle each stockholder to buy one-one thousandth of a
newly issued share of Series A Junior Participating Preferred Stock of the
Company at an exercise price of $95.00. The Rights will be exercisable only if a
person or group, other than an exempted person, makes a tender offer for, or
acquires beneficial ownership of 15% or more of the Company's then-outstanding
common stock.
If any person other than an exempted person becomes the beneficial owner of
15% or more of the Company's outstanding common stock, then each Right not owned
by such person or certain related parties will entitle its holders to purchase,
at the Right's then-current exercise price, shares of the Company's common stock
(or, in certain circumstances, cash, property or other securities of the
Company) having a market value equal to twice the then-current exercise price.
In addition, if, after a person becomes the beneficial owner of 15% or more of
the Company's outstanding common stock, the Company is acquired in a merger or
other business combination transaction, or sells 50% or more of its assets or
earning power to another person, each Right will entitle its holder to purchase,
at the Right's then-current exercise price, shares of common stock of such other
person having a market value equal to twice the then-current exercise price.
The Company's Board of Directors will generally be entitled to redeem the
Rights at $.01 per Right at any time prior to a person or group acquiring 15% or
more of the Company's common stock.
EMPLOYEE STOCK-BASED COMPENSATION PLANS
1995 Stock Option/Stock Issuance Plan
At December 31, 1998, approximately 5,315,300 shares of common stock were
authorized for issuance under the Company's 1995 Stock Option/Stock Issuance
Plan (the "1995 Plan"), which serves as the successor equity incentive program
to the Company's 1991 Stock Option/Stock Issuance Plan (the "1991 Plan"). The
1995 Plan will terminate on September 13, 2005, unless sooner terminated by the
Board of Directors.
The 1995 Plan is divided into three separate components: (i) the
Discretionary Option Grant Program under which eligible individuals may, at the
discretion of the Plan Administrator, be granted incentive or non-statutory
stock options to purchase shares of common stock at an exercise price not less
than 100% or 85%, respectively, of their fair market value on the grant date;
(ii) the Stock Issuance Program under which individuals may, at the Plan
Administrator's discretion, be issued shares of common stock directly either by
the purchase of such shares at a price not less than 85% of their fair market
value at the time of issuance or in consideration of the past performance of
services; and (iii) the Automatic Option Grant program under which non-statutory
stock option grants will be automatically made at periodic intervals to eligible
non-employee Board members to purchase shares of common stock at an exercise
price equal to 100% of their fair market value on the grant date. Options are
exercisable at times and in increments as specified by the Plan Administrator
and generally expire ten years after grant.
On May 9, 1997, the Compensation Committee of the Board of Directors
approved the repricing of certain outstanding stock options under the Company's
1995 Plan with exercise prices in excess of the fair market value on May 9,
1997. Each employee or officer who elected prior to May 9, 1997 to participate
in the repricing program received a new option with an exercise price of $13.50
per share (the fair market value on May 9, 1997). Each repriced option retained
its original vesting schedule except that no portion of the option could be
exercised prior to December 9, 1997 and no vesting accrued between May 9, 1997
and December 9, 1997. Certain options granted within 12 months of May 9, 1997
were subject to a longer vesting schedule. Approximately 1,008,000 shares
subject to stock options were repriced pursuant to this program.
1999 NON-EMPLOYEE DIRECTORS' OPTION PLAN
In October 1998, the Board of Directors approved the new Non-Employee
Director's Option Plan (subject to stockholder approval) to include an initial
pool of 300,000 shares available for issuance under the plan. This plan will
replace the automatic grant program of the 1995 Stock Option/Stock Issuance
Plan. Options are exercisable at times and increments as specified by the Plan
Administrator and generally expire ten years after grant date. The new plan has
a term of ten years.
There were no repricings of outstanding stock options during the year ended
December 31, 1998.
The share reserve for the 1995 Plan automatically increases on the first
trading day in each of the 1996 (1,048,200 shares reserved), 1997 (1,158,600
shares reserved), 1998 (1,226,200 shares reserved), and 1999 (1,351,400 shares
reserved) and calendar years by the number of shares equal to five percent of
the total number of shares of the Company's common and common stock equivalents
outstanding on December 31 of the immediately preceding calendar year.
17
Option activity for all plans is summarized as follows:
Options Outstanding
---------------------------------
Weighted Average
Number Exercise Price
of Shares per Share
---------------------------------
Outstanding, January 1, 1996
(1,744,700 exercisable at a weighted average price of $1.35) 1,833,400 $ 1.57
Options granted 1,365,800 26.46
Options exercised (442,100) 0.51
Options cancelled (188,100) 13.12
---------- -------
Outstanding, December 31, 1996
(1,296,100 exercisable at a weighted average price of $2.06) 2,569,000 14.14
Options granted 2,276,700 13.74
Options exercised (305,000) 1.42
Options cancelled (1,351,800) 26.81
---------- -------
Outstanding, December 31, 1997
(1,120,500 exercisable at a weighted average price of $4.02) 3,188,900 9.71
Options granted 2,635,300 12.88
Options exercised (369,100) 3.88
Options cancelled (597,500) 11.99
---------- -------
Outstanding, December 31, 1998
(1,343,100 exercisable at a weighted average price of $8.30) 4,857,600 $ 11.59
========== =======
The weighted average fair value of options granted for 1996, 1997 and 1998
was $12.82, $5.88 and $7.75, respectively.
At December 31, 1998, approximately 10,000 shares of common stock issued
under the 1991 Plan were subject to repurchase. At December 31, 1998, an
aggregate of approximately 455,100 shares were available for future grant under
the 1991 and 1995 plans.
The following information applies to options outstanding at December 31,
1998:
Options Outstanding Options Exercisable
-------------------------------------------------------- -------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
----------------------------------------------------------------------------------------------------------------------------------
$ 0.11 - 3.56 510,700 6.23 $ 1.67 510,700 $ 1.67
4.00 - 8.69 563,100 8.81 7.77 149,300 6.31
9.22 - 11.25 510,100 8.84 10.87 124,100 11.04
11.31 - 12.15 623,600 9.07 11.87 89,600 11.61
12.31 - 13.44 651,400 9.21 13.05 25,400 12.95
13.50 - 13.50 695,900 8.28 13.50 283,200 13.50
13.56 - 14.81 556,300 9.15 14.17 48,500 14.32
14.88 - 16.88 508,900 8.96 15.00 35,900 15.45
17.00 - 24.13 236,600 8.75 19.73 75,900 20.08
34.50 - 34.50 1,000 8.07 34.50 500 34.50
--------------- --------- ---- ------- --------- -------
$ 0.11 - 34.50 4,857,600 8.60 $ 11.59 1,343,100 $ 8.30
=============== ========= ==== ======= ========= =======
18
EMPLOYEE STOCK PURCHASE PLAN
At December 31, 1998, the Company had a total of approximately 642,000 shares
of common stock reserved for future issuance under its Employee Stock Purchase
Plan (the ESPP). The purpose of the ESPP is to provide eligible employees of
the Company with a means of acquiring common stock of the Company through
payroll deductions. The plan consists of four six-month purchase periods in
each two year offering period. Employees purchase stock at 85% of the market
value at either the beginning of the offering period or at the end of the
purchase period, whichever price is lower. No participant may purchase more
than $25,000 worth of common stock in any calendar year. Employees may end
their participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment with the Company.
