UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 2002
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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)
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 [ ]
The number of shares of the Registrant's Common Stock outstanding as of July 31,
2002 was 25,195,813.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Operations 2
Condensed Consolidated Statements of Cash Flows 3
Notes to the Condensed Consolidated Financial Statements 4
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 24
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 24
ITEM 2. Changes in Securities and Use of Proceeds 25
ITEM 3. Defaults Upon Senior Securities 25
ITEM 4. Submission of Matters to a Vote of Security Holders 25
ITEM 5. Other Information 26
ITEM 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
EXTENSITY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
ASSETS
June 30, December 31,
2002 2001
--------- ---------
Current assets:
Cash and cash equivalents $ 4,816 $ 19,456
Short-term investments 33,998 26,883
Accounts receivable, net 3,740 5,393
Prepaid and other current assets 1,466 1,835
--------- ---------
Total current assets 44,020 53,567
Property and equipment, net 3,014 3,657
Restricted long-term investments 1,397 1,397
Other assets 367 601
--------- ---------
Total assets $ 48,798 $ 59,222
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,451 $ 3,672
Accrued liabilities 3,281 3,977
Deferred revenue 3,182 3,488
Capital lease obligations 167 240
Sublease loss accrual 383 787
--------- ---------
Total current liabilities 10,464 12,164
Capital lease obligations -- 54
Sublease loss accrual and other noncurrent liabilities 1,849 809
--------- ---------
Total liabilities 12,313 13,027
--------- ---------
Stockholders' equity:
Common stock 25 25
Additional paid-in capital 147,334 147,394
Deferred stock compensation (94) (504)
Notes receivable from stockholders (446) (433)
Accumulated comprehensive income 192 155
Accumulated deficit (110,526) (100,442)
--------- ---------
Total stockholders' equity 36,485 46,195
--------- ---------
Total liabilities and stockholders' equity $ 48,798 $ 59,222
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
EXTENSITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ------------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
License $ 1,743 $ 5,651 $ 2,949 $ 11,673
Service and maintenance 3,074 3,480 6,197 7,260
Hosted 194 -- 388 --
-------- -------- -------- --------
Total revenues 5,011 9,131 9,534 18,933
-------- -------- -------- --------
Cost of revenues: (*)
Licenses 144 263 249 708
Service and maintenance 1,843 3,444 4,247 7,518
Hosted 340 -- 606 --
-------- -------- -------- --------
Total cost of revenues 2,327 3,707 5,102 8,226
-------- -------- -------- --------
Gross profit 2,684 5,424 4,432 10,707
-------- -------- -------- --------
Operating expenses: (*)
Sales and marketing 2,894 7,043 6,410 14,957
Research and development 1,830 3,945 3,934 7,737
General and administrative 1,472 1,856 2,965 3,628
Restructuring and other non-recurring charges 1,695 -- 1,695 377
-------- -------- -------- --------
Total operating expenses 7,891 12,844 15,004 26,699
-------- -------- -------- --------
Loss from operations (5,207) (7,420) (10,572) (15,992)
Interest income, net 220 687 490 1,760
-------- -------- -------- --------
Net loss $ (4,987) $ (6,733) $(10,082) $(14,232)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.20) $ (0.28) $ (0.41) $ (0.60)
Shares used in computing basic and diluted net loss
per share 24,818 23,735 24,676 23,562
(*) Amounts include non-cash stock based compensation as follows:
Cost of revenues:
Service and maintenance $ -- $ 9 $ 3 $ 59
Operating expenses:
Sales and marketing -- 18 7 112
Research and development -- 11 4 68
General and administrative -- 17 7 109
-------- -------- -------- --------
$ -- $ 55 $ 21 $ 348
======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
EXTENSITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
----------------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net loss $(10,082) $(14,232)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 850 1,402
Amortization of deferred stock compensation and other 35 433
Amortization of debt discount and lease line issuance costs 4 35
Interest earned on notes from stockholders (13) --
Changes in operating assets and liabilities:
Accounts receivable 1,653 3,044
Prepaids and other current assets 369 (114)
Other assets 234 (162)
Accounts payable (221) (295)
Accrued liabilities (696) (1,195)
Other liabilities 665 --
Deferred revenue (306) (7,112)
-------- --------
Cash used in operating activities (7,508) (18,196)
-------- --------
Cash flows from investing activities:
Purchases of short-term investments (13,951) (20,207)
Maturities of short-term investments 6,836 37,208
Capital expenditures (207) (1,704)
Restricted long-term investments -- 39
-------- --------
Cash (used in) provided by investing activities (7,322) 15,336
-------- --------
Cash flows from financing activities:
Payments on notes payable -- (614)
Payments on capital lease obligation (132) (225)
Proceeds from exercise of stock options and warrants 312 944
-------- --------
Cash provided by financing activities 180 105
-------- --------
Effect of exchange rate on cash and cash equivalents 10 5
Decrease in cash and cash equivalents (14,640) (2,750)
Cash and cash equivalents, beginning of period 19,456 40,695
-------- --------
Cash and cash equivalents, end of period $ 4,816 $ 37,945
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
EXTENSITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments (consisting only of normal recurring adjustments) which,
in the opinion of management, are necessary for a fair presentation of the
financial results for the periods shown. The balance sheet as of December 31,
2001 was derived from audited financial statements, but does not include all
necessary disclosures required by generally accepted accounting principles.
These condensed consolidated financial statements should be read in
conjunction with the audited financial statements and notes thereto included in
the Company's report on Form 10-K (File No. 000-28897), filed with the
Securities and Exchange Commission (the "SEC") on April 1, 2002.
The condensed 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.
The results of operations for the current interim period are not
necessarily indicative of the results to be expected for the entire current year
or other future interim periods.
2. Net Loss Per Share
Basic and diluted net loss per share are computed using the weighted
average number of common shares outstanding. Options and warrants were not
included in the computation of diluted net loss per share because the effect
would be antidilutive.
Diluted net loss per share does not include the effect of the following
potential common shares at June 30, 2002 and 2001 (in thousands):
June 30,
--------------------------
2002 2001
------------ ------------
Shares issuable under stock options 797 3,321
Shares of unvested stock subject to repurchase 9 300
------------ ------------
806 3,621
============ ============
3. Significant Customers
No customers accounted for more than 10% of total revenues for the
three or six-month periods ended June 30, 2002. For the three months ended June
30, 2001, sales to three customers accounted for approximately 21%, 13% and 12%
of total revenues. For the six months ended June 30, 2001, sales to one customer
accounted for 12% of total revenues.
