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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[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, 2000
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. [X]
As of January 31, 2001, there were 24,169,098 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 January 31, 2001,
as reported on the Nasdaq National Market System was $156,974,106. 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 2001 Annual Meeting of Stockholders, which
is expected to be filed not later than 120 days after the Registrant's fiscal
year ended December 31, 2000.
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EXTENSITY, INC.
INDEX
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 23
Item 3. Legal Proceedings........................................... 23
Item 4. Submission of Matters to a Vote of Security Holders......... 23
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 27
Item 6. Selected Consolidated Financial Data........................ 28
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 29
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 34
Item 8. Financial Statements and Notes to the Financial
Statements.................................................. 35
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................... 53
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 53
Item 11. Executive Compensation...................................... 53
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 53
Item 13. Certain Relationships and Related Transactions.............. 53
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 53
SIGNATURE............................................................... 55
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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 1. BUSINESS
OVERVIEW
Extensity provides a suite of Internet-based software applications that
automate expense reporting, travel management, indirect procurement and project
time capture for enterprise employees. These workforce management applications
serve to increase employee efficiency and productivity by streamlining
traditionally paper-based processes. Our applications also help increase
corporate control of expenses by automatically enforcing company policies. We
deliver these applications through a single user interface called Extensity
Connect. Extensity Connect integrates our suite of applications with reporting
tools for enhanced business intelligence and provides access to e-commerce and
employee services over the Web. Since data is captured in a single repository
and shared among the Extensity applications and backend systems, Extensity
Connect enables managers to monitor business policy violations, track
employee/resource utilization, manage project cost allocation, and access
information critical to negotiating vendor contracts.
We have designed our software from inception to leverage the ease-of-use,
accessibility and open architecture of the Internet. Furthermore, our software
architecture allows our applications to be readily integrated with enterprise
resource planning systems and other information technology systems. By taking
advantage of the Internet as an application platform, we enable employees to use
our solutions on the devices they use most, whether at the office through a
networked PC, at home or on the road through a laptop or Personal Digital
Assistant ("PDA"). We will deliver our solution via WAP-enabled devices in the
first quarter of 2001.
Our products are now deployed in over 40 countries worldwide with more than
700,000 licensed seats. We currently have more than 300 customers, including
Cisco Systems, Bestfoods, The Boston Beer Company, Office Depot, A.T. Kearney,
Home Box Office, Aspect Communications, Sea Ray, Franklin Templeton Investments
and T. Rowe Price. Our objective is to become a leading provider of applications
that increase workplace efficiency, improve employee productivity and reduce
expenses for large corporate customers.
INDUSTRY BACKGROUND
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 fundamental business change for 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 to expect the immediacy, self-service, ease-of-use and accessibility to
content and commerce that the Internet provides.
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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
only address the business processes unique to each functional area. Also, they
offer limited integration of information across functional areas. These systems
have been significantly 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 many 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
project 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
project time capture through paper-based processes that require actions by many
people, both inside and outside of 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, 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 Workforce Management Applications
A significant market opportunity exists for workforce and employee services
via the Web, management applications that streamline administrative processes
and provide access to e-commerce. Such applications should also drive
cost-savings by automatically enforcing corporate policies, pointing end-users
to approved vendors in the areas of travel and indirect procurement and
delivering integrated reporting tools for in-depth analysis of corporate
expenses and resource utilization. At the same time, the rapid adoption of the
Internet by businesses has radically changed the business environment. The
growth of the Internet, in conjunction with increasing globalization and
technological advancements, has increased competitive pressures for all
businesses because it has lowered the barriers to market entry, rewarded
innovative business models and provided an easily accessible commerce channel.
Accordingly, the rapid growth of the Internet has both enabled the introduction
of Internet-based workforce management solutions and made their adoption a
strategic imperative.
A comprehensive workforce management solution must provide benefits to
people at all levels of an organization, from executives to managers to
front-line employees. Such a solution must:
- Give companies a highly scalable, easily implemented and widely
accessible set of applications that streamlines workforce processes by
linking employees, approvers and administrative personnel;
- Reduce the time employees spend on general business tasks, freeing them
to focus on their core responsibilities;
- Provide data to business managers for contract negotiation and for
enforcing discounts with preferred vendors;
- Provide business managers with information on individual employee and
overall workforce utilization in order to manage employee productivity
and profitability more effectively;
- Enable business administrators to enforce policies actively and
efficiently; and
- Provide an end-to-end solution by connecting the employee to relevant
third-party content, commerce and service providers over the Internet.
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THE EXTENSITY SOLUTION
Extensity provides an integrated suite of Internet-based software
applications for workforce management designed to improve the productivity of
employees and enhance operating efficiency across the enterprise. Our product
suite currently comprises applications for expense reporting, business travel
management, indirect procurement and project time capture, as well as a system
administration tool that facilitates implementation and administration of these
applications. The Extensity application suite resides within Extensity Connect,
a solution that lets employees access our four applications from a single user
interface and seamlessly connects them to commerce sites and employee services
over the Internet. Furthermore, Extensity Connect lets managers run reports that
help them track expenditures in real time and analyze employee/resource
utilization.
Our workforce management applications are called Extensity Expense Reports,
Extensity Travel Plans, Extensity Timesheets, Extensity Purchase Reqs and the
System Administration Tool (SAT). The application suite is fully integrated so
that each application works and shares information with all of 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 an end-to-end
solution for workforce management. Our applications are designed for rapid
implementation and cost-effective deployment to end-users. With this scalable
Web architecture, our products can support any organization -- from medium-sized
businesses to multinational companies with decentralized operations.
Our workforce management applications effect direct and indirect cost
savings by:
- Streamlining and automating traditional paper-based processes, thereby
reducing the time and personnel requirements associated with processing
expense reports, travel plans, purchase requisitions and timesheets;
- Increasing accuracy through automation of error-checking, data import and
business rule compliance;
- Providing greater control of expenditure policy enforcement and
administration; and
- Supporting analysis of corporate purchasing and utilization patterns to
enhance decision-making capabilities and increase leverage in negotiating
vendor and service provider contracts, as well as promoting and enforcing
the use of preferred vendors.
Our workforce management solution also increases productivity throughout
the enterprise by:
- Reducing employee time spent on tasks outside of their core
responsibilities;
- Providing a consistent, intuitive, browser-based user interface to all
applications;
- Supporting remote access via laptop computers and PDAs; and
- Enabling exception-based management that allows business managers to
review only those expenditures that fall outside of their company's
policies.
The Extensity Partner Network
We have developed our partner network to deliver e-commerce and employee
services to each and every member of a company's workforce. We believe this
network benefits employees at all levels of an organization because it allows
them to access content, commerce and services that are relevant to their
business tasks. Specifically, our network of partners will benefit our customers
by:
- Providing users with seamless, integrated access to relevant content,
services and e-commerce providers;
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- Reducing transaction costs to both our customers and content, commerce
and service providers by utilizing the Internet to enhance information
flow; and
- Enabling open access to online markets and vendors.
EXTENSITY STRATEGY
Our objective is to gain broad market acceptance of the importance of
strategic workforce management for increasing employee productivity, enhancing
corporate control and boosting competitive advantage. Our current suite of
applications automates internal employee-centric processes and integrates them
with external services, supply chains and information providers. As we grow our
company, our product suite and our partner network, we will continue to focus on
applying technology to helping employees perform business processes more
efficiently and effectively and to helping companies capture information for
making better business decisions.
Key elements of our growth strategy include:
Expanding our suite of workforce management solutions. We intend to
continue enhancing 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 workforce management applications.
As part of our plan, we will soon add to our suite of applications a new
solution that will accelerate the process of hiring and managing qualified
employees while lowering the associated costs. We believe this solution will
enable customers to automate and capture strategic information to improve
employee management throughout the entire employee lifecycle.
Aggressively penetrating the large and untapped workforce management
market. We believe that the market for automated workforce management solutions
for enterprises of all sizes is large and under-penetrated. In order to address
this market opportunity, we have aggressively expanded, and will continue to
expand, our direct and indirect sales channels. We plan to focus our direct
sales efforts on large multinational organizations across a variety of
industries. In addition, we plan to address mid-size organizations and vertical
markets through a combination of telesales and relationships with OEMs and other
resellers.
Strengthening international presence through strategic partnerships and
direct distribution. In order to capitalize on international market
opportunities, we have opened regional and sales offices in the United Kingdom,
Germany and Australia, expanded our international direct sales force and built
strategic overseas partnerships. We have staffed our international organization
with senior local management with specific product and market expertise. This
will continue to be our strategy as we establish other overseas offices and
expand into new markets. Our application suite is internationalized and we plan
to localize it for certain European languages, namely German, French, Spanish
and Italian, during 2001.
Increasing market adoption through our application service provider
offering. We offer flexible deployment options for our applications. Customers
can choose our hosted offering rather than license our applications, through our
premium hosted service.
EXTENSITY PRODUCT AND SERVICES
Integrated Suite of Applications
With Extensity Connect we provide a single, Web-based point of entry to an
integrated suite of Internet-based workforce management applications designed to
enhance employee productivity and corporate efficiency. Our application suite
currently includes Extensity Expense Reports, Extensity Travel Plans, Extensity
Timesheets, Extensity Purchase Reqs and the Extensity System Administration
Tool. When customers purchase Extensity Connect, they can choose to activate one
or more of the applications in the suite, in the combination that fits their
business needs.
All applications are launched within Extensity Connect and share a
consistent and easy-to-use, browser-based graphical user interface. The
applications share a common underlying technology architecture
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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 connected desktop, a disconnected laptop,
a PDA, and soon through a Web-enabled cell phone.
Once deployed, our applications are quickly configured, easily customized
and easily upgraded, regardless of the degree of customization. Our
Internet-based architecture also keeps system administration costs to a minimum.
For example, customers can automatically install and update new versions via the
Internet.