During 1996, 1997 and 1998, approximately 289,000, 463,000 and 477,000 shares,
respectively, were sold through the ESPP.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." If compensation cost for the 1995 Plan and the ESPP had been
determined based on the fair value on the grant dates for awards in 1996 and
1995 consistent with the provisions of SFAS No. 123, the Company's net income
(loss) and diluted net income (loss) per share would have been reduced to the
pro forma amounts indicated below (in thousands except per share data):
1996 1997 1998
-----------------------------
Pro forma net income (loss) $ 6,398 $ (849) $ 434
-----------------------------
Pro forma basic net income (loss) per share $ 0.32 $ (0.04) $0.02
-----------------------------
Pro forma diluted net income (loss) per share $ 0.29 $ (0.04) $0.02
-----------------------------
Pro forma net income (loss) reflects only options granted since January 1,
1995. Therefore, the full impact of calculating compensation cost under SFAS
123 is not reflected in the pro forma amounts presented above because
compensation cost is reflected over the options' vesting period of generally
four or five years and compensation cost for options granted prior to January
1, 1995 is not considered.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes options-pricing model with the following
weighted-average assumptions used:
1996 1997 1998
-----------------------------
Risk free interest rate 6.00% 5.74% 5.15%
Expected life (years) 4 4 4
Volatility 0.55 0.55 0.77
Dividends yield 0.00 0.00 0.00
The fair value of employees' stock purchase rights under the ESPP was
estimated using the Black-Scholes model with the following assumptions:
1996 1997 1998
---------------------------------
Risk free interest rate 6.00% 5.74% 5.50%
Expect life (months) 6 and 12 6 and 12 6
Volatility 0.55 0.55 0.77
Dividends yield 0.00 0.00 0.00
19
8. INCOME TAXES
The components of the provision for income taxes are as follows (in
thousands):
1996 1997 1998
----------------------------------
Federal-current payable $ 152 $ 3,185 $ 5,284
Federal-deferred 3,172 (802) (735)
State-current payable 5 452 686
State deferred 612 (142) 61
Foreign-deferred - (961) (1,385)
Valuation allowance (3,001) 576 387
----------------------------------
Provision for income tax $ 940 $ 2,308 $ 4,298
==================================
The reconciliation of the statutory federal income tax to the effective rate
is as follows (as a percent of pretax income):
1996 1997 1998
---------------------------
Federal statutory tax rate 34% 34% 35%
State tax, net of federal tax benefit 6 5 4
Permanent differences 3 (3) 1
Tax credits utilized (4) (4) (5)
Utilization of net operating losses (19) 0 0
Change in valuation allowance (14) 9 3
Other 4 (4) (1)
----------------------------
Provision for income tax 10% 37% 37%
============================
The significant components of deferred tax assets are as follows (in
thousands):
1997 1998
------------------
Foreign loss carryforward $ 961 $ 2,124
Tax credit carryforwards 1,360 600
Reserves 862 1,525
Accrued expenses 1,798 1,367
Deferred revenue 788 2,232
Other 499 (91)
Valuation allowance (576) (963)
------------------
Net deferred tax assets $ 5,692 $ 6,794
==================
Current deferred tax assets $ 4,133 $ 4,934
Non-current deferred tax assets 1,559 1,860
------------------
Net deferred tax assets $ 5,692 $ 6,794
==================
The Company has not recorded a valuation allowance for those deferred tax
assets that management believes are more likely than not to be realized through
taxable income in the carryback period or through future taxable income.
However, at December 31, 1998, a valuation allowance of approximately $963,000
has been recorded. This valuation allowance is provided because of the
uncertainty regarding realization of certain foreign tax net operating losses
as a result of the limited profitable operating history in certain foreign tax
jurisdictions.
At December 31, 1998, the Company had a foreign loss carryforward of
$6,069,000 and state tax credit carryforwards totalling $923,000. The
carryforwards will expire between 2001 and 2008.
20
9. SEGMENT INFORMATION AND MAJOR CUSTOMERS
In accordance with Statement of Financial Accounting Standards (SFAS) No. 131,
"Disclosures about Segments of an Enterprise and Related Information," the
Company is required to disclose information about its products, services, the
geographic area in which it operates and major customers. The Company operates
in a single industry segment encompassing the design, development, marketing
and technical support for front-office automation software.
The following are revenues and long-lived assets by geographic area as of
and for the years ended December 31 (in thousands):
Revenues Long-Lived Assets
------------------------------ -----------------
1996 1997 1998 1997 1998
--------------------------------------------------
U.S. ..................... $48,620 $79,121 $ 97,928 $7,639 $7,257
International ............ 7,702 9,096 32,582 972 1,180
--------------------------------------------------
Total .................... $56,322 $88,217 $130,510 $8,611 $8,437
==================================================
No one customer accounted for more than 10% of total revenues in 1996,
1997 and 1998.
10. RETIREMENT PLAN
Effective August 1991, the Company began a voluntary 401(k) plan covering
substantially all employees. The plan provides for discretionary employer
contributions. No employer contributions were made or authorized in 1996, 1997
or 1998.
11. SUBSEQUENT EVENT
On March 12, 1999, the Board of Directors approved an amendment to the current
ESPP. The Company anticipates that the shares available for future purchase
under the current plan will be depleted on or before April 30, 2000. The Board
approved the following amendment to include one final six-month offering period
commencing May 1, 1999 and ending October 31, 1999. All other terms for
participation by employees will remain the same. The current plan will terminate
after this final purchase period. Additionally, the Board approved the new 1999
Employee Stock Purchase Plan (subject to stockholder approval) to include an
initial pool of 1,000,000 shares available for purchase under the Plan plus an
annual increase to the shares reserved under the Plan on the first day of each
fiscal year in 2000, 2001, 2002, 2003 and 2004 equal to the lesser of (i)
500,000, (ii) 5% of the Company's common stock outstanding on the last day of
the preceding fiscal year, or (iii) a lesser number of shares as determined by
the Board, for stock purchases. The new Plan has a term of 20 years.
21
CLARIFY INC.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF CLARIFY, INC.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Clarify,
Inc. and its subsidiaries at December 31, 1997 and 1998, and the results of
their operations and their cash flows in each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audit of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ Pricewaterhouse Coopers LLP
San Jose, California, January 19, 1999
except for Note 11 for which the date is March 12, 1999
22
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Nortel Networks Corporation
Brampton, Ontario (Canada)
We have audited the accompanying combined balance sheet of the Clarify business
("Clarify") of Nortel Networks Corporation ("Nortel Networks") as of December
31, 2000, and the related combined statements of operations, net investment and
cash flows for the period from March 17, 2000 (acquisition date) to December 31,
2000. We have also audited the accompanying consolidated balance sheet of the
predecessor of the Clarify business, Clarify Inc., as of December 31, 1999 and
the related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended, and for the period from January 1, 2000 to March
16, 2000. These financial statements are the responsibility of Nortel Networks'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, the balance sheet of the
Clarify business of Nortel Networks as of December 31, 2000 includes the net
assets acquired by Nortel Networks in its purchase of Clarify on March 16, 2000,
after giving effect to the allocation of Nortel Networks' purchase price to
Clarify's net assets and to the changes in the net assets of Clarify subsequent
to the acquisition; the related combined statements of operations, net
investment and cash flows reflect the results of operations and the cash flows
of Clarify subsequent to such acquisition after giving effect to the allocation
of Nortel Networks' purchase price to Clarify's net assets.
In our opinion, such combined financial statements present fairly, in all
material respects, the financial position of the Clarify business of Nortel
Networks as of December 31, 2000, and the results of its operations and its cash
flows for the period from March 17, 2000 to December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the above-mentioned consolidated financial statements of the
predecessor of Clarify present fairly, in all material respects, its financial
position as of December 31, 1999 and its results of operations and its cash
flows for the year ended December 31, 1999, and for the period from January 1,
2000 to March 16, 2000, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Deloitte & Touche LLP
January 7, 2002
23
CLARIFY
(A BUSINESS OF NORTEL NETWORKS CORPORATION)
BALANCE SHEETS
(In thousands, except par value amounts)
Predecessor
Company
December 31, December 31,
ASSETS 1999 2000
---------- ----------
Current assets:
Cash and cash equivalents .................................................... $ 37,491 $ 13,459
Short-term investments ....................................................... 21,210 --
Accounts receivable, net of allowance for doubtful accounts and returns
of $5,894 in 1999 and $876 in 2000 ......................................... 76,243 94,058
Prepaid expenses and other current assets..................................... 7,696 8,868
Deferred tax assets .......................................................... 7,518 12,208
Receivable from Nortel Networks Corporation .................................. -- 9,426
---------- ----------
Total current assets ................................................ 150,158 138,019
Property and equipment, net .................................................... 16,984 15,735
Long-term investments .......................................................... 19,587 --
Noncurrent deferred tax assets ................................................. 3,267 20,404
Other noncurrent assets ........................................................ 1,146 1,187
Acquired intangibles, net ...................................................... 14,959 1,450,595
---------- ----------
Total assets ................................................................... $ 206,101 $1,625,940
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY / NET INVESTMENT
Current liabilities:
Accounts payable ............................................................. $ 17,800 $ 15,065
Payroll-related accruals ..................................................... 14,384 12,146
Other accrued liabilities .................................................... 10,014 13,036
Income taxes payable ......................................................... 205 4,216
Unearned revenue ............................................................. 36,504 56,230
---------- ----------
Total current liabilities ........................................... 78,907 100,693
========== ==========
Commitments (Note 5)
Stockholders' equity/net investment:
Nortel Networks Corporation net investment ................................... -- 1,525,247
Preferred stock, $.0001 par value, 5,000 shares authorized; none outstanding . --
Common stock, $.0001 par value, 55,000 shares authorized; 24,060 shares issued
and outstanding in 1999 .................................................... 2
Additional paid-in-capital ................................................... 100,508
Accumulated other comprehensive loss ......................................... (803)
Retained earnings ............................................................ 27,487
---------- ----------
Total stockholders' equity/net investment ........................... 127,194 1,525,247
---------- ----------
Total liabilities and stockholders' equity/net investment ...................... $ 206,101 $1,625,940
========== ==========
See notes to financial statements.