4
4. Comprehensive Loss
The components of comprehensive loss are as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -------------------------
2002 2001 2002 2001
-------- -------- --------- ---------
Net loss $ (4,987) $ (6,733) $ (10,082) $ (14,232)
Foreign currency translation adjustment 5 3 37 3
-------- -------- --------- ---------
Total comprehensive $ (4,982) $ (6,730) $ (10,045) $ (14,229)
======== ======== ========= =========
5. Restructuring
In response to the continuing economic slowdown, the Company
implemented a restructuring plan in the third quarter of fiscal 2001 and
recorded a restructuring charge of $4.5 million. The goal of the restructuring
plan is to reduce costs and improve operating efficiencies in order to match the
current business environment. The restructuring charge consisted of severance
and benefits of $729,000 related to the involuntary termination of 70 employees,
which was fully paid as of December 31, 2001. These terminations were from all
functions across the Company. In addition, the Company accrued for lease costs
of $2.2 million pertaining to the estimated obligations for non-cancelable lease
payments for excess facilities in the United States and Europe. The Company also
wrote off computer equipment and software with a net book value of $1.6 million
as these assets were taken out of service because they were deemed unnecessary
due to the reductions in workforce.
In April of 2002, the Company took additional steps to reduce expenses,
which included reducing full-time equivalent employees at the Company by
approximately 18% and evaluating the adequacy of its sublease loss accrual for
its lease commitments for office space. The Company incurred a restructuring
charge of approximately $1.5 million for the three months ended June 30, 2002.
The charge consisted of severance and benefits of $523,000 related to the
involuntary termination of 39 employees, which was fully paid as of June 30,
2002. In addition, the Company accrued for lease costs of $946,000 pertaining to
the estimated obligations for non-cancelable lease payments for excess
facilities in the United States.
The sublease loss accrual as of December 31, 2001 was $1,286,000. The
Company made payments of $243,000 against the accrual in the six-month period
ending June 30, 2002. The sublease loss accrual balance as of June 30, 2002 is
$1,989,000. The Company expects to pay the remaining obligations relating to the
non-cancelable lease obligations over the remaining lease terms through 2006.
6. Commitments and Contingencies
In November 2001, the Company and certain of its officers and directors
were named as defendants in a class action shareholder complaint filed in the
United States District Court for the Southern District of New York and now
captioned as In re Extensity, Inc. Initial Public Offering Securities
Litigation. The plaintiffs seek unspecified monetary damages and other relief.
The Company believes these charges to be without merit and therefore, has not
accrued any amounts in connection with this matter.
We are also subject to various other claims and legal actions arising
in the ordinary course of business. The ultimate disposition of these various
other claims and legal actions is not expected to have a material effect on our
business, financial condition or results of operations.
5
7. Recent Accounting Pronouncements
In July of 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets". SFAS No.
141 requires business combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting, and broadens the criteria for
recording intangible assets separately from goodwill. Recorded goodwill and
intangibles will be evaluated against these new criteria and may result in
certain intangibles being subsumed into goodwill, or alternatively, amounts
initially recorded as goodwill may be separately identified and recognized apart
from goodwill. SFAS No. 142 requires the use of a non-amortization approach to
account for purchased goodwill and certain intangibles. Under a non-amortization
approach, goodwill and certain intangibles will not be amortized into results of
operations, but instead would be reviewed for impairment and written down and
charged to results of operations only in the periods in which the recorded value
of goodwill and certain intangibles is more than its fair value. The provisions
of each statement, which apply to goodwill and intangible assets acquired prior
to June 30, 2001, were adopted by the Company on January 1, 2002. The adoption
of these accounting standards had no impact on our financial position or results
of operations for any historic transactions.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 nullifies the
guidance of the Emerging Issues Task Force (EITF) in EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)".
Under EITF Issue No. 94-3, an entity recognized a liability for an exit cost on
the date that the entity committed itself to an exit plan. In SFAS 146, the FASB
acknowledges that an entity's commitment to a plan does not, by itself, create a
present obligation to other parties that meets the definition of a liability and
requires that a liability for a cost that is associated with an exit or disposal
activity be recognized when the liability is incurred. It also establishes that
fair value is the objective for the initial measurement of the liability. SFAS
146 will be effective for exit or disposal activities that are initiated after
December 31, 2002. The Company does not expect an impact on its financial
position and results of operating from the adoption of SFAS 146.
6
ITEM 2: 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 our financial condition and
results of operations should be read in conjunction with our Summary of
Condensed Consolidated Financial Data, our condensed consolidated financial
statements and related notes included in this report, and Management's
Discussion and Analysis of Financial Condition and Results of Operations and
related financial information contained in the Company's Form 10-K (File No.
000-28897).
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
introduced the newest version of our suite of products, Extensity 6, in June
2002.
We generate revenue principally from licensing our applications and
providing related services, including product installation, maintenance and
support, consulting and training. We license our applications individually or as
an integrated suite of products. The pricing of our software and services
fluctuates on a per transaction basis depending on various factors, such as the
number of seats covered by a contract and the degree of customization requested
by the particular customer. The dollar amounts of our contracts depend on the
number of users and applications being used and the professional services
requested. In the third quarter of 2001, we began recognizing revenue from our
hosted offering. Under this offering, customers pay a monthly usage fee based on
the number of users and a one-time set-up fee to access the Extensity
application on our servers.
7
We promote and sell our software products through our direct sales
force and through indirect channels, including Elite Information Group and
Emplaza, S.A., a joint venture between Terra Networks and Meta4. We also have
marketing referral arrangements in place with Cisco Systems, IBM, US Bank,
Amadeus/eTravel, Rosenbluth Travel, WebEx, DigitalThink, Visa, GetThere.com, and
ProAct Technologies.
For the six months ended June 30, 2002 and 2001, revenues derived from
our international operations represented approximately 12% of total revenues.
Critical Accounting Policies
A summary of the Company's critical accounting policies is included in
our report on Form 10K for the year ended December 31, 2001.
Results of Operations
The following table sets forth certain statement of operations data in
absolute dollars for the periods indicated. The data has been derived from the
condensed 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.