Our application suite provides comprehensive, real-time data regarding
spending, suppliers, policy violations, resource utilization and budgets. We
offer pre-configured and role-based reports. Our database approach facilitates
further query and analysis using standard report writing applications. We
believe that this information can improve an organization's strategic management
and decision-making processes and can enhance vendor negotiation.
COMMON FEATURES OF OUR APPLICATIONS
FEATURES DESCRIPTION
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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 a trip or a time sheet can be
linked with an expense report and a
purchase requisition for a project.
Proxy user creation...................... 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 The application suite is fully
capture................................ 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, purposes for a trip and
previously used vendors.
Online help.............................. Context sensitive online help is provided
for all applications.
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 expense reports. Compliant reports can be automatically
approved so that 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
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can receive reimbursement rapidly through seamless integration with the
organization's financial, payroll and human resources systems.
FEATURES DESCRIPTION
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Credit card integration and Uses the data feed from corporate card
pre-population......................... vendors to enable 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.
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 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 travel booking to
post-trip expense reimbursement and at the same time giving managers a
comprehensive view of projected and actual costs for variance analysis.
FEATURES DESCRIPTION
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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 Can automatically approve expense reports
Reports................................ that fall within the specified parameters
of an approved travel plan.
Integrated business intelligence......... Extensity's reporting tool allows
managers to analyze expenses and monitor
adherence to corporate policies.
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Extensity Purchase Reqs. Extensity Purchase Reqs automates and optimizes
the requisitioning of non-production goods and services while enforcing a
company's procurement policies. Through Extensity Purchase Reqs employees can
access various online marketplaces or their company's own catalog. 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 Purchase Reqs 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 Purchase Reqs
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.
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.
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
vendor usage.
Extensity Timesheets. Extensity Timesheets enables quick and accurate
time-capture and provides enhanced business intelligence for project management.
Timesheets allows employees to capture their project hours efficiently and
accurately so managers can focus on analyzing and improving the business rather
than on gathering or verifying 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. Employees can access Extensity Timesheets from
a desktop or laptop computer, a PDA and soon on a WAP enabled device, Extensity
Timesheets integrates with existing financial systems, as well as with Extensity
Expense Reports and Extensity Purchase Regs to ensure accurate pictures of
project performance and bill-back to clients.
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FEATURES DESCRIPTION
-------- -----------
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 Allows users to enter and track time by
options................................ calendar view or by project line item.
Flexible reporting periods............... Configures multiple reporting periods for
various groups of users.
Real-time reports........................ Identifies delinquent time sheets,
invalid project codes, and various views
of time and expense by project.
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 System Administration 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. 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.
SERVICES
Our customer satisfaction is essential to our long-term success. We offer
customers a comprehensive selection of implementation services, support and
training. Our professional services organization consisted of 69 professionals
as of December 31, 2000.
Implementation. Implementation 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. Implementations are performed by our professional
services organization and are 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. Our three support levels are: 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
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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 entirely 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 TCP/IP and makes database connections via
standard Java database drivers. Our applications are inherently scalable, due to
our multi-tier architecture employing thin clients, multi-threaded application
servers and relational databases. In addition, our Java-based architecture
enables the Extensity Application Suite to operate across multiple platforms
within any organization, including Windows 95, 98 or NT, Macintosh, Solaris and
Palm operating systems.
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, can manage
key business functions and can 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 conformity 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 email 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 email 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
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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. These integration processes
are scheduled according to the needs of our customer's information services and
finance departments.
STRATEGIC RELATIONSHIPS
To rapidly deliver a comprehensive, robust solution to our customers, we
have established strategic relationships with companies in four general
categories: e-business providers; e-commerce and employee services providers;
marketing and distribution partners, and implementation service providers.
E-Business providers. We have established relationships with key solutions
providers to deliver integrated workforce management 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.
In the procurement card market, we work with Visa to integrate our
applications suite with the Visa Procurement Card. We have agreed to a product
integration work plan with Visa, which enhances the quality of integration for
our customers. American Express Purchasing Card data also feeds directly into
Extensity Purchase Reqs, allowing employees to directly purchase smaller-ticket
items without the complicated paperwork of traditional procurement systems.
Extensity Expense Reports also 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.
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.
Commerce One -- We support Commerce One's open platform by bringing
together employee buyers and suppliers of indirect goods and services. Our
Purchase Reqs application module is integrated with Commerce One.net, Commerce
One's online marketplace. In addition, Commerce One has chosen us to be the
preferred provider of expense reporting applications to its customers and
prospects. Commerce One also refers its prospects to us for joint selling. Under
a fee agreement, Commerce One and Extensity have each agreed to pay to the other
party reciprocal business referral fees.
DigitalThink -- We have long been focused on providing solutions that
enable companies to control costs related to travel and entertainment.
DigitalThink'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. DigitalThink's online catalog of courses can be
easily launched from within Extensity Connect, providing employees a common user
experience.
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.
Ontheroad.com -- Ontheroad.com is a premier provider of travel information
for the business traveler. Ontheroad.com provides travel information content for
the Extensity Application Suite.
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ProAct Technologies -- ProAct Technologies is the 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.
We are dedicated to providing an open platform for our customers and will
continue to work with strategic vendors as necessary for our clients. Other
strategic e-commerce and content partnerships include elcom, EventSource and
Netcentives.
Marketing and distribution partners. We have established relationships with
solutions providers to resell our products and to provide prospect referrals to
us.
J.D. Edwards -- We have a worldwide distribution arrangement with J.D.
Edwards World Solution Company. J.D. Edwards is headquartered in Denver,
Colorado and has over 50 offices worldwide supporting its 5,500 customers in
more than 100 countries. Under the agreement, J.D. Edwards purchases our
products at a discount and resells the products to its customers.
Niku -- We have an OEM arrangement in place with Niku Corporation. Niku is
a leading provider of e-business software applications that serve professional
service organizations and individuals. Under this agreement, Niku has a
non-exclusive right to bundle our applications with Niku's products. We receive
royalty fees from Niku for sales of Niku products that incorporate our
applications.
Item4you.com -- Item4you.com 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 Item4you.com, users will be
able to access our applications via a single sign-on through Item4you.com,
giving users one central point of access to the administrative applications they
use every day. We also have an agreement whereby Item4you.com can purchase our
products at a discount and resell the products to its customers.
QSP -- We have a worldwide distribution arrangement in place with QSP. QSP
is headquartered in the United Kingdom and has satellite offices in London,
Raleigh, NC, and Sydney, Australia supporting its 200 worldwide customers. QSP
purchases our applications at a discount and resells them together with
implementation services to QSP's customers.
We also have marketing referral arrangements in place with Cisco Systems,
IBM, Commerce One, WebEx, DigitalThink, EventSource, Visa, GetThere.com,
Rosenbluth, ProAct Technologies and elcom.
Implementation services providers -- We have formed partnerships with
implementation service 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 -- Our relationship with Cap Gemini Ernst & Young
(CGEY)further enhances our joint partnership with Cisco. CGEY is combining
Cisco's experience and metrics for workforce management with its own expertise
in change management, technology and integration to provide solutions to our
joint customers. CGEY's business solution, the "Connected Innerprise", includes
leading solutions such as Extensity's integrated applications suite. The
Connected Innerprise(SM) uses Web-based technologies to connect people,
processes, data, and applications across the ValueWeb(SM). CGEY has a
significant presence in North America, Europe and Asia.
KPMG -- We have strengthened our position in the European marketplace
through 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 initiatives in Germany.
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To augment our implementation services worldwide, we have bolstered our
network of certified implementation partners to include FutureNext, Parson Group
and TechSpan in the United States and Princeton Consulting and Glue Ltd in
Europe.
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
enterprises of all sizes 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
organized under two area vice presidents and a senior vice president of sales.
We have sales offices in Emeryville, California, Irvine, California, Irving,
Texas, Parsippany, New Jersey, Rosemont, Illinois, and Vienna, Virginia. Our
North America sales organization included 32 direct sales representatives as of
December 31, 2000. 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 is
operating under a European general manager and a senior vice president of
international operations. Three field-based engineers and sales staff support
four direct sales representatives.
PRODUCT DEVELOPMENT
We have been developing and enhancing the Java-based architecture of our
applications 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 Purchase Reqs in July 1999. These four applications, together with
the Extensity System Administration Tool, comprise our Extensity Application
Suite. In March 2000 we launched Extensity Connect, a business to employee hub
that delivers our applications plus Internet content and commerce and integrated
reporting functionality.
As of December 31, 2000, our engineering organization consists of 73
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
making significant investments in our engineering organization and in our
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. Our research and development expenses, excluding amortization of
non-cash stock base compensation, totaled $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
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methodology for 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 existing 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, among other things, 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 workforce management 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 products, the core technology
underlying the applications, a high level of customer service and the ability to
implement solutions rapidly. With respect to these factors, we believe that our
workforce management 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. As a result of the large market opportunity, we also expect
competition from other established and emerging companies.
EMPLOYEES
As of December 31, 2000, we had a total of 289 employees, including 77 in
research and development, 108 in sales, marketing and business development, 69
in professional services and 35 in finance and administration. None of our
employees is subject to a collective bargaining agreement and we believe our
relationship with our employees is good.
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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, together with
the risks and other information contained in the Company's Registration
Statement on Form S-1/A (File No. 333-90979) and its periodic reports filed
pursuant to the Exchange Act 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 EXTREMELY LIMITED OPERATING HISTORY AND THE FACT THAT WE OPERATE IN A NEW
INDUSTRY MAKES OUR BUSINESS PROSPECTS DIFFICULT TO EVALUATE.
We were incorporated in November 1995 and commenced licensing of our
software applications in March 1998. Accordingly, we have a limited operating
history. 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 Internet-based 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 sales channels through geographic expansion and the development of
indirect channels such as relationships with OEM customers, and
distributors, and application service providers;
- increase awareness of our brand; and
- maintain our current, and develop new, third-party relationships,
including but not limited to third-party implementors.