24
CLARIFY
(A BUSINESS OF NORTEL NETWORKS CORPORATION)
STATEMENTS OF OPERATIONS
(In thousands)
Predecessor Company
-----------------------------
Period from Period From
January 1, March 17,
Year Ended 2000 to 2000 to
December 31, March 16, December 31,
1999 2000 2000
--------- --------- ---------
Revenues:
License fees ....................... $ 134,687 $ 4,330 $ 159,647
Services ........................... 96,010 22,293 118,292
--------- --------- ---------
Total revenues ............ 230,697 26,623 277,939
--------- --------- ---------
Cost of revenues:
License fees ....................... 3,764 1,252 5,522
Services ........................... 50,935 13,397 59,865
--------- --------- ---------
Total cost of revenues .... 54,699 14,649 65,387
--------- --------- ---------
Gross margin ......................... 175,998 11,974 212,552
Operating expenses:
Product development and engineering 29,837 9,395 56,237
Sales and marketing ................ 101,706 31,186 118,784
General and administrative ......... 14,803 3,946 15,648
In-process research and development 2,348 -- 63,939
Merger-related expenses ............ 2,464 -- --
Amortization of acquired intangibles 978 810 557,223
--------- --------- ---------
Total operating expenses .. 152,136 45,337 811,831
--------- --------- ---------
Operating income (loss) .............. 23,862 (33,363) (599,279)
Interest income ...................... 2,225 599 829
Interest expense ..................... (41) (4) (1)
Other income (expense), net .......... 539 214 (1,678)
--------- --------- ---------
Income (loss) before income taxes .... 26,585 (32,554) (600,129)
Provision (benefit) for income taxes . 11,908 (14,773) (28,194)
--------- --------- ---------
Net income (loss) .................... $ 14,677 $ (17,781) $(571,935)
========= ========= =========
See notes to financial statements.
25
CLARIFY
(A BUSINESS OF NORTEL NETWORKS CORPORATION)
STATEMENTS OF STOCKHOLDERS' EQUITY / NET INVESTMENT
(In thousands)
NORTEL ACCUMULATED
NETWORKS OTHER DEFERRED TOTAL
CORPORATION COMMON STOCK ADDITIONAL COMPRE- STOCK COMPRE-
NET -------------- PAID-IN HENSIVE COMPEN- RETAINED HENSIVE
INVESTMENT SHARES AMOUNT CAPITAL INCOME SATION EARNINGS TOTAL INCOME
----------- ------ ------ ---------- ----------- -------- -------- -------- --------
Predecessor company:
Balances, January 1, 1999 ..... 22,168 $ 2 $ 59,127 $ (602) $ (18) $ 12,810 $ 71,319
Net income .................... 14,677 14,677 $ 14,677
Other comprehensive loss,
net of tax:
Translation adjustment ....... (116) (116) (116)
Change in unrealized gain
on investment ............... (85) (85) (85)
---------
Total comprehensive
income ................. $ 14,476
=========
Exercise of stock options ..... 1,217 11,896 11,896
Employee stock purchases ...... 414 5,486 5,486
Common stock issued for
Newtonian Acquisition ........ 261 11,162 11,162
Amortization of deferred
stock option compensation .... 18 18
Tax benefit from exercise
of nonqualified stock
options ...................... 12,837 12,837
------ ------ -------- ------ ----- -------- --------
Balances, December 31, 1999 ... 24,060 $ 2 100,508 (803) -- 27,487 127,194
Net loss ...................... (17,781) (17,781) $(17,781)
Other comprehensive income,
net of tax:
Translation adjustment ....... 291 291 291
Change in unrealized gain
on investment ............... 6 6 6
---------
Total comprehensive
loss ................... $ (17,484)
=========
Exercise of stock options ..... 267 3,552 3,552
Employee stock purchases ...... 54 3,730 3,730
Tax benefit from exercise
of nonqualified stock
options ...................... 4,740 4,740
------ ------ -------- ------ ----- -------- --------
Balances, March 16, 2000 ...... 24,381 $ 2 $112,530 $ (506) $ -- $ 9,706 $121,732
====== ====== ======== ====== ===== ======== ========
================================================================================================================================
Balance, March 17, 2000 ........ $2,042,441
Net loss ....................... (571,935) $(571,935)
Other comprehensive income,
net of tax-translation
adjustment ................... 1,445 1,445
---------
Total comprehensive
loss ..................... $(570,490)
=========
Contribution of Introspect
Systems, Inc. 6,174
Tax benefit from exercise
of nonqualified stock
options ...................... 47,122
----------
Balance, December 31, 2000 ..... $1,525,247
==========
See notes to financial statements.
26
CLARIFY
(A BUSINESS OF NORTEL NETWORKS CORPORATION)
STATEMENTS OF CASH FLOWS
(In thousands)
Predecessor Company
--------------------------
Period from Period From
January 1, March 17,
Year Ended 2000 to 2000 to
December 31, March 16, December 31,
1999 2000 2000
--------- --------- ---------
Cash flows from (used in) operating activities:
Net income (loss) .......................................................... $ 14,677 $ (17,781) $(571,935)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities, net of the effects of acquisitions:
Depreciation and amortization ............................................ 6,829 2,275 562,379
Provision for doubtful accounts and returns .............................. 2,773 83 1,916
Deferred income taxes .................................................... (3,243) (19,176) (77,007)
Gain on disposal of assets ............................................... (434) -- --
Write-off of acquired in-process research and development ................ 2,348 -- 63,939
Tax benefit from exercise of nonqualified stock options .................. 12,837 4,740 47,122
Changes in assets and liabilities:
Accounts receivable .................................................... (33,392) 26,350 (46,911)
Prepaid and other assets ............................................... (4,365) (27,630) 25,529
Accounts payable ....................................................... 11,835 702 (3,377)
Payroll-related accruals ............................................... 4,741 (4,718) 2,660
Other accrued liabilities .............................................. (1,106) 655 (42,196)
Unearned revenue ....................................................... 11,175 5,828 14,326
--------- --------- ---------
Net cash provided by (used in) operating activities ............... 24,675 (28,672) (23,555)
--------- --------- ---------
Cash flows from (used in) investing activities:
Purchase of property and equipment ......................................... (14,545) (1,902) (9,591)
Purchase of investments .................................................... (158,582) -- --
Sale and maturities of investments ......................................... 144,133 15,517 25,280
Acquisition of business, net of cash received .............................. (6,727) -- --
--------- --------- ---------
Net cash provided by (used in) investing activities ............... (35,721) 13,615 15,689
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock, net ................................ 17,382 7,282 --
Receivable from Nortel Networks Corporation ................................ -- -- (9,426)
--------- --------- ----------
Net cash provided by (used in) financing activities ............... 17,382 7,282 (9,426)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ......................... 6,336 (7,775) (17,292)
--------- --------- ---------
Effect of foreign exchange rate changes on cash .............................. (116) 320 715
Cash and cash equivalents, beginning of period ............................... 31,271 37,491 30,036
--------- --------- ---------
Cash and cash equivalents, end of period ..................................... $ 37,491 $ 30,036 $ 13,459
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest ..................................... $ 36 $ -- $ 2
========= ========= =========
Cash paid during the year for taxes ........................................ $ 7,123 $ 28 $ 125
========= ========= =========
Supplemental disclosure of noncash investing and financing activities:
Change in unrealized holding gains on investments .......................... $ (85) $ 6 $ --
========= ========= =========
Common stock issued for business acquisition ............................... $ 11,162 $ -- $ --
========= ========= =========
Contribution of Introspect Systems, Inc .................................... $ -- $ -- $ 6,174
========= ========= =========
See notes to financial statements.
27
CLARIFY
(A BUSINESS OF NORTEL NETWORKS CORPORATION)
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 (PREDECESSOR COMPANY), PERIOD FROM
JANUARY 1, 2000 THROUGH MARCH 16, 2000 (PREDECESSOR COMPANY)
AND PERIOD FROM MARCH 17, 2000
THROUGH DECEMBER 31, 2000
1. BUSINESS OF THE COMPANY
On March 16 2000, Nortel Networks Limited (then known as Nortel Networks
Corporation), currently the principal operating subsidiary of Nortel
Networks Corporation ("Nortel Networks"), acquired all of the issued and
outstanding shares of Clarify Inc. ("Clarify"), a Delaware corporation, in
a transaction ("the Acquisition") that was accounted for using the
purchase method (the on-going business is also referred to as "Clarify").
Clarify was founded in August 1990 to develop, market and support
adaptable client/server application software designed to address the
external and internal service, support, and product quality needs of
today's global enterprises. Clarify markets its software and services
through its direct sales organization and other Nortel Networks sales
organizations.
