UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD TO .
------------- -------------
Commission File Number: 000-28897
EXTENSITY, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
68-0368868
(IRS Employer Identification Number)
2200 Powell Street, Suite 300, Emeryville, California 94608
(Address of principal executive offices and zip code)
(510) 594-5700
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12 (b) of the Act:
None
Securities Registered Pursuant to Section 12 (g) of the Act:
Common Stock, $0.001 par value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this 10-K or any amendment to this Form
10K. |_|
As of December 31, 2001, there were 24,871,147 shares of the Registrant's Common
Stock outstanding. The aggregate market value of the Common Stock held by non -
affiliates of the Registrant based on the closing price on December 31, 2001, as
reported on the
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Nasdaq National Market System was $26,756,226. Shares of Common Stock held by
each officer and director and by each person who owns 5% or more of the
outstanding common stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to
specified portions of the Registrant's definitive Proxy Statement to be issued
in conjunction with the Registrant's 2002 Annual Meeting of Stockholders, which
is expected to be filed not later than 120 days after the Registrant's fiscal
year ended December 31, 2001.
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EXTENSITY, INC.
INDEX
PART I
PAGE
Item 1. Business 4
Item 2. Properties 25
Item 3. Legal Proceedings 25
Item 4. Submission of Matters to a Vote of 25
Security Holders
PART II
Item 5. Market for Registrant's Common Equity and 28
Related Stockholder Matters
Item 6. Selected Consolidated Financial Data 29
Item 7. Management's Discussion and Analysis of 30
Financial Condition and Results of
Operations
Item 7A. Quantitative and Qualitative Disclosures 39
about Market Risk
Item 8. Financial Statements and Supplementary 39
Data.
Item 9. Changes in and Disagreements with 60
Accountants on Accounting and Financial
Disclosures
PART III
Item 10. Directors and Executive Officers of the 61
Registrant
Item 11. Executive Compensation 61
Item 12. Security Ownership of Certain Beneficial 61
Owners and Management
Item 13. Certain Relationships and Related 61
Transactions
PART IV
Item 14. Exhibits and Reports on Form 8K 62
SIGNATURES
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PART I
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE COMPANY'S
EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE STRATEGIES THAT ARE SIGNIFIED BY THE
WORDS "EXPECTS," "ANTICIPATES," "INTENDS," "BELIEVES," OR SIMILAR LANGUAGE. ALL
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION
AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO
OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. IN
EVALUATING THE COMPANY'S BUSINESS, PROSPECTIVE INVESTORS SHOULD CAREFULLY
CONSIDER THE INFORMATION SET FORTH BELOW UNDER THE CAPTION "RISK FACTORS" IN
ADDITION TO THE OTHER INFORMATION SET FORTH HEREIN. THE COMPANY CAUTIONS
INVESTORS THAT ITS BUSINESS AND FINANCIAL PERFORMANCE ARE SUBJECT TO SUBSTANTIAL
RISKS AND UNCERTAINTIES.
ITEM I. BUSINESS
OVERVIEW
Extensity provides an Internet-based Employee Relationship Management
(ERM) solution for the automation of employee-based financial processes. Our
suite of software applications allow employees to plan business travel, file
expense reports, request and approve indirect purchases, and capture time for
project and payroll management. At the same time, the application enforces
business policy and the use of preferred vendors. Extensity also provides
reporting and analytics that leverage the collected data for vendor negotiation,
policy control, and improved employee and resource utilization. A major portion
of corporate spending is widely dispersed amongst employees making purchases as
part of their day-to-day responsibilities. By automating these complex business
processes through the use of our suite, companies can benefit from the
centralized control of employee-initiated corporate spending.
Extensity's applications are available as licensed software or as a hosted
solution. Regardless of a customer's choice of deployment, Extensity integrates
with enterprise resource planning applications and other information technology
systems. Furthermore, our software architecture allows our applications to be
accessed by all employees on a myriad of devices, such as a networked personal
computer, a laptop, a personal digital assistant (PDA) or a wireless application
protocol (WAP)-enabled mobile phone.
Our products are now deployed in over 40 countries worldwide with more
than 1,000,000 licensed seats. Our blue-chip customer base includes A.T.
Kearney, Aventis, Bear Stearns, Cisco Systems, Fluor, Franklin Templeton
Companies, GlaxoSmithKline, and Providian Financial. Extensity targets Global
2000 corporations who are seeking to realize hard-dollar cost savings through
automation. Our mission is to save our customers money by automating all
employee-based financial processes in a single, consolidated solution that
provides efficiency, control, and effectiveness through analytics.
MARKET OVERVIEW
GROWTH OF THE INTERNET AS A MEANS TO DEPLOY ENTERPRISE APPLICATIONS FOR DRIVING
PRODUCTIVITY, INCREASING CORPORATE CONTROL AND REDUCING COSTS
The Internet has emerged as a universal communications medium that has
become a catalyst for change in companies of all sizes. In today's intensely
competitive global business environment, organizations have increasingly adopted
the Internet as a means to streamline their business processes and make their
employees more productive by automating a number of routine business tasks. The
advantages of these Internet-based enterprise applications are clear. They are
easy to deploy and maintain across an entire organization, regardless of size,
and are readily adopted by employees who have come
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to expect the immediacy, self-service, ease-of-use and accessibility of content
and commerce that the Internet provides.
RECENT TRENDS IN PROCESS AUTOMATION
Businesses have traditionally made significant investments in enterprise
resource planning (ERP), customer relationship management (CRM) and other
enterprise software applications to automate processes in functions such as
manufacturing, sales, human resources, customer support and finance. These
systems typically have been focused on specific individual functional areas and
address the business processes unique to each functional area. Frequently, they
offer limited integration of information across functional areas. These systems
have historically been limited in their ability to integrate information
external to the enterprise. ERP and other enterprise software systems have also
traditionally required lengthy and expensive customization and implementation
and are expensive to maintain because their client-server architecture requires
installation and continued maintenance on each desktop. While these systems are
in place in most large companies, they have not focused historically on certain
pervasive business processes that touch a high percentage of the employees in
any organization, such as expense reporting, travel management, procurement and
time capture.
These employee-centric business processes have been largely
under-automated to date, resulting in processes that are time-consuming,
inefficient and costly. Most companies today conduct travel planning, expense
reporting, procurement and time capture through paper-based processes that
require actions by many people, both inside and outside the organization. These
processes involve re-keying of data, manual tracking of forms, limited data
capture and limited ability to track and enforce corporate spending policies.
Without business process automation, expense reporting, travel planning,
procurement and time management transactions can have significant processing
costs. In addition, traditional processes do not generally feature automated
spending and procurement controls and, as a result, may fail to direct spending
to preferred vendors and may permit spending on unapproved goods and services.
OPPORTUNITY FOR EMPLOYEE RELATIONSHIP MANAGEMENT APPLICATIONS
A significant market opportunity exists in the developing market for ERM
applications. ERM presents a new opportunity for employers to introduce
efficiencies and direct cost savings into many of the key processes that involve
their most valuable asset and largest expense - their workforce.
Some of the highest impact solutions within the ERM opportunity center
around employee-based financial processes. These solutions are focused on
providing direct cost savings to the organization and can result in a rapid
Return on Investment (ROI). These significant cost-saving opportunities have
driven demand for ERM solutions. The solutions provide cost-savings by:
o Reducing, and often eliminating, the back-office resources needed to
manage and audit these processes;
o Automatically enforcing corporate policies through real-time
business rules, which point end-users to approved vendors in the
areas of travel and indirect procurement and compare spending to
corporate guidelines;
o Delivering integrated reporting for in-depth analysis of corporate
expenses and resource utilization;
o Providing data to purchasing decision makers for vendor contract
negotiation;
o Providing business managers with information on individual employee
and overall workforce utilization, in order to manage employee
productivity and profitability more effectively; and
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o Reducing the time employees spend on general business tasks, freeing
them to focus on their core responsibilities.
THE EXTENSITY SOLUTION
Extensity provides an integrated suite of Internet-based software
applications for ERM. This solution is designed to save our customers money by
automating employee-based financial processes in a single, consolidated solution
that provides efficiency, control and effectiveness through analytics. Our
product suite currently comprises applications for expense reporting, travel
management, indirect procurement and time capture. The suite shares a common
user interface and can be accessed through a common HTML-based launchpad, called
Extensity Connect.
The application suite is fully integrated so that each application works
and shares information with all the other applications. In addition, our
applications aggregate and integrate information and provide tools for reporting
and analysis. Our applications are easy to learn, as users access all
applications through a common, intuitive, browser-based interface. The
integration of the suite to online services such as travel bookings, credit card
feeds and content services provides a comprehensive solution for employee
relationship management. Our applications are designed for rapid implementation
and cost-effective deployment to end-users. With their scalable Web architecture
and international features, our products can support large multinational
companies.
Our ERM applications effect direct and indirect cost savings by:
o Streamlining and automating traditional paper-based processes,
thereby reducing the time and personnel requirements
associated with expense reporting, travel planning,
procurement and time capture;
o Increasing accuracy through automation of error-checking, data
import and business rule compliance;
o Providing greater control of expenditure policy enforcement
and administration; and
o Supporting analysis of corporate purchasing and utilization
patterns to enhance decision-making capabilities, increase
leverage in negotiating vendor contracts, and promoting and
enforcing the use of preferred vendors.
Our employee relationship management solution also increases productivity
throughout the enterprise by:
o Reducing employee time spent on tasks outside of their core
responsibilities;
o Enabling exception-based management that allows business
managers to review only those expenditures that fall outside
of a company's policies; and.
o Supporting remote access via laptop computers, WAP-enabled
mobile phones and PDAs.
EXTENSITY STRATEGY
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Our objective is to be recognized as the leader of the rapidly developing
market for ERM solutions. Our suite of applications automates employee-based
financial processes that have a direct impact on the bottom line, and we intend
to achieve market leadership through our focus on employee efficiency, spending
analysis and policy control.
Key elements of our growth strategy include:
ENHANCING OUR SUITE OF EMPLOYEE RELATIONSHIP MANAGEMENT SOLUTIONS. In
2002, Extensity 6, a major new release of our solution, will become generally
available. This release includes advances in technology as well as functionality
enhancements in all of our application modules. While our expense reporting
application has been widely recognized as a best-in-class solution, with this
release we intend to increase the visibility and market acceptance of all of our
application modules. We have also made a significant investment in improving our
analytics capabilities and will continue to make this a key priority. Extensity
intends to continue to enhance the Internet-based architecture of our technology
platform in order to provide a comprehensive and functionally rich solution for
employee-centric business processes. We also intend to continue to enhance the
functionality of our existing application suite and leverage the existing
platform to introduce additional integrated modules that address employee-based
financial processes.
AGGRESSIVELY PENETRATING THE LARGE EMPLOYEE RELATIONSHIP MANAGEMENT
MARKET. We believe that the market for ERM solutions is in its earliest stages.
In order to address this market opportunity, we will utilize a combination of
direct and indirect sales channels. We plan to focus our direct sales efforts
across a variety of industries with a focus on large multinational organizations
with a major presence in either North America or Europe. We will utilize our
reseller partners to penetrate geographies such as Latin America and vertical
industries which have unique requirements, such as the legal market.
MAKING CUSTOMER SATISFACTION OUR NUMBER ONE PRIORITY. In the second half
of 2001, we increased our corporate focus on customer satisfaction. A Customer
Life Cycle program, which includes regular contact and measurement of customer
satisfaction metrics, was established to increase our focus on the customer.
Extensity's goal is to be the most responsive vendor with which our customers do
business.
EXTENSITY PRODUCTS AND SERVICES
INTEGRATED SUITE FOR EMPLOYEE RELATIONSHIP MANAGEMENT
Extensity provides an ERM solution for the automation of employee-based
financial processes. Our application suite currently includes Extensity Expense
Reports, Extensity Travel Plans, Extensity Timesheets and Extensity Procurement.
In addition, the suite includes a system administration tool designed for use by
business professionals, not information technology (IT) staff, and an optional
reporting and analysis module.
All applications are launched within a universal interface called
Extensity Connect. This gateway to the Extensity suite provides an inbox
summary, access to all Extensity applications, personal reports on items such as
unattached credit card transactions, and links to external content and services,
such as online travel booking or product catalogs. All Extensity applications
share a consistent and easy-to-use, browser-based graphical user interface. The
applications also share a common underlying technology architecture and a common
data model, which allows them to work together and share information. In
addition, our applications are universally accessible, allowing employees to
work anywhere through a desktop computer, a laptop, a PDA, or through a
WAP-enabled mobile phone.
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Our application suite provides comprehensive data regarding spending,
suppliers, policy violations and resource utilization. We offer a business
intelligence solution that transforms Extensity data into valuable information
for proactive business management. By consolidating data from our expense
reporting, travel, procurement and time capture modules into our central
reporting database, our analytics solution can measure and analyze all
employee-initiated corporate spending.
COMMON FEATURES OF OUR APPLICATIONS
FEATURES DESCRIPTION
Approval workflow Once submitted, documents are automatically routed to
the correct approver/s. Approvers receive e-mail
notification that a document awaits their approval,
streamlining the process to ensure faster processing
times for expense reports, travel plans, purchase
requisitions and timesheets.
Real-time business rules Real-time business rules ensure increased employee
knowledge of corporate policies. By proactively
notifying employees at the time of entry that the item
lies outside of their corporate policy, or requires
additional explanation, these rules help to improve both
accuracy and compliance with business policy.
Employee self service Employees can track in real time the status of any
document that they have submitted, reducing the number
of calls and inquiries to managers and processing
departments.
Complete application integration Documents can be linked. For example, a travel plan can
be linked with an expense report for the trip or a time
sheet can be linked with an expense report and a
purchase requisition for a project.
Proxy user creation and approval Employees can appoint another person to create and/or
approve documents for them.
Project and cost center allocation Expenses and time can be allocated across multiple cost
centers and project codes as percentages or absolute
dollar amounts.
Configurable interface and data capture The application suite is fully configurable to
incorporate each organization's specific data capture
needs.
Intelligent personalization Each employee's application becomes customized,
maintaining previously used information, such as prior
travel itineraries, cities traveled to, purposes and
previously used vendors.
Online help Context sensitive online help is provided for all
applications.
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EXTENSITY EXPENSE REPORTS. Extensity Expense Reports is a full-featured
application providing automation of the entire expense reporting process.
Extensity Expense Reports brings accuracy, efficiency and control to this
process. Using Extensity Expense Reports, employees, whether operating as a
remote, off-line or local user, can quickly and easily create an expense report.
This process is expedited and made more accurate through the use of online
credit card data for automatic data entry. Compliance to business policy is
checked as users create the expense reports. Compliant reports can be
automatically approved so only noncompliant reports are routed to managers for
approval. In reviewing noncompliant reports, managers need only focus on
highlighted exceptions. Similarly, the accounting team spends less time
re-keying data and auditing expense reports and more time analyzing travel and
entertainment expense data for increased cost-savings. Employees can receive
reimbursement rapidly through seamless integration with the organization's
financial, payroll and human resources systems.
FEATURES DESCRIPTION
Credit card integration and Uses the data feed from corporate card vendors to enable
pre-population travelers to select charges and automatically populate
the expense report, reducing creation time and avoiding
data entry errors.
Foreign currency support Enables users to complete reports using local
currencies, as well as enables automated foreign
currency conversion.
Itemization and allocation Supports expense itemization for more accurate
accounting and allows allocations to be made at the
line-item level without requiring a separate expense
report for each project.
Receipt reconciliation Guides users through itemizing receipts to ensure the
expense is fully allocated.
Real-time policy enforcement Ensures compliance to corporate expense policies at the
time data is entered.
Integrated business intelligence Extensity's reporting tool allows managers to analyze
expenses and adherence to corporate policies.
EXTENSITY PROCUREMENT. Extensity Procurement automates and optimizes the
requisitioning of non-production goods and services while enforcing a company's
procurement policies. Through Extensity Procurement, employees can access their
company's own purchasing catalog, or "punch out" to partner sites. The
application is designed to minimize rogue purchasing and to ensure usage of
preferred vendors for volume discounts. Corporate expenditure policies are
automatically applied, approvals are accelerated and employees can have their
orders fulfilled in a fraction of the time required for paper-based procurement.
Extensity Procurement centrally captures key purchasing information that can be
analyzed to continually evaluate and improve the procurement processes for
further optimization and savings. Through automation, Extensity Procurement
significantly reduces time-consuming administrative tasks, freeing purchasing
professionals to focus on more strategic activities such as reducing redundant
sources, selecting better vendors and negotiating contracts.
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FEATURES DESCRIPTION
Purchase requisition templates Accelerates document creation by pre-populating
templates with frequent or common purchases such as new
hire packages.
Sourcing requests Facilitates requests for quotes from professional buyers
using the organization's specific requirements.
Commodity-based routing Routes the line items on a purchase requisition to
different approvers based on the type of commodity being
purchased.
Catalog repository Centrally created catalog with keyword and hierarchical
search for easy reference by employees.
Default shipment locales Creates default shipping locations from the user profile
for additional control over corporate purchasing. Any
change to a ship-to address can be treated as a policy
exception.
Detailed cost allocation Employees and managers can provide detailed cost
allocation across multiple projects and cost centers at
both the line item and document level.
Integrated business intelligence Extensity's reporting tool allows managers to analyze
expenses and adherence to corporate policies and
approved vendor usage.
EXTENSITY TIMESHEETS. Extensity Timesheets enables quick and accurate time
capture for both project management and payroll automation. Timesheets allows
employees to capture their hours and paid time off efficiently and accurately so
managers and payroll professionals can focus on more strategic activities, as
opposed to gathering, entering or verifying employee time data. For professional
services organizations that bill clients, Extensity Timesheets streamlines
processes to ensure timely and accurate client billing, which helps companies
reduce write-offs and enhance cash flow. Users can quickly identify charge codes
with an easy-to-use project code chooser. Extensity Timesheets centralizes time
information so project managers can leverage critical data to evaluate project
profitability, as well as employee/resource utilization. For organizations with
large numbers of non-exempt employees, Extensity can be used to automatically
calculate overtime and feed that information to the payroll system with no need
for additional data entry. In addition, all companies can benefit from Extensity
Timesheets' ability to capture employee paid time off, eliminating payroll data
entry and increasing the accuracy of paid time off reporting. Extensity
Timesheets integrates with existing financial systems, as well as with Extensity
Expense Reports and Extensity Procurement to ensure accurate pictures of project
performance, bill-back to clients, and total employee and departmental spending.
FEATURES DESCRIPTION
Overtime calculation engine Automatically calculates overtime for hourly workers
according to local labor laws and exports this
information to the payroll system, eliminating payroll
data entry.
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Drill-down project chooser Enables users to quickly identify detailed project and
task codes from thousands of options using drill-down
menus and business rules to ensure accuracy.
Multiple viewing and data entry options Allows users to enter and track time by calendar view or
by project line item.
Flexible reporting periods Configures multiple reporting periods for various groups
of users.
Integrated business intelligence Real-time reports, accessed directly from our Connect
portal, notify users of items such as delinquent time
sheets. Integrated business analytics provides deeper
analysis of project and payroll-related time.
Management by exception Enables managers to review only those time sheets that
require their attention by automatically approving time
sheets that are within policy.
EXTENSITY TRAVEL PLANS. Extensity Travel Plans automates the planning,
approval and procurement process for corporate travel. The application enables
users to plan and book business travel through a streamlined method that
enforces corporate travel policies before travel expenses are incurred.
