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 September 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 October
31, 2002 was 25,450,193.
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
ITEM 4. Evaluation of Disclosure Controls and Procedures 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 25
ITEM 6. Exhibits and Reports on Form 8-K 25
SIGNATURE 26
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
EXTENSITY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
ASSETS
September 30, December 31,
2002 2001
--------- ---------
Current assets:
Cash and cash equivalents $ 16,290 $ 19,456
Short-term investments 18,954 26,883
Accounts receivable, net 2,803 5,393
Prepaid and other current assets 1,210 1,835
--------- ---------
Total current assets 39,257 53,567
Property and equipment, net 2,662 3,657
Restricted long-term investments 1,355 1,397
Other assets 357 601
--------- ---------
Total assets $ 43,631 $ 59,222
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,037 $ 3,672
Accrued liabilities 2,725 3,977
Deferred revenue 2,668 3,488
Capital lease obligations 108 240
Sublease loss accrual 383 787
--------- ---------
Total current liabilities 8,921 12,164
Capital lease obligations -- 54
Sublease loss accrual and other noncurrent liabilities 1,694 809
--------- ---------
Total liabilities 10,615 13,027
--------- ---------
Stockholders' equity:
Common stock 25 25
Additional paid-in capital 147,341 147,394
Deferred stock compensation (54) (504)
Notes receivable from stockholders (471) (433)
Accumulated comprehensive income 218 155
Accumulated deficit (114,043) (100,442)
--------- ---------
Total stockholders' equity 33,016 46,195
--------- ---------
Total liabilities and stockholders' equity $ 43,631 $ 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 Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenues:
License $ 1,507 $ 4,886 $ 4,456 $ 16,559
Service and maintenance 2,931 3,174 9,128 10,434
Hosted 319 48 707 48
-------- -------- -------- --------
Total revenues 4,757 8,108 14,291 27,041
-------- -------- -------- --------
Cost of revenues: (*)
Licenses 151 384 400 1,092
Service and maintenance 1,750 2,901 5,997 10,419
Hosted 257 211 863 211
-------- -------- -------- --------
Total cost of revenues 2,158 3,496 7,260 11,722
-------- -------- -------- --------
Gross profit 2,599 4,612 7,031 15,319
-------- -------- -------- --------
Operating expenses: (*)
Sales and marketing 2,452 4,694 8,862 19,651
Research and development 1,664 2,244 5,598 9,981
General and administrative 1,347 1,821 4,312 5,449
Restructuring and other charges 833 5,797 2,528 6,174
-------- -------- -------- --------
Total operating expenses 6,296 14,556 21,300 41,255
-------- -------- -------- --------
Loss from operations (3,697) (9,944) (14,269) (25,936)
Interest income, net 178 565 668 2,325
-------- -------- -------- --------
Net loss $ (3,519) $ (9,379) $(13,601) $(23,611)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.14) $ (0.39) $ (0.55) $ (1.00)
Shares used in computing basic and diluted net loss per share 24,997 23,970 24,783 23,680
(*) Amounts include non-cash stock based compensation as follows:
Cost of revenues:
Service and maintenance $ 6 $ -- $ 9 $ 59
Operating expenses:
Sales and marketing 14 -- 21 112
Research and development 9 -- 13 68
General and administrative 14 -- 21 109
-------- -------- -------- --------
$ 43 $ -- $ 64 $ 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)
Nine Months Ended
September 30,
2002 2001
-------- --------
Cash flows from operating activities:
Net loss $(13,601) $(23,611)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 1,238 1,915
Amortization of deferred stock compensation and other 74 434
Amortization of debt discount and lease line issuance costs 6 42
Interest earned on notes from stockholders (38) (46)
Write off of computer equipment and software -- 2,882
Changes in operating assets and liabilities:
Accounts receivable 2,590 2,304
Prepaids and other current assets 625 602
Other assets 244 (138)
Accounts payable (635) (2,464)
Accrued liabilities (1,252) (845)
Other liabilities 524 1,461
Deferred revenue (820) (10,082)
-------- --------
Cash used in operating activities (11,045) (27,546)
-------- --------
Cash flows from investing activities:
Purchases of short-term investments (15,907) (39,545)
Maturities of short-term investments 23,836 47,523
Capital expenditures (243) (2,389)
Restricted long-term investments 42 39
-------- --------
Cash provided by investing activities 7,728 5,628
-------- --------
Cash flows from financing activities:
Payments on notes payable -- (770)
Payments on capital lease obligation (191) (308)
Proceeds from employee stock plans 322 1,028
-------- --------
Cash provided by (used in) financing activities 131 (50)
-------- --------
Effect of exchange rate on cash and cash equivalents 20 14
Decrease in cash and cash equivalents (3,166) (21,954)
Cash and cash equivalents, beginning of period 19,456 40,695
-------- --------
Cash and cash equivalents, end of period $ 16,290 $ 18,741
======== ========
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 September 30, 2002 and 2001 (in thousands):
September 30,
----------------
2002 2001
---- -----
Shares issuable under stock options 821 2,737
Shares of unvested stock subject to repurchase -- 204
---- -----
821 2,941
==== =====
3. Significant Customers
No customers accounted for more than 10% of total revenues for the three
or nine-month periods ended September 30, 2002 and 2001. No customers accounted
for more than 10% of accounts receivable for the three or nine-month periods
ended September 30, 2002 or 2001.