As a result of the ownership change, the accompanying financial statements
reflect the effect of the purchase accounting adjustments that relate to
Clarify in accordance with Staff Accounting Bulletin No. 54 of the United
States Securities and Exchange Commission. The financial statements of
Clarify for the period prior to the March 16, 2000 acquisition date are
referred to herein as the Predecessor Company financial statements. The
aggregate purchase price allocated to Clarify as of March 16, 2000 was
$2,083 million. The allocation of the purchase price, based on the
estimated fair value of the net assets, was to net tangible assets of $18
million, in-process research and development ("IPR&D") of $64 million,
acquired technology of $210 million, and goodwill of $1,791 million. The
goodwill is being amortized over three years, and the acquired technology
is being amortized over two years. On August 24, 2000, a division of
Nortel Networks acquired specified assets and assumed specified
liabilities of Introspect Systems, Inc. ("ISI"), a privately held Clarify
implementation and training consultancy. This acquisition was contributed
to Clarify. The aggregate purchase price was approximately $7 million of
which Nortel Networks paid $6.2 million on behalf of Clarify and other
acquisition costs of $0.8 million were paid by Clarify. The allocation of
the purchase price was to goodwill of $6.7 million and net intangible
assets of $0.3 million. The goodwill is being amortized over three years.
Effective December 31, 2000, Nortel Networks merged Clarify into another
Nortel Networks' legal entity and Clarify ceased to exist as a separate
legal entity. The accompanying financial statements reflect the carved-out
operations and financial position of Clarify as if it had been a
stand-alone entity for the period from March 17, 2000 to December 31,
2000. The financial statements therefore include revenue and cost of sales
of Clarify's product, as well as personnel, facilities and other expenses
which were directly attributable to Clarify's general and administrative,
research and development, and sales and marketing activities.
Subsequent to the acquisition, certain functions and processes (including,
but not limited to, cash management, processing of receivables and certain
payables, legal services, and payroll ("centralized services")) were
transitioned during the period from March 17, 2000 to December 31, 2000 to
be performed centrally by Nortel Networks for Clarify. Costs for these
services are billed to Clarify based on actual usage and are included in
Clarify's statement of operations. These costs totaled $167.4 million for
the period from March 17, 2000 to December 31, 2000. Although management
is unable to determine the actual costs that would have been incurred if
the services performed by Nortel Networks had been purchased from
independent third parties, management considers the allocation methodology
28
described to be reasonable. The financial position, results of operations
and cash flows of Clarify may differ from those that would have been
achieved had Clarify operated independent of Nortel Networks for the
period after March 16, 2000.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statements - The accompanying combined financial
statements of the Clarify business of Nortel Networks include the net
assets acquired by Nortel Networks in its purchase of Clarify on March 16,
2000, and the results of Clarify's operations and its cash flows for the
period from March 17, 2000 to December 31, 2000, after giving effect to
the allocation of Nortel Networks' purchase price to Clarify's net assets,
to the changes in net assets of Clarify subsequent to the acquisition and
to allocations of certain operating costs provided by Nortel Networks (see
Note 1). Accordingly, such financial statements do not purport to be those
of Clarify as a separate corporate entity prepared on a historical cost
basis of accounting. The accompanying financial statements of Clarify for
periods presented prior to March 17, 2000 represent the stand-alone
consolidated financial statements of Clarify. All significant intercompany
balances and transactions have been eliminated. The functional currency
for the majority of Clarify's foreign operations is the applicable local
currency. The translation from the applicable foreign currency to U.S.
dollars is performed for balance sheet accounts using current exchange
rates in effect at the balance sheet date and for revenue and expense
accounts using the weighted average exchange rate during the period.
Adjustments resulting from such translation are reflected in accumulated
other comprehensive income. Gains or losses resulting from foreign
currency transactions are included in the results of operations.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Significant
estimates include allowance for doubtful accounts, valuation of IPR&D and
estimated useful life of tangible and intangible assets.
Financial Instruments - Clarify considers cash and all highly liquid
investments purchased with a remaining maturity of less than three months
at the date of purchase to be cash equivalents. Short-term and long-term
investments are classified as available-for-sale and are carried at fair
market value. Unrealized holding gains and losses on such investments are
reported, net of related taxes, as a part of accumulated other
comprehensive income. Realized gains and losses on sales of such
investments are reported in earnings and computed using the specific
identification cost method.
The amounts reported for cash equivalents, accounts receivables and other
financial instruments are considered to approximate fair value based upon
comparable market information available at the respective balance sheet
dates.
The financial instruments that potentially subject Clarify to
concentrations of credit risk comprise principally cash and cash
equivalents, investments and trade accounts receivable. Cash and cash
equivalents and investments are, for the most part, held by three major
financial institutions. Deposits held with banks may exceed the amount of
insurance provided on such deposits. These deposits may
29
generally be redeemed upon demand and, therefore, bear minimal risk.
Clarify's customer base is dispersed across many different geographic
areas throughout the United States, Europe and Asia and consists
principally of companies in the networking equipment, high-end software,
telecommunications and computer systems industries. Clarify performs
ongoing credit evaluations of its customers and maintains an allowance for
potential credit losses. Collateral, such as letters of credit and bank
guarantees, is generally not required.
In the normal course of business, Clarify has exposures to foreign
currency fluctuations arising from foreign currency sales and purchases
and intercompany transactions, among other things. Prior to its
acquisition by Nortel Networks, Clarify used foreign exchange forward
contracts to limit its exposure to foreign exchange losses arising from
foreign currency payables and receivables. Clarify evaluated its net
exposure therefrom and entered into forward contracts to hedge the net
exposure over a specified amount. Gains and losses on these contracts
served as hedges in that they offset fluctuations that would otherwise
impact Clarify's financial results. Costs associated with entering into
such contracts were generally amortized over the life of the instruments
and are not material to Clarify's consolidated financial results. After
its acquisition by Nortel Networks, Clarify no longer engaged in foreign
currency hedging activities to offset its net foreign currency exposure.
At December 31, 1999, Clarify had foreign currency forward contracts
outstanding to hedge foreign currency intercompany accounts receivable and
accounts payable. The total aggregate fair value and the net unrealized
loss on foreign exchange contracts for the year ended December 31, 1999
were $15.0 million and $88,000, respectively.
Revenue Recognition - Clarify's revenue is derived from primarily two
sources, across many industries: (i) product license revenue, derived
primarily from product sales to customers, including large-scale
enterprises; and (ii) service and support revenue, derived primarily from
providing software updates, support, training and consulting services to
customers.
Clarify applies the provisions of Statement of Position (SOP) 97-2,
Software Revenue Recognition, as amended, and recognizes product revenue
upon delivery if a signed contract and customer purchase order exists, the
fee is fixed and determinable and collection of resulting receivables is
probable.
For contracts with multiple obligations (e.g., deliverable and
undeliverable products, maintenance and other services), Clarify allocates
revenue to each component of the contract based on objective evidence of
its fair value, which is specific to Clarify, or for products not being
sold separately, the price established by management ("VSOE"). If VSOE
cannot be determined, the entire transaction is deferred until such time
as VSOE exists for the undelivered product. Clarify recognizes revenue
allocated to maintenance fees for ongoing customer support and product
updates ratably over the period of the maintenance contract. Payments for
maintenance fees are generally made in advance and are nonrefundable. For
revenue allocated to training and consulting services, Clarify recognizes
revenue as the related services are performed. Contracts that have
extended payment terms are recognized as the amounts become due (if the
terms are greater than 90 days).
30
Property and Equipment - Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets (generally three to five years).
Leasehold improvements are amortized over the lesser of their useful lives
or the term of the lease. Upon disposal, the assets and related
accumulated depreciation are removed from Clarify's accounts, and the
resulting gains or losses are reflected in the statement of operations.
When events and circumstances warrant a review, Clarify evaluates the
carrying values of long-lived assets, certain identifiable intangibles,
and goodwill related to those assets to be held and used in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of. An impairment review is performed whenever
events or circumstances indicate that the carrying value may not be
recoverable. Certain factors that Clarify considers important which could
trigger an impairment review include, but are not limited to, significant
underperformance relative to historical or projected future operating
results, significant changes in the manner of use of the acquired assets
or the strategy for Clarify's overall business, and significant negative
industry or economic trends.
The carrying values of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets are considered impaired
when the anticipated undiscounted cash flow from such assets is less than
their carrying values. In that event, a loss is recognized based on the
amount by which the carrying value exceeds the fair value. Fair value is
determined using the anticipated cash flows discounted at a rate
commensurate with the risk involved. Losses on long-lived assets to be
disposed of are determined in a similar manner, except that fair values
are reduced by the cost to dispose of such assets.