Extensity Travel Plans provides an immediate link to information and resources
needed by a business traveler, such as corporate travel policies, online booking
systems and general travel information resources. Managers can easily review
travel plans, as corporate travel policies are enforced at the trip-planning
stage. Extensity Travel Plans can be seamlessly integrated with Extensity
Expense Reports for an end-to-end business travel solution. Working in tandem,
Extensity Expense Reports and Extensity Travel Plans offer an efficient and
accurate travel management system. Together, the two applications provide a
seamless flow of information, from pre-trip planning to post-trip expense
reimbursement and give managers a comprehensive view of projected and actual
costs for variance analysis.
FEATURES DESCRIPTION
Industry average cost data Integrates benchmark costs into the product to create an
accurate itinerary for domestic and international
travel, which allows the user to better estimate travel
costs.
Policy enforcement Streamlines pre-trip approval process for cost savings
and increased business efficiency, warning the user of
out-of-policy items before costs are incurred.
Integrated online booking Extensity integrates with leading travel booking tools
for seamless online booking of air, lodging and car
rental.
Integrated with Extensity Expense Reports Can automatically approve expense reports that fall
within the specified parameters of an approved travel
plan.
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Integrated business intelligence Extensity's reporting tool allows managers to analyze
expenses and monitor adherence to corporate policies.
EXTENSITY SYSTEM ADMINISTRATOR TOOL. The Extensity System Administration
Tool is an application designed to allow the business users within an
organization to maintain the Extensity suite, minimizing reliance on the
internal information technology staff or outside consultants. The interface is
graphical and easy to use. Single or multiple administrators can be created for
various departments, groups or functional areas. All systems changes are
recorded in an audit log for further security.
FEATURES DESCRIPTION
User and group setup and maintenance Maintains all aspects of user and group information,
such as department identification, group-specific
business rules and individual approval authority. Allows
administrators to perform group-wide editing.
Corporate data setup and maintenance Enables a system administrator to modify corporate data
values such as cost centers, departments, mileage rates
and permitted charge codes.
Business rules setup and maintenance Enables a system administrator to modify business rules
and policies.
Document viewing and modification Allows an administrator to view and modify work items by
reassigning access privileges of a particular document.
EXTENSITY BUSINESS INTELLIGENCE. Extensity's applications capture a wide
range of corporate and employee data, with far more detail than is typically
contained in a financial system of record. Extensity's business intelligence
strategy is two-fold: real-time reporting accessible to all users and business
intelligence tools for business analysts. Through our Extensity Connect
interface, Extensity users can access reporting on everyday items such as
unattached credit card transactions or delinquent or unapproved timesheets. For
business analysis, Extensity has partnered with Business Objects, a respected
leader in business intelligence, to provide world-class business intelligence.
With these choices, Extensity provides organizations with comprehensive
analytics that transform Extensity data into valuable information for vendor
negotiation, policy compliance and enforcement, and proactive business
management.
FEATURES DESCRIPTION
Real-time user reporting Real-time access to user-specific data, such as credit
card transactions awaiting attachment to an expense
report or delinquent timesheets.
Simplified reporting database Enables users to perform analysis of Extensity data
either through the embedded Business Objects solution or
through the user's own reporting solution.
Robust business analytics Extensity uses the Business Objects product to deliver a
configurable analytics solution complete with drill down
capabilities and the ability for users to design
reports.
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Employee spending analytics Access to data on employee-based financial processes,
including expense, procurement, travel and time capture,
for comprehensive reporting. Report on spending by
employee, department, project, cost center, or division,
or distill valuable data for vendor negotiation or
employee utilization.
SERVICES
We offer customers a comprehensive selection of implementation services,
support and training. Our professional services organization consisted of 62
professionals as of December 31, 2001.
IMPLEMENTATION. Implementation typically requires tailoring of business
rules, configuration of workflow, integration of customer data, and integration
with one or more financial systems, a human resources system and an external
corporate credit card system. Extensity provides a highly configurable solution,
and customers can choose from a range of services, including our Extensity
Advantage Best-Practices Implementation. Extensity Advantage delivers a targeted
90-day implementation utilizing our experience working with global customers to
configure a solution that can be delivered quickly and inexpensively, without
sacrificing functionality or control. Implementations are performed by our
professional services organization or a system integrator partner and are
typically billed based on a daily rate.
CUSTOMER SUPPORT AND MAINTENANCE. We provide support and maintenance
services for each customer to whom we license an application. We offer three
different support options for our workforce management applications, so
customers can choose the level of support that best fits their business needs
and resources. We have named our three support levels, Operations Support,
Enterprise Support, and Mission Critical Support. Support and maintenance
contracts are required for one year and can be renewed by the customer
thereafter. Our customer support staff provides timely and accurate resolution
of customer inquiries and is available via telephone, e-mail and fax. We also
provide Extensity eSupport, a self-service Internet support option. Customers
who choose Mission Critical Support, our most comprehensive support level,
receive support services 24 hours per day, seven days per week.
TRAINING. Extensity offers a comprehensive set of training and learning
tools. The training curriculum covers application features for all users,
prepares company trainers to redeliver the training, and teaches the application
administrators--accounting personnel, help desk staff and implementation
teams--how to modify the dynamic aspects of the applications. Training is
conducted at our training facilities, the customer site or via Web broadcast. We
also offer Web-based reference tools, which can be used for self-paced training.
TECHNOLOGY
Our applications are fully standards-based, designed for the Internet and
built upon an underlying architecture that is written in Java. Our applications
run on standard Web browsers and servers and support leading relational database
management systems (RDBMS), including Oracle, Sybase, Microsoft SQL Server and
IBM DB2. The multi-tier architecture connects browser-based applications to
application servers and the RDBMS through a corporate local area network (LAN),
wide area network (WAN), intranet or secure Internet connection. Our technology
performs messaging between clients and the application engine in real time over
transmission control protocol/internet protocol (TCP/IP), the suite of
communications protocols used to connect hosts on the internet, and makes
database connections via standard Java database drivers. Our applications are
inherently scalable, due to our multi-tier architecture employing thin clients,
multi-
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threaded application servers and relational databases. In addition, our
Java-based architecture enables Extensity to operate across multiple platforms
within an organization, including Windows 95, 98 or NT, Macintosh, Solaris and
Palm operating systems. Our upcoming release, Extensity 6, includes many
technological advances, including moving to Java 2, the utilization of Java
WebStart, and the addition of Connect portlets. Java 2 allows Extensity to make
great strides in scalability and usability, while Java WebStart will enable
Extensity applications to run independent of a browser and enable automatic
updates to be pushed to the user seamlessly upon each connection with the
server. New portlets, available through our Connect HTML interface, allow for
access to real-time reports on user specific data, such as unattached credit
cards.
THE EXTENSITY ARCHITECTURE
Building on a standards-based foundation, we have designed a
component-based application infrastructure composed of readily configurable
business rules, a workflow system and advanced data management capabilities.
Each of these core elements plays a crucial role in deploying enterprise-wide
solutions that can model a company's unique policies and processes, manage key
business functions and scale to meet the needs of an organization of any size.
BUSINESS RULES SYSTEM. Our business rules system allows each of our
applications to be configured so that companies can effectively monitor their
processes and policies. This system is also flexible and can be edited and
modified as a company's processes and policies evolve. Employees are presented
with appropriate warnings, explanations and message prompts to guide data entry
and encourage conformance with corporate policies. The business rules
dramatically reduce reworking of procedures, track and resolve policy exceptions
online and eliminate re-keying of data into back-end systems. The business rules
system permits management by exception, in which items requiring managerial
attention are automatically highlighted so that managers need not review items
that are clearly in compliance with established business rules.
WORKFLOW SYSTEM. Our workflow system ensures that information flows
through the organization in a timely, secure and efficient manner. Robust
enterprise applications require database-driven workflow, rather than
e-mail-based messaging, to provide increased security and reliability, data and
transaction integrity, real-time availability, optimization for high performance
and usage reporting. Workflow processes can be configured to reflect the unique
process flow of documents and business processes in any organization. Our
applications also permit e-mail notification to users as to status of a
procedure or of events requiring attention, alteration and action. For example,
after an employee has submitted an expense report, the system can notify him or
her where the document is in the approval and reimbursement cycle. Similarly, an
e-mail notification can alert a manager of a document that requires attention.
ADVANCED DATA MANAGEMENT. Data management ensures that all our
applications can be customized and extended to add, delete or modify buttons,
type-in fields or other controls on an application's user interface, in each
case as required by a customer's unique business objectives. New functionality
can also be assigned to existing controls, or new controls, with little
application modification and minimal programming. Our application suite can
integrate with enterprise systems such as ERP systems and other financial, human
resources (for user information and organizational structure) and project
accounting systems as well as corporate credit card data feeds. These interfaces
allow for the automatic exchange of data between our system and other enterprise
systems and for the downloading of data managed by these enterprise systems into
our application suite.
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STRATEGIC RELATIONSHIPS
To rapidly deliver a comprehensive, robust solution to our customers, we
have established strategic relationships with companies in six categories:
travel management, finance, implementation services providers, resellers,
e-business infrastructure providers, and e-commerce and employee services
providers.
TRAVEL MANAGEMENT. We have established relationships with key partners in
the travel management market, creating solutions for employee focused end-to-end
travel management.
AMADEUS/E-TRAVEL--Announced in October 2001, Extensity entered into an
agreement with Amadeus and e-Travel, an Amadeus company, to jointly market our
travel management solutions. This agreement initially provides for joint
marketing and sales between the companies. Future plans include integration of
Extensity's ERM solution with e-Travel's online suite of services. Under the
terms of the agreement, customers will be able to access e-Travel's online
booking service through a single sign-on in Extensity Connect and complete the
entire travel booking process from pre-trip approval and automatic policy
enforcement through to expense reimbursement. The integration of Extensity's
Employee Relationship Management (ERM) solution with e-Travel's online travel
procurement and fulfillment service provides seamless business travel planning,
transacting and reporting.
GETTHERE.COM--In April 2000, we partnered with Sabre Business Travel
Solutions to provide an integrated e-commerce solution to approve, book, fulfill
and expense corporate travel. In August 2000, Sabre acquired GetThere, Inc.
Today, GetThere's online booking solution is a key integrated component in our
Extensity Travel Plans application. As a leader in business-to-business online
booking, GetThere.com provides airline, hotel and car rental bookings for our
customers. GetThere.com and Extensity have joined forces to offer customers a
completely integrated Web-based travel booking and expense reporting solution.
The alliance capitalizes on the synergy between GetThere's Web-based Global
Travel Manager, which links travelers and travel agencies to real-time travel
information and reservations, and Extensity Travel Plans and Expense Reports.
The integration between these products offer tremendous benefits to our mutual
customers in supporting cost-efficient travel management from initial booking
and approval through expense reporting and reimbursement, all via the Web.
MCCORD TRAVEL MANAGEMENT--Announced in January 2002, McCord recommends
Extensity to their customers, allowing the companies to provide an end-to-end
travel management solution. Extensity will be a part of the overall travel
management strategy that McCord creates and recommends to its customers. By
including Extensity Travel Plans and Expense Reports as part of the travel
solution, McCord's travel agents can concentrate on travel planning and booking
rather than lengthy trip approval and reimbursement processes.
ROSENBLUTH INTERNATIONAL--Rosenbluth International continues to develop
innovative business applications and integrated systems, which enable it to
provide highly personalized service to its clients. By integrating with
Extensity Expense Reports, Rosenbluth provides and supports an innovative,
flexible travel and expense management solution that adapts well to clients'
internal accounting procedures.
WORLDSPAN--As more and more companies reevaluate their traditional travel
and expense processes, Worldspan and Extensity provide an automated travel
management and expense reporting solution to significantly save time and
processing costs. The partnership between Extensity and Worldspan is a natural
extension of each company's core competencies, which translates to a
high-caliber T&E solution for joint customers.
15
WORLD TRAVEL PARTNERS/BTI-- This company's services span the globe through
more than 1,200 offices in North America and the 2,800 locations of Business
Travel International, a joint venture of more than 50 travel management
companies operating in over 60 countries. Through their agreement, Extensity and
World Travel Partners can offer a comprehensive business travel management
solution.
We also have partnerships in place with companies, such as Runzheimer
International and OANDA, which provide access to information essential to travel
planning. Runzheimer provides transportation cost benchmarks, while OANDA
provides a currency conversion data service.
FINANCE. Extensity Expense Reports accepts American Express, Diners Club,
Visa and Master Card corporate card data feeds, allowing business travelers to
select charges to automatically populate their expense reports. In the
procurement card market, we work with Visa to integrate our applications suite
with the Visa procurement card. American Express Purchasing Card data also feeds
directly into Extensity Procurement, allowing employees to directly purchase
smaller-ticket items without the complicated paperwork of traditional
procurement systems. Our key finance partners also include JP Morgan Chase, GE
Capital and US Bank.
INTERPLX TECHNOLOGIES-- INTERPLX Technologies provides corporations of all
sizes with automated services to manage the processing of expense transactions
related to corporate travel and procurement. These services include electronic
funds transfer to employees and corporate charge cards, document collection,
auditing, imaging and archiving, and related integration services. The
combination of Extensity Expense Reports and INTERPLX's document management and
auditing services dramatically reduces the cost, processing time and risk of
error traditionally associated with expense report processing. Within the
Extensity application, an employee creates an expense report and submits it for
approvals, which are governed by the automatic business rules and workflow
established through the application. From there, INTERPLX downloads the reports
for processing and payment and sends an e-mail notification of payment to the
employee. INTERPLX then audits, images, and archives the reports. This joint
solution eliminates the time-consuming manual processes involved in the expense
reporting and payment process, resulting in significant cost savings.
IMPLEMENTATION SERVICE PROVIDERS. We have formed partnerships with
implementation services providers to both enhance our implementation capacity
and expand our distribution. All of our partners are certified under our
Extensity Certified Program.
CAP GEMINI ERNST & YOUNG--CGEY's business solution, the "Connected
Innerprise", includes leading solutions such as Extensity's integrated
applications suite. The Connected InnerpriseSM uses Web-based technologies to
connect people, processes, data and applications across the ValueWebSM. CGEY has
a significant presence in North America, Europe and Asia.
KPMG--We have a strategic partnership with KPMG Consulting AG, Germany.
Under the terms of our agreement, KPMG Consulting AG has committed to marketing
and implementing our solutions for travel planning and expense management for
customers within its enterprise e-business strategies in Germany.
To augment our implementation services worldwide, we have an additional
network of certified implementation partners including TechSpan and Systime in
the United States, and Princeton Consulting and Glue Ltd in Europe.
RESELLERS. We have established relationships with solutions providers to
resell our products.
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ELITE--Elite Information Systems and Extensity have entered into a
strategic alliance under which Elite resells Extensity's suite of applications.
Elite provides practice management and financial software products to more than
700 customers worldwide. Extensity's ERM solutions are marketed to those
customers to help them lower operating costs and improve employee productivity
by automating day-to-day processes, such as expense reporting, travel planning
and procurement. Both companies benefit from this alliance. Through Elite's
expertise with mid-market customers, typically defined as companies with 10 to
4,000 employees, Extensity reaches a previously untapped market.
EMPLAZA--Emplaza is a 50/50 joint venture between Terra Networks and
Meta4. The joint venture has been formed to create a virtual
business-to-employee marketplace, while offering a comprehensive range of
interactive services and products for the management of human resources and
knowledge within companies. Under our agreement with Emplaza, users will be able
to access our applications via a single sign-on through Emplaza, giving users
one central point of access to the administrative applications they use every
day. We also have an agreement whereby Emplaza can purchase our products at a
discount and resell the products to its customers.
E-BUSINESS INFRASTRUCTURE. We have established relationships with key
solutions providers to deliver integrated ERM solutions to our customers. Cisco
Systems has selected us as one of its key solutions providers to support its
workforce management effort. We have an agreement with Cisco that establishes us
as Cisco's strategic Internet Business Solutions software partner and Cisco as
our strategic networking partner. This relationship includes a mutual agreement
to integrate each party's sales and marketing plans and obligates each party to
review the other party's respective architectures for possible product
integration. In this initiative, Cisco has taken an active role in communicating
to its customers the benefits of Extensity Expense Reports. Cisco also supports
Extensity through sales assistance, customer referrals and co-marketing
activities. Other e-business infrastructure partners include IBM, Microsoft,
Netigy, Sun Microsystems and Sybase.
E-COMMERCE AND EMPLOYEE SERVICES PROVIDERS. We have formed strategic
relationships with several content, commerce and service providers to allow our
network of customer employees to conduct commerce efficiently over the Internet.
DIGITAL THINK--We have long been focused on providing solutions that
enable companies to control costs related to travel and entertainment. Digital
Think's solution is a natural fit as it adds a cost avoidance component to our
suite of applications, as well as an increasingly important component to
employee retention: e-Learning. Digital Think's online catalog of courses can be
easily launched from within Extensity Connect, providing employees a common user
experience.
EVENTSOURCE--EventSource.com is the Internet's first online community for
meeting planning. EventSource.com is used by corporate professionals to plan
conferences, meetings, training, tradeshows, and sales and incentive programs.
PROACT TECHNOLOGIES--ProAct Technologies is a leader in providing an
integrated suite of employee benefits, HR, and life planning solutions to large
companies, allowing employees to easily make informed health, wealth, and
benefits choices online. By partnering with ProAct, we can further provide
automated everyday HR processes, which translates into overall cost savings and
improved efficiencies for companies.
WEBEX--WebEx powers real-time meetings on the Web. Through Extensity
Connect, we provide access to WebEx's Meeting Center Services providing an
alternative to travel and further encouraging cost control.
17
MARKETING AND SALES
We focus our marketing efforts on achieving brand recognition, market
awareness and lead generation. The market for Extensity's product suite includes
Global 2000 enterprises in many industries. We typically market to the senior
financial officer in an organization, such as the Chief Financial Officer or
Vice President of Finance, although decisions to implement a solution such as
ours are usually made by a committee with representatives from various
departments including, but not limited to, IT, travel, accounts payable and
human resources.
We also conduct public relations campaigns to promote market awareness of
our product developments and major initiatives. Programs we use to attract
customers include advertising in business and financial publications,
e-newsletters, tradeshows, seminars, and direct mail. We also participate in
various co-marketing initiatives with strategic partners. We maintain close
relationships with industry analysts and frequently participate in industry
conferences and events. Our website serves as another sales tool for prospective
customers.
We sell the Extensity suite primarily through our direct sales
organization operating in North America and Europe. Our North American sales
force is divided into three sales regions: East, Central and West. We have sales
offices in Emeryville, California; Irvine, California; Irving, Texas;
Parsippany, New Jersey; Downer's Grove, Illinois; and Bethesda, Maryland. Our
U.S. sales organization included 20 direct sales representatives as of December
31, 2001. Field-based sales engineers and sales development staff support our
direct sales representatives. Our European offices are located in London,
England and Frankfurt, Germany. Our European sales organization includes a
European general manager. Three field-based engineers and sales staff support
three direct sales representatives.
PRODUCT DEVELOPMENT
We have been developing and enhancing the Java-based architecture of our
applications for the Internet since 1996. We released our first Extensity
application, Extensity Expense Reports, in March 1998. Extensity Expense Reports
was one of the first workforce management applications to be developed
specifically for the Internet. We introduced Extensity Travel Plans in December
1998 and Extensity Timesheets and Extensity Procurement in July 1999. These four
applications comprise our suite of ERM applications. In March 2000, we launched
Extensity Connect, an HTML interface to our applications plus Internet content
and commerce and integrated reporting functionality.
As of December 31, 2001, our engineering organization consists of 56
employees and is grouped according to the following areas of focus: product
development, core technology, release engineering, mobile engineering,
architecture, tools development, quality assurance and technical documentation.