4
4. Comprehensive Loss
The components of comprehensive loss are as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ---------------------------
2002 2001 2002 2001
------- ------- -------- --------
Net loss $(3,519) $(9,379) $(13,601) $(23,611)
Foreign currency translation adjustment 26 31 63 28
------- ------- -------- --------
Total comprehensive loss $(3,493) $(9,348) $(13,538) $(23,583)
======= ======= ======== ========
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 was 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 from all functions across
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 nine months ended
September 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 $383,000 against the accrual in the nine-month period
ending September 30, 2002. The sublease loss accrual balance as of September 30,
2002 is $1,849,000. 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,
as well as certain of the underwriters from Extensity's IPO were named as
defendants in a class action shareholder complaint filed in the United States
District Court for the Southern District of New York and 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.
The Company is 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 the Company's business, financial condition, results of operations or cash
flows.
5
7. Proposed Merger with Geac Computer Corporation Limited
On August 26, 2002, Extensity entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Geac Computer Corporation Limited ("Geac") and
Cage Acquisition, Inc., a subsidiary of Geac ("Merger Sub"). Pursuant to the
Merger Agreement, Merger Sub will merge with and into Extensity (the "Merger"),
and at the effective time of the Merger, each outstanding share of Extensity
common stock will be converted into the right to receive, at the election of the
stockholder, cash in the amount of $1.75 or approximately 0.627 of a Geac common
share (the "Exchange Ratio"), subject to adjustment in certain circumstances.
Pursuant to the terms of the Merger Agreement, certain outstanding options to
purchase shares of Extensity common stock will terminate immediately prior to
the effective time of the Merger, and other outstanding options to purchase
Extensity common stock will be assumed by Geac, based on the Exchange Ratio. On
October 11, 2002, an F-4 Registration Statement regarding the Merger was
submitted by Geac to the SEC on a confidential basis. This registration
statement, which includes the proxy statement for the special meeting of
Extensity stockholders to adopt the Merger Agreement is being reviewed by the
SEC on a confidential basis. Upon the completion of the SEC review, the
registration statement will be made available for public review and proxy
materials relating to the special meeting of Extensity stockholders will be
mailed to Extensity stockholders. The Merger is subject to customary closing
conditions, including the approval of Extensity stockholders. In connection with
this transaction the Company incurred $833,000 of expenses in the three months
ended September 30, 2002.
8. Recent Accounting Pronouncements
In July 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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 a material impact on its
financial position or results of operations 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 6.0, 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 amount of revenues associated with 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 application
on our servers.
We promote and sell our software products through our direct sales force
and through indirect channels, including Elite Information Group and Emplaza,
S.A., a joint venture between Terra Networks and Meta4. We also have marketing
referral arrangements in place with Cisco Systems, IBM, US Bank,
Amadeus/eTravel, Rosenbluth Travel, WebEx, DigitalThink, Visa, GetThere.com, and
Pro Act Technologies.
For the nine months ended September 30, 2002, revenues derived from our
international operations represented approximately 11.0 % of total revenues.
On August 26, 2002, Extensity entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Geac Computer Corporation Limited ("Geac") and
Cage Acquisition, Inc., a subsidiary of Geac ("Merger Sub"). Pursuant to the
Merger Agreement, Merger Sub will merge with and into Extensity (the "Merger"),
and at the effective time of the Merger, each outstanding share of Extensity
common stock will be converted into the right to receive, at the election of the
stockholder, cash in the amount of $1.75 or approximately 0.627 of a Geac common
share (the "Exchange Ratio"), subject to adjustment in certain circumstances.