Income Taxes - Deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse. Clarify is
required to adjust its deferred tax liabilities in the period when tax
rates or the provisions of the income tax laws change. Valuation
allowances are established when necessary to reduce deferred tax assets to
the amounts expected to be realized.
Product Development and Engineering Expenditures - Costs related to
research, design and development of products are charged to product
development and engineering expenses as incurred. Software development
costs are capitalized beginning when a product's technological feasibility
has been established and ending when a product is available for general
release to customers. Generally, Clarify's products are released soon
after technological feasibility has been established. As a result, costs
subsequent to achieving technological feasibility have not been
significant and all software development costs have, therefore, been
expensed.
Advertising Costs - Advertising costs are expensed as incurred and totaled
$2,617,000 for the year ended December 31, 1999, $980,000 for the period
January 1 to March 16, 2000 and $689,000 for the period March 17 to
December 31, 2000.
Stock-Based Compensation - SFAS No. 123, Accounting for Stock-Based
Compensation, encourages but does not require companies to record
compensation cost for stock-based compensation plans at fair value.
Clarify has chosen to continue to account for employee stock options using
the intrinsic value method prescribed by Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock
31
Issued to Employees. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of Clarify's
stock at the date of the grant over the amount an employee must pay to
acquire the stock.
Reclassifications - Certain reclassifications have been made to the 1999
financial statements to conform with the 2000 financial statement
presentation. The reclassifications had no impact on net loss or
stockholders' equity.
Recently Issued Accounting Standards - In August 2001, the Financial
Accounting Standards Board (the "FASB") issued SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, which addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. This Statement supersedes SFAS No. 121, and the
accounting and reporting provisions of APB 30, for the disposal of a
segment of a business. The provisions of SFAS No. 144 are required to be
adopted by Clarify effective January 1, 2002. Clarify has not yet
determined the effect that the adoption of SFAS No. 144 will have on its
business, results of operations, and financial condition.
In June 2001, the FASB issued SFAS No. 141, Business Combinations,
effective for business combinations initiated after June 30, 2001, and
SFAS No. 142, Goodwill and Other Intangible Assets, effective for fiscal
years beginning after December 15, 2001. SFAS No. 141 transitional rules
require that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. As a result, the
pooling-of-interests method is now prohibited. SFAS No. 142 changes the
accounting for goodwill from an amortization method to an impairment-only
approach. Thus, amortization of goodwill, including goodwill recorded in
past business combinations, and intangibles with an indefinite life, will
cease upon adoption of this Statement, which for Clarify will be January
1, 2002. However, for any acquisitions completed after June 30, 2001,
goodwill and intangible assets with an indefinite life will not be
amortized. The adoption of SFAS No. 141 will not have an impact on the
business, results of operations, and financial condition of Clarify. The
first of the required SFAS No. 142 impairment tests will be performed
during 2002 and Clarify has not yet determined the effect that the
adoption of SFAS No. 142 will have on its business, results of operations,
and financial condition.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No. 133 will be effective for Clarify's
fiscal year 2001. Management has determined that this statement will not
have a significant impact on Clarify.
32
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consists of the following (in
thousands):
1999 2000
-------- --------
Leasehold improvements .................. $ 4,305 $ 7,531
Equipment ............................... 9,446 3,335
Furniture and fixtures .................. 8,543 5,825
Purchased software ...................... 4,947 4,200
-------- --------
27,241 20,891
Accumulated depreciation and amortization (10,257) (5,156)
-------- --------
Property and equipment, net ............. $ 16,984 $ 15,735
======== ========
4. ACQUIRED INTANGIBLES
Acquired intangibles at December 31 consist of the following (in
thousands):
1999 2000
----------- -----------
Acquired technology ...... $ 5,280 $ 210,147
Goodwill ................. 10,657 1,797,671
----------- -----------
15,937 2,007,818
Accumulated amortization (978) (557,223)
----------- -----------
Acquired intangibles, net $ 14,959 $ 1,450,595
=========== ===========
5. COMMITMENTS
Clarify leases its principal operating facility and off-site sales offices
under operating leases expiring no later than 2007. Future minimum lease
payments under these leases, as of December 31, 2000, are as follows (in
thousands):
2001 ............... $ 8,823
2002 ............... 8,985
2003 ............... 9,154
2004 ............... 8,883
2005 ............... 8,376
Thereafter ............... 12,031
-------
$56,252
=======
Rent expense was approximately $7,274,000 in 1999, $2,457,000 for the
period from January 1, 2000 through March 16, 2000, and $10,729,000 for
the period from March 17, 2000 through December 31, 2000.
33
6. EMPLOYEE STOCK PLANS
Employee Stock-Based Compensation Plans
As a result of the acquisition of Clarify by Nortel Networks, all stock
option plans were assumed by Nortel Networks; however, no Clarify options
were granted subsequent to the acquisition. Canadian regulatory
requirements do not allow further options to be granted without
stockholder approval.
1995 Stock Option/Stock Issuance Plan - Clarify's 1995 Stock Option/Stock
Issuance Plan (the "1995 Plan"), which serves as the successor equity
incentive program to Clarify's 1991 Stock Option/Stock Issuance Plan (the
"1991 Plan), is divided into three separate components: (i) the
Discretionary Option Grant Program under which eligible individuals may,
at the discretion of the Plan Administrator, be granted incentive or
nonstatutory stock options to purchase shares of common stock at an
exercise price not less than 100% or 85%, respectively, of their fair
market value on the grant date; (ii) the Stock Issuance Program under
which individuals may, at the Plan Administrator's discretion, be issued
shares of common stock directly either by the purchase of such shares at a
price not less than 85% of their fair market value at the time of issuance
or in consideration of the past performance of services; and (iii) the
Automatic Option Grant program under which nonstatutory stock option
grants will be automatically made at periodic intervals to eligible
nonemployee Board members to purchase shares of common stock at an
exercise price equal to 100% of their fair market value on the grant date.
Options are exercisable at times and in increments as specified by the
Plan Administrator and generally expire ten years after grant.
On May 9, 1997, the Compensation Committee of the Board of Directors
approved the repricing of certain outstanding stock options under
Clarify's 1995 Plan with exercise prices in excess of the fair market
value on May 9, 1997. Each employee or officer who elected prior to May 9,
1997 to participate in the repricing program received a new option with an
exercise price of $13.50 per share (the fair market value on May 9, 1997).
Each repriced option retained its original vesting schedule except that no
portion of the option could be exercised prior to December 9, 1997 and no
vesting accrued between May 9, 1997 and December 9, 1997. Certain options
granted within 12 months of May 9, 1997 were subject to a longer vesting
schedule. Approximately 1,008,000 shares of Clarify common stock subject
to stock options were repriced pursuant to this program.
1999 NonEmployee Directors' Option Plan - In October 1998, the Board of
Directors approved the new NonEmployee Directors' Option Plan to include
an initial pool of 300,000 shares of Clarify common stock available for
issuance under the plan. This plan replaced the automatic grant program of
the 1995 Stock Option/Stock Issuance Plan. Options are exercisable at
times and in increments as specified by the Plan Administrator and
generally expire ten years after grant date.
34
Option activity for all plans is summarized as follows:
Outstanding Options
-----------------------------
Weighted
Average
Number of Exercise Price
Shares per Share
---------- ----------
Outstanding, January 1, 1999 (1,343,100 exercisable
at a weighted average price of $8.30) ............. 4,857,600 $ 11.59
Options granted ..................................... 3,800,100 37.70
Options exercised ................................... (1,216,500) 9.62
Options cancelled ................................... (649,000) 18.13
---------- ----------
Outstanding, December 31, 1999 (1,543,700 exercisable
at a weighted average price of $12.75) ............ 6,792,200 25.93
Options granted ..................................... 394,705 133.31
Options exercised ................................... (266,876) 13.30
Options cancelled ................................... (151,128) 18.13
---------- ----------
Outstanding, March 16, 2000 (1,560,912 exercisable
at a weighted average price of $10.09) ............ 6,768,901 $ 32.86
========== ==========
The weighted average fair values of options granted during 1999 and
between January 1, 2000 and March 16, 2000 was $24.48 and $84.13,
respectively.
Nortel Networks Stock Option Plans
After the acquisition of Clarify by Nortel Networks in March 2000, certain
employees of Clarify received grants of nonqualifying stock options under
Nortel Networks stock option plans. The stock options were granted at the
market price on the date of grant and expire on the tenth anniversary
date. The stock options granted generally vest over three years.