Each group within our engineering organization regularly shares resources and
collaborates with other groups on code development, quality assurance and
documentation. Our engineering organization includes a number of key individuals
that have developed Internet applications and services and have extensive
experience with Java-based application development. We believe that a
technically skilled and experienced engineering organization is a key factor in
the market acceptance of our applications and, accordingly, we plan to continue
to make significant investments in our engineering organization and efforts to
promote the success of our products.
To date, we have made significant investments in our technology
architecture and applications, and we believe they provide us with a significant
competitive advantage.
18
Our research and development expenses, excluding amortization of non-cash stock
based compensation, totaled $11.9 million in 2001, $13.3 million in 2000, $7.1
million in 1999 and $4.4 million in 1998. We intend to maintain our competitive
advantage by continuing to focus on and refine our development efforts. Our
engineering organization employs a defined product development methodology to
each application, which includes technology and architectural roadmaps, product
planning, requirement specifications, prototyping, design specifications, code
review, identified program review points and beta testing.
To implement our business strategy successfully, we must provide software
applications and related services that meet the demands of our customers and
prospective customers. We expect that competitive factors will create a
continuing need for us to improve and add to our suite of software solutions. We
will have to expend significant funds on engineering and other resources to
continue to improve our suite of applications, and to properly anticipate and
respond to consumer preferences and demands. As organizations' needs change with
respect to their enterprise applications, our existing suite of software
applications may require modifications or improvements. The addition of new
products and services will also require that we continue to improve the
technology underlying our applications.
COMPETITION
The market for Internet-based ERM applications is intensely competitive.
The key competitive factors affecting this market include a significant base of
reference customers, the breadth and depth of products and product features, the
quality and performance of our products, the core technology underlying our
applications, a high level of customer service and the ability to implement our
solutions rapidly. With respect to these factors, we believe that our ERM
applications compete favorably.
Our competitors in this market vary in size and in the scope and breadth
of the products and services they offer. Companies offering one or more products
that compete directly with our products include Ariba, Captura Software, Concur
Technologies, IBM, Oracle Corporation, PeopleSoft Corporation and SAP
Corporation. We also expect future competition from other established and
emerging companies.
EMPLOYEES
As of December 31, 2001, we had a total of 216 employees, including 56 in
research and development, 68 in sales, marketing and business development, 62 in
professional services and 30 in finance and administration. None of our
employees are subject to a collective bargaining agreement and we believe our
relationship with our employees is good.
19
RISK FACTORS
THE FOLLOWING IS A DISCUSSION OF CERTAIN FACTORS THAT CURRENTLY IMPACT OR MAY
IMPACT OUR BUSINESS, OPERATING RESULTS AND/OR FINANCIAL CONDITION. ANY
INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CONSIDER CAREFULLY THE FOLLOWING INFORMATION ABOUT THESE RISKS IN EVALUATING OUR
BUSINESS. THE MARKET PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE
ALL OR PART OF THE MONEY YOU PAID TO BUY OUR COMMON STOCK.
RISKS RELATED TO OUR BUSINESS
-----------------------------
OUR LIMITED OPERATING HISTORY AND THE FACT THAT WE OPERATE IN A NEW INDUSTRY
MAKE OUR BUSINESS PROSPECTS DIFFICULT TO EVALUATE.
We were incorporated in November 1995 and commenced licensing of our
software applications in March 1998. An investor in our common stock must
consider the risks, uncertainties, expenses and difficulties frequently
encountered by companies in their early stages of development, particularly
companies in new and rapidly evolving markets such as the market for employee
relationship management software applications. Risks and difficulties include
our ability to:
- expand our base of customers with fully installed and deployed
systems that can serve as reference accounts for our ongoing sales
efforts;
- expand our pipeline of sales prospects in order to promote greater
predictability in our period-to-period sales levels;
- continue to offer new products that complement our existing product
line, in order to make our suite of applications more attractive to
customers;
- continue to develop and upgrade our technology to add additional
features and functionality;
- continue to attract and retain qualified personnel;
- expand direct sales channels and indirect channels such as
relationships with OEM customers and distributors;
- increase awareness of our brand; and
- maintain our current and develop new third-party relationships,
including but not limited to third-party implementers.
The Company may not be able to successfully address these risks or
difficulties and our business strategy may not be successful. If we fail to
address these risks or difficulties adequately, our business will likely suffer.
WE HAVE A HISTORY OF LOSSES AND NEGATIVE CASH FLOW AND EXPECT THIS TO CONTINUE
INTO THE CURRENT FISCAL YEAR.
20
Our business is new; we have offered products for a relatively short
period of time; and our base of customers and prospective customers is still
relatively small. We have spent significant funds to date to develop our current
products and to develop our sales and market resources. We have incurred
significant operating losses and have not achieved profitability. As of December
31, 2001, we had an accumulated deficit of $100.4 million. We expect to continue
to invest in research and development to enhance current products and develop
future products and support our current sales and marketing efforts that promote
our company and our products in the marketplace. As a result, we will need to
increase our revenues significantly to achieve profitability. In addition,
because we expect to continue to invest in our business ahead of anticipated
future revenues, we expect that we will continue to incur operating losses into
the current fiscal year.
OUR BUSINESS IS CHANGING RAPIDLY, WHICH COULD CAUSE OUR QUARTERLY OPERATING
RESULTS TO VARY AND OUR STOCK PRICE TO FLUCTUATE.
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors, many of which are beyond our control. We
expect to continue to make expenditures in all areas of our business,
particularly in our sales and marketing operations, in order to promote future
revenue growth. Because the expenses associated with these activities are
relatively fixed in the short-term, we will be unable to adjust spending quickly
enough in any particular quarter to offset any unexpected shortfall in revenue.
As a result, we expect our quarterly operating results to fluctuate. Our
financial results may, as a consequence of quarterly revenue fluctuations, fall
short of the expectations of public market analysts or investors. If this
occurs, the price of our common stock may drop.
We also seek to develop and maintain a significant pipeline of potential
sales prospects, but it is difficult to predict when individual customer orders
will be closed. Our base of customers and the number of additional customer
licenses we enter into each quarter are still relatively small. Accordingly, the
loss or deferral of a small number of anticipated large customer orders in any
quarter could result in a significant shortfall in revenues for that quarter and
future quarters, which could result in a drop in the price of our stock.
Other important factors that could cause our quarterly results and stock
price to fluctuate materially include:
- our ability to grow our customer base and our base of referencing
customers, in light of our relatively limited number of customers to
date;
- our ability to successfully develop alternative sales channels for
our products, such as sales through OEM customers or distributors;
- our ability to expand our implementation and consulting resources
through third-party relationships, in light of the fact that we have
limited third-party implementation and consulting relationships
currently in place;
- technical difficulties or "bugs" affecting the operation of our
software; and
- delays in the introduction of new or enhanced versions of our
products.
Due to our limited operating history, the early stage of our market and
the factors discussed above, you should not rely on quarter-to-quarter
comparisons of our results of operations as indicators of our future
performance.
21
WE FACE INTENSE COMPETITION, WHICH COULD AFFECT OUR ABILITY TO INCREASE REVENUE,
MAINTAIN OUR MARGINS AND INCREASE MARKET SHARE.
The market for our internet-based employee relationship management
software applications is intensely competitive and we expect competition to
increase in the future. Competitors vary in size and in the scope and breadth of
the products and services they offer. Companies offering one or more products
directly competitive with our products include Ariba, Captura Software, Concur
Technologies, IBM, PeopleSoft and Oracle. As a result of the large market
opportunity for employee relationship management solutions we also expect
competition from other established and emerging companies.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition, and a larger installed base
of customers than us. In addition, many of our competitors have well-established
relationships with our current and potential customers and have extensive
knowledge of our industry. Current and potential competitors have established or
may establish cooperative relationships among themselves or with third parties
to increase the ability of their products to address customer needs.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. We also expect that
competition will increase as a result of industry consolidation. Increased
competition may result in price reductions, reduced margins and loss of market
share, any one of which could seriously harm our business.
IF WE DO NOT PROVIDE SOFTWARE APPLICATIONS AND RELATED SERVICES THAT MEET THE
CHANGING DEMANDS OF OUR CUSTOMERS, THE MARKET FOR OUR PRODUCTS WILL NOT GROW OR
MAY DECLINE, AND OUR PRODUCT SALES WILL SUFFER.
To successfully implement our business strategy, we have to provide
software applications and related services that meet the demands of our
customers and prospective customers as the market and customer requirements
evolve. We expect that competitive factors will create a continuing need for us
to improve and add to our suite of software applications. Not only will we have
to expend additional funds and other resources to continue to improve our
existing suite of applications, but we must also properly anticipate, address
and respond to customer preferences and demands. As organizations' needs change
with respect to their enterprise applications, our existing suite of software
applications may become obsolete or inefficient relative to our competitors'
offerings and may require modifications or improvements. The addition of new
products and services will also require that we continue to improve the
technology underlying our applications. These requirements could be significant,
and we may fail to fulfill them quickly and efficiently. If we fail to expand
the breadth of our applications quickly in response to customer needs or if
these offerings fail to achieve market acceptance, the market for our products
will not grow or may decline, and our business may suffer significantly.
Our employee relationship management software products and related
services have accounted for substantially all of our revenues to date. We
anticipate that revenues from these products and related services will continue
to constitute substantially all of our revenues for the foreseeable future.
Consequently, our future financial performance will depend, in significant part,
upon the successful development, introduction and customer acceptance of
enhanced versions of our employee relationship management software applications
and any new products or services that we may develop or acquire. We cannot
assure you that we will be successful in enhancing, upgrading or continuing to
effectively market our employee relationship management software applications or
that
22
any new products or services that we may develop or acquire will achieve market
acceptance.
EVOLVING TECHNOLOGICAL DEVELOPMENTS AND EMERGING INDUSTRY STANDARDS WILL REQUIRE
US TO ENHANCE THE FUNCTIONALITY OF OUR EMPLOYEE RELATIONSHIP MANAGEMENT SOFTWARE
APPLICATIONS, AND ANY INABILITY TO ENHANCE FUNCTIONALITY COULD CAUSE OUR SALES
TO DECLINE.
Because the market for our products is subject to rapid technological
change and evolving industry standards, the life cycles of our products are
difficult to predict. Competitors may introduce new products or enhancements to
existing products employing new technologies, which could render our existing
products and services obsolete and unmarketable. For example, our currently
available software applications are written entirely in the Java computer
language. While we believe that this provides our solution with significant
advantages in terms of functionality and flexibility, it is not clear whether
Java-based systems will continue to maintain commercial acceptance.
To be successful, our products and services must keep pace with
technological developments and emerging industry standards, address the
ever-changing and increasingly sophisticated needs of our customers and achieve
market acceptance. Our results of operations would be seriously harmed if we are
unable to develop, release and market new software product enhancements on a
timely and cost-effective basis, or if new products or enhancements do not
achieve market acceptance or fail to respond to evolving industry or technology
standards.
In developing new products and services, we may also fail to develop and
market products that respond to technological changes or evolving industry
standards in a timely or cost-effective manner, or experience difficulties that
could delay or prevent the successful development, introduction and marketing of
these new products and services.
IN ANY GIVEN QUARTER, OUR REVENUES HAVE BEEN DERIVED FROM A RELATIVELY SMALL
NUMBER OF CUSTOMERS, AND THE LOSS OF A SMALL NUMBER OF MAJOR CUSTOMERS OR
POTENTIAL CUSTOMERS COULD ADVERSELY IMPACT OUR QUARTERLY REVENUES OR OPERATING
RESULTS.
We expect that we will continue to derive a significant portion of our
revenues from a relatively small number of customers in the future. Accordingly,
the loss of a small number of major customers could materially and adversely
affect our business, and the deferral or loss of anticipated orders from a small
number of prospective customers could materially and adversely impact our
quarterly revenues and operating results in any period.
IF WE FAIL TO MAINTAIN POSITIVE MARGINS ON SERVICE REVENUES IN THE FORESEEABLE
FUTURE, OUR RESULTS OF OPERATIONS COULD SUFFER.
For the year ended December 31, 2001, our service margins were positive.
While we anticipate that our margins will continue to be positive in the future,
we cannot guarantee that they will remain positive. Failure to maintain positive
margins on service revenues would cause our business to suffer. For more
information related to our costs associated with our service revenues, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
IF WE FAIL TO EXPAND OUR RELATIONSHIPS WITH THIRD PARTIES THAT CAN PROVIDE
IMPLEMENTATION AND CONSULTING SERVICES TO OUR CUSTOMERS, WE MAY BE UNABLE TO
GROW OUR REVENUES AND OUR BUSINESS COULD BE HARMED.
23
In order for us to focus more effectively on our core business of
developing and licensing software solutions, we must continue to establish
relationships with third parties that can provide implementation and consulting
services to our customers. Third-party implementation and consulting firms can
also be influential in the choice of employee relationship management software
applications by new customers. To date, we have established relationships with
several third-party implementation and consulting firms. In general, however, if
we are unable to establish and maintain effective, long-term relationships with
implementation and consulting providers, or if these providers do not meet the
needs or expectations of our customers, we may be unable to grow our revenues
and our business could be seriously harmed. As a result of the limited resources
and capacities of many third-party implementation providers, we may be unable to
attain sufficient focus and resources from the third-party providers to meet all
of our customers' needs, even if we establish relationships with these third
parties. If sufficient resources are unavailable, we will be required to provide
these services internally, which could limit our ability to expand our base of
customers. A number of our competitors have significantly more established
relationships with these third parties and, as a result, these third parties may
be more likely to recommend competitors' products and services rather than our
own. Even if we are successful in developing additional relationships with
third-party implementation and consulting providers, we will be subject to
significant risk, as we cannot control the level and quality of service provided
by third-party implementation and consulting partners.
OUR EXPECTATIONS OF FUTURE GROWTH DEPEND ON OUR ABILITY TO EXPAND
INTERNATIONALLY, AND FACTORS SPECIFIC TO OUR INTERNATIONAL EXPANSION MAY PREVENT
US FROM ACHIEVING OUR ANTICIPATED GROWTH.
Over time, we intend to expand our international operations to achieve our
anticipated growth, but we may face significant challenges to our international
expansion. The expansion of our existing international operations and entry into
additional international markets will require significant management attention
and financial resources. To achieve broad acceptance in international markets,
our products must be localized to handle a variety of factors specific to each
international market, such as tax laws and local regulations. The incorporation
of these factors into our products is a complex process and often requires
assistance from third parties. We may not adequately address all of the factors
necessary to achieve broad acceptance in our target international markets.
Further, to achieve broad usage by employees across international organizations,
our products must be localized to handle native languages and cultures in each
international market. Localizing our products is also a complex process and we
intend to continue working with third parties to develop localized products. To
date, we have localized our product for the markets where the English language
is the native language and completed translations for the German, French,
Italian and Spanish languages.
We have only a limited history of marketing, selling and supporting our
products and services internationally. In 1999, we opened a regional office in
the United Kingdom. In 2000, we expanded our European Operations through opening
a second office in Frankfurt, Germany. As of December 31, 2001, we had a total
of 13 employees in our international operations. For the twelve months ended
December 31, 2001, we derived approximately 10% of our revenues from our
international operations. To succeed internationally, we must react quickly to
the business environment in which we operate overseas. Thus we must effectively
monitor the size of our international workforce and make adjustments as
necessary. During periods of growth we must hire and train experienced
international personnel as well as recruit and retain qualified domestic
personnel to staff and manage our international operations. However, we may
experience difficulties in recruiting and training additional international
staff. We must also be able to enter into strategic relationships with companies
in international markets.
24
If we are not able to maintain successful strategic relationships
internationally or recruit additional companies to enter into strategic
relationships, our future growth could be limited. We also face other risks
inherent in conducting business internationally, such as:
- difficulties in collecting accounts receivable and longer collection
periods;
- seasonal business activity in certain parts of the world;
- fluctuations in currency exchange rates; and
- trade barriers.
Any of these factors could seriously harm our international operations
and, consequently, our business.
OUR SALES CYCLES ARE LONG AND UNPREDICTABLE, WHICH MAKES PERIOD-TO-PERIOD
REVENUES DIFFICULT TO PREDICT.
Because the market for our employee relationship management software
products and related services is relatively new, we experience long and
unpredictable sales cycles. The sales cycle for our employee relationship
management software applications typically ranges from two to nine months. In
the early stages of this market, our customers have frequently viewed the
purchase of our products as part of a long-term strategic decision regarding the
management of their workforce-related operations and expenditures. This decision
process has sometimes resulted in customers taking a long period of time to
assess alternative solutions by our competitors or deferring a purchase decision
until the market evolves. Sales cycles continue to be long and the timing of
purchase decisions by individual customers remain at times uncertain. We must
continue to educate potential customers on the use and benefits of our products
and services, as well as the integration of our products and services with
additional software applications utilized by the individual customers. Because
the sales cycle is long and the time of individual orders is uncertain, our
period-to-period revenues are difficult to predict.
WE MAY BE UNABLE TO ATTRACT AND RETAIN HIGHLY SKILLED EMPLOYEES THAT ARE
NECESSARY FOR THE SUCCESS OF OUR BUSINESS PLAN.
Our ability to execute our business plan and be successful also depends on
our continued ability to attract and retain highly skilled employees. We depend
on the services of senior management and other personnel, particularly Robert A.
Spinner, our Chief Executive Officer. Over time, we will need to hire additional
personnel in all operational areas. Competition for personnel in our industry is
intense. We have in the past experienced, and we expect to continue to
experience in the future, difficulty in hiring and retaining highly skilled
employees with appropriate qualifications. If we do not succeed in attracting or
retaining personnel, our business could be adversely affected.
SOFTWARE DEFECTS COULD LEAD TO LOSS OF REVENUE OR DELAY THE MARKET ACCEPTANCE OF
OUR APPLICATIONS.
Our enterprise applications software is complex and, accordingly, may
contain undetected errors or failures when first introduced or as new versions
are released. This may result in loss of, or delay in, market acceptance of our
products. We have in the past discovered software errors in our new releases and
new products after their introduction. In the event that we experience
significant software errors in future releases,
25
we could experience delays in the release, customer dissatisfaction and lower
revenues and service margins during the period required to correct these errors.
We may in the future discover errors, and additional scalability limitations, in
new releases or new products after the commencement of commercial shipments. Any
of these errors or defects could cause our business to be materially harmed.
WE MAY BECOME INCREASINGLY DEPENDENT ON THIRD-PARTY SOFTWARE INCORPORATED IN OUR
PRODUCTS AND, IF SO, IMPAIRED RELATIONS WITH THESE THIRD PARTIES, ERRORS IN
THIRD-PARTY SOFTWARE OR INABILITY TO ENHANCE THE SOFTWARE OVER TIME COULD HARM
OUR BUSINESS.
We incorporate third-party software into our products. Currently, the
third-party software we use includes application server software that we license
from BEA Systems, off-line database software from Pointbase, off-line client
server software from PUMATECH, synchronization software from AETHER Systems and
reporting software from BUSINESS OBJECTS. We may incorporate additional
third-party software into our products as we expand our product line and broaden
the content and services accessible through our gateway. The operation of our
products would be impaired if errors occur in the third-party software that we
license. It may be more difficult for us to correct any errors in third-party
software because the software is not within our control. Accordingly, our
business would be adversely affected in the event of any errors in this
software. Furthermore, it may be difficult for us to replace any third-party
software if a vendor seeks to terminate our license to the software.
OUR SUCCESS DEPENDS IN PART UPON OUR ABILITY TO PROTECT OUR INTELLECTUAL
PROPERTY AND WE MAY NOT BE ABLE TO DO SO ADEQUATELY.