8
Summary Condensed Consolidated Financial Data
(In thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2002 2001 2002 2001
------- ------- ------- -------
Revenues:
License $ 1,743 $ 5,651 $ 2,949 $11,673
Service and maintenance 3,074 3,480 6,197 7,260
Hosted 194 -- 388 --
------- ------- ------- -------
Total revenues $ 5,011 $ 9,131 $ 9,534 $18,933
======= ======= ======= =======
Cost of revenues:(*)
License $ 144 $ 263 $ 249 $ 708
Service and maintenance 1,843 3,435 4,244 7,459
Hosted 340 -- 606 --
------- ------- ------- -------
Total cost of revenues $ 2,327 $ 3,698 $ 5,099 $ 8,167
======= ======= ======= =======
Operating expenses:(*)
Sales and marketing $ 2,894 $ 7,025 $ 6,403 $14,845
Research and development 1,830 3,934 3,930 7,669
General and administrative 1,472 1,839 2,958 3,519
Restructuring and other non recurring charges 1,695 -- 1,695 377
Interest income, net $ 220 $ 687 $ 490 $ 1,760
(*) Amounts exclude the amortization of non-cash stock based
compensation as follows:
Cost of revenues:
Service and maintenance $ -- $ 9 $ 3 $ 59
Operating expenses:
Sales and marketing -- 18 7 112
Research and development -- 11 4 68
General and administrative -- 17 7 109
------- ------- ------- -------
$ -- $ 55 $ 21 $ 348
======= ======= ======= =======
Revenues
Total revenues decreased to $5.0 million for the three months ended
June 30, 2002 from $9.1 million for the three months ended June 30, 2001, a
decrease of 45%. Total revenues decreased to $9.5 million for the six months
ended June 30, 2002 from $18.9 million for the six months ended June 30, 2001, a
decrease of 50%. No customers accounted for more than 10% of total revenues for
the three or six-month periods ended June 30, 2002. Sales to three customers
accounted for approximately 21%, 13% and 12% of total revenues for the three
months ended June 30, 2001 and sales to one customer accounted for approximately
12% of total revenues for the six months ended June 30, 2001.
9
License Revenues. Our license revenues decreased to $1.7 million for
the three months ended June 30, 2002 from $5.7 million for the three months
ended June 30, 2001, a decrease of 69%. License revenue decreased to $2.9
million for the six months ended June 30, 2002 from $11.7 million for the six
months ended June 30, 2001, a decrease of 75%. The decrease in license revenue
for the three and six-month periods ended June 30, 2002 was attributable to a
decrease in revenue recognized on shipment from our direct and indirect sales
channels which have been impacted by the decrease in capital spending associated
with the current global economic downturn. In the three months ended June 30,
2001, $1.9 million of license revenue was recognized through the Company's
relationship with a reseller. The Company and the reseller jointly decided to
terminate the reseller arrangement.
Service and Maintenance Revenues. Our service and maintenance revenues
decreased to $3.1 million for the three months ended June 30, 2002 from $3.5
million for the three months ended June 30, 2001, a decrease of 12%. Service and
maintenance revenues decreased to $6.2 million for the six months ended June 30,
2002 from $7.3 million for the six-month period ended June 30, 2001, a decrease
of 15%. The decrease in the three and six-month periods ended June 30, 2002 was
attributable to a decrease in professional services billing opportunities
resulting from a decrease in capital spending associated with current global
economic conditions.
Hosted Revenues. Our hosted revenues were $194,000 and $388,000 for the
three and six-month periods ended June 30, 2002, respectively. This is the
fourth quarterly period the Company has recognized revenue from this offering.
The Company does not believe these revenues will be a significant percentage of
total revenues in the near term.
Cost of Revenues
Total cost of revenues decreased to $2.3 million for the three months
ended June 30, 2002 from $3.7 million for the three months ended June 30, 2001,
a decrease of 37%. Total cost of revenues decreased to $5.1 million for the six
months ended June 30, 2002 from $8.2 million for the six months ended June 30,
2001, a decrease of 38%.
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 revenue
decreased to $144,000 for the three months ended June 30, 2002 from $263,000 for
the three months ended June 30, 2001. Cost of license revenue decreased to
$249,000 for the six months ended June 30, 2002 from $708,000 for the six months
ended June 30, 2001. The decrease in cost for both the three and six-month
periods ended June 30, 2002 was due primarily to decreased sales activity. As a
percentage of license revenues, cost of license revenues increased to 8% for the
three months ended June 30, 2002 from 5% for the three months ended June 30,
2001. As a percentage of license revenues, cost of license revenues increased to
8% for the six months ended June 30, 2002 from 6% for the six months ended June
30, 2001. Cost of revenues as a percentage of license revenue may increase over
the current level in the future if we incorporate additional third-party
products into 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. The cost of service and maintenance revenue decreased
to $1.8 million for the three months ended June 30, 2002 from $3.4 million for
the three months ended June 30, 2001, a decrease of 46%. The cost of service and
maintenance revenues decreased to $4.2 million for the six months ended June 30,
2002 from $7.5 million for the six months ended June 30, 2001, a decrease of
43%. As a percentage of service revenues,
10
cost of service revenues decreased to 60% for the three months ended June 30,
2002 from 99% for the three months ended June 30, 2001. As a percentage of
service revenues, cost of service revenues decreased to 68% for the six months
ended June 30, 2002 from 103% for the six months ended June 30, 2001. The
decrease for the three and six-month periods ended June 30, 2002 was
attributable to lower compensation costs associated with our restructuring plans
implemented in July of 2001 and April 2002 and lower costs for third party
consultants. The Company does not expect these costs to significantly increase
in the near term. Overall, we are seeking to further reduce our cost of service
revenues as a percentage of total service revenue and are also seeking to keep
third parties engaged in providing services related to our applications.
Cost of Hosted Revenues. Cost of hosted revenues consists primarily of
compensation and related overhead costs for personnel engaged in supporting the
hosted customer base, server costs, and telecommunications charges. For the
three months ended June 30, 2002, cost of hosted revenues was $340,000. For the
six months ended June 30, 2002, cost of hosted revenues was $606,000. The
Company does not expect these costs to significantly increase in the near term.
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 decreased
to $2.9 million for the three months ended June 30, 2002 from $7.0 million for
the three months ended June 30, 2001, a decrease of 59%. Sales and marketing
expenses decreased to $6.4 million for the six months ended June 30, 2002 from
$14.8 million for the six months ended June 30, 2001, a decrease of 57%. As a
percentage of total revenues, sales and marketing expenses decreased to 58% for
the three months ended June 30, 2002 from 77% for the three months ended June
30, 2001. As a percentage of total revenues, sales and marketing expenses
decreased to 67% for the six months ended June 30, 2002 from 78% for the six
months ended June 30, 2001. The decrease in sales and marketing expenses for the
three and six-month periods ended June 30, 2002 was attributed to reduced
commission expense associated with the decrease in license revenue and reduced
compensation costs and lower program costs associated with our restructuring
plans implemented in July 2001 and April 2002. We do not expect sales and
marketing expenses, excluding commission charges, to increase significantly in
the near term. Commission charges will vary depending upon the sales activity.