35
Additional information with respect to stock options under the Nortel Networks'
plans is as follows:
Outstanding Options (1)
---------------------------------
Weighted
Average
Exercise
Number Price
of Shares per Share
------------ ------------
Outstanding, March 17, 2000 (2) ................................ 17,563,412 $ 12.64
Options held by Nortel Networks employees transferred to Clarify 33,500 13.04
Options granted ................................................ 580,055 57.88
Options exercised .............................................. (4,929,163) 6.73
Options cancelled (employee terminations and transfers) ........ (1,091,890) 15.30
------------ ------------
Outstanding December 31, 2000 (5,907,361 exercisable at a
weighted average price of $9.38) ............................. 12,155,914 $ 16.97
============ ============
(1) On May 5, 2000, Nortel Networks implemented a two-for-one stock
split with respect to its common shares and, as a result, the
stock option information has been restated to reflect the stock
split.
(2) Pursuant to the terms of the Acquisition, Nortel Networks assumed
outstanding options to purchase 17,563,412 shares of common stock
of Nortel Networks under the Clarify stock option plans at March
16, 2000.
The following information applies to options outstanding at December 31,
2000:
Options Outstanding Options Exercisable
---------------------------------------------- ---------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
--------------- ---------- ---- ---------- --------- ----------
$ 0.01 - $ 4.99 2,288,606 6.56 $ 3.31 1,703,632 $ 3.48
5.00 - 7.99 2,178,986 7.10 5.87 1,550,422 5.94
8.00 - 9.99 1,698,317 7.91 8.86 1,045,883 8.92
10.00 - 14.99 1,706,279 8.33 12.81 634,239 12.99
15.00 - 19.99 1,528,483 8.66 17.63 600,877 17.64
20.00 - 39.99 1,175,362 8.96 30.24 310,559 29.22
40.00 - 59.99 1,032,946 9.09 48.47 61,749 48.51
60.00 - 80.69 546,935 9.31 65.34 -- --
---------- ---------
$ 0.01 - $80.69 12,155,914 7.72 $ 16.97 5,907,361 $ 9.38
========== =========
Employee Stock Purchase Plan ("ESPP") - The purpose of the ESPP is to
provide eligible employees of Clarify with a means of acquiring common
stock of Clarify through payroll deductions. The plan consists of four
six-month purchase periods in each two-year offering period. Employees
purchase stock at 85% of the market value at either the beginning of the
offering period or at the end of the purchase period, whichever price is
lower. No participant may purchase more than $25,000 worth of common stock
in any calendar year. Employees may end their participation in the
offering at any time during the offering period, and participation ends
automatically on termination of employment with Clarify.
36
During 1999, approximately 414,000 shares of Clarify common stock were
sold through the ESPP. During the period January 1, 2000 to March 16,
2000 approximately 54,000 shares of Clarify common stock were sold
through the ESPP. Pursuant to the terms of the Acquisition, the ESPP
was cancelled immediately prior to the closing of the Acquisition.
Stock-Based Compensation - Clarify has adopted the disclosure
provisions of SFAS No. 123. If compensation cost for the 1995 Plan and
the ESPP had been determined based on the fair value on the grant dates
for all awards since January 1, 1995 consistent with the provisions of
SFAS No. 123, Clarify's net income (loss) would have been reduced
(increased) to the pro forma amounts indicated below (in thousands):
YEAR ENDED JANUARY 1 TO
DECEMBER 31, TO MARCH 16,
1999 2000
Pro forma net income (loss) .......... $2,139 $(35,487)
====== =========
Pro forma net income (loss) reflects only options granted since January
1, 1995. Therefore, the full impact of calculating compensation cost
under SFAS 123 is not reflected in the pro forma amounts presented
above because compensation cost is reflected over the options' vesting
period of generally four or five years and compensation cost for
options granted prior to January 1, 1995 is not considered. Pro forma
net income (loss) disclosure for the period after March 16, 2000
reflecting the fair value on the grant dates of options to purchase
Nortel Networks common stock granted to Clarify employees, or held by
Nortel Networks employees transferred to the Clarify business, is not
considered meaningful.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes options-pricing model with the following
weighted-average assumptions used:
JANUARY 1,
TO
MARCH 16,
1999 2000
---- ----
Risk free interest rate ........ 5.50% 5.50%
Expected life (years) .......... 4 4
Volatility ..................... 0.82 0.82
Dividend yield ................. -- --
The fair value of employees' stock purchase rights under the ESPP in
1999 was estimated using the Black-Scholes model with the following
assumptions. The plan was cancelled in 2000:
Risk free interest rate 5.50%
Expected life (months) 6.00
Volatility 0.82
Dividend yield --
37
7. INCOME TAXES
The components of the provision for income taxes are as follows (in
thousands):
PREDECESSOR COMPANY
-------------------
PERIOD FROM PERIOD FROM
JANUARY 1 MARCH 17,
YEAR ENDED 2000 TO 2000 TO
DECEMBER 31, MARCH 16, DECEMBER 31,
1999 2000 2000
Federal - current payable $ 1,506 $ (333) $ --
Federal - deferred (2,545) (17,837) (68,315)
State - current payable 177 (4) --
State - deferred (521) (2,500) (8,692)
Foreign - current payable 454 -- 1,691
Valuation allowance -- 1,161 --
Charge in lieu of taxes attributable
to employer's stock option plans 12,837 4,740 47,122
---------- ---------- ----------
Provision (benefit) for income tax $ 11,908 $ (14,773) $ (28,194)
========== ========== ==========
The reconciliation of the statutory federal income tax rate to the
effective rate is as follows (as a percent of pretax income):
PREDECESSOR COMPANY
-------------------
PERIOD FROM PERIOD FROM
JANUARY 1 MARCH 17,
YEAR ENDED 2000 TO 2000 TO
DECEMBER 31, MARCH 16, DECEMBER 31,
1999 2000 2000
Federal statutory tax rate 35% 35% 35%
State tax, net of federal tax benefit 5 6 1
Tax credits earned (4) 5 --
In-process R&D 4 -- (4)
Nondeductible merger costs and goodwill
amortization 4 (1) (27)
Valuation allowance -- (3) --
Other 1 4 --
---------- ---------- ----------
Effective income tax rate 45% 45% 5%
========== ========== ==========
38
The significant components of the deferred tax assets and liabilities as of
December 31 are as follows (in thousands):
1999 2000
Loss carryforwards $ 4,101 $ 66,602
Tax credit carryforwards 862 9,003
Reserves 2,247 450
Accrued expenses 2,721 471
Deferred revenue 2,283 2,835
Purchased technology (1,936) (49,516)
Other 1,470 4,891
Valuation allowance (963) (2,124)
-------- --------
Net deferred tax assets $ 10,785 $ 32,612
======== ========
Clarify has not recorded a valuation allowance for those deferred tax
assets that management believes will more likely than not be realized
through taxable income in the carryback period or through future
taxable income. However, at December 31, 2000, a valuation allowance of
approximately $2,124,000 has been recorded because of the uncertainty
regarding the realization of certain foreign net operating losses due
to the limited profitable operating history in certain foreign
jurisdictions. The valuation allowance increased by $1,161,000 during
the period from January 1, 2000 to March 16, 2000, due to uncertainty
with respect to realizing tax benefits from current period foreign net
operating losses.
Clarify has net operating loss carryforwards available to offset future
federal and state taxable income of $166,000,000 and $138,000,000,
respectively, expiring through 2020. Clarify has tax credit
carryforwards available to offset future federal and California state
income taxes of $6,000,000 and $4,600,000 and such federal credits
expire through 2020. Such net operating losses and tax credits are
available to offset taxable income and income taxes, respectively, of
other Nortel Networks entities in Nortel Networks' consolidated tax
returns.
8. RELATED PARTY TRANSACTIONS - NORTEL NETWORKS
The following table presents intercompany transactions and the balance
between Clarify and Nortel Networks and its affiliates for the period
from March 17, 2000 through December 31, 2000 (in thousands):
Balance at beginning of period $ --
Net cash transfer to Nortel Networks 151,496
Investment transfer to Nortel Networks 20,969
Fringe and other benefits processed by Nortel Networks (89,385)
Purchases/payments processed by Nortel Networks (77,991)
Tax transfer to Nortel Networks 4,337
---------
Balance due from Nortel Networks at end of period $ 9,426
=========
39
Clarify has deployed its customer relationship management software to
other Nortel Networks operating units between 1999 and 2000. Clarify
recognized revenues from such Nortel Networks operating units of
$5,072,000 and $258,000 for the year ended December 31, 1999 and for
the period from January 1, 2000 through March 16, 2000, respectively.
No revenues from Nortel Networks or its affiliates have been recognized
subsequent to the Acquisition. The cost of sales associated with the
software was not significant.
9. SEGMENT INFORMATION AND MAJOR CUSTOMERS
In accordance with Statement of Financial Accounting Standards (SFAS)
No. 131, "Disclosures about Segments of an Enterprise and Related
Information," the Company is required to disclose information about its
products, services, the geographic area in which it operates and major
customers. The Company operates in a single industry segment
encompassing the design, development, marketing and technical support
for front-office automation software.