Our success depends in large part upon our proprietary technology. We rely
on a combination of copyright, trademark and trade secret protection,
confidentiality and nondisclosure agreements and licensing arrangements to
establish and protect our intellectual property rights. We license rather than
sell our solutions and require our customers to enter into license agreements,
which impose restrictions on their ability to utilize the software. In addition,
we seek to avoid disclosure of our trade secrets through a number of means,
including requiring those persons with access to our proprietary information to
execute nondisclosure agreements with us and restricting access to our source
code. We seek to protect our software, documentation and other written materials
under trade secret and copyright laws, which afford only limited protection.
Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary. Policing unauthorized use of our
products is difficult, and while we are unable to determine the extent to which
piracy of our software products exists, software piracy can be expected to be a
persistent problem. In addition, the laws of some foreign countries do not
protect our proprietary rights to as great an extent as do the laws of the
United States of America. Our means of protecting our proprietary rights may not
be adequate and our competitors may independently develop similar technology,
duplicate our products, or design around our proprietary intellectual property.
SECURITY AND OTHER CONCERNS MAY DISCOURAGE CUSTOMERS FROM PURCHASING OUR HOSTED
PRODUCT.
If customers determine that our hosted product is not scaleable, does not
provide adequate security for the dissemination of information over the
Internet, or is otherwise inadequate for Internet-based use, or if for any other
reason customers fail to accept our hosted products for use on the Internet or
on a subscription basis, our business will be harmed. As a hosted provider, we
expect to receive confidential information including credit card, travel
booking, employee, purchasing, supplier, and other financial and
26
accounting data, through the Internet and there can be no assurance that this
information will not be subject to computer break-ins, theft, and other improper
activity that could jeopardize the security of information for which we are
responsible. Any such lapse in security could expose us to litigation, loss of
customers, or otherwise harm our business. In addition, any person who is able
to circumvent our security measures could misappropriate proprietary or
confidential customer information or cause interruptions in our operations. We
may be required to incur significant costs to protect against security breaches
or to alleviate problems caused by breaches. Additionally, in the past, computer
viruses and software programs that disable or impair computers have been
distributed and have rapidly spread over the Internet. Computer viruses could be
introduced into our systems or those of our customers or suppliers, which could
disrupt our software solutions or make them inaccessible to customers or
suppliers. Further, a well-publicized compromise of security could deter people
from using the Internet to conduct transactions that involve transmitting
confidential information. Our failure to prevent security breaches, or
well-publicized security breaches affecting the Internet in general, could
significantly harm our business, operating results and financial condition.
WE MAY FACE COSTLY DAMAGES OR LITIGATION COSTS IF A THIRD PARTY CLAIMS THAT WE
INFRINGE ITS INTELLECTUAL PROPERTY.
There has been a substantial amount of litigation in the software industry
and the Internet industry regarding intellectual property rights. It is possible
that in the future, third parties may claim that we or our current or potential
future products infringe upon their intellectual property. We expect that
software product developers and providers of Internet-based software
applications will increasingly be subject to infringement claims as the number
of products and competitors in our industry segment grows and the functionality
of products in different industry segments overlaps. Any claims, with or without
merit, could be time consuming, result in costly litigation, cause product
shipment delays or require us to enter into royalty or licensing agreements.
Royalty or licensing agreements, if required, may not be available on terms
acceptable to us or at all, which could seriously harm our business.
WE ARE THE TARGET OF A SECURITIES CLASS ACTION COMPLAINT AND ARE AT RISK OF
SECURITIES CLASS ACTION LITIGATION, WHICH MAY RESULT IN SUBSTANTIAL COSTS AND
DIVERT MANAGEMENT ATTENTION AND RESOURCES.
In November 2001, the Company and certain of its officers and directors,
as well as certain of the underwriters from the Company's initial public
offering, were named as defendants in a class action shareholder complaint filed
in the United States District Court for the Southern District of New York and
captioned FELZEN V. EXTENSITY, INC., ET AL., Case No. 01-CV-11246. In the
complaint, the plaintiffs allege that the Company, certain of its officers and
directors and its initial public offering underwriters violated the federal
securities laws because the Company's registration statement and prospectus for
its initial public offering contained untrue statements of material fact or
omitted material facts regarding the compensation to be received by, and the
stock allocation practices of, the underwriters. The plaintiffs seek unspecified
monetary damages and other relief. Similar complaints were filed in the same
court against numerous public companies that conducted initial public offerings
of their common stock since the mid-1990s. This action may divert the efforts
and attention of our management and, if determined adversely to the Company,
could have a material impact on our business.
ANY FUTURE ACQUISITIONS OF COMPANIES OR TECHNOLOGIES MAY RESULT IN DISTRACTION
OF OUR MANAGEMENT AND DISRUPTIONS TO OUR BUSINESS.
We may acquire or make investments in complementary businesses,
technologies, services or products if appropriate opportunities arise. From time
to time we may engage
27
in discussions and negotiations with companies regarding our acquiring or
investing in such companies' businesses, products, services or technologies. We
cannot make assurances that we will be able to identify future suitable
acquisition or investment candidates, or if we do identify suitable candidates,
that we will be able to make such acquisitions or investments on commercially
acceptable terms or at all. If we acquire or invest in another company, we could
have difficulty assimilating that company's personnel, operations, technology or
products and service offerings. In addition, the key personnel of the acquired
company may decide not to work for us. These difficulties could disrupt our
ongoing business, distract our management and employees, increase our expenses
and adversely affect our results of operations. Furthermore, we may incur
indebtedness or issue equity securities to pay for any future acquisitions. The
issuance of equity securities could be dilutive to our existing stockholders.
WE HAVE ANTI-TAKEOVER PROVISIONS IN OUR CHARTER AND IN OUR CONTRACTS THAT COULD
DELAY OR PREVENT AN ACQUISITION OF OUR COMPANY, EVEN IF SUCH AN ACQUISITION
WOULD BE BENEFICIAL TO OUR STOCKHOLDERS.
Provisions of our certificate of incorporation, our bylaws, Delaware law
and the employment agreements of some of our key officers could make it more
difficult for a third party to acquire us, even if doing so might be beneficial
to our stockholders.
OUR BUSINESS MAY FACE ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO
US, WHICH WOULD CAUSE OUR BUSINESS TO SUFFER.
In addition to the risks specifically identified in this Risk Factors
section or elsewhere in this Annual Report, we may face additional risks and
uncertainties not presently known to us or that we currently deem immaterial
which ultimately may impair our business, results of operations and financial
condition.
RISKS RELATED TO OUR INDUSTRY
OUR SUCCESS WILL DEPEND UPON THE GROWTH AND ACCEPTANCE OF THE MARKET WE ADDRESS
AND OUR ABILITY TO MEET THE NEEDS OF THE EMERGING MARKET FOR EMPLOYEE
RELATIONSHIP MANAGEMENT SOFTWARE APPLICATIONS.
The market for our employee relationship management software applications
and services is at an early stage of development. Our success will depend upon
the continued development of this market and the increasing acceptance by
customers of the benefits to be provided by employee relationship management
applications and services. In addition, as the market evolves, it is unclear
whether the market will accept our suite of applications as a preferred solution
for employee relationship management needs. Accordingly, our products and
services may not achieve significant market acceptance or realize significant
revenue growth. Unless a critical mass of organizations and their suppliers use
our solutions and recommend them to new customers, our solutions may not achieve
widespread market acceptance, which may cause our business to suffer.
MARKET PRICES OF TECHNOLOGY COMPANIES HAVE BEEN HIGHLY VOLATILE, AND THE MARKET
FOR OUR STOCK MAY CONTINUE TO BE VOLATILE AS WELL.
The stock market has experienced significant price and trading volume
fluctuations and the market prices of technology companies generally, and
Internet-related software companies particularly, have been extremely volatile.
Investors may not be able to resell their shares at or above the price they paid
for the stock. In the past, following periods of volatility in the market price
of a public company's securities, securities class action
28
litigation has often been instituted against that company. Such litigation would
likely result in substantial costs and diversion of management's attention and
resources
INCREASING GOVERNMENT REGULATION COULD LIMIT THE MARKET FOR, OR IMPOSE SALES AND
OTHER TAXES ON THE SALE OF, OUR PRODUCTS AND SERVICES.
As Internet commerce evolves, we expect that federal, state or foreign
agencies will adopt regulations covering issues such as user privacy, pricing,
taxation of goods and services provided over the Internet, and content and
quality of products and services. It is possible that legislation could expose
companies involved in electronic commerce to liability, which could limit the
growth of electronic commerce generally. Legislation could dampen the growth in
Internet usage and decrease its acceptance as a communications and commercial
medium. If enacted, these laws, rules or regulations could limit the market for
our products and services.
29
ITEM 2. PROPERTIES
Our primary administrative, sales, marketing, research and development
facility is located in Emeryville, California. Our primary office space is held
under a lease agreement. In addition, we also lease sales offices in Boston,
Chicago, Los Angeles and Mahwah, NJ. We also lease sales and support offices
outside of North America including locations in London and Frankfurt. We believe
our existing facilities meet our current needs and that we will be able to
obtain additional commercial space as needed.
ITEM 3. LEGAL PROCEEDINGS
In November 2001, the Company and certain of its officers and directors,
as well as certain of the underwriters from the Company's initial public
offering ("IPO"), were named as defendants in a class action shareholder
complaint filed in the United States District Court for the Southern District of
New York and captioned FELZEN V. EXTENSITY, INC., ET AL., Case No. 01-CV-11246.
In the complaint, the plaintiffs allege that the Company, certain of its
officers and directors and its IPO underwriters violated the federal securities
laws because the Company's IPO registration statement and prospectus contained
untrue statements of material fact or omitted material facts regarding the
compensation to be received by, and the stock allocation practices of, the IPO
underwriters. The plaintiffs seek unspecified monetary damages and other relief.
Similar complaints were filed in the same court against numerous public
companies that conducted IPOs of their common stock since the mid-1990s
(together with FELZEN V. EXTENSITY, INC., ET AL., the "IPO Lawsuits").
On August 8, 2001, the IPO Lawsuits were consolidated for pretrial
purposes before United States Judge Shira Scheindlin of the Southern District of
New York. Judge Scheindlin held an initial case management conference on
September 7, 2001, at which time she ordered, among other things, that the time
for all defendants to respond to any complaint be postponed until further order
of the court. Thus, the Company has not been required to answer any of the
complaints, and no discovery has been served on the Company.
At a further status conference on March 11, 2002, Judge Scheindlin stated
that she would appoint lead plaintiffs counsel in the IPO Lawsuits in mid-March
2002, and would require the appointed lead plaintiffs counsel to file amended,
consolidated complaints by April 17, 2002. Defendants will not be expected to
file motions to dismiss the amended, consolidated complaints until the summer of
2002. The Company, with the assistance of its legal counsel, intends to defend
its position in this matter vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders.
EXECUTIVE OFFICERS AND OTHER OFFICERS OF THE REGISTRANT
The executive officers and other officers of Extensity are as follows:
30
NAME AGE POSITION
Robert A. Spinner 44 President and Chief Executive Officer and Director
Sharam I. Sasson 47 Chairman of the Board of Directors and Founder
Kenneth R. Hahn 35 Chief Financial Officer
Elizabeth A. Ireland 43 Vice President of Marketing
Allen F. Nordgren 56 Vice President of Professional Services
Mark K. Oney 44 Vice President of Engineering
Donald E. Smith 43 Vice President of Hosted Operations & Customer Advocacy
David A. Yarnold 42 Vice President of Worldwide Sales
Rick L. Spickelmier 42 Chief Technology Officer
Jennifer H. Burt 40 Vice President of Human Resources
ROBERT A. SPINNER has served as Extensity's President, Chief Executive
Officer and director since April 1999. Prior to joining Extensity, from January
1995 to January 1999, Mr. Spinner served as Senior Vice President of Worldwide
Sales and International Operations at Clarify, Inc., a provider of integrated
sales and service solutions for the front office. From October 1988 to December
1994, Mr. Spinner served as Director of Western Regional Sales at Sybase, Inc.,
a relational database management software company. Mr. Spinner has also held
technical positions at Applied Data Research, Inc. and Chevron Corporation. Mr.
Spinner received a B.A. in mathematics from Washington University.
SHARAM I. SASSON is the founder and Chairman of the board of directors of
Extensity and has served as a director since our inception in 1995. Mr. Sasson
served as our President and Chief Executive Officer until March 1999. Prior to
founding Extensity, Mr. Sasson was an executive at Scopus Technology, a provider
of enterprise customer information management systems which he co-founded in
1991. Mr. Sasson has also served as a research scientist at Lockheed Missile and
Space Company and as a developer of structural modeling software at PMB/Bechtel
Corporation. Mr. Sasson received a B.S. in civil engineering from Queen Mary
College, University of London, an M.S. in structural engineering from City
University in London, and a Master in Engineering from the University of
California at Berkeley.
KENNETH R. HAHN was appointed Extensity's Chief Financial Officer in
December 1999, has served as Vice President of Finance and Administration since
January 1999 and previously served as Corporate Controller from January 1998 to
January 1999. From September 1995 to December 1997, Mr. Hahn was employed as a
management consultant with The Boston Consulting Group, a strategy consulting
firm. Mr. Hahn attended the Stanford Graduate School of Business, where he
earned an MBA and was named an Arjay Miller Scholar. Mr. Hahn also held various
positions at Price Waterhouse LLP, most recently as an Audit Manager. He
received a B.A. in business administration from California State University,
Fullerton and is a Certified Public Accountant and has held a Certified
Management Accountant's license.
ELIZABETH A. IRELAND has served as Extensity's Vice President of Marketing
since January 1998. Prior to joining Extensity, Ms. Ireland was employed at
MapInfo Corporation, a software company, from 1989 to October 1997, most
recently as Vice President and General Manager of Internet Businesses.
Additional positions held by Ms. Ireland at MapInfo Corporation include Vice
President of Marketing and Business Development and Vice President of
Information Products. Ms. Ireland received a B.S. in business administration
from the University of South Carolina and has held a Certified Public
Accountant's license.
31
ALLEN F. NORDGREN has served as Extensity's Vice President of Professional
Services since November 1997. Prior to joining Extensity, Mr. Nordgren was
employed from June 1996 to November 1997 at Logica, Inc., a systems integrator,
as Vice President and General Manager of Western U.S. Operations. From October
1992 to May 1996, Mr. Nordgren was employed at Sybase, Inc., a relational
database management software company, most recently as Practice Director of
Professional Services for the Northwest Region. Mr. Nordgren attended Bernard
Baruch University and served four years in the U.S. Military.
MARK K. ONEY has served as Extensity's Vice President of Engineering since
July 1999. Prior to joining Extensity, from May 1999 to June 1999, Mr. Oney
served as the Vice President of Engineering for Ringer Software, a consumer
information Internet company. From September 1998 through January 1999, Mr. Oney
was a co-founder of and served as Vice President of Software Engineering for
Crag Technologies, Inc., a developer and supplier of data storage solutions.
Crag Technologies was acquired by Western Digital Corporation in February 1999.
From July 1997 through May 1998, Mr. Oney was a co-founder of and served as Vice
President of Software Engineering for Ridge Technologies, a Windows NT storage
company which was acquired by Adaptec, Inc., in May 1998. Prior to founding
Ridge, from May 1988 through June 1997, Mr. Oney served in a variety of
engineering and management roles at Apple Computer, Inc., most recently as
Director of Software Development for the PowerBook line of business. Mr. Oney
received a B.S. in electrical engineering from Rochester Institute of
Technology.
DONALD E. SMITH has served as Extensity's Vice President of Hosted
Operations and Customer Advocacy since January 2000. Mr. Smith co-founded
Clarify, Inc. in 1990, and held various management positions at Clarify until
January 2000, including Vice President of Sales Engineering and Director of
Quality Assurance, Product Design and Customer Support. Mr. Smith received a
B.S.E.E. from the University of Nebraska at Lincoln.
DAVID A. YARNOLD has served as Extensity's Vice President of Worldwide
Sales since January 2002; previously, he served as Vice President of North
American Sales from January of 2001 to December 2001, and Vice President of
Business Development from August 1999 to January 2001. Prior to joining
Extensity, from January 1996 to July 1999, Mr. Yarnold was employed at Clarify,
Inc., most recently as Vice President of Northern American Sales. From January
1993 to October 1995, Mr. Yarnold served as Regional Vice President of Platinum
Software Corporation, a financial software provider. Mr. Yarnold received a B.S.
in accounting from San Francisco State University and has held a Certified
Public Accountant's license.
DR. RICK L. SPICKELMIER has served as Extensity's Chief Technology Officer
since July 2000, and prior to this position he was Extensity's Server Architect.
Prior to joining Extensity, from 1990 to 1998, Dr. Spickelmier served as the
Director of Development at Objectivity, a supplier of object database management
systems, and from 1988 to 1990 managed CAD framework development at the
University of California at Berkeley. Dr. Spickelmier holds a Ph.D. and an M.S.
in Electrical Engineering and Computer Sciences from the University of
California at Berkeley and a B.S. in Electrical Engineering from Oregon State
University.
JENNIFER H. BURT has served as Extensity's Vice President of Human
Resources since September 2000. Prior to joining Extensity, from May 2000 to
September 2000, Ms. Burt served as Senior Director of Human Resources at
Fatbrain, an online retailer, and from August of 1985 to May of 2000, at Viking
Freight Inc., an overnight delivery company, she served as a Director of Human
Resources.
32
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our Common Stock commenced trading on the Nasdaq National Market on January 27,
2000 under the symbol "EXTN" following our initial public offering at an
offering price of $20.00 per share. Our present policy is to retain earnings, if
any, to finance future growth. We have never paid a cash dividend and do not
have plans to pay cash dividends in the foreseeable future. As of December 31,
2001, there were approximately 200 stockholders of record and the price per
share of our common stock was $2.18.
The following table sets forth, for the periods indicated, the high and
low sales prices for our common stock as reported by the Nasdaq National Market:
High ($) Low ($)
-------- -------
Year Ended December 31, 2001
First Quarter 9.500 4.250
Second Quarter 10.300 4.938
Third Quarter 10.090 2.475
Fourth Quarter 3.490 1.800
Year Ended December 31, 2000
First Quarter 83.500 39.000
Second Quarter 51.500 9.500
Third Quarter 44.750 14.000
Fourth Quarter 20.750 3.781
33
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction
with the consolidated financial statements and the notes to the consolidated
financial statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The consolidated statements of operations
data for each of the three years ended December 31, 2001, 2000 and 1999 and the
consolidated balance sheet data at December 31, 2001 and 2000 are derived from
our audited consolidated financial statements. The consolidated statements of
operations data for the year ended 1998 and 1997 are derived from our audited
consolidated statement of operations not included herein. The selected
consolidated balance sheet data as of December 31, 1999, 1998 and 1997 are
derived from our audited balance sheets not included herein.
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Revenues:
Licenses $ 20,790 $ 14,596 $ 3,750 $ 718 $ --
Services and maintenance 14,091 10,272 3,064 409 --
Hosted 199 -- -- -- --
-------- -------- -------- -------- --------
Total revenues $ 35,080 $ 24,868 $ 6,814 $ 1,127 $ --
======== ======== ======== ======== ========
Gross profit (loss) $ 20,203 $ 9,251 $ 1,517 $ (517) $ --
Loss from operations (28,556) (39,575) (23,555) (11,060) (3,335)
Restructuring, impairment loss and other 6,174 -- -- -- --
Non-cash stock based compensation expense 509 3,977 4,352 -- --
In-process research and development -- 318 -- -- --
Net loss (25,953) (34,509) (23,389) (11,032) (3,228)
Dividend relating to the beneficial coversion
of Series F preferred stock -- -- 1,500 -- --
Net loss attributable to common stockholders (25,953) (34,509) (24,889) -- --
Basic and diluted net loss per share $ (1.09) $ (1.63) $ (11.20) $ (8.25) $ (4.35)
Shares used in computing basic and diluted net loss
per share 23,840 21,206 2,222 1,338 742
Excluding restructuring, impairment loss and other amortization of non-cash stock based
compensation and in-process research and development
Net loss $(19,270) $(30,214) $(20,537) $(11,032) $ (3,228)
Pro forma basic and diluted net loss per share $ (0.81) $ (1.36) $ (1.45) $ (8.25) $ (4.35)
- See Note 1 to the Consolidated Financial Statements for an explanation of the
determination of the number of shares used to compute basic and diluted net
loss per share.