Sales and marketing expenses may increase in the long term if we expand our
domestic and international sales force and increase our marketing efforts.
Research and Development. Research and development expenses consist
primarily of compensation and related personnel costs, and fees associated with
contractors. Research and development expenses decreased to $1.8 million for the
three months ended June 30, 2002 from $3.9 million for the three months ended
June 30, 2001, a decrease of 53%. Research and development expenses decreased to
$3.9 million for the six months ended June 30, 2002 from $7.7 million for the
six months ended June 30, 2001, a decrease of 49%. As a percentage of total
revenues, research and development expenses decreased to 37% for the three
months ended June 30, 2002 from 43% for the three months ended June 30, 2001. As
a percentage of total revenues, research and development expenses were 41% for
both six-month periods ended June 30, 2002 and June 30, 2001. The decrease in
research and development cost for the three and six- month periods ended June
30, 2002 was attributable to reduced compensation costs associated with our
restructuring plans implemented in July of 2001 and April 2002. We do not expect
research and development costs to significantly increase in the near term.
Research and development expenses may increase in the long term if we make
additional investments in our technology and products.
11
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 decreased to $1.5 million for the three months ended June 30, 2002 from
$1.8 million for the three months ended June 30, 2001, a decrease of 20%.
General and administrative expenses decreased to $3.0 million for the six months
ended June 30, 2002 from $3.5 million for the six months ended June 30, 2001, a
decrease of 16%. As a percentage of total revenues, general and administrative
expenses increased to 29% for the three months ended June 30, 2002 from 20% for
the three months ended June 30, 2001. As a percentage of total revenues general
and administrative expenses increased to 31% for the six months ended June 30,
2002 from 19% for the six months ended June 30, 2001. The decrease in general
and administrative expenses in the three and six-month periods ended June 30,
2002 was primarily attributable to the impact of our restructuring plans
implemented in July of 2001 and April 2002. General and administrative expenses
tend to be relatively fixed in the short term because the Company's
discretionary general and administrative expenses are limited and there are
significant costs associated with being a public company. As a result, declining
revenues have caused an increase in general and administrative expenses as a
percentage of total revenues. We do not expect general and administrative
expenses to significantly increase in the short term. General and administrative
costs may increase in the long term if we expand our operations.
Restructuring and other non-recurring charges. For the three and six
months ended June 30, 2002, restructuring and other non-recurring charges were
approximately $1.7 million, comprised of $523,000 of severance and benefits
associated with the termination of 39 employees, $946,000 of accrued lease costs
pertaining to the estimated obligations for non-cancelable lease payments for
excess facilities in the United States and $225,000 of other non-recurring
general and administrative charges incurred in connection with exploring merger
and acquisition transactions. The entire other non-recurring general and
administration charge was expensed in the three months ended June 30, 2002.
There were no other non-recurring charges for the three months ended June 30,
2001 and there were $377,000 of other non-recurring charges incurred in the six
months ended June 30, 2001. These charges were incurred in connection with
exploring potential merger and acquisition transactions. The entire charge was
expensed in the three months ended March 31, 2001 as these discussions were
terminated.
Interest Income, Net
Interest income, net was $220,000 for the three months ended June 30,
2002 and $687,000 for the three months ended June 30, 2001, a decrease of 68%.
Interest income, net was $490,000 for the six months ended June 30, 2002 and
$1.8 million for the six months ended June 30, 2001, a decrease of 72%. Interest
income is attributed to interest earned on the proceeds from the Company's
initial public offering ("IPO") and working capital. The decrease in interest
income for both the three and six-month periods ended June 30, 2002 is
attributed to lower interest rates and lower cash, cash equivalent and
short-term investments balances. Interest income will fluctuate depending upon
the overall interest rate environment and our cash, cash equivalent and
short-term investments balances.
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 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
12
Appreciation Rights and Other Variable or Award Plans", over the four-year
vesting period of the granted options. Accordingly, our results of operations
include and will continue to include deferred compensation expense at least
through 2003. No expense was recognized in the three months ended June 30, 2002.
For the three months ended June 30, 2001, amortization of non-cash based
compensation was $55,000. For the six months ended June 30, 2002, amortization
of non-cash based compensation was $21,000 and for the six months ended June 30,
2001, amortization of non-cash based compensation was $348,000. The lower
expense in both the three and six-month periods in 2002 is primarily
attributable to the impact of forfeitures and the use of an accelerated method
of amortization. We estimate that we will recognize approximately $68,000 for
the remainder of 2002; however, this amount may change as employee terminations
impact the amortization schedule.
Liquidity and Capital Resources
Since inception, we have financed our operations and funded our capital
expenditures through proceeds from our IPO completed in January 2000 and the
private sale of equity securities, supplemented by loan facilities and equipment
leases. As of June 30, 2002, we had $38.8 million in cash, cash equivalents and
short-term investments, $1.4 million in restricted long-term investments and
$33.6 million in working capital.
Net cash used in operating activities was $7.5 million for the six
months ended June 30, 2002 and $18.2 million for the six months ended June 30,
2001. For the six months ended June 30, 2002 cash used in operating activities
was primarily attributed to a net loss of $10.1 million, adjusted for a
depreciation and amortization of $850,000, and a decrease in accounts receivable
of $1.7 million. For the six months ended June 30, 2001 net cash used in
operating activities was primarily attributable to a net loss of $14.2 million,
adjusted for depreciation and amortization of $1.4 million and amortization of
deferred stock compensation and other of $433,000, a decrease in deferred
revenue of $7.1 million, and a decrease in accrued liabilities of $1.2 million
offset by a decrease in accounts receivable of $3.0 million.
Net cash used in investing activities was $7.3 million for the six
months ended June 30, 2002 and net cash provided by investing activities was
$15.3 million for the six months ended June 30, 2001. Net cash used in investing
activities for the six months ended June 30, 2002 was primarily attributable to
the purchases of short-term investments. Net cash provided by investing
activities for the six months ended June 30, 2001 was primarily attributable to
maturities of short-term investments.
Net cash provided by financing activities was $180,000 for the six
months ended June 30, 2002 due to payments on capital lease obligations of
$132,000 offset by proceeds from employee stock plans of $312,000. Net cash
provided by financing activities was $105,000 for the six months ended June 30,
2001, primarily due to payments on notes payable and capital lease obligations
of $839,000, offset by proceeds from employee stock plans of $944,000.