The following are revenues by geographic area (in thousands):
PREDECESSOR COMPANY
---------------------------
PERIOD FROM PERIOD FROM
JANUARY 1 MARCH 17,
YEAR ENDED 2000 TO 2000 TO
DECEMBER 31, MARCH 16, DECEMBER 31,
1999 2000 2000
------------ ----------- ------------
United States........... 178,590 20,660 183,977
United Kingdom.......... 23,854 2,850 41,909
Other International..... 28,253 3,113 52,053
------- ------ -------
Total................... 230,697 26,623 277,939
======= ====== =======
Long-lived assets outside of the United States are immaterial. No
one customer accounted for more than 10% of total revenues for any of
the above periods.
10. RETIREMENT PLAN
Effective August 1991, Clarify began a voluntary 401(k) plan covering
substantially all employees. The plan provides for discretionary
employer contributions. No employer contributions were made or
authorized in 1999 and 2000. This plan was discontinued at the time of
the Nortel Networks' acquisition.
11. SUBSEQUENT EVENTS
On November 28, 2001, Nortel Networks sold substantially all assets
used in its Clarify business, including patents, intellectual property,
and trademarks, for approximately $200 million in cash to Amdocs
Limited ("Amdocs"). Under the agreement, Amdocs assumed existing
customer contracts, as well as certain leased office space.
Clarify, as part of its review of financial results for the three
months ended June 30, 2001, also performed an assessment of the
remaining carrying values of intangible assets. The assessment was
performed in light of the significant negative industry and economic
trends impacting both Clarify's current operations and expected future
growth rates. The conclusion of that assessment was that the decline in
market conditions within Clarify's industry was significant and other
than temporary. As a result, Clarify recorded an approximately $905
million write down of intangible assets in the three months ended June
30, 2001, based on the amount by which the carrying amount of these
assets exceeded the fair value.
* * * * *
40
CLARIFY
(A BUSINESS OF NORTEL NETWORKS CORPORATION)
STATEMENTS OF NET ASSETS (UNAUDITED)
(IN THOUSANDS)
DECEMBER 31, SEPTEMBER 30,
2000 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 13,459 $ 21,678
Accounts receivable, net of allowance for doubtful accounts
and returns of $876 in 2000 and $3,195 in 2001 94,058 44,053
Prepaid expenses and other current assets 8,868 3,330
Deferred tax assets 12,208 37,791
Receivable from Nortel Networks Corporation 9,426 --
---------- ----------
Total current assets 138,019 106,852
Property and equipment, net 15,735 6,445
Noncurrent deferred tax assets 20,404 27,755
Other noncurrent assets 1,187 --
Acquired intangibles, net 1,450,595 155,557
---------- ----------
Total assets $1,625,940 $ 296,609
---------- ----------
LIABILITIES
Current liabilities:
Accounts payable $ 15,065 $ 1,499
Payable to Nortel Networks Corporation -- 63,403
Payroll-related accruals 12,146 3,903
Other accrued liabilities 13,036 20,308
Income taxes payable 4,216 --
Unearned revenue 56,230 37,978
---------- ----------
Total current liabilities $ 100,693 $ 127,091
---------- ----------
Net assets $1,525,247 $ 169,518
========== ==========
See notes to financial statements.
41
CLARIFY
(A BUSINESS OF NORTEL NETWORKS CORPORATION)
STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
PREDECESSOR
COMPANY
-------
PERIOD FROM PERIOD FROM
JANUARY 1, MARCH 17, NINE MONTHS
2000 TO 2000 TO ENDED
MARCH 16, SEPTEMBER 30, SEPTEMBER 30,
2000 2000 2001
---- ---- ----
Revenues:
License fees $ 4,330 $ 116,538 $ 48,792
Services 22,293 78,983 110,943
----------- ----------- -----------
Total revenues 26,623 195,521 159,735
----------- ----------- -----------
Cost of revenues:
License fees 1,252 3,907 2,800
Services 13,397 37,065 53,756
----------- ----------- -----------
Total cost of revenues 14,649 40,972 56,556
----------- ----------- -----------
Gross margin 11,974 154,549 103,179
----------- ----------- -----------
Operating expenses:
Product development and engineering 9,395 30,429 50,244
Sales and marketing 31,186 82,774 92,304
General and administrative 3,946 8,290 30,749
In-process research and development -- 63,939 --
Amortization of acquired intangibles 810 380,315 389,584
Special charges -- -- 932,104
----------- ----------- -----------
Total operating expenses 45,337 565,747 1,494,985
----------- ----------- -----------
Operating loss (33,363) (411,198) (1,391,806)
Interest income 599 670 195
Interest expense (4) (1) --
Other income (expense), net 214 (1,461) --
----------- ----------- -----------
Loss before income taxes (32,554) (411,990) (1,391,611)
Benefit from income taxes (14,773) (22,108) (38,280)
----------- ----------- -----------
Net loss $ (17,781) $ (389,882) $(1,353,331)
=========== =========== ===========
See notes to financial statements.
42
CLARIFY
(A BUSINESS OF NORTEL NETWORKS CORPORATION)
STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
PREDECESSOR
COMPANY
-------
PERIOD FROM PERIOD FROM
JANUARY 1, MARCH 17, NINE MONTHS
2000 TO 2000 TO ENDED
MARCH 16, SEPTEMBER 30, SEPTEMBER 30,
2000 2000 2001
---- ---- ----
Cash flows from (used in) operating activities:
Net loss $ (17,781) $ (389,882) $(1,353,331)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities, net of the effects of acquisitions:
Depreciation and amortization 2,275 387,790 394,820
Special Charges -- -- 910,804
Provision for doubtful accounts and returns 83 744 4,856
Deferred income taxes . (19,176) (62,483) (32,934)
Write-off of acquired in-process research and development -- 63,939 --
Tax benefit from exercise of nonqualified stock options 4,740 31,415 1,285
Changes in assets and liabilities:
Accounts receivable 26,350 (26,179) 45,149
Prepaid and other assets (27,630) 28,328 6,725
Accounts payable 702 (4,237) (13,566)
Payroll-related accruals (4,718) 3,622 (8,243)
Other accrued liabilities 655 (24,361) 3,056
Unearned revenue 5,828 9,179 (18,252)
----------- ----------- -----------
Net cash provided by (used in) operating activities (28,672) 17,875 (59,631)
----------- ----------- -----------
Cash flows from (used in) investing activities:
Purchase of property and equipment (1,902) (3,743) (1,399)
Sale and maturities of investments 15,517 25,280 --
----------- ----------- -----------
Net cash provided by (used for) investing activities 13,615 21,537 (1,399)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 7,282 -- --
Receivable/payable to Nortel Networks Corporation -- (5,209) 69,146
------------ ------------ ------------
Net cash provided by (used in) financing activities 7,282 (5,209) 69,146
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (7,775) 34,203 8,116
----------- ----------- -----------
Effect of foreign exchange rate changes on cash 320 466 103
Cash and cash equivalents, beginning of period 37,491 30,036 13,459
----------- ----------- -----------
Cash and cash equivalents, end of period $ 30,036 $ 64,705 $ 21,678
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ -- $ 2 $ --
=========== =========== ===========
Cash paid during the period for taxes $ 28 $ 125 $ --
=========== =========== ===========
Supplemental disclosure of noncash investing and financing activities:
Change in unrealized holding gains on investments $ 6 $- $ --
=========== =========== ===========
Contribution of Introspect Systems, Inc $ -- $ 6,174 $ --
=========== =========== ===========
See notes to financial statements.
43
CLARIFY
(A BUSINESS OF NORTEL NETWORKS CORPORATION)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2001, PERIOD FROM JANUARY 1, 2000 THROUGH MARCH
16, 2000 (PREDECESSOR COMPANY) AND PERIOD FROM MARCH 17, 2000 THROUGH SEPTEMBER
30, 2000 (THOUSANDS OF DOLLARS UNLESS OTHERWISE STATED)(CONTINUED)
1. BUSINESS OF THE COMPANY
On March 16, 2000, Nortel Networks Limited (then known as Nortel
Networks Corporation), currently the principal operating subsidiary of
Nortel Networks Corporation ("Nortel Networks") acquired all of the
issued and outstanding shares of Clarify Inc. ("Clarify"), a Delaware
corporation, in a transaction (the "Acquisition") that was accounted
for using the purchase method (the on-going business is also referred
to as "Clarify"). Clarify was founded in August 1990 to develop, market
and support adaptable client/server application software designed to
address the external and internal service, support, and product quality
needs of today's global enterprises. Clarify markets its software and
services through its direct sales organization and other Nortel
Networks sales organizations.