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
FOR THE FORESEEABLE FUTURE.
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, 2000 we
had an accumulated deficit of $74.5 million. We expect to continue to invest in
research and development to enhance current products and develop future
products. We also plan to continue to grow our sales force and to spend
significant funds in marketing to promote our company and our products. We
expect to continue to hire additional people in all other areas of our company
in order to support our growing business. 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 through the
current fiscal year.
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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 expend significant sums in all areas of our business,
particularly in our sales and marketing operations, in order to promote future
growth. Because the expenses associated with these activities are relatively
fixed in the short-term, we may be unable to adjust spending quickly enough to
offset any unexpected shortfall in revenue growth or any decrease in revenue
levels. As a result, we expect our quarterly operating results to fluctuate.
Moreover, because we use the percentage-of-completion method of contract
accounting with respect to recognition of license and implementation fees, if
our professional service organization is unable to implement our applications
for use by customers within our anticipated time frames, our recognition of
revenue for those customers could be deferred, which could cause our quarterly
revenue 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, distributors, or
application service providers;
- 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; and
- technical difficulties or "bugs" affecting the operation and
implementation of our software.
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.
OUR BUSINESS WILL SUFFER IF WE DO NOT SIGNIFICANTLY EXPAND OUR SALES
CAPABILITIES.
We sell our workforce optimization applications primarily through our
direct sales force. We must significantly expand our direct sales operations to
increase our revenues. We cannot be certain that we will be successful in these
efforts. Our products and services require sophisticated sales efforts and our
ability to increase our direct sales operation will depend on our ability to
recruit, train and retain top sales people with effective sales skills and
advanced technical knowledge. Competition for qualified personnel is intense in
our industry. Moreover, new sales personnel require training and take time to
achieve full productivity. If we are unable to hire or retain qualified sales
personnel, if newly hired personnel fail to develop the necessary skills, or if
they reach productivity more slowly than anticipated, we may be unable to grow
our revenues as rapidly as planned, if at all, and our business could be harmed.
WE FACE INTENSE COMPETITION, WHICH COULD AFFECT OUR ABILITY TO INCREASE REVENUE,
MAINTAIN OUR MARGINS AND INCREASE OUR MARKET SHARE.
The market for our Internet-based workforce optimization 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
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products and services they offer. Companies offering one or more products
directly competitive with our products include Ariba, Captura Software, Concur
Technologies, IBM Corporation, PeopleSoft Corporation and Oracle Corporation. As
a result of the large market opportunity for workforce optimization
applications, 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 significant 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 workforce optimization software products and related services have
accounted for 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
workforce optimization 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 workforce
optimization applications, or that 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 WORKFORCE OPTIMIZATION APPLICATIONS, AND
ANY INABILITY TO ENHANCE FUNCTIONALITY COULD CAUSE OUR SALES TO DECLINE.
Because the market for our products is emerging and 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, the market for
Java-based software is still relatively new and it is not clear whether
Java-based systems will continue to maintain commercial acceptance.
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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.
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 REVENUES OR OPERATING RESULTS.
We licensed our first workforce optimization application in March 1998 and
have fully implemented our applications for only a limited number of customers
to date due to the time required to implement. Moreover, as of December 31,
2000, we had not completed an implementation of our Extensity Purchase Reqs
application for any customer. 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 revenues and operating results in any period.
IF WE FAIL TO ACHIEVE POSITIVE MARGINS ON SERVICE REVENUES IN THE FORESEEABLE
FUTURE, OUR RESULTS OF OPERATIONS COULD SUFFER.
Our margins on service revenues to date have been negative. While we
anticipate that our margins will be positive in the current fiscal year we
cannot guarantee we will achieve profitability. Once we reach profitability we
cannot assure you we will continue to maintain profitability. Failure to achieve
positive margins on service revenues could 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".
WE HAVE LIMITED EXPERIENCE WITH LARGE-SCALE IMPLEMENTATIONS, WHICH ARE IMPORTANT
TO OUR FUTURE SUCCESS.
We have limited experience in implementing our applications on a large
scale. As of December 31, 2000, our largest implementation included
approximately 13,400 employee users. We believe that the ability of large
customers to roll-out our products across large numbers of users is critical to
our future success. If our customers cannot successfully deploy our applications
on a large scale, or if they determine for any reason that our products cannot
accommodate large-scale deployment, our business could be harmed.
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.
In order for us to focus more effectively on our core business of
developing and licensing software solutions, we need 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 workforce optimization applications by new
customers. To date, we have established limited relationships with a few
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
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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 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.
CUSTOMER SATISFACTION AND DEMAND FOR OUR PRODUCTS WILL DEPEND ON OUR ABILITY TO
EXPAND OUR PROFESSIONAL SERVICES ORGANIZATION.
We believe that growth in our product sales depends on our ability to
provide our customers with professional services to assist with support,
training, consulting and initial implementation and deployment of our products
and to educate third-party systems integrators in the use of our products. As a
result, we plan to increase the number of professional services personnel to
meet these needs. New professional services personnel will require training and
take time to reach full productivity. We may not be able to attract or retain a
sufficient number of highly qualified professional services personnel.
Competition for qualified professional services personnel is intense due to the
limited number of people who have the requisite knowledge and skills. To meet
our customers' needs for professional services, we may also need to use more
costly third-party consultants to supplement our own professional services
group. In addition, we could experience delays in recognizing revenue if our
professional services group fails to complete implementations in a timely
manner.
WE HAVE ONLY RECENTLY UNDERTAKEN TO CREATE A CONTENT AND COMMERCE GATEWAY
BETWEEN OUR CUSTOMERS' EMPLOYEES AND THIRD-PARTY PROVIDERS, AND OUR FUTURE
OPERATING RESULTS MAY DEPEND ON OUR ABILITY TO SUCCEED IN THIS STRATEGY.
One component of our business strategy includes establishing an integrated
point of access, or gateway, between the network of customer employees that
utilize our workforce optimization solution and third-party content, commerce
and service providers who consider this employee base to be potentially valuable
business customers. We cannot assure you that we will be successful in
developing this gateway. Moreover, we cannot assure you that our customers will
consider a content and commerce gateway to be a valuable feature of our
workforce optimization applications, or that third-party providers will choose
to access our network of customer employees to generate e-commerce. If a market
for such a gateway develops and we are unable to establish a compelling product
offering within this market, or if we build a gateway and the market for such an
offering fails to mature, our business could be seriously harmed.
In enhancing our content and commerce gateway, we may rely increasingly on
third parties. We cannot assure you that third parties will regard our
relationship with them as important to their own respective businesses and
operations. They may choose not to partner with us or, after having established
a partnership with us, they may reassess their commitment to us at any time in
the future and may develop their own competitive services or products. Also, we
cannot assure you that the content, products or services of those companies that
provide access or links to our network will achieve market acceptance or
commercial success. Accordingly, we cannot assure you that our existing or
prospective relationships will result in sustained business partnerships,
successful product or service offerings or the generation of significant
revenues for us.
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.
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. Further, to achieve broad usage by employees
across international organizations, our products must be
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localized to handle native languages and cultures in each international market.
Localizing our products is also a complex process and we intend to work with
third parties to develop localized products. To date, we have not localized our
products for any international market and we cannot assure you that our
localization efforts will be successful.
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 and established a relationship with an international
reseller. As of December 31, 2000 we had 22 employees in the United Kingdom
office. In 2000, we expanded our European Operations through opening a second
office in Frankfurt, Germany. For the year-ended December 31, 2000, 8% of our
revenues have been derived from our international operations. To expand
internationally 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 an international staff. We must also be able to enter into
strategic relationships with companies in international markets. 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.
WE ARE GROWING RAPIDLY, AND OUR FAILURE TO MANAGE THIS GROWTH COULD HARM OUR
BUSINESS.
We have experienced and are currently experiencing a period of significant
growth. Our full-time employees increased from 35 at December 31, 1997 to 83 at
December 31, 1998 to 175 at December 31, 1999 to 289 at December 31, 2000. This
growth has placed a significant strain on our resources. We expect that any
future growth would cause similar or increased strains on our resources. As part
of this growth, we will have to continually enhance our operational and
financial systems, procedures and controls; expand, train and manage our
employee base; and maintain close coordination among our technical, accounting,
finance, marketing and sales staffs. If we are unable to manage our growth
effectively, our business, results of operations and financial condition could
be adversely affected.
Several members of our senior management joined us in 1999, including David
Yarnold, our Vice President of North American Sales and Mark Oney, our Vice
President of Engineering. Additionally, in 2000, Jennifer Burt joined us as Vice
President of Human Resources and Don Smith as Vice President of Hosted
Operations. Although all but two of our executive staff have been employed for
more than one year, we cannot assure you that our management team will be able
to continue to work together effectively or to manage our growth successfully.
We believe that the successful integration of our management team is critical to
our ability to manage our operations effectively and support our anticipated
future growth.
WE MAY BE UNABLE TO ATTRACT OR RETAIN HIGHLY SKILLED EMPLOYEES THAT ARE
NECESSARY FOR THE SUCCESS OF OUR GROWTH PLAN.
In addition to our dependence on our sales and professional services
personnel as previously discussed, our ability to execute our growth 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. As we
continue to grow, 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.
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OUR SALES CYCLES ARE LONG AND UNPREDICTABLE, WHICH MAKES PERIOD-TO-PERIOD
REVENUES DIFFICULT TO PREDICT.
Because the market for our workforce optimization software products and
related services is new, we experience long and unpredictable sales cycles. The
sales cycle for our workforce optimization 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 remains 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.
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, we could experience delays in
release, customer dissatisfaction and potentially lost revenues 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 and synchronization software from AETHER Systems.
We expect to 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, BUT 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
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countries do not protect our proprietary rights to as great an extent as do the
laws of the United States. 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.
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.
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 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 COULD CAUSE OUR BUSINESS TO SUFFER.