Presently, we anticipate that our existing capital resources will meet
our operating and investing needs for at least the next twelve months. In
particular, we believe that our current cash balances are sufficient to fund any
existing cash obligations or commercial commitments as well as any cash needed
for planned operating activities. Furthermore, should our operating results be
worse than expected, we could use more cash in funding operating activities
which would diminish our capital resources. While we do not presently anticipate
a need for additional capital, if we do require additional capital resources to
grow our business, execute our operating plans, or acquire complementary
technologies or businesses, at any time in the future, we may seek to sell
additional equity or debt securities or secure additional lines of credit, which
may result in additional dilution to our stockholders. Additional funding may or
may not be available on acceptable terms or at all.
13
RISK FACTORS
The following is a discussion of certain factors that currently impact or may
impact our business, operating results and/or financial condition. Any
investment in our common stock involves a high degree of risk. You should
consider carefully the following information about these risks in evaluating our
business. The market price of our common stock could decline, and you may lose
all or part of the money you paid to buy our common stock.
RISKS RELATED TO OUR BUSINESS
Our limited operating history and the fact that we operate in a new industry
make our business prospects difficult to evaluate.
We were incorporated in November 1995 and commenced licensing of our
software applications in March 1998. An investor in our common stock must
consider the risks, uncertainties, expenses and difficulties frequently
encountered by companies in their early stages of development, particularly
companies in new and rapidly evolving markets such as the market for employee
relationship management software applications. Risks and difficulties include
our ability to:
- expand our base of customers with fully installed and deployed
systems that can serve as reference accounts for our ongoing
sales efforts;
- expand our pipeline of sales prospects in order to promote
greater predictability in our period-to-period sales levels;
- continue to offer new products that complement our existing
product line, in order to make our suite of applications more
attractive to customers;
- continue to develop and upgrade our technology to add
additional features and functionality;
- continue to attract and retain qualified personnel;
- expand direct sales channels and indirect channels such as
relationships with OEM customers and distributors;
- increase awareness of our brand; and
- maintain our current and develop new third-party
relationships, including but not limited to third-party
implementers.
The Company may not be able to successfully address these risks or
difficulties and our business strategy may not be successful. If we fail to
address these risks or difficulties adequately, our business will likely suffer.
We have a history of losses and negative cash flow and expect this to continue
into the current fiscal year.
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.
14
We have incurred significant operating losses and have not achieved
profitability. As of June 30, 2002, we had an accumulated deficit of $110.5
million. We expect to continue to invest in research and development to enhance
current products and develop future products and support our current sales and
marketing efforts that promote our company and our products in the marketplace.
As a result, we will need to increase our revenues significantly to achieve
profitability. In addition, because we expect to continue to invest in our
business ahead of anticipated future revenues, we expect that we will continue
to incur operating losses through the current fiscal year.
Our business is changing rapidly, which could cause our quarterly operating
results to vary and our stock price to fluctuate.
Our revenues and operating results may vary significantly from quarter
to quarter due to a number of factors, many of which are beyond our control.
Even after our reorganization in April of 2002, where headcount was
significantly reduced, we expect to continue to make expenditures in all areas
of our business in order to promote future revenue growth. Because the expenses
associated with these activities are relatively fixed in the short-term, we will
be unable to adjust spending quickly enough in any particular quarter to offset
any unexpected shortfall in revenue. As a result, we expect our quarterly
operating results to fluctuate. Our financial results may, as a consequence of
quarterly revenue fluctuations, fall short of the expectations of public market
analysts or investors. If this occurs, the price of our common stock may drop.
We also seek to develop and maintain a significant pipeline of
potential sales prospects, but it is difficult to predict when individual
customer orders will be closed. Our base of customers and the number of
additional customer licenses we enter into each quarter are still relatively
small. Accordingly, the loss or deferral of a small number of anticipated large
customer orders in any quarter could result in a significant shortfall in
revenues for that quarter and future quarters, which could result in a drop in
the price of our stock.
Other important factors that could cause our quarterly results and
stock price to fluctuate materially include:
- our ability to grow our customer base and our base of
referencing customers, in light of our relatively limited
number of customers to date;
- our ability to successfully develop alternative sales channels
for our products, such as sales through OEM customers or
distributors;
- our ability to expand our implementation and consulting
resources through third-party relationships, in light of the
fact that we have limited third-party implementation and
consulting relationships currently in place;
- technical difficulties or "bugs" affecting the operation of
our software; and
- delays in the introduction of new or enhanced versions of our
products.
Due to our limited operating history, the early stage of our market and
the factors discussed above, you should not rely on quarter-to-quarter
comparisons of our results of operations as indicators of our future
performance.
We face intense competition, which could affect our ability to increase revenue,
maintain our margins and increase market share.
15
The market for our internet-based employee relationship management
software applications is intensely competitive and we expect competition to
increase in the future. Competitors vary in size and in the scope and breadth of
the products and services they offer. Companies offering one or more products
directly competitive with our products include Ariba, Concur Technologies, IBM,
PeopleSoft and Oracle. As a result of the large market opportunity for employee
relationship management solutions we also expect competition from other
established and emerging companies.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition, and a larger installed base
of customers than us. In addition, many of our competitors have well-established
relationships with our current and potential customers and have extensive
knowledge of our industry. Current and potential competitors have established or
may establish cooperative relationships among themselves or with third parties
to increase the ability of their products to address customer needs.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. We also expect that
competition will increase as a result of industry consolidation. Increased
competition may result in price reductions, reduced margins and loss of market
share, any one of which could seriously harm our business.
If we do not provide software applications and related services that meet the
changing demands of our customers, the market for our products will not grow or
may decline, and our product sales will suffer.
To successfully implement our business strategy, we have to provide
software applications and related services that meet the demands of our
customers and prospective customers as the market and customer requirements
evolve. We expect that competitive factors will create a continuing need for us
to improve and add to our suite of software applications. Not only will we have
to expend additional funds and other resources to continue to improve our
existing suite of applications, but we must also properly anticipate, address
and respond to customer preferences and demands. As organizations' needs change
with respect to their enterprise applications, our existing suite of software
applications may become obsolete or inefficient relative to our competitors'
offerings and may require modifications or improvements. The addition of new
products and services will also require that we continue to improve the
technology underlying our applications. These requirements could be significant,
and we may fail to fulfill them quickly and efficiently. If we fail to expand
the breadth of our applications quickly in response to customer needs or if
these offerings fail to achieve market acceptance, the market for our products
will not grow or may decline, and our business may suffer significantly.