- The Company paid no cash dividends during the 5 year period
34
DECEMBER 31,
------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA
Cash, cash equivalents and short-term investments $ 46,339 $ 79,620 $ 24,285 $ 10,883 $ 2,560
Working capital 41,403 62,721 13,151 7,237 2,061
Total assets 59,222 99,762 31,661 13,811 3,584
Notes payable and capital lease obligations,
noncurrent 54 368 1,285 2,471 --
Mandatorily redeemable convertible preferred stock -- -- 49,648 21,269 6,983
Total stockholders' equity (deficit) 46,195 70,246 (35,061) (15,012) (4,040)
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE
COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE STRATEGIES THAT ARE
SIGNIFIED BY THE WORDS "EXPECTS," "ANTICIPATES," "INTENDS," "BELIEVES," OR
SIMILAR LANGUAGE. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE
BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE
COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS.
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS. IN EVALUATING THE COMPANY'S BUSINESS, PROSPECTIVE
INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH BELOW UNDER THE
CAPTION "RISK FACTORS" IN ADDITION TO THE OTHER INFORMATION SET FORTH HEREIN.
THE COMPANY CAUTIONS INVESTORS THAT ITS BUSINESS AND FINANCIAL PERFORMANCE ARE
SUBJECT TO SUBSTANTIAL RISKS AND UNCERTAINTIES.
The following discussion and analysis of the financial condition and
results of operations of Extensity should be read in conjunction with "Selected
Consolidated Financial Data" and our consolidated financial statements and
related notes appearing elsewhere in this report.
OVERVIEW
Extensity was formed in November 1995 and introduced its first commercial
product for general availability in March 1998. During this period, our
operating activities consisted of the design and development of our product
architecture and our first application, the building of our corporate
infrastructure, and the development of our professional services and customer
support organizations. Our first application, Extensity Expense Reports, was
released for general availability in March 1998. We released Extensity Travel
Plans in December 1998 and Extensity Timesheets and Extensity Purchase Reqs in
July 1999. Extensity Connect, our portalized application front end, role-based
reporting tool, and content and commerce gateway was released in March 2000. We
expect to introduce the newest version of our suite of products, Extensity 6.0,
in the first half of 2002.
We generate revenue principally from licensing our applications and
providing related services, including product installation, maintenance and
support, consulting and training. We license our applications individually or as
an integrated suite of products. The pricing of our software and services
fluctuates on a per transaction basis
35
depending on various factors, such as the number of seats covered by a contract
and the degree of customization requested by the particular customer. The dollar
amounts of our contracts depend on the number of users and applications being
used and the professional services requested. In the third quarter of 2001, we
began recognizing revenue from our hosted offering. Under this offering,
customers pay a monthly usage fee based on the number of users and a one-time
set-up fee to access the Extensity application on our servers.
We promote and sell our software products through our direct sales force
and through indirect channels, including Elite Information Group and Emplaza,
S.A., a joint venture between Terra Networks and Meta4. We also have marketing
referral arrangements in place with Cisco Systems, IBM, US Bank,
Amadeus/eTravel, Rosenbluth Travel, WebEx, Digital Think, Visa, GetThere.com,
and Pro Act Technologies.
In February 2001, we opened a sales office in Sydney, Australia; however,
we closed the Sydney office in July of 2001, as part of our restructuring plan.
We continue to support our European operations, however, as part of our
restructuring plan implemented in July 2001, we significantly reduced our
resources in this region to match the current business environment. For the
twelve months ended December 31, 2001 and 2000 revenues derived from our
international operations represented approximately 10% and 11%, respectively, of
total revenues. In 1999, all of the Company's revenues were derived from U.S.
customers.
CRITICAL ACCOUNTING POLICIES
Our critical and significant accounting policies are more fully described
in Note 2 to our consolidated financial statements. However, certain of our
accounting policies are particularly important to an understanding of our
financial position and results of operations. Application of many of these
policies requires our management to make estimates and judgments that affect the
reported amounts of assets, liabilities and expenses and related disclosures. In
general, these estimates or judgments are based on the historical experience of
our management, prevailing industry trends, information provided by our
customers and information available from other outside sources, each as
appropriate. Actual results may differ from these estimates under different
conditions. Our critical accounting policies include:
Revenue recognition
Revenues are derived from software licenses and related services, which include
implementation and integration, technical support, training and consulting. For
contracts with multiple elements, and for which vendor-specific objective
evidence of fair value for the undelivered elements exists, revenue is
recognized for the delivered elements based upon the residual contract value as
prescribed by Statement of Position No. 98-9, "Modification of SOP No. 97-2 with
Respect to Certain Transactions".
Revenue from license fees is recognized when persuasive evidence of an agreement
exists, delivery of the product has occurred, the fee is fixed or determinable
and collectibility is probable. Arrangements for which the fees are not deemed
fixed or determinable are recognized in the period they become due.
Services revenue primarily comprises revenue from consulting fees, maintenance
contracts and training. Services revenue from consulting and training is
recognized as the service is performed.
36
Maintenance contracts include the right to unspecified upgrades and ongoing
support. Maintenance revenue is deferred and recognized on a straight-line basis
as services revenue over the life of the related contract, which is typically
one year.
In the event the Company enters into a contract involving significant
implementation, customization or services which are essential to the
functionality of the software, license and service revenues are recognized over
the period of each engagement, using the percentage-of-completion method. Labor
hours incurred is used as the measure of progress towards completion. Revenue
for these arrangements is classified as license revenue and services revenue
based upon our estimates of fair value for each element and recognizes the
revenue based on the percentage-of-completion ratio for the arrangement. A
provision for estimated losses on engagements is made in the period in which the
loss becomes probable and can be reasonably estimated.
The Company has entered into agreements under which value added resellers
receive unspecified future products during the terms of the arrangements
(typically two years) in consideration for upfront non-refundable fees.
Consistent with the provisions of SOP 97-2, the Company recognizes such fees
ratably, on a subscription basis, over the terms of the arrangements.
The Company has accumulated relevant information from contracts to use in
determining the availability of vendor-specific objective evidence and believes
that such information complies with the criteria established in Statement of
Position 97-2, "Software Revenue Recognition" ("SOP 97-2") as follows:
o Customers are required to pay separately for annual maintenance.
Future renewal rates are included as a term of the contracts. The
Company uses the renewal rate as vendor-specific objective evidence
of fair value for maintenance.
o The Company charges standard hourly rates for consulting services
based upon the nature of the services and experience of the
professionals performing the services. The Company has a history of
selling services separately.
o For training, the Company charges standard course rates for each
course based upon the duration of the course, and such courses are
separately priced in contracts. The Company has a history of selling
such courses separately.
o Customer billing occurs in accordance with contract terms. Customer
advances and amounts billed to customers in excess of revenue
recognized are recorded as deferred revenue.
Bad Debt Allowance:
The Company bills its customers only if collectibility is reasonably assured.
The Company estimates the amount of uncollectible receivables each period and
establishes an allowance for uncollectable amounts. The amount of the allowance
is based on the age of unpaid amounts, information about the ongoing
creditworthiness of customers, and other relevant information. Estimates of
uncollectable amounts are revised each period, and changes are recorded in the
period they become known.
Deferred Tax Assets:
37
The Company has provided a full valuation reserve related to its net deferred
tax assets. In the future, if sufficient evidence of the Company's ability to
generate sufficient future taxable income becomes apparent, the Company may be
required to reduce its valuation allowance. Management evaluates the
realizability of the deferred tax assets and the need for a valuation allowance
quarterly.
Restructuring:
The calculation of the estimated sublease loss reserve for vacated facilities
requires that management must make estimates of potential future sublease
income. Management analyzes current market conditions for real estate with the
assistance of reputable commercial real estate brokers. However, future actual
sublease income may materially differ from estimated amounts.
Recent Accounting Pronouncements:
In July of 2001, the FASB issued SFAS No. 141 "BUSINESS COMBINATIONS" and
SFAS No. 142 "GOODWILL AND OTHER INTANGIBLE ASSETS". SFAS No. 141 requires
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting, and broadens the criteria for recording
intangible assets separately from goodwill. Recorded goodwill and intangibles
will be evaluated against these new criteria and may result in certain
intangibles being subsumed into goodwill, or alternatively, amounts initially
recorded as goodwill may be separately identified and recognized apart from
goodwill. SFAS No. 142 requires the use of a non-amortization approach to
account for purchased goodwill and certain intangibles. Under a non-amortization
approach, goodwill and certain intangibles will not be amortized into results of
operations, but instead would be reviewed for impairment and written down and
charged to results of operations only in the periods in which the recorded value
of goodwill and certain intangibles is more than its fair value. The provisions
of each statement, which apply to goodwill and intangible assets acquired prior
to June 30, 2001, were adopted by the Company on January 1, 2002. The adoption
of these accounting standards did not result in a significant impact on our
financial position or results of operations for any historic transactions.
In October 2001, the FASB issued SFAS No. 144, "ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS". SFAS No.144 supersedes SFAS No.
121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF" and applies to all long-lived assets (including
discontinued operations) and consequently amends Accounting Principles Board
Opinion No. 30 ("APB 30"), "REPORTING RESULTS OF OPERATIONS REPORTING THE
EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS." SFAS No. 144 develops one
accounting model (based on the model in SFAS No. 121) for long-lived assets that
are to be disposed of by sale, as well as addresses the principal implementation
issues. SFAS No.144 requires that long-lived assets that are to be disposed of
by sale be measured at the lower of book value or fair value less cost to sell.
That requirement eliminates APB 30's requirement that discontinued operations be
measured at net realizable value or that entities include under "discontinued
operations" in the financial statements amounts for operating losses that have
not yet occurred. Additionally, SFAS No.144 expands the scope of discontinued
operations to include all components of an entity with operations that (1) can
be distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS No.144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001. The Company does not expect the adoption of SFAS No.144 to
have a material impact on the Company's financial position or results of
operations.
38
In November 2001, the FASB Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue 01-09, "Accounting for Consideration Given to a Customer
or a Reseller of the Vendor's Products". This issue presumes that consideration
from a vendor to a customer or a reseller should not be recorded as revenue
unless (1) the vendor receives an identifiable benefit in return for the
consideration paid that is sufficiently separable from the sale to the customer,
such that the vendor could have entered into an exchange transaction with a
party other than a purchaser of its products and services in order to receive
that benefit and (2) the benefit's fair value can be reasonably estimated. This
Issue is to be adopted no later than in annual or interim financial statements
for periods beginning after December 15, 2001. We adopted the provisions of this
consensus in the fourth quarter of fiscal 2001. Such adoption had no impact on
our financial position or results of operations.
In November 2001, the FASB issued Announcement D-103, which states that
out-of-pocket expenses should be recorded as revenue in fiscal periods
commencing after December 15, 2001. We will adopt the provisions of this
Announcement as of January 1, 2002.
RESULTS OF OPERATIONS
The following table sets forth certain statements of operations data in
absolute dollars for the periods indicated. The data has been derived from the
consolidated financial statements contained in this report. The operating
results discussed below do not include the amortization of non-cash stock based
compensation. These amounts are discussed separately within this discussion.
39
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------
2001 2000 1999
------- ------- -------
Revenues:
Licenses $20,790 $14,596 $ 3,750
Services and maintenance 14,091 10,272 3,064
Hosted 199 -- --
------- ------- -------
Total revenues $35,080 $24,868 $ 6,814
======= ======= =======
Cost of revenues:(*)
Licenses $ 1,430 $ 705 $ 195
Services and maintenance 12,960 14,236 4,758
Hosted 422 -- --
------- ------- -------
$14,812 $14,941 $ 4,953
======= ======= =======
Operating expenses:(*)
Sales and marketing $23,453 $26,783 $11,202
Research and development 11,932 13,288 7,052
General and administrative 6,756 5,136 2,810
Restructuring, impairment loss and other 6,174 -- --
In-process research and development -- 318 --
Interest income, net $ 2,621 $ 5,111 $ 166
(*) Amounts exclude the amortization of non-cash stock based compensation
as follows:
Cost of revenues:
Services and maintenance $ 65 $ 677 $ 344
Operating expenses:
Sales and marketing 244 1,279 989
Research and development 76 774 1,045
General and administrative 124 1,247 1,974
------- ------- -------
$ 509 $ 3,977 $ 4,352
======= ======= =======
REVENUES
Total revenues were $35.1 million, $24.9 million and $6.8 million in 2001,
2000 and 1999, respectively, representing increases of 41% from 2000 to 2001 and
265% from 1999 to 2000. For the year ended December 31, 2001, no customer
accounted for 10% or more of total revenues. For the years ended December 31,
2000 and December 31, 1999 sales to one customer accounted for 10% and 11%,
respectively, of total revenues.
LICENSE REVENUES. License revenues were $20.8 million, $14.6 million and
$3.8 million in 2001, 2000 and 1999, respectively, representing increases of 42%
from 2000 to 2001 and 289% from 1999 to 2000. The increase in these periods was
attributable to our growing customer base, an increase in amount of license
revenue recognized upon shipment (while continuing to recognize revenue from our
deferred balances for contracts initiated prior to the third quarter of 2001),
an increase in the revenue attributable to our indirect sales channels and to a
lesser extent, an increase in the average size of the sales
40
contracts entered into by our customers. Revenues from our indirect channels may
decrease in 2002.
SERVICE AND MAINTENANCE REVENUES. Service and maintenance revenues were $14.1
million, $10.3 million and $3.1 million in 2001, 2000 and 1999, respectively,
representing increases of 37% from 2000 to 2001 and 235% from 1999 to 2000. The
increase in these periods were attributable to our growing customer base, an
increase in professional services revenues recognized on a time and materials
basis, an increase in revenues recognized from work performed on partner
integration, and to a lesser extent, an increase in the average size of the
sales contracts entered into by our customers.
HOSTED REVENUES. Our hosted revenues were $199,000 for the year ended
December 31, 2001. This is the first fiscal year the Company has recognized
revenue from this offering. The Company does not believe these revenues will be
a significant percentage of total revenues in the near term. As discussed in
Note 12 of the Notes to the Financial Statements, we incurred an impairment
charge associated with our hosted offering.
COST OF REVENUES
Total cost of revenues were $14.8 million, $14.9 million and $5.0 million
in 2001, 2000 and 1999, respectively, representing approximately no increase
from 2000 to 2001 and an increase of 202% from 1999 to 2000.
COST OF LICENSE REVENUES. Cost of license revenues consists primarily of
third-party license and support fees and, to a lesser extent, costs of
duplicating media and documentation and shipping. Cost of license revenues were
$1.4 million, $705,000 and $195,000 in 2001, 2000 and 1999 respectively,
representing increases of 103% from 2000 to 2001 and 262% from 1999 to 2000. The
increase in both periods was due primarily to increased sales activity. As a
percentage of license revenues, cost of license revenues was 6.9%, 4.8% and 5.2%
in 2001, 2000 and 1999, respectively. Cost of revenues as a percentage of
license revenue may increase over the current level in the future as we
incorporate additional third-party products in our offerings.
COST OF SERVICE AND MAINTENANCE REVENUES. Cost of service and maintenance
revenues consists of compensation and related overhead costs for personnel
engaged in consulting, training, maintenance and support services for our
customers as well as costs for third parties contracted to provide such services
to our customers. Cost of service and maintenance revenues were $13.0 million,
$14.2 million and $4.8 million in 2001, 2000 and 1999, respectively,
representing a decrease of 9% from 2000 to 2001 and an increase of 199% from
1999 to 2000. As a percentage of service and maintenance revenues, cost of
service and maintenance revenues were 92%, 139% and 155% in 2001, 2000 and 1999.
The decrease from 2000 to 2001 was attributed to a 246% decrease in third party
consulting costs offset in part by 40% higher payroll costs as the Company
replaced third party consultants with permanent employees. Approximately 34% of
the increase from 1999 to 2000 was attributed to our hiring of additional
service and maintenance personnel, and approximately 49% was due to an increase
in costs for third party contractors. Total service and maintenance revenues
exceeded costs of service and maintenance revenues in 2001. Total cost of
service and maintenance revenues exceeded our service and maintenance revenues
in 2000 and 1999, as we have built our consulting and customer support groups in
advance of growing contract volume. We are seeking to reduce our cost of service
revenues as a percentage of total revenues and are also seeking to engage third
parties to provide services related to our applications.
COST OF HOSTED REVENUES. Cost of hosted revenues consists primarily of
compensation and related overhead costs for personnel engaged in supporting the
hosted customer base, server costs, and telecommunications charges. We started
recognizing revenue for the hosted product in the third quarter of 2001. The
cost of hosted revenues for 2001
41
was $422,000, representing expenses for the third and fourth quarters of 2001
therefore, on a year-to-year comparison, cost of hosted revenues will increase.
However, on a quarter-to-quarter basis, the Company does not expect these costs
to significantly increase.
42
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses consist primarily of
compensation and related costs for sales and marketing personnel, including
commissions and marketing program costs. Sales and marketing expenses were $23.5
million, $26.8 million and $11.2 million in 2001, 2000 and 1999 respectively,
representing a decrease of 12% from 2000 to 2001 and an increase of 139% from
1999 to 2000. As a percentage of total revenues, sales and marketing expenses
were 67%, 108% and 164% in 2001, 2000 and 1999. Approximately 63% of the
decrease from 2000 to 2001 was attributed to lower marketing program spending
and 21% to lower payroll costs associated with our restructuring plan
implemented in July of 2001. Approximately 67% of the increase from 1999 to 2000
was attributable to increased compensation, commissions and other related costs
associated with hiring additional sales representatives, management and
marketing personnel and 19% of the increase was attributable to increased
spending on marketing programs. Commission charges will vary depending upon the
sales activity. Sales and marketing expenses may increase in the long term if we
expand our domestic and international sales force and increase our marketing
efforts.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of compensation and related personnel costs and fees associated with
contractors. Research and development expenses were $11.9 million, $13.3 million
and $7.1 million in 2001, 2000 and 1999, respectively, representing a decrease
of 10% from 2000 to 2001 and an increase of 88% from 1999 to 2000. As a
percentage of total revenues, research and development expenses were 34%, 53%
and 103% in 2001, 2000 and 1999. Approximately 60% of the decrease from 2000 to
2001 was attributed to lower costs for third party consultants. Approximately
66% of the increase from 1999 to 2000 was attributed to the addition of
personnel and 19% due to an increase in consulting services. These increases
resulted from our continuing efforts to add enhancements to our existing
software applications and to develop software applications that incorporate new
functionality into our integrated suite. Research and development expenses may
increase in the long term if we make additional investments in our technology
and products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of compensation and related costs for our executive, finance and
administrative personnel and other related expenses. General and administrative
expenses were $6.8 million, $5.1 million and $2.8 million in 2001, 2000 and
1999, respectively, representing increases of 32% from 2000 to 2001 and 83% from
1999 to 2000. As a percentage of total revenues, general and administrative
expenses were 19%, 21% and 41% in 2001, 2000 and 1999. The increase from 2000 to
2001 was primarily attributed to hiring additional human resources and internal
information technology personnel. Approximately 60% of the increase from 1999 to
2000 was attributable to hiring additional executive and financial personnel and
40% to general administrative costs. General and administrative expenses may
increase in the long term if we expand our operations.