In addition to the risks specifically identified in this Risk Factors
section or elsewhere in this Annual Report on Form 10K, 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 OUR SOLUTIONS.
The market for our workforce optimization 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 workforce optimization applications and services. In
addition, as
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the market evolves, it is unclear whether the market will accept our suite of
applications as a preferred solution for workforce optimization 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.
CUSTOMERS MAY NOT ACCEPT THE INTERNET AS A MEANS TO ACCESS ENTERPRISE
APPLICATIONS, AND THIS WOULD LIKELY CAUSE OUR BUSINESS MODEL TO BE UNSUCCESSFUL.
To date, enterprises have generally managed operational functions through
internal computer or manual systems rather than over the Internet. Our business
model assumes that enterprises and their employees will increasingly adopt the
Internet or corporate intranets as a means of managing important business
functions. This market is not yet proven, and if we are unable to successfully
implement our business model, our business will be materially adversely
affected.
MARKET PRICES OF INTERNET AND TECHNOLOGY COMPANIES HAVE BEEN HIGHLY VOLATILE,
AND THE MARKET FOR OUR STOCK MAY BE VOLATILE AS WELL.
The stock market has experience significant price and trading volume
fluctuations especially this past year, and the market prices of technology
companies generally, and Internet-related software companies particularly, have
been extremely volatile. Recent initial public offerings by technology
companies, including ours, have been accompanied by exceptional share price and
trading volume changes. Technology companies that have been publicly traded for
a long period of time have also experienced extreme fluctuations in the price of
their common stock. 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
litigation has often been instituted against such a company. Such litigation
could result in substantial costs and diversion of management's attention and
resources.
SECURITY RISKS AND CONCERNS MAY DETER THE USE OF THE INTERNET FOR CONDUCTING
ELECTRONIC COMMERCE.
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. Advances
in computer capabilities, new discoveries in the field of cryptography or other
events or developments could result in compromises or breaches of our security
systems or those of other websites to protect proprietary information. If
well-publicized compromises of security were to occur, it could have the effect
of substantially reducing the use of the Internet for commerce and
communications. Anyone who circumvents our security measures could
misappropriate proprietary information or cause interruptions in our services or
operations. The Internet is a public network, and data is sent over this network
from many sources. 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. We may be required to expend
significant capital and other resources to protect against the threat of
security breaches or to alleviate problems caused by breaches. To the extent
that our activities may involve the storage and transmission of proprietary
information, such as credit card numbers, security breaches could expose us to a
risk of loss or litigation and possible liability. Our security measures may be
inadequate to prevent security breaches, and our business would be harmed if we
do not prevent them.
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
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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.
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
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of Security Holders.
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EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES OF THE REGISTRANT
The executive officers of Extensity are as follows:
NAME AGE POSITION
---- --- --------
EXECUTIVE OFFICERS
Robert A. Spinner....................... 43 President and Chief Executive Officer and Director
Sharam I. Sasson........................ 45 Chairman of the Board of Directors and Founder
Kenneth R. Hahn......................... 34 Chief Financial Officer
Elizabeth A. Ireland.................... 42 Vice President of Marketing
Allen F. Nordgren....................... 55 Vice President of Professional Services
Mark K. Oney............................ 42 Vice President of Engineering
Eric C. Ruud............................ 41 Vice President of International Operations
Donald E. Smith......................... 42 Vice President of Hosted Operations
David A. Yarnold........................ 40 Vice President of North American Sales
OTHER KEY EMPLOYEES
Jennifer Burt........................... 39 Vice President of Human Resources
Brian H. Mort........................... 41 Vice President and General Manager of European
Operations
Dr. Rick Spickelmier.................... 41 Chief Technology Officer
Executive Officers
Robert A. Spinner has served as Extensity's President, Chief Executive
Officer and as 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 an M.Eng. 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 PriceWaterhouse 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 a Certified Management Accountant.
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 Business. Additional
positions held by Ms. Ireland at MapInfo Corporation include Vice President of
Marketing and Business
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Development and Vice President of Information Products. Ms. Ireland received a
B.S. in business administration from the University of South Carolina and is a
Certified Public Accountant.
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, 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.
Eric C. Ruud has served as Extensity's Vice President of International
Operations since January 2001; previously, he served as Vice President of Sales
from June 1997 to January 2001. Prior to joining Extensity, from September 1995
to June 1997, Mr. Ruud served as Sales Director for Documentum, a provider of
document management solutions. From September 1992 to June 1995, Mr. Ruud served
as District Sales Manager at Sybase. Mr. Ruud has also worked at System
Industries and Xerox Corporation. Mr. Ruud received a B.S. from the University
of Utah.
Donald E. Smith has served as Extensity's Vice President of Hosted
Operations 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 and 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 North American
Sales since January 2001; previously, he served as 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 is a Certified Public
Accountant.
Other Key Employees
Jennifer 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 the Director of Human Resources.
Brian H. Mort has served as Extensity's Vice President and General Manager
of European Operations since July 1999. Prior to joining Extensity, Mr. Mort was
employed from June 1996 to June 1999 at SAP (UK) Ltd., a provider of ERP
applications, most recently as Global Accounts Director. From February 1994 to
May 1996, Mr. Mort served as Global Account Sales Manager at Oracle Corporation,
a relational database and software applications provider. Mr. Mort has also held
senior sales positions at Dell Computer Corporation, Xerox Corporation and
Granada Plc. Mr. Mort received a B.A. in history and politics from London
University.
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Dr. Rick Spickelmier has served as Extensity's Chief Technology Officer
since July of 2000, and prior to this position head 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 MS
in Electrical Engineering and Computer Sciences from the University of
California at Berkeley and a BS in Electrical Engineering from Oregon State
University.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common stock is traded on the Nasdaq National Market under the symbol
"EXTN". Our initial public offering of stock was on January 27, 2000 at $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 January 31, 2001 there were
approximately 270 stockholders of record and the price per share of our common
stock was $7.625.
The price range reflected in the table below, is the highest and lowest
sale price for our stock as reported by the Nasdaq National Market during each
quarter the stock had been publicly traded.
THREE MONTHS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2000 2000 2000 2000
--------- -------- ------------- ------------
Price Per Share:
High............................... $83.500 $51.500 $44.750 $20.750
Low................................ $39.000 $ 9.500 $14.000 $ 3.781
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.
To date we have used $39.2 million to fund working capital. All remaining
proceeds are invested in cash, cash equivalents, or short-term investments
consisting of highly liquid money market funds, commercial paper,
government/federal notes and bonds, certificates of deposit, and auction rate
preferred stock. The use of these proceeds does not represent a material change
in the use of proceeds described in the prospectus.
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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, 2000, 1999 and
1998 and the consolidated balance sheet data at December 31, 2000 and 1999 are
derived from our audited consolidated financial statements. The consolidated
statements of operations data for the years ended 1997 and 1996 are derived from
our audited consolidated statements of operations not included herein. The
selected consolidated balance sheet data as of December 31, 1997 and 1996 are
derived from our audited balance sheets not included herein.
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- ------- ------
Revenues:
Licenses..................................... $ 14,596 $ 3,750 $ 718 $ -- $ --
Services and maintenance..................... 10,272 3,064 409 -- --
-------- -------- -------- ------- ------
Total revenues....................... $ 24,868 $ 6,814 $ 1,127 $ -- $ --
======== ======== ======== ======= ======
Gross profit (loss)............................ 9,251 1,517 (517) -- --
Loss from operations........................... (39,575) (23,555) (11,060) (3,335) (854)
Non-cash stock based compensation expense...... 3,977 4,352 -- -- --
In-process research and development............ 318 -- -- -- --
Net loss....................................... (34,509) (23,389) (11,032) (3,228) (830)
Dividend relating to the beneficial conversion
feature of Series F preferred stock.......... -- 1,500 -- -- --
Net loss attributable to common stockholders... (34,509) (24,889) -- -- --
Basic and diluted net loss per share......... $ (1.63) $ (11.20) $ (8.25) $ (4.35) $(3.79)
Shares used in computing basic and diluted
net loss per share........................ 21,206 2,222 1,338 742 219
Excluding amortization of non-cash stock based compensation and in-process research and
development
Net loss....................................... $(30,214) $(20,537) (11,032) (3,228) (830)
Pro forma basic and diluted net loss per
share........................................ (1.36) (1.45) (8.25) (4.35) (3.79)
- 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.
DECEMBER 31,
------------------------------------------------
2000 1999 1998 1997 1996
------- -------- -------- ------- ------
(IN THOUSANDS)
Consolidated Balance Sheet Data
Cash and cash equivalents....................... $79,620 $ 24,285 $ 10,883 $ 2,560 $ 32
Working capital................................. 64,158 13,227 7,319 2,061 26
Total assets.................................... 99,762 31,661 13,811 3,584 197
Notes payable and capital lease obligations,
noncurrent.................................... 368 1,285 2,471 -- --
Mandatorily redeemable convertible preferred
stock......................................... -- 49,648 21,269 6,983 1,000
Total stockholders' equity (deficit)............ $70,246 $(35,061) $(15,012) $(4,040) $ (841)
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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 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 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.
Our software products typically require significant customization,
installation and other services. Prior to the release in July 1999 of Version
4.0 of our application suite, it was difficult to generate dependable estimates
of the costs necessary to complete product implementations. Therefore, we
accounted for our software licenses and implementation revenues using the
completed contract method of contract accounting as required under the
provisions of SOP 97-2, "Software Revenue Recognition", and SOP 81-1,
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts".
Following the release of Version 4.0 in July 1999, we were able to generate
dependable estimates of the costs necessary to complete product implementations.
Consequently, we are accounting for our software licenses and implementation
revenues using the percentage-of-completion method of contract accounting. In
cases where a sale of a license does not include implementation services (i.e.,
a sale of additional seats or a sale of product to be implemented by a third
party), revenue is recorded upon delivery with an appropriate deferral for
maintenance services, if applicable.