Our employee relationship management software products and related
services have accounted for substantially all of our revenues to date. We
anticipate that revenues from these products and related services will continue
to constitute substantially all of our revenues for the foreseeable future.
Consequently, our future financial performance will depend, in significant part,
upon the successful development, introduction and customer acceptance of
enhanced versions of our employee relationship management software applications
and any new products or services that we may develop or acquire. We cannot
assure you that we will be successful in enhancing, upgrading or continuing to
effectively market our employee relationship management software applications or
that any new products or services that we may develop or acquire will achieve
market acceptance.
16
In any given quarter, our revenues have been derived from a relatively small
number of customers, and the loss of a small number of major customers or
potential customers could adversely impact our quarterly revenues or operating
results.
We expect that we will continue to derive a significant portion of our
revenues from a relatively small number of customers in the future. Accordingly,
the loss of a small number of major customers could materially and adversely
affect our business, and the deferral or loss of anticipated orders from a small
number of prospective customers could materially and adversely impact our
quarterly revenues and operating results in any period.
If we are unable to maintain our Nasdaq National Market listing, the liquidity
of our common stock would be seriously limited.
Since July 3, 2002, our stock had minimum closing bid prices of less
than $1.00 per share, which is the minimum bid price requirement for continued
listing with the Nasdaq National Market. If we fail to comply with the minimum
bid price requirement for 30 straight trading days, we will likely receive a
deficiency notice from the Nasdaq National Market. We will then have 90 calendar
days to reestablish compliance with that requirement. To reestablish compliance,
our minimum closing bid price must be more than $1.00 per share for 10
consecutive trading days. If we do not reestablish compliance with this
requirement during the 90-day period, Nasdaq will commence delisting proceedings
and we may be delisted from the Nasdaq National Market. Our shares will continue
to trade on the Nasdaq National Market unless and until the delisting
proceedings have commenced and been completed and the Nasdaq National Market has
made a determination to delist us. In the event our shares are delisted from the
Nasdaq National Market, we will attempt to have our common stock traded on the
Nasdaq Small Cap Market. If our common stock is delisted, it could seriously
limit the liquidity of our common stock and would limit our ability to raise
future capital through the sale of our common stock, which could seriously harm
our business.
If we fail to maintain positive margins on service revenues in the foreseeable
future, our results of operations could suffer.
For the three-month and six-month periods ended June 30, 2002, our
service margins were positive. While we anticipate that our margins will
continue to be positive in the future, we cannot guarantee that they will remain
positive. Failure to maintain positive margins on service revenues would cause
our business to suffer. For more information related to our costs associated
with our service revenues, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Evolving technological developments and emerging industry standards will require
us to enhance the functionality of our employee relationship management software
applications, and any inability to enhance functionality could cause our sales
to decline.
Because the market for our products is subject to rapid technological
change and evolving industry standards, the life cycles of our products are
difficult to predict. Competitors may introduce new products or enhancements to
existing products employing new technologies, which could render our existing
products and services obsolete and unmarketable. For example, our currently
available software applications are written entirely in the Java computer
language. While we believe that this provides our solution with significant
advantages in terms of functionality and flexibility, it is not clear whether
Java-based systems will continue to maintain commercial acceptance.
17
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.
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 must continue to establish
relationships with third parties that can provide implementation and consulting
services to our customers. Third-party implementation and consulting firms can
also be influential in the choice of employee relationship management software
applications by new customers. To date, we have established relationships with
several third-party implementation and consulting firms. In general, however, if
we are unable to establish and maintain effective, long-term relationships with
implementation and consulting providers, or if these providers do not meet the
needs or expectations of our customers, we may be unable to grow our revenues
and our business could be seriously harmed. As a result of the limited resources
and capacities of many third-party implementation providers, we may be unable to
attain sufficient focus and resources from the third-party providers to meet all
of our customers' needs, even if we establish relationships with these third
parties. If sufficient resources are unavailable, we will be required to provide
these services internally, which could limit our ability to expand our base of
customers. A number of our competitors have significantly more established
relationships with these third parties and, as a result, these third parties may
be more likely to recommend competitors' products and services rather than our
own. Even if we are successful in developing additional relationships with
third-party implementation and consulting providers, we will be subject to
significant risk, as we cannot control the level and quality of service provided
by third-party implementation and consulting partners.
Our expectations of future growth depend on our ability to expand
internationally, and factors specific to our international expansion may prevent
us from achieving our anticipated growth.
Over time, we intend to expand our international operations to achieve
our anticipated growth, but we may face significant challenges to our
international expansion. The expansion of our existing international operations
and entry into additional international markets will require significant
management attention and financial resources. To achieve broad acceptance in
international markets, our products must be localized to handle a variety of
factors specific to each international market, such as tax laws and local
regulations. The incorporation of these factors into our products is a complex
process and often requires assistance from third parties. We may not adequately
address all of the factors necessary to achieve broad acceptance in our target
international markets. Further, to achieve broad usage by employees across
international organizations, our products must be localized to handle native
languages and cultures in each international market. Localizing our products is
also a complex process and we intend to continue working with third parties to
develop localized products. To date, we have
18
localized our product for the markets where the English language is the native
language and completed translations for the German, French, Italian and Spanish
languages.
We have only a limited history of marketing, selling and supporting our
products and services internationally. In 1999, we opened a regional office in
the United Kingdom. In 2000, we expanded our European Operations through opening
a second office in Frankfurt, Germany; however, as part of our restructuring
plan implemented in April of 2002, we closed the Frankfurt office. As of June
30, 2002, we had a total of 10 employees in our international operations. For
the six months ended June 30, 2002, we derived approximately 12% of our revenues
from our international operations. To succeed internationally, we must react
quickly to the business environment in which we operate overseas. Thus, we must
effectively monitor the size of our international workforce and make adjustments
as necessary. During periods of growth we must hire and train experienced
international personnel as well as recruit and retain qualified domestic
personnel to staff and manage our international operations. However, we may
experience difficulties in recruiting and training additional international
staff. We must also be able to enter into strategic relationships with companies
in international markets. 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.
19
Our sales cycles are long and unpredictable, which makes period-to-period
revenues difficult to predict.