As a result of the ownership change, the accompanying financial
statements reflect the effect of the purchase accounting adjustments
that relate to Clarify in accordance with Staff Accounting Bulletin No.
54 of the United States Securities and Exchange Commission. The
financial statements of Clarify for the period prior to the March 16,
2000 acquisition date are referred to herein as the Predecessor Company
financial statements. The aggregate purchase price allocated to Clarify
as of March 16, 2000 was $2,083 million. The allocation of the purchase
price, based on the estimated fair value of the net assets was to net
tangible assets of $18 million, in-process research and development
("IPR&D") of $64 million, acquired technology of $210 million, and
goodwill of $1,791 million. The goodwill is being amortized over 3
years and the acquired technology is being amortized over 2 years. On
August 24, 2000, a division of Nortel Networks acquired specified
assets and assumed specified liabilities of Introspect Systems, Inc.
("ISI"), a privately held Clarify implementation and training
consultancy. This acquisition was made on behalf of Clarify. The
aggregate purchase price was approximately $7.0 million of which Nortel
Networks paid $6.2 million on behalf of Clarify and other acquisition
costs of $0.8 million were paid by Clarify. The allocation of the
purchase price was to goodwill of $6.7 million and net tangible assets
of $0.3 million. The goodwill is being amortized over 3 years.
Effective December 31, 2000, Nortel Networks merged Clarify into
another Nortel Networks' legal entity and Clarify ceased to exist as a
separate legal entity. The accompanying financial statements reflect
the carved-out operations and financial position of Clarify as if it
had been a stand alone entity for all periods presented. The financial
statements therefore include revenue and cost of sales of Clarify's
product, as well as personnel, facilities and other expenses which were
directly attributable to Clarify's general and administrative, research
and development, and sales and marketing activities.
Subsequent to the acquisition, certain functions and processes
(including, but not limited to; cash management, processing of
receivables and certain payables, legal services, and payroll
("centralized services")) were transitioned during the period from
March 17, 2000 to December 31, 2000 to be performed centrally by Nortel
Networks for Clarify. Costs for these services are billed to Clarify
based on actual usage and are included in Clarify's statement of
operations. Although management is unable to determine the actual cost
that would have been incurred if the services performed by Nortel
Networks had been purchased from independent third parties, management
considers the allocation methodology described to be reasonable. The
financial position, results of operations and cash flows of Clarify may
44
differ from those that would have been achieved had Clarify operated
independent of Nortel Networks for the periods after March 16, 2000.
2. SPECIAL CHARGES
Special charges were as follows:
NINE MONTHS PROVISION
ENDED BALANCE AS AT
SEPTEMBER 30, CUMULATIVE DRAWDOWNS SEPTEMBER 30,
--------------------
2001 CASH NON-CASH 2001
---- ---- -------- ----
Restructuring activities:
Workforce reduction $ 6,668 $ 4,243 $ -- $ 2,425
Contract settlement
and lease costs 14,632 -- -- 14,632
Plant and equipment writedowns 5,804 -- 5,804 --
---------- ---------- ---------- ----------
27,104 4,243 5,804 17,057
Intangible assets write down 905,000 -- 905,000 --
---------- ---------- ---------- ----------
Special charges $ 932,104 $ 4,243 $ 910,804 $ 17,057
========== ========== ========== ==========
In light of the continued significant downturn in both the industry and
economic environment, there has been a continual augmentation of the
work plan for Clarify during the first nine months of 2001 to optimize
results and drive efficiencies in its business.
Restructuring activities
For the nine months ended September 30, 2001, Clarify recorded
restructuring charges of $27,104.
Workforce reduction charges of $6,668 for the nine months ended
September 30, 2001 were related to the cost of severance and benefits
associated with approximately 139 employees notified of termination.
The workforce reduction was primarily in North America. As at September
30, 2001, the workforce reduction provision balance has been drawn down
by cash payments of $4,243, resulting in an ending provision balance of
$2,425. The remaining provision is expected to be substantially drawn
down by the end of the first quarter of 2002.
In conjunction with the above noted workforce reduction, Clarify
identified a number of leased facilities comprised of office and
warehouse and manufacturing space, as well as leased manufacturing
equipment, that were no longer required. As a result, Clarify recorded
net lease costs of approximately $14,632 for the nine months ended
September 30, 2001. The costs primarily related to Clarify's future
45
contractual obligations under operating leases. Partially offsetting
the total lease charge is approximately $11,754 in expected sublease
revenue on leases that Clarify cannot terminate. As at September 30,
2001, the provision balance has not yet been drawn down. The provision
is expected to be substantially drawn down by the end of the fourth
quarter of 2002.
Plant and equipment write downs of $5,804 for the nine months ended
September 30, 2001 consisted of the writedown of leasehold improvements
and certain information technology equipment associated with the
exiting of the above noted leased facilities.
Intangible assets write down
For the nine months ended September 30, 2001, Clarify recorded an
intangible assets write down of approximately $905,000.
Clarify, as part of its review of financial results during the three
months ended June 30, 2001, performed an assessment of the carrying
values of intangible assets recorded in connection with acquisitions.
The assessment during that period was performed in light of the
significant negative industry and economic trends impacting both the
current operations and expected future growth rates, and the adjustment
of technology valuations. The conclusion of that assessment was that
the decline in market conditions within the industry was significant
and other than temporary. As a result, Clarify recorded a write down of
intangible assets of approximately $905,000 in the three months ended
June 30, 2001, based on the amount by which the carrying amount of
these assets exceeded the fair value.
Fair value was determined based on discounted future cash flows. The
cash flow period used was five years, the discount rate used was 20
percent, and the terminal value was estimated based upon a terminal
growth rate of 5 percent. The assumptions supporting the estimated
future cash flows, including the discount rate and estimated terminal
value, reflect management's best estimates. The discount rate was based
upon the weighted average cost of capital as adjusted for the risks
associated with the operations.
Clarify has determined that the remaining intangible asset balances
will continue to be amortized on a straight-line basis over the
remaining useful lives established at the time of the related
acquisition as the remaining useful life of these intangible assets has
not changed.
The conclusion of the assessment performed during the three months
ended September 30, 2001 was that no additional write down of
intangible assets was required.
46
3. COMPREHENSIVE LOSS
The components of comprehensive loss, net of tax, were as follows:
PREDECESSOR
COMPANY
-------
JANUARY 1 MARCH 17, NINE MONTHS
2000 TO 2000 TO ENDED
MARCH 16, SEPTEMBER 30, SEPTEMBER 30,
2000 2000 2001
---- ---- ----
Net loss $ (17,781) $ (389,882) $(1,353,331)
Other comprehensive income (loss):
Change in foreign currency translation adjustment 291 725 (3,542)
Unrealized gain (loss) on investments - net 6 -- --
----------- ----------- -----------
Comprehensive loss $ (17,484) $ (389,157) $(1,356,873)
=========== =========== ===========
4. RECENT PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"), which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
Statement supersedes SFAS 121, and the accounting and reporting
provisions of APB 30, for the disposal of a segment of a business. The
provisions of SFAS 144 are required to be adopted by Clarify effective
January 1, 2002. Clarify has not yet determined the effect that the
adoption of SFAS 144 will have on its business, results of operations,
and financial condition.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations"
("SFAS 141"), effective for business combinations initiated after June
30, 2001, and SFAS No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142") effective for fiscal years beginning after December 15,
2001. SFAS 141 transitional rules require that the purchase method of
accounting be used for all business combinations initiated after June
30, 2001. As a result, the pooling-of-interests method is now
prohibited. SFAS 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Thus, amortization
of goodwill, including goodwill recorded in past business combinations,
and intangibles with an indefinite life, will cease upon adoption of
this Statement, which for Clarify will be January 1, 2002. However, for
any acquisitions completed after June 30, 2001, goodwill and intangible
assets with an indefinite life will not be amortized.
The adoption of SFAS 141 will not have an impact on the business,
results of operations, and financial condition of Clarify. The first of
the required SFAS 142 impairment tests will be performed during 2002
47
and Clarify has not yet determined the effect that the adoption of SFAS
142 will have on its business, results of operations, and financial
condition.
5. SUBSEQUENT EVENT
On November 28, 2001, Nortel Networks sold substantially all assets
used in its Clarify business, including patents, intellectual property,
and trademarks, for approximately $200 million in cash to Amdocs
Limited ("Amdocs"). Under the agreement, Amdocs assumed existing
customer contracts, as well as certain leased office space.
* * * * *
48
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMDOCS LIMITED
/s/ THOMAS G. O'BRIEN
----------------------------------
Date: February 11, 2002 Thomas G. O'Brien
Treasurer and Secretary
Authorized U.S. Representative
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Deloitte & Touche LLP.
99.1* Amdocs Press Release dated November 28, 2001.
-------------
* Previously filed.