We defer amounts billed for maintenance and recognize such amounts ratably
over the maintenance period.
We have entered into two distribution arrangements under which the
distributors would receive unspecified future products over the life of the
arrangements (two or three years) in consideration for agreed-upon,
non-refundable fees. We recognize such fees ratably, on a subscription basis,
over the life of these related agreements.
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32
Payments received in advance of revenue recognition are recorded as
deferred revenues. All of our customers enter into one-year maintenance and
support contracts when they purchase their initial Extensity applications and
have the option to purchase additional contracts after completion of the initial
contract period. Although we do not grant any rights to our customers to return
products, we do provide warranties that our products will function according to
written documentation.
We promote and sell our software products through our direct sales force
and through indirect channels, including JD Edwards and Niku. We also have
marketing referral arrangements in place with Cisco Systems, IBM, Commerce One,
WebEx, Digital Think, EventSource, Visa, GetThere.com, ProAct Technologies and
Elcom.
In 1999, we expanded our presence in international markets by opening a
sales office in the United Kingdom and by establishing a relationship with a
provider of enterprise financial applications. In July of 1999, we hired our
Vice President and General Manager of European Operations. In 2000, we expanded
our European Operations through opening a second office in Frankfurt, Germany.
We have continued to hire staff for our European Operations and expect to
continue to do so in advance of anticipated revenues. For the twelve months
ended December 31 2000, we recognized revenues derived from our international
sales of approximately 5% of total revenues.
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.
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
----------------------------
2000 1999 1998
------- ------- ------
Revenues:
Licenses.................................................. $14,596 $ 3,750 $ 718
Services and maintenance.................................. 10,272 3,064 409
------- ------- ------
Total revenues.................................... $24,868 $ 6,814 $1,127
======= ======= ======
Cost of revenues:(*)
Licenses.................................................. $ 705 $ 195 $ 90
Services and maintenance.................................. 14,236 4,758 1,554
------- ------- ------
$14,941 $ 4,953 $1,644
======= ======= ======
Operating expenses:(*)
Sales and marketing....................................... $26,784 $11,202 $4,703
Research and development.................................. 13,288 7,052 4,401
General and administrative................................ $ 5,136 $ 2,810 $1,439
(*) Amounts exclude the amortization of non-cash stock based
compensation as follows:
Cost of revenues:
Services and maintenance............................. $ 676 $ 344 $ --
Operating expenses:
Sales and marketing.................................. 1,279 989 --
Research and development............................. 774 1,045 --
General and administrative........................... 1,247 1,974 --
------- ------- ------
$ 3,977 $ 4,352 $ --
======= ======= ======
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REVENUES
Total revenues were $24.9 million, $6.8 million and $1.1 million in 2000,
1999 and 1998, respectively, representing increases of 265% from 1999 to 2000
and 505% from 1998 to 1999. For the year ended December 31, 2000 sales to one
customer accounted for 10% of total revenues. For the year ended December 31,
1999 sales to one customer accounted for 11% of total revenues. For the year
ended December 31, 1998, sales to four customers accounted for 20%, 19%, 14%,
and 13%, respectively, of total revenues.
License Revenues. License revenues were $14.6 million, $3.7 million and
$718,000 in 2000, 1999 and 1998, respectively, representing increases of 289%
from 1999 to 2000 and 422% from 1998 to 1999. The increase from 1999 to 2000 was
attributable to our growing customer base, 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 contracts entered into by our customers and an
increase in amount of license revenue recognized upon shipment. The increase
from 1998 to 1999 was attributable primarily to an increase in our customer
base.
Service and Maintenance Revenues. Service and maintenance revenues were
$10.3 million, $3.1 million and $409,000 in 2000, 1999 and 1998, respectively,
representing increases of 235% from 1999 to 2000 and 649% from 1998 to 1999. The
increase from 1999 to 2000 was attributable to our growing customer base, to an
increase in professional services revenues recognized on a time and materials
basis, to an increase in revenues recognized from work performed on partner
integration, and to a lesser extent, to an increase in the average size of the
sales contracts that customers have signed. The increase from 1998 to 1999 was
primarily attributable to an increase in the number of new customers in 1999 as
compared to 1998, an to a lesser extent, to increased maintenance and support
fees associated with our increased customer base.
COST OF REVENUES
Total cost of revenues were $14.9 million, $5.0 million and $1.6 million in
2000, 1999 and 1998, respectively, representing increases of 202% from 1999 to
2000 and 201% from 1998 to 1999.
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
$705,000, $195,000 and $90,000 in 2000, 1999 and 1998, respectively,
representing increases of 262% from 1999 to 2000 and 116% from 1998 to 1999. The
increase in both periods was due primarily to increased sales activity. As a
percentage of license revenues, cost of license revenues was 4.8%, 5.2% and
12.5% in 2000, 1999 and 1998, 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 $14.2 million,
$4.8 million and $1.6 million in 2000, 1999 and 1998, respectively, representing
increases of 199% from 1999 to 2000 and 366% from 1998 to 1999. As a percentage
of service revenues, cost of service revenues were 139%, 155% and 380% in 2000,
1999 and 1998. 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.
Approximately 60% of the increase in the cost of service revenues from 1998 to
1999 was due to an increase in personnel and approximately 30% was due to an
increase in cost for third party consultants. These additional costs were
necessary to support our expanding customer base. Total costs have exceeded our
service and maintenance revenues as we have built our consulting and customer
support groups in advance of growing contract volume. Although cost of service
revenues declined as a percentage of service revenues for the periods ended
December 31, 1999 and 2000, this cost has continued to exceed the amount of
related service revenues. We are seeking to reduce our cost of service revenues
and are also seeking to engage third parties to provide a substantial portion of
services related to our applications.
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34
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 $26.8
million, $11.2 million and $4.7 million in 2000, 1999 and 1998, respectively,
representing increases of 139% from 1999 to 2000 and 138% from 1998 to 1999. As
a percentage of total revenues, sales and marketing expenses were 108%, 164% and
417% in 2000, 1999 and 1998. 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. Approximately 60% of the increase from 1998 to
1999 was attributable to increased compensation, commissions and other related
costs associated with hiring additional sales representatives, management and
marketing personnel and approximately 15% was due to increased spending on
marketing programs. We expect that the absolute dollar amount of sales and
marketing expenses will continue to increase as we expand our domestic and
international sales force and increase our marketing efforts to capitalize on
the growth of our market.
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 $13.3 million, $7.1 million
and $4.4 million in 2000, 1999 and 1998, respectively, representing increases of
88% from 1999 to 2000 and 60% from 1998 to 1999. As a percentage of total
revenues, research and development expenses were 53%, 103% and 391% in 2000,
1999 and 1998. 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. Approximately 65% of the increase from 1998 to 2000 was attributable
to the addition of personnel and approximately 25% was due to increases in
consulting services. These increases resulted from our continuing efforts to
enhance our existing software applications and to develop software applications
that incorporate new functionality into our integrated suite. We expect that the
absolute dollar amount of research and development expenses will continue to
increase as 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 $5.1 million, $2.8 million and $1.4 million in 2000, 1999 and
1998, respectively, representing increases of 83% from 1999 to 2000 and 95% from
1998 to 1999. As a percentage of total revenues, general and administrative
expenses were 21%, 41% and 128% in 2000, 1999 and 1998. Approximately 59% of the
increase from 1999 to 2000 was attributable to hiring additional executive and
financial personnel and 46% to general administrative costs. Approximately 55%
of the increase from 1998 to 1999 was attributable to hiring additional
executive and financial personnel. We expect that the absolute dollar amount of
general and administrative expenses will continue to increase as we expand our
operations.
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 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 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
$4.0 million and $4.4 million of this expense in 2000 and 1999, respectively.
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
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35
company had no revenues, no other tangible or intangible assets and only one
employee. There were no acquisitions made in 1999 or 1998.
INTEREST INCOME, NET
Interest income, net was $5.1 million, $166,000 and $28,000 in 2000, 1999
and 1998, respectively. 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 and
cash equivalent 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, 2000, we had net operating loss carryforwards of approximately $62
million and $32 million for federal and state income tax purposes, respectively.
The federal and state net operating loss carryforwards, if not utilized, expire
through 2020 and 2005, respectively. We also have research and development
credit carryforwards of approximately $1 million and $900,000 for federal and
state tax purposes. Federal and state tax laws 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
$25.2 million at December 31, 2000, 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 our initial public offering completed in January 2000 and
the private sale of equity securities, supplemented by loan facilities and
equipment leases. Aggregate net proceeds 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, 2000, we had
$79.6 million in cash, cash equivalents and short-term investments and $64.2
million in working capital.
Net cash used in operating activities was $21.8 million for the year ended
December 31, 2000, and $11.3 million for the year ended December 31, 1999. For
the year ended December 31, 2000, 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, increase in accounts payable of
$4.6 million and an increase in accrued liabilities of $3.0 million. For the
year ended December 31, 1999, cash used in operating activities was primarily
attributable to net loss from operations of $23.4 million, adjusted for the
amortization of deferred stock compensation of $4.4 million and offset by an
increase in deferred revenue of $7.5 million.
Net cash used in investing activities was $32.2 million for the year ended
December 31, 2000 and $9.5 million for the year ended December 31, 1999.
Investing activities during 2000 consisted primarily of an increase in
short-term investments and capital expenditures. Investing activities in 1999
consisted primarily of an increase in short-term investments.
Net cash provided by financing activities was $84.3 million for the year
ended December 31, 2000, primarily due to the net proceeds of $83.3 million from
the Company's IPO. Net cash provided by financing activities was $26.0 million
for the year ended December 31, 1999, primarily due to proceeds from the
Company's issuance of $26.9 million of preferred stock.
As we execute our strategy, we expect significant increases in our
operating expenses, especially in sales, marketing and engineering. Presently,
we anticipate that our existing capital resources will meet our operating
33
36
and investing needs for at least the next 12 months. After that time, we cannot
be certain that additional funding will be available on acceptable terms or at
all. If we require additional capital resources to grow our business, execute
our operating plans, or acquire complimentary 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.