RESTRUCTURING, IMPAIRMENT LOSS AND OTHER. For the year ended December 31,
2001, restructuring, impairment loss and other expenses were $6.2 million
comprised of $4.5 million in restructuring, a $1.3 million impairment of assets
associated with building the hosted offering and $377,000 of other expenses. The
$4.5 million in restructuring charges were made up of $2.2 million in lease
costs, a $1.6 million write-off of property and equipment and $700,000 in
severance and benefits.
AMORTIZATION OF NON-CASH STOCK BASED COMPENSATION
Prior to our IPO, we granted certain stock options to our officers and
employees at prices deemed to be below the fair value of the underlying stock.
The cumulative difference between the deemed fair value of the underlying stock
at the date the
43
options were granted and the exercise price of the granted options was $12.1
million as of the IPO date. This amount is being amortized, using the
accelerated method of the Financial Accounting Standards Board ("FASB")
Interpretation No. 28, "ACCOUNTING FOR STOCK APPRECIATION RIGHTS AND OTHER
VARIABLE OR AWARD PLANS", over the four-year vesting period of the granted
options. Accordingly, our results from operations will include deferred
compensation expense at least through 2003. We recognized $509,000, $4.0 million
and $4.4 million of this expense in 2001, 2000 and 1999, respectively. The lower
expense in 2001 is primarily attributable to the impact of forfeitures and the
use of an accelerated method of amortization. The remaining expense to be
recognized in 2002 and 2003 is $504,000. We estimate that we will recognize
approximately $450,000 of expense in fiscal 2002; however, this amount may
change as employee terminations and accelerated vesting impact the amortization
schedule.
IN-PROCESS RESEARCH AND DEVELOPMENT
In process research and development expense was $318,000 for the year
ended December 31, 2000. This expense was incurred in connection with the
acquisition of a company. Substantially the entire purchase price was allocated
to in-process research and development as technological feasibility of the
acquired product had not been established and no future alternative use existed
at the time of purchase. Furthermore, the acquired company had no revenues, no
other tangible or intangible assets and only one employee. There were no
acquisitions made in 2001 or 1999.
INTEREST INCOME, NET
Interest income, net was $2.6 million, $5.1 million and $166,000 in 2001,
2000 and 1999, respectively. The decrease from 2000 to 2001 was attributed to
lower interest rates and lower cash, cash equivalent and short-term investment
balances. The increase from 1999 to 2000 was attributed to interest earned on
the proceeds from the Company's IPO. Interest income will fluctuate depending
upon the overall interest rate environment and our cash, cash equivalent and
short-term investment balances.
PROVISION FOR INCOME TAXES
Since inception, we have incurred net losses for federal and state tax
purposes and have not recognized any material tax provision or benefit. As of
December 31, 2001, we had net operating loss carryforwards of $82.7 million and
$33.9 million for federal and state income tax purposes, respectively. The
federal and state net operating loss carryforwards, if not utilized, expire
through 2021 and 2011, respectively. We also have research and development
credit carryforwards of $2.7 million for federal and state tax purposes. The
federal research and development credits expire through 2021 and the state
credits expire when exhausted. Federal and state tax laws will impose
significant restrictions on the utilization of net operating loss carryforwards
in the event of a shift in our ownership that constitutes an ownership change,
as defined in Section 382 of the Internal Revenue Code.
We have placed a valuation allowance against our net deferred tax assets
due to the uncertainty of the realization of these assets. The allowance totaled
$33.0 million at December 31, 2001, resulting in no net deferred tax asset. We
evaluate on a quarterly basis the recoverability of net deferred tax assets and
the level of valuation allowance. When we have determined that it is more likely
than not that the deferred tax assets are realizable, we will reduce the
valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations and funded our capital
expenditures through proceeds from our IPO completed in January 2000 and the
private
44
sale of equity securities, supplemented by loan facilities and equipment leases.
Aggregate net proceeds to date from private equity financings totaled $42.3
million and proceeds from the Company's IPO were $83.3 million, net of offering
costs of approximately $2.2 million. As of December 31, 2001, we had $46.3
million in cash, cash equivalents and short-term investments and $41.4 million
in working capital.
Net cash used in operating activities was $30.9 million for the year ended
December 31, 2001, and $22.1 million for the year ended December 31, 2000. For
the year ended December 31, 2001 cash used in operating activities was primarily
attributed to a net loss of $26.0 million, adjusted for a non-cash charge
associated with the write-off of computer equipment and software of $2.9
million, depreciation and amortization of $2.4 million, a decrease in deferred
revenue of $12.6 million, a decrease of $2.8 million in accounts payable and a
decrease in accrued liabilities of $1.1 million offset by a decrease in accounts
receivable of $2.9 million, a decrease in prepaids of $1.4 million and an
increase in other current and noncurrent liabilities of $1.3 million. For the
year ended December 31, 2000 net cash used in operating activities was primarily
attributable to a net loss of $34.5 million, adjusted for the amortization of
deferred stock compensation of $4.0 million and offset by an increase in
deferred revenue of $6.0 million, an increase in accounts payable of $4.6
million and an increase in accrued liabilities of $3.0 million. We expect that
net cash used in operating activities will decrease in the year ending December
31, 2002.
Net cash provided by investing activities was $9.6 million for the year
ended December 31, 2001 and net cash used in investing activities was $32.2
million for the year ended December 31, 2000. Excluding capital expenditures of
$2.4 million and $5.7 million in 2001 and 2000, respectively, investing
activities consisted of short-term investment maturities in 2001 and purchases
of short-term investments in 2000.
Net cash provided by financing activities was $100,000 for the year ended
December 31, 2001, due to payments on notes payable and capital lease
obligations of approximately $1.4 million, offset by proceeds from employee
stock plans of approximately $1.5 million. Net cash provided by financing
activities was $84.4 million for the year ended December 31, 2000, primarily due
to the net proceeds of $83.3 million from the Company's IPO.
Presently, we anticipate that our existing capital resources will meet our
operating and investing needs for at least the next twelve months. We have $46.3
million in cash, cash equivalents and short-term investments. As discussed in
Note 5 to the consolidated financial statements, we have approximately $12.7
million in capital and operating lease commitments coming due through 2006. In
particular, we believe that our current uncommitted cash balances are sufficient
to fund any existing cash obligations or commercial commitments as well as any
cash needed for planned operating activities. After that time, we cannot be
certain that additional funding will be available on acceptable terms or at all.
Furthermore, should our operating results be worse than expected, we could use
more cash in funding operating activities which would diminish our capital
resources. While we do not presently anticipate a need for additional capital,
if we do require additional capital resources to grow our business, execute our
operating plans, or acquire complementary technologies or businesses, at any
time in the future, we may seek to sell additional equity or debt securities or
secure additional lines of credit, which may result in additional dilution to
our stockholders.
45
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
FOREIGN CURRENCY EXCHANGE RATE RISK
We develop products in the United States and market our products in North
America and, to a lesser extent, in Europe and the rest of the world. As a
result, our financial results could be affected by factors such as changes in
foreign currency rates or weak economic conditions in foreign markets. Because
our revenues are typically denominated in U.S. dollars, a strengthening of the
dollar could make our products less competitive in foreign markets.
INTEREST RATE RISK
We have an investment portfolio of money market funds and fixed income
certificates of deposit. The fixed income certificates of deposit, like all
fixed income securities, are subject to interest rate risk and will fall in
value if market interest rates increase. We attempt to limit this exposure by
investing primarily in short-term securities. In view of the nature and mix of
our total portfolio, a 10% movement in market interest rates would not have a
significant impact on the total value of our portfolio as of December 31, 2001.
ITEM 8. FINANCIAL STATEMENTS AND NOTES TO THE FINANCIAL STATEMENTS
The following consolidated financial statements, and the related notes thereto,
of Extensity and the Report of Independent Accountants are filed as part of this
Form 10K.
INDEX
Page
----
Report of Independent Accountants 40
Consolidated Balance Sheets as of December 31, 41
2001 and 2000
Consolidated Statements of Operations for the years 42
ended December 31, 2001, 2000 and 1999
Consolidated Statements of Stockholders' Equity 43
(Deficit) for the years ended December 31, 2001, 2000
and 1999
Consolidated Statements of Cash Flows for the years 44
ended December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements 45
46
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Extensity, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive loss, of stockholders'
equity and of cash flows present fairly, in all material respects, the financial
position of Extensity, Inc. and its subsidiary at December 31, 2001 and 2000,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. 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 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 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 our opinion.
PricewaterhouseCoopers LLP
San Jose, California
January 15, 2002, except for the last paragraph of Note 9
as to which the date is March 6, 2002
47
48
EXTENSITY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
December 31,
----------------------
2001 2000
--------- ---------
Current assets:
Cash and cash equivalents $ 19,456 $ 40,695
Short-term investments 26,883 38,925
Trade accounts receivable, net of allowance for doubtful accounts
of $676 and $466, respectively 5,393 8,527
Prepaid and other current assets 1,835 3,443
--------- ---------
Total current assets 53,567 91,590
Property and equipment, net 3,657 6,279
Restricted long-term investments 1,397 1,436
Other assets 601 457
--------- ---------
Total assets $ 59,222 $ 99,762
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,672 $ 6,434
Accrued liabilities 3,977 5,125
Deferred revenue 3,488 16,041
Capital lease obligations, current portion 240 486
Notes payable, current portion -- 783
Sublease loss accrual and other current liabilities 787 --
--------- ---------
Total current liabilities 12,164 28,869
Capital lease obligations, noncurrent portion 54 368
Sublease loss accrual and other noncurrent liabilities 809 279
--------- ---------
Total liabilities 13,027 29,516
--------- ---------
Commitments and Contingencies (Note 5)
Stockholders' equity:
Common stock, $0.001 par value
75,000,000 shares authorized and 24,871,147 and 24,144,938 shares
outstanding as of December 31, 2001 and 2000, respectively 25 24
Additional paid-in capital 147,394 147,475
Deferred stock compensation (504) (2,679)
Notes receivable from stockholders (433) (380)
Accumulated comprehensive income 155 295
Accumulated deficit (100,442) (74,489)
--------- ---------
Total stockholders' equity 46,195 70,246
--------- ---------
Total liabilities and stockholders' equity $ 59,222 $ 99,762
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
49
EXTENSITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
YEARS ENDED DECEMBER 31,
-------------------------------
2001 2000 1999
--------- --------- ---------
Revenues:
Licenses $ 20,790 $ 14,596 $ 3,750
Services and maintenance 14,091 10,272 3,064
Hosted 199 -- --
--------- --------- ---------
Total revenues 35,080 24,868 6,814
--------- --------- ---------
Cost of revenues: (*)
Licenses 1,430 705 195
Services and maintenance 13,025 14,912 5,102
Hosted 422 -- --
--------- --------- ---------
Total cost of revenues 14,877 15,617 5,297
--------- --------- ---------
Gross profit 20,203 9,251 1,517
--------- --------- ---------
Operating expenses: (*)
Sales and marketing 23,697 28,063 12,191
Research and development 12,008 14,062 8,097
General and administrative 6,880 6,383 4,784
Restructuring, impairment loss and other 6,174 -- --
In-process research and development -- 318 --
--------- --------- ---------
Total operating expenses 48,759 48,826 25,072
--------- --------- ---------
Loss from operations (28,556) (39,575) (23,555)
Interest income 2,768 5,460 667
Interest expense (147) (349) (501)
Provision for income taxes (18) (45) --
--------- --------- ---------
Net loss $(25,953) $(34,509) $(23,389)
========= ========= =========
Dividend relating to the beneficial conversion
feature of Series F preferred stock -- -- (1,500)
--------- --------- ---------
Net loss attributable to common stockholders $(25,953) $(34,509) $(24,889)
========= ========= =========
Other comprehensive loss:
Change in cumulative translation adjustment (140) 300 (5)
--------- --------- ---------
Total comprehensive loss $(26,093) $(34,209) $(23,394)
========= ========= =========
Basic and diluted net loss per share $ (1.09) $ (1.63) $ (11.20)
Shares used in computing basic and diluted
net loss per share 23,840 21,206 2,222
(*) Amounts include non-cash stock based
compensation as follows:
Cost of revenues:
Services and maintenance $ 65 $ 677 $ 344
Operating expenses:
Sales and marketing 244 1,279 989
Research and development 76 774 1,045
General and administrative 124 1,247 1,974
--------- --------- ---------
$ 509 $ 3,977 $ 4,352
========= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
50
EXTENSITY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
Notes
Common Stock Additional Receivable Deferred Accumulated
------------------- Paid-in from Stock Comprehensive
Shares Amount Capital Stockholders Compensation Income
----------- ------ ---------- ------------ ------------ -------------
Balance at December 31, 1998 2,350,815 $ 2 $ 77 $ -- $ -- $ --
Issuance of common stock upon exercise of
stock options 1,855,091 2 621 (230) -- --
Deferred stock compensation -- -- 10,205 -- (10,205) --
Amortization of deferred stock compensation -- -- -- -- 4,352 --
Repayment of note receivable from
stockholder -- -- -- 100 -- --
Beneficial conversion feature- Series F
preferred stock -- -- -- -- -- --
Cumulative translation adjustment -- -- -- -- -- (5)
Net loss -- -- -- -- -- --
----------- --- ---------- ------ --------- ------
Balance at December 31, 1999 4,205,906 4 10,903 (130) (5,853) (5)
Issuance of common stock in initial
public offering, net of underwriters
discount and issuance costs of $2.2
million 4,600,000 4 83,352 -- -- --
Issuance of common stock upon conversion
of convertible preferred stock 14,594,549 15 49,633 -- -- --
Issuance of common stock upon exercise
of stock options 432,966 1 1,068 (250) -- --
Issuance of commons stock upon exercise
of Warrants 175,038 -- 34 -- -- --
Issuance of common stock in connection
with the employee stock purchase plan 136,479 -- 1,682 -- -- --
Deferred stock compensation -- -- 1,881 -- (1,881) --
Forfeiture of unvested stock options -- -- (1,078) -- 1,078 --
Amortization of deferred stock compensation
and other -- -- -- -- 3,977 --
Cumulative translation adjustment -- -- -- -- -- 300
Net loss -- -- -- -- -- --
----------- --- ---------- ------ -------- ------
Balance at December 31, 2000 24,144,938 24 147,475 (380) (2,679) 295
Issuance of common stock upon exercise of
stock options 414,009 1 445 -- -- --
Issuance of common stock in connection
with the employee stock purchase plan 292,200 -- 1,045 -- -- --
Issuance of common stock for services
rendered 20,000 -- 95 -- -- --
Forfeiture of unvested stock options -- -- (1,666) -- 1,666 --
Amortization of deferred stock compensation
and Other -- -- -- -- 509 --
Interest earned on notes receivable from
stockholders -- -- -- (53) -- --
Cumulative translation adjustment -- -- -- -- -- (140)
Net loss -- -- -- -- -- --
----------- --- ---------- ------ --------- ------
Balance at December 31, 2001 $24,871,147 $25 $ 147,394 $(433) $ (504) $ 155
=========== === ========= ====== ========= =====
Total
Stockholders'
Accumulated Equity
Deficit (Deficit)
----------- -------------
Balance at December 31, 1998 $ (15,091) $(15,012)
Issuance of common stock upon exercise of
stock options -- 393
Deferred stock compensation -- --
Amortization of deferred stock compensation -- 4,352
Repayment of note receivable from
stockholder -- 100
Beneficial conversion feature- Series F
preferred stock (1,500) (1,500)
Cumulative translation adjustment -- (5)
Net loss (23,389) (23,389)
---------- ---------
Balance at December 31, 1999 (39,980) (35,061)
Issuance of common stock in initial
public offering, net of underwriters
discount and issuance costs of $2.2
million -- 83,356
Issuance of common stock upon conversion
of convertible preferred stock -- 49,648
Issuance of common stock upon exercise
of stock options -- 818
Issuance of commons stock upon exercise
of Warrants -- 34
Issuance of common stock in connection
with the employee stock purchase plan -- 1,682
Deferred stock compensation -- --
Forfeiture of unvested stock options -- --
Amortization of deferred stock compensation
and other -- 3,977
Cumulative translation adjustment -- 300
Net loss (34,509) (34,509)
---------- ---------
Balance at December 31, 2000 (74,489) 70,246
Issuance of common stock upon exercise of
stock options -- 446
Issuance of common stock in connection
with the employee stock purchase plan -- 1,045
Issuance of common stock for services
rendered -- 95
Forfeiture of unvested stock options -- --
Amortization of deferred stock compensation
and Other -- 509
Interest earned on notes receivable from
stockholders -- (53)
Cumulative translation adjustment -- (140)
Net loss (25,953) (25,953)
---------- ---------
Balance at December 31, 2001 $(100,442) $ 46,195
========== =========
The accompanying notes are an integral part of these consolidated
financial statements.
51
EXTENSITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
--------------------------------
2001 2000 1999
-------- -------- --------
Cash flows from operating activities:
Net loss $(25,953) $(34,509) $(23,389)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization 2,361 1,772 908
Allowance for doubtful accounts 210 266 200
Amortization of deferred stock compensation and other 509 3,977 4,352
In-process research and development -- 318 --
Common stock issued for services rendered 95 -- --
Interest earned on notes from stockholders (53) -- --
Amortization of debt discount and lease line issuance costs 48 100 88
Write-off of computer equipment and software 2,882 -- --
Changes in operating assets and liabilities:
Accounts receivable 2,924 (5,617) (2,197)
Prepaids and other current assets 1,420 (2,165) (1,624)
Other assets (144) 80
Accounts payable (2,762) 4,600 1,485
Accrued liabilities (1,148) 2,980 1,239
Deferred revenue (12,553) 5,990 7,538
Other current liabilities 757 -- --
Other noncurrent liabilities 530 78 61
--------- --------- ---------
Cash used in operating activities (30,877) (22,130) (11,339)
--------- --------- ---------
Cash flows from investing activities:
Purchases of short-term investments (48,649) (81,305) (21,761)
Maturities of short-term investments 60,691 56,249 13,536
Capital expenditures (2,433) (5,742) (1,322)
Business acquisition -- (90) --
Restricted long-term investments 39 (1,360) 6
--------- --------- ---------
Cash provided by (used in) investing activities 9,648 (32,248) (9,541)
--------- --------- ---------
Cash flows from financing activities:
Payments on notes payable (819) (1,228) (1,117)
Payments on capital lease obligation (572) (306) (446)
Proceeds from sale-lease back -- -- 254
Proceeds from exercise of stock options and warrants 446 853 493
Net proceeds from issuance of preferred stock -- -- 26,878
Net proceeds from issuance of common stock for the ESPP 1,045 1,682 --
Net proceeds from issuance of common stock -- 83,356 --
--------- --------- ---------
Cash provided by financing activities 100 84,357 26,062
--------- --------- ---------
Effect of exchange rate on cash and cash equivalents (110) 300 (5)
Increase (decrease) in cash and cash equivalents (21,239) 30,279 5,177
Cash and cash equivalents, beginning of year 40,695 10,416 5,239
--------- --------- ---------
Cash and cash equivalents, end of year $ 19,456 $ 40,695 $ 10,416
========= ========= =========
Supplemental cash flow information:
Interest paid $ 147 $ 349 $ 435
========= ========= =========
Income taxes paid $ 18 $ 45 $ 1
========= ========= =========
Noncash investing and financing activities:
Notes & interest receivable from stockholders $ 53 $ 250 $ 130
========= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
52
EXTENSITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Extensity, Inc. (the "Company") provides Internet-based workforce
optimization software applications designed to improve the productivity of
employees across the enterprise and to enhance enterprise operating efficiency.