Pursuant to the terms of the Merger Agreement, certain outstanding options to
purchase shares of Extensity common stock will terminate immediately prior to
the effective time of the Merger, and other outstanding options to purchase
Extensity common stock will be
7
assumed by Geac, based on the Exchange Ratio. On October 11, 2002, an F-4
Registration Statement regarding the Merger was submitted by Geac to the SEC on
a confidential basis. This registration statement, which includes the proxy
statement for the special meeting of Extensity stockholders to adopt the Merger
Agreement is being reviewed by the SEC on a confidential basis. Upon the
completion of the SEC review, the registration statement will be made available
for public review and proxy materials relating to the special meeting of
Extensity stockholders will be mailed to Extensity stockholders. The Merger is
subject to customary closing conditions, including the approval of Extensity
stockholders.
Critical Accounting Policies
A summary of the Company's critical accounting policies is included in our
report on Form 10-K 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 Nine Months Ended
September 30, September 30,
-------------------- ----------------------
2002 2001 2002 2001
------ ------ ------- -------
Revenues:
License $1,507 $4,886 $ 4,456 $16,559
Service and maintenance 2,931 3,174 9,128 10,434
Hosted 319 48 707 48
------ ------ ------- -------
Total revenues $4,757 $8,108 $14,291 $27,041
====== ====== ======= =======
Cost of revenues:(*)
License $ 151 $ 384 $ 400 $ 1,092
Service and maintenance 1,744 2,901 5,988 10,360
Hosted 257 211 863 211
------ ------ ------- -------
Total cost of revenues $2,152 $3,496 $ 7,251 $11,663
====== ====== ======= =======
Operating expenses:(*)
Sales and marketing $2,438 $4,694 $ 8,841 $19,539
Research and development 1,655 2,244 5,585 9,913
General and administrative 1,333 1,821 4,291 5,340
Restructuring and other charges 833 5,797 2,528 6,174
Interest income, net $ 178 $ 565 $ 668 $ 2,325
(*) Amounts exclude the amortization of non-cash stock based
compensation as follows:
Cost of revenues:
Service and maintenance $ 6 $ -- $ 9 $ 59
Operating expenses:
Sales and marketing 14 -- 21 112
Research and development 9 -- 13 68
General and administrative 14 -- 21 109
------ ------ ------- -------
$ 43 $ -- $ 64 $ 348
====== ====== ======= =======
Revenues
Total revenues decreased to $4.8 million for the three months ended
September 30, 2002 from $8.1 million for the three months ended September 30,
2001, a decrease of 41%. Total revenues decreased to $14.3 million for the nine
months ended September 30, 2002 from $27.0 million for the nine months ended
September 30, 2001, a decrease of 47%. No customers accounted for more than 10%
of total revenues for the three or nine-month periods ended September 30, 2002
and 2001.
License Revenues. License revenues decreased to $1.5 million for the three
months ended September 30, 2002 from $4.9 million for the three months ended
September 30, 2001, a decrease of 69%. License revenue decreased to
9
$4.5 million for the nine months ended September 30, 2002 from $16.6 million for
the nine months ended September 30, 2001, a decrease of 73%. The decrease in
license revenue for the three and nine-month periods ended September 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 nine
months ended September 30, 2001, $1.9 million of license revenue was recognized
through the Company's relationship with a reseller. In the second quarter of
2001, the Company and the reseller jointly decided to terminate the reseller
arrangement.
Service and Maintenance Revenues. Service and maintenance revenues
decreased to $2.9 million for the three months ended September 30, 2002 from
$3.2 million for the three months ended September 30, 2001, a decrease of 8%.
Service and maintenance revenues decreased to $9.1 million for the nine months
ended September 30, 2002 from $10.4 million for the nine-month period ended
September 30, 2001, a decrease of 13%. The decrease in the three and nine-month
periods ended September 30, 2002 was attributable to a decrease in professional
services opportunities resulting from a decrease in capital spending associated
with current global economic conditions.
Hosted Revenues. Hosted revenues for the three-month period ended
September 30, 2002 were $319,000 and $707,000 for the nine-month period ended
September 30, 2002. Hosted revenues for the three and nine-month period ended
September 30, 2001 were $48,000. The third quarter of 2001 was the first period
the Company began recognizing revenue on this offering.