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
the majority of our revenues are currently 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, 2000.
34
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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........................... 36
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... 37
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998.......................... 38
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 2000, 1999 and 1998...... 39
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998.......................... 40
Notes to Consolidated Financial Statements.................. 41
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Extensity, Inc.
and subsidiary:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity (deficit)
and of cash flows present fairly, in all material respects, the financial
position of Extensity, Inc. and subsidiary at December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2000 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 of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
January 19, 2001
San Jose, California
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EXTENSITY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
DECEMBER 31,
--------------------
2000 1999
-------- --------
Current assets:
Cash and cash equivalents................................. $ 40,695 $ 10,416
Short-term investments.................................... 38,925 13,869
Restricted short-term investment.......................... 1,436 76
Trade accounts receivable, net of allowance for doubtful
accounts of $466 and $200 respectively................. 8,527 3,176
Prepaids and other current assets......................... 3,443 1,278
-------- --------
Total current assets.............................. 93,026 28,815
Property and equipment, net................................. 6,279 2,309
Other assets................................................ 457 537
-------- --------
Total assets...................................... $ 99,762 $ 31,661
======== ========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 6,434 $ 1,834
Accrued liabilities....................................... 5,125 1,917
Deferred revenue.......................................... 16,041 10,051
Capital lease obligations, current portion................ 486 561
Notes payable, current portion............................ 783 1,225
-------- --------
Total current liabilities......................... 28,869 15,588
Notes payable, noncurrent portion........................... -- 698
Capital lease obligations, noncurrent portion............... 368 587
Deferred rent............................................... 279 201
-------- --------
Total liabilities................................. 29,516 17,074
-------- --------
Commitments (Note 5)
Mandatorily redeemable convertible preferred stock:
15,082,970 shares authorized; 14,594,549 shares
outstanding as of December 31, 1999 and none as of
December 31, 2000...................................... -- 49,648
-------- --------
Stockholders' equity (deficit):
Common stock, $.001 par value,
75,000,000 shares authorized and 24,144,938 outstanding
as of December 31, 2000 and 30,000,000 shares
authorized and 4,205,906 shares outstanding as of
December 31, 1999...................................... 24 4
Additional paid-in capital................................ 147,475 10,903
Deferred stock compensation............................... (2,679) (5,853)
Notes receivable from stockholders........................ (380) (130)
Cumulative translation adjustment......................... 295 (5)
Accumulated deficit....................................... (74,489) (39,980)
-------- --------
Total stockholders' equity (deficit).............. 70,246 (35,061)
-------- --------
Total liabilities, mandatorily redeemable
convertible preferred stock and stockholders'
equity (deficit)................................ $ 99,762 $ 31,661
======== ========
The accompanying notes are an integral part of these consolidated financial
statements
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EXTENSITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
Revenues:
Licenses................................................. $ 14,596 $ 3,750 $ 718
Services and maintenance................................. 10,272 3,064 409
-------- -------- --------
Total revenues................................... 24,868 6,814 1,127
-------- -------- --------
Cost of revenues:(*)
Licenses................................................. 705 195 90
Services and maintenance................................. 14,912 5,102 1,554
-------- -------- --------
Total cost of revenues........................... 15,617 5,297 1,644
-------- -------- --------
Gross profit (loss)...................................... 9,251 1,517 (517)
-------- -------- --------
Operating expenses:(*)
Sales and marketing...................................... 28,063 12,191 4,703
Research and development................................. 14,062 8,097 4,401
General and administrative............................... 6,383 4,784 1,439
In-process research and development...................... 318 -- --
-------- -------- --------
Total operating expenses......................... 48,826 25,072 10,543
-------- -------- --------
Loss from operations....................................... (39,575) (23,555) (11,060)
Interest income............................................ 5,460 667 332
Interest expense........................................... (349) (501) (304)
Provision for income taxes................................. (45) -- --
-------- -------- --------
Net loss................................................... $(34,509) $(23,389) $(11,032)
======== ======== ========
Dividend relating to the beneficial conversion feature of
Series F preferred stock................................. -- (1,500) --
-------- -------- --------
Net loss attributable to common stockholders............... $(34,509) $(24,889) $(11,032)
======== ======== ========
Other comprehensive loss:
Change in cumulative translation adjustment.............. 300 (5) --
-------- -------- --------
Total comprehensive loss................................... $(34,209) $(24,894) $(11,032)
======== ======== ========
Basic and diluted net loss per share....................... $ (1.63) $ (11.20) $ (8.25)
Shares used in computing basic and diluted net loss per
share.................................................... 21,206 2,222 1,338
(*) Amounts include non-cash stock based compensation as
follows:
Cost of revenues:
Services and maintenance.............................. $ 676 $ 344 $ --
Operating expenses:
Sales and marketing................................... 1,279 989 --
Research and development.............................. 774 1,045 --
General and administrative............................ 1,247 1,974 --
-------- -------- --------
$ 3,977 $ 4,352 $ --
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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EXTENSITY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE DEFERRED CUMULATIVE
------------------- PAID-IN FROM STOCK TRANSLATION ACCUMULATED
SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION ADJUSTMENT DEFICIT
---------- ------ ---------- ------------ ------------ ----------- -----------
Balance at December 31,
1997..................... 1,946,111 $ 2 $ 17 $ -- $ -- $ -- $ (4,059)
Issuance of common stock
for services rendered.... 47,703 -- 7 -- -- -- --
Issuance of common stock
upon exercise of stock
options.................. 357,001 -- 53 -- -- -- --
Net loss................... -- -- -- -- -- -- (11,032)
---------- --- -------- ----- -------- ---- --------
Balance at December 31,
1998..................... 2,350,815 2 77 -- -- -- (15,091)
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 -- -- --
Cumulative translation
adjustment............... -- -- -- -- -- (5) --
Beneficial conversion
feature -- Series F
preferred stock.......... -- -- -- -- -- -- (1,500)
Net loss................... -- -- -- -- -- -- (23,389)
---------- --- -------- ----- -------- ---- --------
Balance at December 31,
1999..................... 4,205,906 4 10,903 (130) (5,853) (5) (39,980)
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 exercise of stock
options.................. 432,966 1 1,068 (250) -- -- --
Issuance of common stock
upon exercise of
warrants................. 175,038 -- 34 -- -- -- --
Issuance of common stock in
connection with the
employee stock purchase
plan..................... 136,479 -- 1,682 -- -- -- --
Issuance of common stock
upon conversion of
convertible preferred
stock.................... 14,594,549 15 49,633 -- -- -- --
Deferred stock
compensation............. -- -- 1,881 -- (1,881) -- --
Forfeiture of unvested
stock options............ -- -- (1,078) -- 1,078 -- --
Amortization of deferred
stock compensation....... -- -- -- -- 3,977 -- --
Cumulative translation
adjustment............... -- -- -- -- -- 300 --
Net loss................... -- -- -- -- -- -- (34,509)
---------- --- -------- ----- -------- ---- --------
Balance at December 31,
2000..................... 24,144,938 $24 $147,475 $(380) $ (2,679) $295 $(74,489)
========== === ======== ===== ======== ==== ========
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
Balance at December 31,
1997..................... $ (4,040)
Issuance of common stock
for services rendered.... 7
Issuance of common stock
upon exercise of stock
options.................. 53
Net loss................... (11,032)
--------
Balance at December 31,
1998..................... (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
Cumulative translation
adjustment............... (5)
Beneficial conversion
feature -- Series F
preferred stock.......... (1,500)
Net loss................... (23,389)
--------
Balance at December 31,
1999..................... (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 exercise of stock
options.................. 818
Issuance of common stock
upon exercise of
warrants................. 34
Issuance of common stock in
connection with the
employee stock purchase
plan..................... 1,682
Issuance of common stock
upon conversion of
convertible preferred
stock.................... 49,648
Deferred stock
compensation............. --
Forfeiture of unvested
stock options............ --
Amortization of deferred
stock compensation....... 3,977
Cumulative translation
adjustment............... 300
Net loss................... (34,509)
--------
Balance at December 31,
2000..................... $ 70,246
========
The accompanying notes are an integral part of these consolidated financial
statements
39
42
EXTENSITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31
--------------------------------
2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net loss.................................................. $(34,509) $(23,389) $(11,032)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization........................... 1,772 908 528
Amortization of deferred stock compensation............. 3,977 4,352 --
In-process research and development..................... 318 -- --
Common stock issued for services rendered............... -- -- 7
Amortization of debt discount and lease line issuance
costs................................................. 100 88 58
Changes in operating assets and liabilities:
Increase in accounts receivable......................... (5,351) (1,997) (1,178)
Increase in prepaids.................................... (2,165) (1,624) (55)
Decrease in other assets................................ 80
Increase in accounts payable............................ 4,600 1,485 69
Increase in accrued liabilities......................... 2,980 1,239 628
Increase in deferred revenue............................ 5,990 7,538 2,213
Increase in other noncurrent liabilities................ 78 61 130
-------- -------- --------
Cash used in operating activities.................. (22,130) (11,339) (8,632)
-------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments....................... (81,305) (21,761) (8,739)
Sales of short-term investments........................... 56,249 13,536 3,095
Capital expenditures...................................... (5,742) (1,322) (429)
Business acquisition...................................... (90) -- --
(Increase) decrease in restricted cash.................... (1,360) 6 (49)
-------- -------- --------
Cash used in investing activities.................. (32,248) (9,541) (6,122)
-------- -------- --------
Cash flows from financing activities:
Proceeds from loan........................................ -- -- 3,500
Payments on notes payable................................. (1,228) (1,117) (446)
Payments on capital lease obligation...................... (306) (446) (186)
Proceeds from sale-lease back............................. -- 254 535
Proceeds from exercise of stock options and warrants...... 853 493 52
Net proceeds from issuance of preferred stock............. -- 26,878 13,978
Net proceeds from issuance of common stock for the ESPP... 1,682 -- --
Net proceeds from issuance of common stock................ 83,356 -- --
-------- -------- --------
Cash provided by financing activities.............. 84,357 26,062 17,433
-------- -------- --------
Effect of exchange rate on cash and cash equivalents........ 300 (5) --
Increase in cash and cash equivalents....................... 30,279 5,177 2,679
Cash and cash equivalents, beginning of year................ 10,416 5,239 2,560
-------- -------- --------
Cash and cash equivalents, end of year...................... $ 40,695 $ 10,416 $ 5,239
======== ======== ========
Supplemental cash flow information:
Interest paid............................................. $ 349 $ 435 $ 241
======== ======== ========
Income taxes paid......................................... $ 45 $ 1 $ 1
======== ======== ========
Noncash investing and financing activities:
Purchase of equipment under capital leases................ $ -- $ -- $ 1,281
======== ======== ========
Notes receivable from stockholders........................ $ 250 $ 130 $ --
======== ======== ========
Convertible preferred stock warrants issued............... $ -- $ -- $ 309
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
40
43
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
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, which have not been material to date,
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
No. 115 (SFAS 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, 2000, the Company's carrying value of its short term investments
approximated their amortized cost basis.