The Company was incorporated in Delaware in November 1995.
On January 27, 2000, the SEC declared effective the Company's Registration
Statement on Form S-1. Pursuant to this Registration Statement, the Company
completed an initial public offering ("IPO") of 4,600,000 shares of its common
stock (including 600,000 shares sold pursuant to the exercise of the
Underwriters' over-allotment option) at an initial offering price of $20.00 per
share (the "Offering"). Proceeds to the Company from the Offering, after
calculation of the Underwriters discounts, commissions, and concessions, totaled
approximately $83.3 million, net of offering costs of approximately $2.2
million.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, Extensity Europe Limited, which
commenced operations in September 1999. All significant intercompany balances
and transactions have been eliminated in consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue recognition
Revenues are derived from software licenses and related services, which include
implementation and integration, technical support, training and consulting. For
contracts with multiple elements, and for which vendor-specific objective
evidence of fair value for the undelivered elements exists, revenue is
recognized for the delivered elements based upon the residual contract value as
prescribed by Statement of Position No. 98-9, "Modification of SOP No. 97-2 with
Respect to Certain Transactions".
Revenue from license fees is recognized when persuasive evidence of an agreement
exists, delivery of the product has occurred, the fee is fixed or determinable
and collectibility is probable. Arrangements for which the fees are not deemed
fixed or determinable are recognized in the period they become due.
Services revenue primarily comprises revenue from consulting fees, maintenance
contracts and training. Services revenue from consulting and training is
recognized as the service is performed.
Maintenance contracts include the right to unspecified upgrades and ongoing
support. Maintenance revenue is deferred and recognized on a straight-line basis
as services revenue over the life of the related contract, which is typically
one year.
53
In the event the Company enters into a contract involving significant
implementation, customization or services which are essential to the
functionality of the software, license and service revenues are recognized over
the period of each engagement, using the percentage-of-completion method. Labor
hours incurred is used as the measure of progress towards completion. Revenue
for these arrangements is classified as license revenue and services revenue
based upon our estimates of fair value for each element and recognizes the
revenue based on the percentage-of-completion ratio for the arrangement. A
provision for estimated losses on engagements is made in the period in which the
loss becomes probable and can be reasonably estimated.
The Company has entered into agreements under which value added resellers
receive unspecified future products during the terms of the arrangements
(typically two years) in consideration for upfront non-refundable fees.
Consistent with the provisions of SOP 97-2, the Company recognizes such fees
ratably, on a subscription basis, over the terms of the arrangements.
The Company has accumulated relevant information from contracts to use in
determining the availability of vendor-specific objective evidence and believes
that such information complies with the criteria established in Statement of
Position 97-2, "Software Revenue Recognition" ("SOP 97-2") as follows:
o Customers are required to pay separately for annual maintenance.
Future renewal rates are included as a term of the contracts. The
Company uses the renewal rate as vendor-specific objective evidence
of fair value for maintenance.
o The Company charges standard hourly rates for consulting services
based upon the nature of the services and experience of the
professionals performing the services. The Company has a history of
selling services separately.
o For training, the Company charges standard course rates for each
course based upon the duration of the course, and such courses are
separately priced in contracts. The Company has a history of selling
such courses separately.
o Customer billing occurs in accordance with contract terms. Customer
advances and amounts billed to customers in excess of revenue
recognized are recorded as deferred revenue.
CONCENTRATION OF CREDIT RISK AND CERTAIN RISKS
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents, short-term
investments and accounts receivable. The Company's accounts receivable are
derived from revenue earned from customers located primarily in the United
States. The Company performs credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. The Company
maintains an allowance for doubtful accounts receivable based upon the expected
collectibility of accounts receivable. The Company wrote off approximately
$164,000 and $60,000 in accounts receivable in 2001 and 2000, respectively.
At December 31, 2001, no customers accounted for 10% or more of accounts
receivable. At December 31, 2000, two customers accounted for 32% and 10% of
total accounts receivable.
No customer accounted for 10% or more of total revenue in 2001. One
customer accounted for approximately 10% and 11% of total revenues in 2000 and
1999, respectively. Approximately 10% and 11% of the Company's revenues were
derived from our international business, primarily in Europe, in 2001 and 2000,
respectively. In 1999, all of the Company's revenues were derived from U.S.
customers.
54
The market in which the Company competes is characterized by changing
customer needs, frequent new software product introductions and rapidly evolving
industry standards. Significant technological change could adversely affect the
Company's operating results.
The Company operates in one single reportable business segment and,
therefore, no disclosures under SFAS No.131, "DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION", are necessary. Virtually all of our
long-lived assets are located in the United States of America.
USE OF ESTIMATES
The preparation of consolidated 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.
FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's international subsidiary is the
local currency of the country in which it operates. Assets and liabilities are
translated using the exchange rate at the balance sheet date. Revenue, expenses,
gains and losses are translated at the exchange rate on the date those elements
are recognized. Translation adjustments are included in other comprehensive
income (loss).
CASH AND CASH EQUIVALENTS
The Company considers all investments with an original maturity of three
months or less to be cash equivalents. The Company periodically maintains cash
balances at banks in excess of the Federal Deposit Insurance Corporation
insurance limit of $100,000.
SHORT-TERM INVESTMENTS
The Company accounts for its investments in quality corporate debt
securities under the provisions of Statement of Financial Accounting Standards
("SFAS") No. 115, "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES". The Company has classified all marketable debt securities as
held-to-maturity and has accounted for these investments at amortized cost. As
of December 31, 2001, the Company's carrying value of its short-term investments
approximated their amortized cost basis.
RESTRICTED LONG-TERM INVESTMENTS
The restricted long-term investments consist of several one-year
certificates of deposit required as collateral for the Company's letters of
credit (Note 5).
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs under the provisions of
SFAS No. 86, "ACCOUNTING FOR COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR
OTHERWISE MARKETED". Capitalization of computer software development costs
begins upon the establishment of technological feasibility, which the Company
has defined as completion of a working model. The Company has not capitalized
any software
55
development costs to date as costs that would qualify were immaterial and has
charged software development costs as incurred to research and development
expense in the accompanying consolidated statements of operations.
ADVERTISING COSTS
Amounts received under co-marketing agreements with strategic partners are
recorded as a reduction of advertising expenses incurred in connection with such
agreements. Immaterial amounts have been received during the three-year period
ended December 31, 2001.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are calculated using the straight-line method over estimated useful lives of the
assets. Currently, our computer hardware and software and assets under capital
lease are amortized over three years and furniture and fixtures, leasehold
improvements and office equipment are amortized over six years (Note 3).
When assets are sold or retired, the cost and related accumulated
depreciation and amortization are removed from the accounts and any resulting
gain or loss is included in operations. Maintenance and repairs are charged to
operations as incurred.
IMPAIRMENT OF LONG - LIVED ASSETS
The company evaluates its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of any asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount of fair value less
costs to sell (Note 12).
INCOME TAXES
Income taxes are accounted for in accordance with SFAS No. 109,
"ACCOUNTING FOR INCOME" TAXES. Under SFAS No. 109, deferred income tax
liabilities and assets are determined based on the difference between the
financial reporting amounts and tax bases of assets and liabilities that will
result in taxable or deductible amounts in the future based on enacted tax laws
and rates in effect for the years in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized. Income tax
expense is the tax payable for the period and the change during the period in
deferred tax assets and liabilities.
STOCK BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES"(APB No. 25) and complies with the
disclosure provisions of SFAS No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION". Under APB No. 25, compensation expense is based on the
difference, if any, between the fair value of the Company's stock and the
exercise price of the option on the measurement date, which is typically the
date of grant.
56
In March of 2000, the Financial Accounting Standards Board ("FASB") issued
FIN 44, "ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION," an
interpretation of APB No.25. FIN 44 was effective July 1, 2000. In June of 2001,
the Company executed a stock option exchange program and accounted for the stock
options exchange program according to FIN 44 (Note 9).
The Company accounts for options granted to non-employees under SFAS No.
123. Under SFAS No. 123 and EITF 96-18, "Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services", options are recorded at their fair value on the
measurement date, which is typically the date of grant.
NET LOSS PER SHARE
Basic and diluted net loss per share are computed using the weighted
average number of common shares outstanding. Options, warrants and convertible
preferred stock were not included in the computation of diluted net loss per
share because the effect would be antidilutive.
Diluted net loss per share does not include the effect of the following
potential common shares for the periods presented (in thousands):
Years End December 31,
--------------------------
2001 2000 1999
-------- -------- --------
Shares issuable under stock options 4,467 5,089 2,943
Shares of unvested stock subject to repurchase 147 699 1,139
Shares issuable pursuant to warrants to purchase common
and convertible preferred stock 20 184
Shares of convertible preferred stock on an "as if converted" basis -- -- 14,594
-------- -------- --------
4,614 5,808 18,860
======== ======== ========
The weighted-average exercise price of stock options outstanding was
$4.29, $9.73 and $2.10 as of December 31, 2001, 2000 and 1999, respectively. The
weighted average repurchase price of unvested stock was $2.22, $1.50 and $0.38
as of December 31, 2001, 2000 and 1999, respectively. The exercise price of
warrants outstanding was $14.50 as of December 31, 2001 and 2000 and $3.08 as of
December 31, 1999.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July of 2001, the FASB issued SFAS No. 141 "BUSINESS COMBINATIONS" and
SFAS No. 142 "GOODWILL AND OTHER INTANGIBLE ASSETS". SFAS No. 141 requires
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting, and broadens the criteria for recording
intangible assets separately from goodwill. Recorded goodwill and intangibles
will be evaluated against these new criteria and may result in certain
intangibles being subsumed into goodwill, or alternatively, amounts initially
recorded as goodwill may be separately identified and recognized apart from
goodwill. SFAS No. 142 requires the use of a non-amortization approach to
account for purchased goodwill and certain intangibles. Under a non-amortization
approach, goodwill and certain intangibles will not be amortized into results of
operations, but instead would be reviewed for impairment and written down and
charged to results of operations only in the periods in which the recorded value
of
57
goodwill and certain intangibles is more than its fair value. The provisions of
each statement, which apply to goodwill and intangible assets acquired prior to
June 30, 2001, were adopted by the Company on January 1, 2002. The adoption of
these accounting standards did not result in a significant impact on our
financial position or results of operations for any historic transactions.
In October 2001, the FASB issued SFAS No. 144, "ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS". SFAS No.144 supersedes SFAS No.
121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF" and applies to all long-lived assets (including
discontinued operations) and consequently amends Accounting Principles Board
Opinion No. 30 ("APB 30"), "REPORTING RESULTS OF OPERATIONS REPORTING THE
EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS." SFAS No. 144 develops one
accounting model (based on the model in SFAS No. 121) for long-lived assets that
are to be disposed of by sale, as well as addresses the principal implementation
issues. SFAS No.144 requires that long-lived assets that are to be disposed of
by sale be measured at the lower of book value or fair value less cost to sell.
That requirement eliminates APB 30's requirement that discontinued operations be
measured at net realizable value or that entities include under "discontinued
operations" in the financial statements amounts for operating losses that have
not yet occurred. Additionally, SFAS No.144 expands the scope of discontinued
operations to include all components of an entity with operations that (1) can
be distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS No.144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001. The Company does not expect the adoption of SFAS No.144 to
have a material impact on the Company's financial position or results of
operations.
In November 2001, the FASB Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue 01-09, "Accounting for Consideration Given to a Customer
or a Reseller of the Vendor's Products". This issue presumes that consideration
from a vendor to a customer or a reseller should not be recorded as revenue
unless (1) the vendor receives an identifiable benefit in return for the
consideration paid that is sufficiently separable from the sale to the customer,
such that the vendor could have entered into an exchange transaction with a
party other than a purchaser of its products and services in order to receive
that benefit and (2) the benefit's fair value can be reasonably estimated. This
issue is to be adopted no later than in annual or interim financial statements
for periods beginning after December 15, 2001. We adopted the provisions of this
consensus in the fourth quarter of fiscal 2001. Such adoption had no impact on
our financial position or results of operations.
In November 2001, the FASB issued Announcement D-103 which states that
out-of-pocket expenses should be recorded as revenue in fiscal periods
commencing after December 15, 2001. We will adopt the provisions of this
Announcement as of January 1, 2002.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
58
December 31,
---------------------
2001 2000
-------- --------
(In thousands)
Computer hardware and software $ 4,256 $ 6,013
Furniture and fixtures 1,479 1,209
Leasehold improvements 705 385
Office equipment 219 219
Assets under capital leases 1,847 1,847
-------- --------
8,506 9,673
Less accumulated depreciation and amortization (4,849) (3,394)
-------- --------
Total property and equipment, net $ 3,657 $ 6,279
======== ========
Accumulated amortization relating to assets under capital leases amounted
to $1,846,950 and $1,291,437 as of December 31, 2001 and 2000, respectively.
4. INCOME TAXES
The provision for income taxes for the years ended December 31, 2001 and
2000 relate to foreign income tax associated with the Company's European
subsidiary. The difference between the amount of income tax benefit recorded of
zero and the amount of income tax benefit calculated using the federal statutory
rate of 34% is primarily due to net operating losses being fully offset by a
valuation allowance. Significant components of the Company's deferred tax
balances are as follows (in thousands):
December 31,
-----------------------
2001 2000
--------- ---------
Deferred tax assets:
Net operating loss carry forwards $ 30,100 $ 23,000
Research and development credit carryforwards 2,650 1,900
Other 200 300
--------- ---------
Total deferred tax assets 32,950 25,200
Valuation allowance (32,950) (25,200)
--------- ---------
Net deferred tax assets $ -- $ --
========= =========
Due to the uncertainty of realization, a valuation allowance has been
provided to offset net deferred tax assets at December 31, 2001 and 2000. The
increase in the valuation allowance was $7.7 million, $11.4 million and $8.0
million during the years ended December 31, 2001, 2000 and 1999, respectively.
As of December 31, 2001, the Company had net operating loss carryforwards
of approximately $82.7 million and $33.9 million for federal and state income
tax purposes, respectively. Such carryforwards expire through 2021 and 2011 for
federal and state income tax purposes, respectively. At December 31, 2001, the
Company also had research and experimentation tax credit carryforwards of $2.7
million for federal and state purposes, respectively. The federal research and
experimentation credits expire through 2021 and the state credits expire when
exhausted.
Under the Tax Reform Act of 1986, the benefits from net operating loss and
tax credit carry-forwards may be impaired or limited in certain circumstances
including as a result
59
of a cumulative ownership change of more than 50%, as defined, over a three-year
period. The issuance of the Company's convertible preferred securities may have
resulted in a limitation on utilization of such net operating loss
carryforwards.
60
5. COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment under various non-cancelable capital
leases. The capital leases expire through 2003. The Company leases office space
under various non-cancelable operating leases expiring through 2006. Rental
expense was approximately $3,021,000, $2,212,000 and $864,000 for the years
ended December 31, 2001, 2000 and 1999, respectively, net of sublease income of
approximately $156,000 in 2001. Minimum future rental payments under capital and
operating leases at December 31, 2001 are as follows (in thousands):
DECEMBER 31, 2001 CAPITAL OPERATING
------------------------------------------------- ------- ---------
2002 $ 257 $ 3,067
2003 55 2,622
2004 -- 2,688
2005 -- 2,688
2006 -- 1,687
------- ---------
Total minimum lease payments 312 12,752
Less sublease income (350)
---------
Less amount representing interest and discount (18) $12,402
------- =========
Present value of minimum lease payments 294
Less current portion of capital lease obligations (240)
-------
Long term portion $ 54
=======
In connection with certain capital lease transactions, in 1999, the
Company granted to the lessor warrants to purchase 22,425 shares of Series D
preferred stock at an exercise price of $3.30 per share. Such warrants were
valued at approximately $44,000 using the Black-Scholes valuation model with the
following assumptions: expected volatility of 40%, risk-free interest rate of 6%
and expected life of 10 years. The value of these warrants was recorded as a
long-term asset, which is being amortized over the capital lease term of 4
years. Such amortization amounted to $17,000, $11,000 and $11,000 during the
years ended December 31, 2001, 2000 and 1999, respectively. On the effective
date of the company's IPO all outstanding preferred stock was converted to
common stock. These warrants were exercised in 2000 in exchange for common
stock. There were no outstanding warrants as of December 31, 2001.
The Company has established letters of credit totaling $1,397,000 for the
benefit of the Company's office space lessor and credit card processor. These
letters of credit are collateralized by certificates of deposit amounting to
$1,397,000. As of December 31, 2001, no amounts were outstanding under these
letters of credit.
The Company and certain of its officers and directors, as well as certain
of the underwriters from the Company's initial public offering were named as
defendants in a class action shareholder complaint filed in the United States
District Court for the Southern District of New York and captioned FELZEN V.
EXTENSITY, INC. ET AL., CASE NO. 01-CV-11246. The plaintiffs seek unspecified
monetary damages and other relief. The Company believes these charges to be
without merit and therefore, has not accrued any amounts in connection with this
matter.
61
6. DEBT
In March 1998, the Company entered into a loan and security agreement with
a lender for $3,500,000. Borrowings under this loan accrued interest at an
average rate of 11.4% per annum and matured through December 31, 2001. The
agreement provided the lender with the right to exercise warrants to purchase
137,878 shares of Series D preferred stock at an exercise price of $3.30 per
share. The Company recorded the loan at a discount of approximately $265,000,
which was allocated to the warrants. The debt discount was calculated in
accordance with the provisions of APB No. 14, "ACCOUNTING FOR CONVERTIBLE DEBT
AND DEBT ISSUED WITH STOCK PURCHASE WARRANT". The fair value of the warrants was
estimated on the date of grant using the Black-Scholes valuation model with
expected volatility of 40%, risk-free interest of 6% and expected life of 10
years. Amortization of the debt discount was recorded as interest expense and
amounted to $36,000, $88,000 and $88,000 for the years ended December 31, 2001,
2000 and 1999. On the effective date of the company's IPO all outstanding
preferred stock was converted to common stock. These warrants were exercised in
2000 in exchange for common stock. There were no outstanding warrants as of
December 31, 2001. The loan was repaid in full during fiscal 2001.
62
7. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND PREFERRED STOCK
WARRANTS
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
Mandatorily Redeemable Convertible Preferred Stock consists of the following
(in thousands except share data):
OUTSTANDING
SHARES AMOUNT
------------ ---------
Balance at December 31, 1998 10,361,729 21,269
Issuance of Series E preferred stock 3,732,820 22,379
Issuance of Series F preferred stock 500,000 4,500
Series F beneficial conversion feature -- 1,500
------------ ---------
Balance at December 31, 1999 14,594,549 49,648
Conversion to common stock (14,594,549) (49,648)
------------ ---------
Balance at December 31, 2000 -- $ --
============ =========
On December 16, 1999, the Company sold 500,000 shares of its Series F
Preferred Stock at a price of $9.00 per share for gross proceeds of $4.5 million
in cash to an investor. The difference between the deemed fair value of the
series F preferred stock of $12.00 and the price per share of $9.00 was deemed
to be a beneficial conversion feature analogous to a dividend to the preferred
stockholders as prescribed under the provisions of EITF 98-5, "ACCOUNTING FOR
CONVERTIBLE SECURITIES WITH BENEFICIAL CONVERSION FEATURES OR CONTINGENTLY
ADJUSTABLE CONVERSION RATIOS". The value of the beneficial conversion feature of
$1.5 million was recognized immediately at the date of issuance as the preferred
stockholders had the right to convert their preferred shares at their option.