Because the market for our employee relationship management software
products and related services is relatively new, we experience long and
unpredictable sales cycles. The sales cycle for our employee relationship
management software applications typically ranges from two to nine months. Our
customers have frequently viewed the purchase of our products as part of a
long-term strategic decision regarding the management of their workforce-related
operations and expenditures. This decision process has sometimes resulted in
customers taking a long period of time to assess alternative solutions by our
competitors or deferring a purchase decision until the market evolves. Sales
cycles continue to be long and the timing of purchase decisions by individual
customers remain at times uncertain. We must continue to educate potential
customers on the use and benefits of our products and services, as well as the
integration of our products and services with additional software applications
utilized by the individual customers. Because the sales cycle is long and timing
of individual orders is uncertain, our period-to-period revenues are difficult
to predict.
We may be unable to attract and retain highly skilled employees that are
necessary for the success of our business plan.
Our ability to execute our business plan and be successful also depends
on our continued ability to attract and retain highly skilled employees. We
depend on the services of senior management and other personnel, particularly
Robert A. Spinner, our Chief Executive Officer. None of our senior management is
obligated to continue to provide services to the Company. Over time, we will
need to hire additional personnel in all operational areas. Competition for
personnel in our industry is intense. We have in the past experienced, and we
expect to continue to experience in the future, difficulty in hiring and
retaining highly skilled employees with appropriate qualifications. If we do not
succeed in attracting or retaining personnel, our business could be adversely
affected.
Software defects could lead to loss of revenue or delay the market acceptance of
our applications.
Our enterprise applications software is complex and, accordingly, may
contain undetected errors or failures when first introduced or as new versions
are released. This may result in loss of, or delay in, market acceptance of our
products. We have in the past discovered software errors in our new releases and
new products after their introduction. In the event that we experience
significant software errors in future releases, we could experience delays in
the release, customer dissatisfaction and lower revenues and service margins
during the period required to correct these errors. We may in the future
discover errors, and additional scalability limitations, in new releases or new
products after the commencement of commercial shipments. Any of these errors or
defects could cause our business to be materially harmed.
We may become increasingly dependent on third-party software incorporated in our
products and, if so, impaired relations with these third parties, errors in
third-party software or inability to enhance the software over time could harm
our business.
We incorporate third-party software into our products. Currently, the
third-party software we use includes application server software that we license
from BEA Systems, off-line database software from Pointbase, off-line client
server software from Pumatech, synchronization software from Aether Systems,
reporting software from Business Objects and Java Web Start from Sun
Microsystems. We may incorporate additional third-party software into our
products as we
20
expand our product line and broaden the content and services accessible through
our gateway. The operation of our products would be impaired if errors occur in
the third-party software that we license. It may be more difficult for us to
correct any errors in third-party software because the software is not within
our control. Accordingly, our business would be adversely affected in the event
of any errors in this software. Furthermore, it may be difficult for us to
replace any third-party software if a vendor seeks to terminate our license to
the software.
Our success depends in part upon our ability to protect our intellectual
property and we may not be able to do so adequately.
Our success depends in large part upon our proprietary technology. We
rely on a combination of copyright, trademark and trade secret protection,
confidentiality and nondisclosure agreements and licensing arrangements to
establish and protect our intellectual property rights. We license rather than
sell our solutions and require our customers to enter into license agreements,
which impose restrictions on their ability to utilize the software. In addition,
we seek to avoid disclosure of our trade secrets through a number of means,
including requiring those persons with access to our proprietary information to
execute nondisclosure agreements with us and restricting access to our source
code. We seek to protect our software, documentation and other written materials
under trade secret and copyright laws, which afford only limited protection.
Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary. Policing unauthorized use of our
products is difficult, and while we are unable to determine the extent to which
piracy of our software products exists, software piracy can be expected to be a
persistent problem. In addition, the laws of some foreign countries do not
protect our proprietary rights to as great an extent as do the laws of the
United States of America. Our means of protecting our proprietary rights may not
be adequate and our competitors may independently develop similar technology,
duplicate our products, or design around our proprietary intellectual property.
Security and other concerns may discourage customers from purchasing our hosted
product.
If customers determine that our hosted product is not scaleable, does
not provide adequate security for the dissemination of information over the
Internet, or is otherwise inadequate for Internet-based use, or if for any other
reason customers fail to accept our hosted products for use on the Internet or
on a subscription basis, our business will be harmed. As a hosted provider, we
expect to receive confidential information including credit card, travel
booking, employee, purchasing, supplier, and other financial and accounting
data, through the Internet and there can be no assurance that this information
will not be subject to computer break-ins, theft, and other improper activity
that could jeopardize the security of information for which we are responsible.
Any such lapse in security could expose us to litigation, loss of customers, or
otherwise harm our business. In addition, any person who is able to circumvent
our security measures could misappropriate proprietary or confidential customer
information or cause interruptions in our operations. We may be required to
incur significant costs to protect against security breaches or to alleviate
problems caused by breaches. Additionally, in the past, computer viruses and
software programs that disable or impair computers have been distributed and
have rapidly spread over the Internet. Computer viruses could be introduced into
our systems or those of our customers or suppliers, which could disrupt our
software solutions or make them inaccessible to customers or suppliers. Further,
a well-publicized compromise of security could deter people from using the
Internet to conduct transactions that involve transmitting confidential
information. Our failure to prevent security breaches, or well-publicized
security
21
breaches affecting the Internet in general, could significantly harm our
business, operating results and financial condition.
We may face costly damages or litigation costs if a third party claims that we
infringe its intellectual property.
There has been a substantial amount of litigation in the software
industry and the Internet industry regarding intellectual property rights. It is
possible that in the future, third parties may claim that we or our current or
potential future products infringe upon their intellectual property. We expect
that software product developers and providers of Internet-based software
applications will increasingly be subject to infringement claims as the number
of products and competitors in our industry segment grows and the functionality
of products in different industry segments overlaps. Any claims, with or without
merit, could be time consuming, result in costly litigation, cause product
shipment delays or require us to enter into royalty or licensing agreements.
Royalty or licensing agreements, if required, may not be available on terms
acceptable to us or at all, which could seriously harm our business.
We are the target of a securities class action complaint and are at risk of
securities class action litigation, which may result in substantial costs and
divert management attention and resources.
In November 2001, the Company and certain of its officers and directors
were named as defendants in a class action shareholder complaint filed in the
United States District Court for the Southern District of New York now captioned
In re Extensity, Inc. Initial Public Offering Securities Litigation. In the
complaint, the plaintiffs allege that the Company, certain of its officers and
directors and the underwriters of its initial public offering ("IPO") violated
the federal securities laws because the Company's IPO registration statement and
prospectus contained untrue statements of material fact or omitted material
facts regarding the compensation to be received by, and the stock allocation
practices of, the IPO underwriters. The plaintiffs seek unspecified monetary
damages and other relief. Similar complaints were filed in the same court
against hundreds of public companies that conducted IPOs of their common stock
since the mid-1990s. This action may divert the efforts and attention of
management and, if determined adversely to the Company, could have a material
impact on our business.