RESTRICTED SHORT TERM INVESTMENT
The restricted short term investment consists of several one year
certificates of deposit required as collateral for the Company's letters of
credit (Note 5).
41
44
EXTENSITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONCENTRATION OF CREDIT RISK AND CERTAIN OTHER 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.
At December 31, 2000, two customers accounted for 32% and 10% of total
accounts receivable. At December 31, 1999, one customer accounted for 10% of
total accounts receivable.
One customer accounted for approximately 10% of the revenue in 2000. One
customer accounted for 11% of the total revenue in 1999 and four customers
accounted for 66% of total revenue in 1998. In 1999, all of the Company's
revenues were derived from U.S. customers. In 2000, 8% percent of our total
revenues were derived from our international customers.
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 reportable business segment and, therefore, no
disclosures under SFAS 131, Disclosures about Segments of an Enterprise and
Related Information, are necessary.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes internally generated software development costs
under the provisions of Statement of Financial Accounting Standards No. 86 (SFAS
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. Internally generated capitalizable software
development costs have not been material for years ended December 31, 2000, 1999
and 1998. The Company has not capitalized any software development costs to
date, 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, 2000.
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
three years, or over the lease term if it is shorter for leasehold improvements.
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.
42
45
EXTENSITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 exceed 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.
INCOME TAXES
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes(SFAS No. 109). 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.
REVENUE RECOGNITION
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2, Software Revenue Recognition (SOP 97-2).The
Company adopted SOP 97-2 beginning in fiscal 1998. SOP 97-2 has been modified by
SOP 98-4 and SOP 98-9 as it relates to certain transactions. These standards
generally require revenues earned on software arrangements involving multiple
elements such as software products, upgrades, enhancements, postcontract
customer support, installation and training to be allocated to each element
based on the relative fair values of the elements. The fair value of an element
must be based on evidence that is specific to the vendor. Evidence of the fair
value of each element is based on the price charged when the element is sold
separately or, if the element is not being sold separately, the price for each
element established by management having relevant authority; substantive renewal
terms for maintenance services included in contracts also serves as evidence of
fair value for such services.
The Company's software products require implementation services that
primarily consist of configuring the software to incorporate a customer's
business policies, workflow approvals and interfaces to information systems used
by its customers. Prior to the release in July 1999 of Version 4.0, it was
difficult to develop dependable estimates of the costs necessary to complete
product implementations. Therefore, the Company accounted for its software
licenses and implementation revenues using the completed contract method of
contract accounting as required under the provisions of SOP 97-2 and SOP 81-1,
Accounting for Performance of Construction-Type and Certain Production-Type
Contracts. Following the release of Version 4.0 in July 1999, the Company was
able to develop dependable estimates of the costs necessary to complete
implementation of the substantially enhanced Version 4.0 product. Consequently,
beginning with Version 4.0, the Company is accounting for its software licenses
and implementation revenues using the percentage-of-completion method of
contract accounting. The percentage-of-completion method is applied based upon
man-days incurred as a percentage of total estimated man-days for each
implementation. In cases where a sale of a license does not include
implementation services, such revenue is recorded upon delivery with an
appropriate deferral for maintenance services, if applicable.
Amounts billed for maintenance are deferred and recognized ratably over the
maintenance period.
The Company has entered into two agreements under which certain
distributors would receive unspecified future products over the life of the
arrangements (two or three years) in consideration for agreed-
43
46
EXTENSITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
upon non-refundable fees. Consistent with SOP 97-2, the Company recognizes such
fees ratably, on a subscription basis, over the term of the related agreements.
Revenue for contracts containing specified upgrades for which no vendor
specific objective evidence (VSOE) of fair value exists is deferred until such
specified upgrades are delivered or VSOE is established.
In December of 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, or SAB 101, which summarizes certain areas of the
Staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. SAB 101 was effective for the year ending
December 31, 2000. The adoption of SAB 101 did not have a material impact on the
Company's financial statements.
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 Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123). 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 (see Note 9).
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. The
implementation of FIN 44 did not have a material impact on the Company's
financial statements.
The Company accounts for options granted to non-employees under SFAS No.
123. Under SFAS No. 123, 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.
The following table sets forth the computation of basic and diluted net
loss per share for the periods indicated (in thousands, except per share data):
YEAR END
DECEMBER 31,
-------------------------------
2000 1999 1998
-------- -------- --------
Numerator:
Net loss................................... $(34,509) $(24,889) $(11,032)
Denominator:
Weighted average shares.................... 22,297 3,483 2,169
Weighted average unvested common shares.... (1,091) (1,261) (831)
-------- -------- --------
Total weighted average shares...... 21,206 2,222 1,338
-------- -------- --------
Basic and diluted net loss per share......... $ (1.63) $ (11.20) $ (8.25)
======== ======== ========
44
47
EXTENSITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Diluted net loss per share does not include the effect of the following
potential common shares for the periods presented:
DECEMBER 31,
-------------------------------------
2000 1999 1998
--------- ---------- ----------
Shares issuable under stock options............. 5,088,439 2,942,582 1,606,548
Shares of unvested stock subject to
repurchase.................................... 699,479 1,139,086 210,417
Shares issuable pursuant to warrants to purchase
common and convertible preferred stock........ 20,000 183,888 137,878
Shares of convertible preferred stock on an "as
if converted" basis........................... -- 14,594,549 10,361,729
--------- ---------- ----------
5,807,917 18,860,105 12,316,572
========= ========== ==========
The weighted-average exercise price of stock options outstanding was $9.73
and $2.10 as of December 31, 2000 and 1999, respectively. The weighted average
repurchase price of unvested stock was $1.50, $0.38 and $0.16 as of December 31,
2000, 1999 and 1998, respectively. The weighted average exercise price of
warrants outstanding was $14.50, $3.08 and $3.30 as of December 31, 2000, 1999
and 1998.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative
Instruments. SFAS No. 137 extends the effective date of SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities which established accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
statement requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. As amended by SFAS No. 137, SFAS No. 133 is effective for fiscal
years beginning after June 15, 2000 and is not to be applied retroactively.
Because the Company does not currently hold any derivative instruments and does
not engage in hedging activities, the adoption of SFAS No. 133 will not have
material impact on the Company's financial statements.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
------------------
2000 1999
------- -------
(IN THOUSANDS)
Computer hardware and software........................... $ 6,013 $ 1,315
Furniture and fixtures................................... 1,209 592
Leasehold improvements................................... 385 65
Office equipment......................................... 219 113
Assets under capital leases.............................. 1,847 1,847
------- -------
9,673 3,932
Less accumulated depreciation and amortization........... (3,394) (1,623)
------- -------
Total property and equipment, net.............. $ 6,279 $ 2,309
======= =======
Accumulated amortization relating to assets under capital leases amounted
to $763,737 and $1,291,437 as of December 31, 1999 and 2000, respectively.
45
48
EXTENSITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES
The provision for income taxes for the years ended December 31, 1998 and
1999 relates to minimum state income tax. The provision for income taxes for the
year ended December 31, 2000 also includes a foreign tax provision of $45,000.
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,
--------------------
2000 1999
-------- --------
Deferred tax assets:
Net operating loss carryforwards..................... $ 23,000 $ 12,400
Research and development credit carryforwards........ 1,900 1,170
Other................................................ 300 200
-------- --------
Total deferred tax assets.................... 25,200 13,770
Valuation allowance.................................. (25,200) (13,770)
-------- --------
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, 1999 and 2000. The
increase in the valuation allowance was $4,040,000, $8,005,000 and $11,430,000
during the years ended December 31, 1998, 1999 and 2000, respectively.
As of December 31, 2000, the Company had net operating loss carryforwards
of approximately $62 million and $32 million for federal and state income tax
purposes, respectively. Such carryforwards expire through 2020 and 2005 for
federal and state income tax purposes, respectively. At December 31, 2000, the
Company also had research and experimentation tax credit carryforwards of $1
million and $900,000 for federal and state purposes, respectively, which expire
in varying amounts through 2015.
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 of a cumulative ownership change of more than 50%, as
defined, over a three-year period. The issuance of the Company's securities may
have resulted in a limitation on utilization of such net operating loss
carryforwards.
46
49
EXTENSITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS
The Company leases certain equipment and facilities under various
non-cancelable leases. The equipment related capital leases expire through 2003.