On January 27, 2000, the SEC declared effective the Company's Registration
Statement on Form S-1. Pursuant to this Registration Statement, the Company
completed an initial public offering ("IPO") of 4,600,000 shares of its common
stock (including 600,000 shares sold pursuant to the exercise of the
Underwriters' over-allotment option) at an initial offering price of $20.00 per
share (the "Offering"). All preferred stock was converted to common stock on the
effective date of the company's IPO. Each share of Series A, B, C, D, E, and F
preferred stock was converted into common stock at the option of the stockholder
on a one-for-one basis, subject to certain adjustments. Holders of preferred
stock received one vote for each share of common stock into which such shares
were converted.
PREFERRED STOCK WARRANTS ISSUED IN CONNECTION WITH FINANCINGS
On January 29, 1997, the Company entered into a loan and security
agreement with a bank. During fiscal 1997, $250,000 was drawn on the loan and
was repaid in the same year. This loan expired on June 15, 1997. In conjunction
with this loan agreement, the Company issued to the lender a warrant to purchase
23,585 shares of Series B preferred stock at an exercise price per share of
$1.59. The Company recorded the loan at a discount of $24,000 which was
allocated to the warrant and amortized as interest expense during 1997. The fair
value of the warrant was estimated on the date of grant using the Black-Scholes
valuation model with expected volatility of 60%, risk-free interest of 5.50% and
expected life of 5 years. On the effective date of the company's IPO all
outstanding preferred stock was converted to common stock. These warrants were
exercised in 2000 in exchange for common stock. There were no outstanding
warrants in connection with this transaction as of December 31, 2001.
63
During 1998, the Company entered into financing agreements with a
financial institution (see Note 6). In conjunction with these transactions, the
Company issued to the financial institution warrants to purchase shares of
Series D preferred stock at an exercise price of $3.30 per share. On the
effective date of the company's IPO all outstanding preferred stock was
converted to common stock. These warrants were exercised in 2000 in exchange for
common stock. There were no outstanding warrants in connection with this
transaction as of December 31, 2001.
8. COMMON AND PREFERRED STOCK
During 2000, the Company's Board of Directors approved an amendment to the
Company's Certificate of Incorporation to increase the number of its authorized
shares of common stock to 75,000,000 and authorized 5,000,0000 shares of
preferred stock.
During the year ended December 31, 1999, the Company loaned to three
officers an aggregate of $230,000 to exercise options to purchase 933,439 shares
of the Company's common stock. The officers paid $193,750 in cash in conjunction
with these exercises. A promissory note of $100,000 to one of the officers,
bearing interest at 4.77% and due on February 28, 2004 was repaid in full,
including interest of $3,000, in November of 1999. The notes of the other two
officers bear interest at 5.87%, are due on July 16, 2004 and are collateralized
by their personal assets.
During the year ended December 31, 2000, the Company loaned $250,000 to an
officer to exercise options to purchase 90,000 shares of the Company's stock.
The officer paid $560,000 in cash in conjunction with this exercise. The
promissory note is due January 17, 2005 and bears interest at a rate of 6.12%
per annum and is collateralized by the officer's personal assets.
COMMON STOCK WARRANTS
In October of 2000, The Company granted warrants to a service provider to
purchase 20,000 shares of the Company's common stock at an exercise price of
$14.50 per share. These warrants vest ratably over a two-year period and expire
in October 2007. The Company is accounting for these warrants under the variable
accounting provisions of FIN 44. The charge for fiscal 2001 and 2000 amounted to
$66,000 and $10,500, respectively, using the Black Scholes valuation model with
the following variables: expected volatility of 90%, risk free interest of 6%
and expected life of 7 years. The warrants were not exercised as of December 31,
2001.
64
9. STOCK OPTIONS
1996 STOCK OPTION PLAN
In 1996, the Company adopted the 1996 Stock Option Plan (the 1996 Plan)
under which eligible employees, directors, and consultants can receive options
to purchase shares of the Company's common stock at a price generally not less
than 100% of the fair value of the common stock on the date of the grant for
incentive stock options and nonstatutory stock options. The 1996 Plan, as
amended through December 31, 2001, allows for the issuance of a maximum of
8,960,462 shares of the Company's common stock and an annual replenishment of
the shares of common stock authorized for issuance there under equal to the
lesser of (a) 1,300,000 shares, (b) 4% of the outstanding shares on such date or
(c) a lesser amount to be determined by the Board. The options granted under the
1996 Plan vest according to varying schedules determined by the 1996 Plan
Administrator, currently the Board of Directors. Options generally vest over
four years and expire ten years from the date of grant.
2000 NONSTATUTORY STOCK OPTION PLAN
In August 2000, the Board of Directors adopted the 2000 Nonstatutory Stock
Option plan (the 2000 Plan) under which eligible employees can receive options
to purchase shares of the Company's common stock at a price generally not less
than 100% of the fair value of the common stock on the date of grant for non
statutory options. The 2000 Plan as amended through December 31, 2001, allows
for a maximum of 3,394,845 shares of the Company's common stock and an annual
replenishment of the shares of common stock authorized for issuance on the first
day of the Company's fiscal year (the "calculation date") beginning on January
1, 2002, equal to 4% of the outstanding shares on the calculation date. The
Board may act, prior to the first day of any fiscal year of the Company, to
increase the share reserve by such number of shares as the Board shall
determine, which number shall be less than 4% of the outstanding shares on the
calculation date. The options granted under the 2000 Plan vest according to
varying schedules determined by the 2000 Plan Administrator. Options generally
vest over four years and expire ten years from the date of grant. The 2000 plan
explicitly excludes Officers and Directors, however, the company may grant
Options to Officers in connection with the Officer's initial employment.
A summary of the activity under the 1996 and 2000 Plans since inception is
set forth below:
65
Options Outstanding
----------------------------------------------
Number of Price Aggregate
Shares Per Share Price
---------- --------------- --------------
(In thousands)
Balance at December 31, 1997 1,012,923 $0.100 - $ 0.160 $ 149
Options granted 1,066,500 $0.160 - $ 0.330 280
Options exercised (357,001) $0.100 - $ 0.160 (53)
Options forfeited (115,874) $0.100 - $ 0.160 (18)
----------- ---------
Balance at December 31, 1998 1,606,548 $0.050 - $ 0.330 359
Options granted 3,495,872 $0.330 - $ 9.000 6,336
Options exercised (1,855,091) $0.050 - $ 1.500 (623)
Options forfeited (304,747) $0.160 - $ 9.000 (134)
----------- ---------
Balance at December 31, 1999 2,942,582 $0.100 - $ 9.000 5,938
Options granted 2,959,950 $5.375 - $38.813 46,853
Options exercised (432,966) $0.100 - $ 9.000 (1,068)
Options forfeited (381,127) $0.100 - $38.813 (2,205)
----------- ---------
Balance at December 31, 2000 5,088,439 $0.100 - $38.813 49,504
Options granted 3,398,950 $2.150 - $ 9.090 13,935
Options exercised (414,009) $0.100 - $ 7.500 (446)
Options forfeited (3,039,429) $0.160 - $38.813 (41,422)
----------- ---------
Balance at December 31, 2001 5,033,951 $0.160 - $37.250 $ 21,571
=========== =========
66
The following table summarizes information with respect to stock options
outstanding at December 31, 2001:
Options Outstanding Options Exerciseable
------------------------------------------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
---------------- ----------- ---------------- -------- ----------- --------
$0.160 - $ 1.500 1,066,993 7.22 $ 0.635 394,591 $ 0.611
$2.150 - $ 2.280 1,995,638 9.94 $ 2.275 290,626 $ 2.280
$2.450 - $ 8.820 1,405,107 7.87 $ 6.417 421,624 $ 6.931
$9.000 - $37.250 566,213 8.38 $12.954 230,318 $12.498
--------- ---------
$0.160 - $37.250 5,033,951 8.61 $ 4.285 1,337,159 $ 5.339
The Plans allows certain option holders to exercise their options prior to
vesting. However, such exercises are subject to repurchase by the Company if not
vested. The Company's repurchase right lapses over a four year period. As of
December 31, 2001, 146,873 shares of common stock acquired by option holders are
subject to repurchase by the Company.
The Company accounts for employee and board of director stock options in
accordance with the provisions of APB No. 25 and complies with the disclosure
provisions of SFAS No. 123.
Under APB No. 25, compensation expense is recognized based on the amount
by which the fair value of the underlying common stock exceeds the exercise
price of the stock options at the measurement date, which in the case of
employee stock options is typically the date of grant. For financial reporting
purposes, the Company has determined that the deemed fair market value on the
date of grant of certain employee stock options issued prior to the IPO was in
excess of the exercise price of the options. This amount is recorded as deferred
compensation and is classified as a reduction of stockholders' equity and is
amortized as a charge to operations over the vesting period of the applicable
options. The vesting period is generally four years. The fair value per share
used to calculate deferred compensation was derived by reference to the
preferred stock values and the Company's initial public offering price range.
Consequently, the Company Recorded deferred stock compensation of $1,881,000 and
$10,205,000 during the years ended December 31, 2000 and 1999, respectively.
Amortization recognized for the years ended December 31, 2001, 2000 and 1999
totaled $509,000, $3,977,000 and $4,352,000, respectively.
The weighted average fair values of the options granted in fiscal 2001,
2000 and 1999 were $4.10, $15.83 and $1.80, respectively.
Had compensation cost for option grants to employees been determined
consistent with SFAS No. 123, the Company's net loss would have been as follows
(in thousands, except per share data):
67
Years Ended December 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
Net Loss:
As reported $(25,953) $(34,509) $(24,889)
Pro forma net loss $(27,765) $(38,042) $(24,762)
Pro forma net loss per share, basic
and diluted $ (1.16) $ (1.79) $ (11.14)
The above pro forma disclosures are not necessarily representative of the
effects on reported income or loss for future years as additional grants are
made each year and options vest over several years.
The fair value of each option grant was estimated on the date of grant
using the minimum value options pricing model with the following weighted
average assumptions by period:
Years Ended December 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
Risk-free interest rate 3.7% 6.2% 5.6%
Expected volatility 108% 189% --
Expected life (in years) 1.7 1.5 4
Dividends -- -- --
Because the Company was not publicly traded until January 27, 2000, the
date of the IPO, volatility was not considered in the determining the value of
options granted to employees in the 1999.
STOCK OPTION EXCHANGE
Pursuant to a Tender Offer Statement filed with the SEC on May 4, 2001,
employees surrendered for cancellation 1,744,400 options to purchase shares of
the Company's common stock at exercise prices ranging from $5.44 to $38.81. In
exchange, the Company on June 6, 2001 granted short-term options to purchase
174,440 shares of the Company's common stock at an exercise price of $8.82
covering ten percent (10%) of the number of shares that were cancelled.
The grant of short-term options was accounted for as prescribed under the
provisions of FIN No. 44, "ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK
COMPENSATION". For the twelve months ended December 31, 2001, the Company did
not incur any compensation expense associated with such options.
On December 12, 2001 the Company granted new options equal to ninety
percent (90%) of the number of shares that were cancelled on June 5, 2001. The
number of new options actually granted on December 12, 2001, totaling 1,366,560
shares is less than the amount cancelled on June 5, 2001 as a result of employee
terminations related to our restructuring plan implemented in July 2001. The
exercise price of the new options is $2.28, the closing price of the Company's
Common Stock on the date of grant. The new
68
options have the same vesting schedule as the cancelled options and will expire
if not exercised ten years from the grant date or earlier if employment is
terminated.
The short-term options vested on December 6, 2001 and expired unexercised
on March 6, 2002.
10. EMPLOYEE SAVINGS AND INVESTMENT PLANS
401(K) PLAN
In January 1998, the Company adopted a 401(k) plan for employees. All
employees who meet certain service requirements are eligible to participate.
Matching contributions are at the discretion of the Company. The Company made no
matching or discretionary contributions during 2001, 2000 or 1999.
EMPLOYEE STOCK PURCHASE PLAN
The Company's 2000 Employee Stock Purchase Plan was adopted by the board
of directors and stockholders of Extensity in November 1999 and became effective
upon the closing of the IPO in January of 2000. A total of 1,235,241 shares have
been reserved for issuance under the purchase plan. The purchase plan provides
for automatic annual increases in the number of shares reserved for issuance
under the plan in an amount equal to the lesser of 1) 1.5% of the outstanding
shares on such date, 2) 500,000 shares or 3) such lesser amount as may be
determined by the board. Under the purchase plan, eligible employees may
purchase common stock in an amount not to exceed 15% of the employee's cash
compensation. The purchase price will be 85% of the common stock fair value at
the lower of certain plan-defined dates. As of December 31, 2001, there have
been 428,679 shares issued and 805,910 shares reserved for future issuance.
11. ACQUISITION
In September of 2000, Extensity acquired all the outstanding shares of a
company. The total acquisition cost was approximately $343,000 primarily
comprised of $265,000 in cash, 2,500 shares of the Company's stock valued at
$53,000 and approximately $25,000 in transaction costs. The transaction was
accounted for as a purchase business combination. Substantially the entire
purchase price was allocated to in-process research and development as
technological feasibility of the acquired product had not been established and
no future alternative use existed at the time of purchase. Furthermore, the
acquired company had no revenues, no other tangible or intangible assets and
only one employee.
12. RESTRUCTURING, IMPAIRMENT LOSS AND OTHER
In response to the continuing economic slowdown, the Company implemented a
restructuring plan in the third quarter of fiscal 2001 and recorded a
restructuring charge of $4.5 million. The goal of the restructuring plan is to
reduce costs and improve operating efficiencies in order to match the current
business environment. The restructuring charge consisted of severance and
benefits of $729,000 related to the involuntary termination of 70 employees.
These terminations were from all functions across the Company. In addition, the
Company accrued for lease costs of $2.2 million pertaining to the estimated
obligations for non-cancelable lease payments for excess facilities in the
United States, Europe and Australia. The Company also wrote off computer
equipment and software with a net book value of $1.6 million as these assets
were taken out of service because they were deemed unnecessary due to the
reductions of workforce.
69
The following table sets forth an analysis of the components of the
restructuring charge and the payments made against the accrual through December
31, 2001 (in thousands):
Computer
Severance and Equipment and Accrued Lease
Benefits Software Costs
------------- ------------- -------------
Restructuring provision:
Severance and benefits $ 729 $ -- $ --
Accrued lease costs -- -- 2,187
Property and equipment write-off -- 1,577 --
------------- ------------- -------------
Total 729 1,577 2,187
Cash paid (729) -- (901)
Non-cash charges -- (1,577) --
------------- ------------- -------------
Accrual balance at December 31, 2001 $ -- $ -- $ 1,286
============= ============= =============
The Company expects to pay the remaining obligations relating to the
non-cancelable lease obligations over the remaining lease terms through 2006.
In the third quarter of 2001, the Company incurred an impairment loss of
$1.3 million. This charge was attributed to the impairment of assets acquired in
conjunction with building the hosted offering. These assets were written down to
a level commensurate with the expected future cash flows as prescribed by SFAS
No. 121 "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF".
During the first quarter of 2001, the Company incurred $377,000 in
connection with exploring potential merger and acquisition transactions.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is unaudited financial data for 2001 and 2000 (amounts in
thousands, except for per share amounts).
Revenues Q4'01 Q3'01 Q2'01 Q1'01 Q4'00 Q3'00 Q2'00 Q1'00
------- ------- ------- ------- ------- ------- ------- -------
License $ 4,231 $ 4,886 $ 5,651 $ 6,022 $ 5,316 $ 4,021 $ 3,034 $ 2,225
Service and maintenance 3,657 3,174 3,480 3,780 3,470 3,005 2,299 1,498
Hosted 151 48 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total revenues 8,039 8,108 9,131 9,802 8,786 7,026 5,333 3,723
Gross profit $ 4,884 $ 4,612 $ 5,424 $ 5,283 $ 4,433 $ 2,847 $ 1,421 $ 550
Net loss (2,342) (9,379) (6,733) (7,499) (7,605) (8,702) (8,865) (9,337)
Basic and diluted net loss per share $ (0.10) $ (0.39) $ (0.28) $ (0.32) $ (0.33) $ (0.38) $ (0.39) $ (0.56)
70
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None
71
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See the information in "Proposal No. 1 - Election of Directors" in
Extensity's Proxy Statement for the 2002 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission within 120 days after the end
of Extensity's fiscal year ended December 31, 2001 (the "2002 Proxy Statement")
which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
See the information set forth in the section entitled "Executive
Compensation" in the 2002 Proxy Statement, which is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the information set forth in the section entitled "Security Ownership
of Certain Beneficial Owners and Management" in the 2002 Proxy Statement, which
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the information set forth in the section entitled "Certain
Transactions" in the 2002 Proxy Statement, which is incorporated herein by
reference.
72
PART IV
ITEM 14. EXHIBITS, AND REPORTS ON FORM 8-K
1) FINANCIAL STATEMENTS.
The financial statements filed as part of this report are listed on the
Index to Consolidated Statements on page 39
2) FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
3) EXHIBITS
Exhibit
-------
Number
------
3.2.(1) Amended and Restated Certificate of Incorporation of the
Registrant.
3.3.(1) Bylaws of the Registrant.
4.1.(1) Registrant's Common Stock Certificate
10.1.(1) Form of Indemnification Agreement entered into by and between the
Registrant and each of its directors and executives.
10.8.(1) Lease agreement by and between the Registrant and Spieker
Properties, Inc.
10.8.1(4) Amended Lease agreement dated December 12, 2000 by and between
the Registrant and Spieker Properties, Inc.
10.9.(1) Offer letter dated February 16, 1999 by and between the
Registrant and Robert A. Spinner.
10.10(1)(3) 1996 Stock Option Plan, as amended.
10.11(1)(3) 2000 Employee Stock Purchase Plan and related agreements.
10.11.1(2) 2000 Nonstatutory Stock Option, as amended.
10.12(4) Note Dated January 17, 2000 by and between the Registrant and
Donald E. Smith
10.13(4) Note dated August 20, 1999 by and between the Registrant and
Mark K. Oney.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
--------------------------------------------------------------------------------
73
--------------------------------------------------------------------------------
(1) Filed as an exhibit to the Registrant's Registration Statement on
Form S-1 (No. 333-90979) and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Registration Statement on
Form S-8 (No. 333-45748) and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Registration Statement on
Form S-8 (No. 333-36336) and incorporated herein by reference.
(4) Filed as an exhibit to the Registrant's Annual Report on Form
10-K (No. 000-28897) and incorporated herein by reference.
(b) Reports on Form 8-K
None
(c) Exhibits
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
April 1, 2002
EXTENSITY, INC.
By /s/ Kenneth R. Hahn
----------------------
Kenneth R. Hahn
Chief Financial Officer (Principal Financial
and Accounting Officer)
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature
appears below constitutes and appoints Robert A. Spinner and Kenneth R. Hahn,
and each of them, his true and lawful attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Report on Form 10-K, and to file the same, with Exhibits thereto and other
documents in connection therewith the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or substitute
or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
74
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROBERT A. SPINNER President and Chief Executive Officer and Director April 1, 2002
----------------------------------- (Principal Executive Officer)
Robert A. Spinner
/s/ KENNETH R. HAHN Chief Financial Officer April 1, 2002
----------------------------------- (Principal and Accounting Officer)
Kenneth R. Hahn
/s/ SHARAM I. SASSON Chairman of the Board of Directors April 1, 2002
-----------------------------------
Sharam I. Sasson
/s/ CHRISTOPHER D. BRENNAN Director April 1, 2002
-----------------------------------
Christopher D. Brennan
/s/ JOHN R. HUMMER Director April 1, 2002
-----------------------------------
John R. Hummer
/s/ DAVID A. REED Director April 1, 2002
-----------------------------------
David A. Reed
/s/ TED E. SCHLEIN Director April 1, 2002
-----------------------------------
Ted E. Schlein
75