Any future acquisitions of companies or technologies may result in distraction
of our management and disruptions to our business.
We may acquire or make investments in complementary businesses,
technologies, services or products if appropriate opportunities arise. From time
to time we may engage 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.
22
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 certain agreements entered into by or for the benefit of some of our key
officers could make it more difficult for a third party to acquire us, even if
doing so might be beneficial to our stockholders.
Our business may face additional risks and uncertainties not presently known to
us, which would cause our business to suffer.
In addition to the risks specifically identified in this Risk Factors
section or elsewhere in this Annual Report, we may face additional risks and
uncertainties not presently known to us or that we currently deem immaterial
which ultimately may impair our business, results of operations and financial
condition.
RISKS RELATED TO OUR INDUSTRY
Our success will depend upon the growth and acceptance of the market we address
and our ability to meet the needs of the emerging market for employee
relationship management software applications.
The market for our employee relationship management software
applications and services is at an early stage of development. Our success will
depend upon the continued development of this market and the increasing
acceptance by customers of the benefits to be provided by employee relationship
management applications and services. In addition, as the market evolves, it is
unclear whether the market will accept our suite of applications as a preferred
solution for employee relationship management needs. Accordingly, our products
and services may not achieve significant market acceptance or realize
significant revenue growth. Unless a critical mass of organizations and their
suppliers use our solutions and recommend them to new customers, our solutions
may not achieve widespread market acceptance, which may cause our business to
suffer.
Market prices of technology companies have been highly volatile, and the market
for our stock may continue to be volatile as well.
The stock market has experienced significant price and trading volume
fluctuations and the market prices of technology companies generally, and
Internet-related software companies particularly, have been extremely volatile.
Investors may not be able to resell their shares at or above the price they paid
for the stock. In the past, following periods of volatility in the market price
of a public company's securities, securities class action litigation has often
been instituted against that company. Such litigation would likely result in
substantial costs and diversion of management's attention and resources.
Increasing government regulation could limit the market for, or impose sales and
other taxes on the sale of, our products and services.
As Internet commerce evolves, we expect that federal, state or foreign
agencies will adopt regulations covering issues such as user privacy, pricing,
taxation of goods and services provided over the Internet, and content and
quality of products and services. It is possible that legislation could expose
companies involved in electronic commerce to liability, which could limit the
growth of electronic commerce generally. Legislation could dampen the growth in
Internet
23
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 3. Quantitative and Qualitative Disclosures About Market 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 June 30, 2002.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
In November 2001, the Company and certain of its officers and directors
were named as defendants in a class action shareholder complaint filed in the
United States District Court for the Southern District of New York, now
captioned, In re Extensity, Inc. Initial Public Offering Securities Litigation.
In the complaint, the plaintiffs allege that the Company, certain of its
officers and directors and the underwriters of its initial public offering
("IPO") violated the federal securities laws because the Company's IPO
registration statement and prospectus contained untrue statements of material
fact or omitted material facts regarding the compensation to be received by, and
the stock allocation practices of, the IPO underwriters. The plaintiffs seek
unspecified monetary damages and other relief. Similar complaints were filed in
the same court against hundreds of other public companies that conducted IPOs of
their common stock since the mid-1990s (collectively, the "IPO Lawsuits").
On August 8, 2001, the IPO Lawsuits were consolidated for pretrial
purposes before United States Judge Shira Scheindlin of the Southern District of
New York. Judge Scheindlin held an initial case management conference on
September 7, 2001, at which time she ordered, among other things, that the time
for all defendants to respond to any complaint be postponed until further order
of the court. Thus, the Company has not been required to answer the complaint,
and no discovery has been served on the Company.
In accordance with Judge Scheindlin's orders at further status
conferences in March and April, the appointed lead plaintiffs' counsel filed
amended, consolidated complaints in the IPO Lawsuits on April 19, 2002.
Defendants then filed motions to dismiss the IPO lawsuits on July 1 and July 15,
2002, as to which the Court does not expect to issue a decision until at least
November 2002. The Company believes that this lawsuit is without merit and
intends to defend against it vigorously.
24
ITEM 2. Changes in Securities and Use of Proceeds
a. Not applicable.
b. Not applicable.
c. Not applicable.
d. Not applicable.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters To a Vote of Security Holders
The Company's annual meeting of stockholders was held on May 31, 2002 (the
"Annual Meeting"). The following matters were voted upon at the Annual Meeting:
Proposal 1 - To elect directors to hold office until 2003 Annual Meeting of
Stockholders and until their successors are elected.
For Withheld Authority
--- ------------------
Robert A. Spinner 21,485,121 66,674
Sharam I. Sasson 21,529,848 21,947
Christopher D. Brennan 21,483,448 68,347
John R. Hummber 21,431,275 120,520
David A. Reed 21,431,448 120,347
Ted E. Schlein 21,484,048 67,747
Proposal 2 - To ratify the selection of PricewaterhouseCoopers LLP as
independent auditors of the Company for its fiscal year ending December 31,
2002.
For Against Abstain
--- ------- -------
21,483,558 61,010 7,227
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ITEM 5. Other Information
In accordance with Section 10A(i)(2) of the Securities Exchange Act of 1934, as
added by Section 202 of the Sarbanes-Oxley Act of 2002 (the "Act"), we are
required to disclose the non-audit services approved by our Audit Committee to
be performed by PricewaterhouseCoopers LLP, our external auditor. Non-audit
services are defined in the Act as services other than those provided in
connection with an audit or a review of the financial statements of a company.
The Audit Committee has not approved the engagement of PricewaterhouseCoopers
LLP for any non-audit services.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibits 10.11.1, 10.14 and 99.1 are filed as updates to the exhibit index
included in the Company's Form 10-K filed with the SEC on April 1, 2002 (File
No. 000-28897).
Exhibit 10.11.1 Extensity, Inc. Amended and Restated 2000 Non-statutory Stock
Option Plan.
Exhibit 10.14 Extensity, Inc. Executive Change of Control Severance Benefit
Plan.
Exhibit 99.1 - Certification by Chief Executive Officer and Chief Financial
Officer.
None.
(b) Reports on Form 8-K:
None.
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
August 14, 2002 EXTENSITY, INC.
By /s/ Kenneth R. Hahn
Chief Financial Officer (Principal Financial
and Accounting Officer)
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