The Company leases office space under various non-cancelable operating lease
expiring through 2006. Rental expense was approximately $2,212,000, $864,000 and
$383,000 for the years ended December 31, 2000, 1999 and 1998. Minimum future
rental payments under capital and operating leases at December 31, 2000 are as
follows (in thousands):
FISCAL YEAR ENDING DECEMBER 31, CAPITAL OPERATING
------------------------------- ------- ---------
2001...................................................... $534 $ 2,368
2002...................................................... 319 2,201
2003...................................................... 86 2,201
2004...................................................... -- 2,201
2005...................................................... -- 2,135
2006...................................................... -- 1,327
---- -------
Total minimum lease payments.................... $938 $12,433
=======
Less amount representing interest and discount............ 84
----
Present value of minimum lease payments................... $854
Less current portion of capital lease obligations......... 486
----
Long term portion......................................... $368
====
In connection with certain capital lease transactions, 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 $11,000, $11,000 and $5,000 during the years ended December 31,
2000, 1999 and 1998, 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, 2000.
The Company has established letters of credit totaling $1,436,000 for the
benefit the Company's office space lessor and credit card processor. These
letters of credit are collateralized by Certificates of Deposits amounting to
$1,436,000. As of December 31, 2000, no amounts were outstanding under these
letter of credit.
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 accrue interest at an
average rate of 11.4% per annum and mature 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 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 $88,000, $88,000 and $58,000 for the years ended December 31, 2000, 1999 and
1998. 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, 2000.
The current portion of the Notes payable of $783,000 as of December 31,2000 is
net of the remaining debt discount of $36,000. The remaining balance of $819,000
will be repaid during fiscal 2001.
47
50
EXTENSITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. 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, 1997........................ 5,750,000 $ 6,983
Issuance of Series C preferred stock.............. 937,500 1,872
Issuance of Series D preferred stock.............. 3,674,229 12,105
Issuance of Series D preferred stock warrants..... -- 309
----------- --------
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
stockholder 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
stockholder 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
stockholders 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 discount 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 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 as of December 31,
2000. 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
48
51
EXTENSITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 2000.
8. COMMON AND PREFERRED STOCK
During 1999, the Company's Board of Directors approved an amendment to the
Company's Certificate of Incorporation to increase the number of authorized
common stock to 30,000,000.
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 1998, the Company issued a total of 47,703 shares of its common
stock at fair value to several service providers. The Company recorded the fair
values of the common stock which amounted to $7,300 as compensation expense.
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 this exercise. The promissory note to one of the officers bears interest at
4.77%, is due on February 28, 2004 and is collateralized by the common stock
purchased for cash. The cash portion of the exercise of $150,000 exceeded the
face value of the note by $50,000. The officer repaid the note in full,
including $3,000 in interest, in November 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 their 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 2000 amounted to $10,500
using the Black-Scholes 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, 2000.
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, 2000, allows for the issuance of a maximum of
7,000,000 shares of the Company's common stock and an annual replenishment of
the shares of common stock authorized for issuance thereunder 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 Plan
Administrator, currently the Board of Directors. Options generally vest over
four years and expire ten years from the date of grant.
49
52
EXTENSITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2000 NON STATUTORY 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 allows for a maximum of 1,100,000 shares of the
Company's common stock. This number of common stock has been reserved for
issuance under the 2000 Plan. The options granted under the 2000 Plan vest
according to varying schedules determined by the Plan Administrator. Options
generally vest over four years and expire ten years from the date of grant.
A summary of the activity under the Plans since inception is set forth
below:
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 $0.160 - $ 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 - $ 4.000 (134)
---------- ---------------- -------
Outstanding 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)
---------- ---------------- -------
Outstanding at December 31, 2000................ 5,088,439 $0.100 - $38.813 $49,504
========== ================ =======
The following table summarizes information with respect to stock options
outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
--------------- ----------- ---------------- -------- ----------- --------
$ 0.100 - $ 0.700 1,338,503 8.1 $ 0.441 358,281 $ 0.409
$ 1.000 - $ 7.438 1,020,615 8.9 $ 4.451 207,638 $ 4.493
$ 7.500 - $13.938 1,056,771 9.3 $10.572 50,874 $ 8.504
$ 14.50 - $23.188 1,061,750 9.7 $16.043 -- --
$23.375 - $38.813 610,800 9.5 $26.460 -- --
--------- ---- ------- ------- -------
5,088,439 9.0 $ 9.728 616,793 $16.493
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, 2000, 699,479 shares of common stock acquired by option holders are
subject to repurchase by the Company.
The Company accounts for employee and director stock options in accordance
with the provisions of APB No. 25 and complies with the disclosure provisions of
SFAS No. 123.
50
53
EXTENSITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $10,205,000
and $1,881,000 during the year ends December 31, 1999 and 2000, respectively.
Amortization recognized for the year ended December 31, 1999 and 2000 totaled
$4,352,000 and $3,977,000, respectively.
The weighted average fair values of the options granted in fiscal 1998,
1999 and 2000 were $0.81, $2.98 and $15.83 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):
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1999 2000
-------- -------- --------
Pro forma net loss................................. $(11,070) $(24,762) $(38,042)
Pro forma net loss per share, basic and diluted.... $ (8.27) $ (11.14) $ (1.79)
Pro forma net loss attributable to common
stockholders..................................... $(11,070) $(26,262) $(38,042)
Pro forma net loss per share attributable to common
stockholders, basic and diluted.................. $ (8.27) $ (11.82) $ (1.79)
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:
YEAR ENDED
DECEMBER 31,
--------------------
1998 1999 2000
---- ---- ----
Risk-free interest rate..................................... 5.5% 5.6% 6.2%
Expected life (in years).................................... 4 4 4
Dividends................................................... -- -- --
Because the Company was not publicly traded until January 27, 2000, the
date of the IPO, volatility was not considered in the determination of the value
of options granted to employees in 1998 and 1999. For the year 2000, volatility
was 189%.
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 1998, 1999 and 2000.
51
54
EXTENSITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan 2000 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. At total of 500,000 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, 2000 there have been
136,479 shares issued and 363,521 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. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is unaudited financial data for 1999 and 2000 (amounts in
thousands, except for per share amounts.)
Q1 '99 Q2 '99 Q3 '99 Q4 '99 Q1 '00 Q2 '00 Q3 '00 Q4 '00
------- ------- ------- ------- ------- ------- ------- -------
Revenues
Licenses........................ $ 220 $ 437 $ 1,282 $ 1,811 $ 2,225 $ 3,034 $ 4,021 $ 5,316
Service and maintenance......... 206 673 795 1,390 1,498 2,299 3,005 3,470
------- ------- ------- ------- ------- ------- ------- -------
Total revenues........... 426 1,110 2,077 3,201 3,723 5,333 7,026 8,786
Gross profit (loss)............... (360) (17) 771 1,467 550 1,421 2,847 4,433
Net loss.......................... (3,856) (5,038) (6,949) (9,045) (9,337) (8,865) (8,702) (7,605)
Basic and diluted net loss per
share........................... $ (2.27) $ (2.55) $ (2.87) $ (3.24) $ (0.56) $ (0.39) $ (0.38) $ (0.33)
52
55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
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 2001 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, 2000 "the 2001 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 2001 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 2001 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 2001 Proxy Statement, which is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, 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 35.
(2) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts and Reserves.
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.
53
56
(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 (which is incorporated
by reference to Exhibit 4.1 in the Registrant's Form S-1
Registration No. 333-9097).
4.3.(2) Registration statement for 2000 Nonstatutory Stock Option.
10.1.(1) Form of Indemnification Agreement entered into by and
between the Registrant and each of its director and
executive.
10.8.(1) Lease agreement by and between the Registrant and Spieker
Properties, Inc.
10.8.1 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 Spinner.
10.10.1(1)(3) 1996 Stock Option Plan.
10.11.(1)(3) Employee Stock Purchase Plan 2000 and related agreements.
10.12 Note dated January 17, 2000 by and between the Registrant
and Donald Smith
10.13 Note dated August 20, 1999 by and between the Registrant and
Mark Oney.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
---------------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 333-90979) an 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.
(b) Reports on Form 8-K
None
(c) Exhibits
54
57
SIGNATURE
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.
March 30, 2001 EXTENSITY, INC.
By /s/ KENNETH R. HAHN
------------------------------------
Kenneth R. Hahn
Chief Financial Officer
(Principle 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 there with 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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROBERT A. SPINNER President and Chief Executive March 30, 2001
----------------------------------------------------- Officer and Director
Robert A. Spinner
/s/ KENNETH R. HAHN Chief Financial Officer March 30, 2001
-----------------------------------------------------
Kenneth R. Hahn
/s/ SHARAM I. SASSON Chairman of the Board of March 30, 2001
----------------------------------------------------- Directors
Sharam I. Sasson
/s/ CHRISTOPHER D. BRENNAN Director March 30, 2001
-----------------------------------------------------
Christopher D. Brennan
/s/ JOHN R. HUMMER Director March 30, 2001
-----------------------------------------------------
John R. Hummer
/s/ TED E. SCHLEIN Director March 30, 2001
-----------------------------------------------------
Ted E. Schlein
/s/ MAYNARD G. WEBB Director March 30, 2001
-----------------------------------------------------
Maynard G. Webb
55
58
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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 (which is incorporated
by reference to Exhibit 4.1 in the Registrant's Form S-1
Registration No. 333-9097).
4.3.(2) Registration statement for 2000 Nonstatutory Stock Option.
10.1.(1) Form of Indemnification Agreement entered into by and
between the Registrant and each of its director and
executive.
10.8.(1) Lease agreement by and between the Registrant and Spieker
Properties, Inc.
10.8.1 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 Spinner.
10.10.1(1)(3) 1996 Stock Option Plan.
10.11.(1)(3) Employee Stock Purchase Plan 2000 and related agreements.
10.12 Note dated January 17, 2000 by and between the Registrant
and Donald Smith
10.13 Note dated August 20, 1999 by and between the Registrant and
Mark Oney.
10.14 Warrant dated October 12, 2000 issued to Cooley Godward LLP.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
---------------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 333-90979) an 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.
(b) Reports on Form 8-K
None
(c) Exhibits
56