Cost of Revenues
Total cost of revenues decreased to $2.2 million for the three months
ended September 30, 2002 from $3.5 million for the three months ended September
30, 2001, a decrease of 38%. Total cost of revenues decreased to $7.3 million
for the nine months ended September 30, 2002 from $11.7 million for the nine
months ended September 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 $151,000 for the three months ended September 30, 2002 from
$384,000 for the three months ended September 30, 2001. Cost of license revenue
decreased to $400,000 for the nine months ended September 30, 2002 from $1.1
million for the nine months ended September 30, 2001. The decrease in cost for
both the three and nine-month periods ended September 30, 2002 was due primarily
to decreased sales activity. As a percentage of license revenues, cost of
license revenues increased to 10% for the three months ended September 30, 2002
from 8% for the three months ended September 30, 2001. As a percentage of
license revenues, cost of license revenues increased to 9% for the nine months
ended September 30, 2002 from 7% for the nine months ended September 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, exclusive of non-stock based compensation, 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 $1.7 million for the three months
ended September 30, 2002 from $2.9 million for the three months ended September
30, 2001, a decrease of 40%. The cost of service and maintenance revenues
decreased to $6.0 million for the nine months ended September 30, 2002 from
$10.4 million for the nine months ended September 30, 2001, a decrease of 42%.
As a percentage of service revenues, cost of service revenues decreased to 60%
for the three months ended September 30, 2002 from 91% for the three months
ended September 30, 2001. As a percentage of service revenues, cost of service
revenues decreased to 66% for the nine months ended September 30, 2002 from 100%
for the nine months ended September 30, 2001. The decrease for the three and
nine-month periods ended September 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.
10
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. Cost of
hosted revenues increased to $257,000 for the three months ended September 30,
2002, from $211,000 for the three months ended September 30, 2001. Cost of
hosted revenues for the nine months ended September 30, 2002, was $863,000,
which includes three full quarters of expense. Cost of hosted revenues for the
nine months ended September 30, 2001 was $211,000, which includes one quarter of
expense as the Company began recognizing revenue on it's hosted offering in the
third quarter of 2001.
Operating Expenses
Sales and Marketing. Sales and marketing expenses, exclusive of non-cash
stock based compensation, consist primarily of compensation and related costs
for sales and marketing personnel, including commissions and marketing program
costs. Sales and marketing expenses decreased to $2.4 million for the three
months ended September 30, 2002 from $4.7 million for the three months ended
September 30, 2001, a decrease of 48%. Sales and marketing expenses decreased to
$8.8 million for the nine months ended September 30, 2002 from $19.5 million for
the nine months ended September 30, 2001, a decrease of 55%. As a percentage of
total revenues, sales and marketing expenses decreased to 51% for the three
months ended September 30, 2002 from 58% for the three months ended September
30, 2001. As a percentage of total revenues, sales and marketing expenses
decreased to 62% for the nine months ended September 30, 2002 from 72% for the
nine months ended September 30, 2001. The decrease in sales and marketing
expenses for the three and nine-month periods ended September 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, exclusive of
non-cash stock based compensation, consist primarily of compensation and related
personnel costs, and fees associated with contractors. Research and development
expenses decreased to $1.7 million for the three months ended September 30, 2002
from $2.2 million for the three months ended September 30, 2001, a decrease of
26%. Research and development expenses decreased to $5.6 million for the nine
months ended September 30, 2002 from $9.9 million for the nine months ended
September 30, 2001, a decrease of 44%. As a percentage of total revenues,
research and development expenses increased to 35% for the three months ended
September 30, 2002 from 28% for the three months ended September 30, 2001. As a
percentage of total revenues, research and development expenses were 39% and 37%
for the nine-month periods ended September 30, 2002 and 2001, respectively. The
decrease in research and development cost for the three and nine- month periods
ended September 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.
General and Administrative. General and administrative expenses, exclusive
of non-cash stock based compensation, consist primarily of compensation and
related costs for our executive, finance and administrative personnel and other
related expenses. General and administrative expenses decreased to $1.3 million
for the three months ended September 30, 2002 from $1.8 million for the three
months ended September 30, 2001, a decrease of 27%. General and administrative
expenses decreased to $4.3 million for the nine months ended September 30, 2002
from $5.3 million for the nine months ended September 30, 2001, a decrease of
20%. As a percentage of total revenues, general and administrative expenses
increased to 28% for the three months ended September 30, 2002 from 22% for the
three months ended September 30, 2001. As a percentage of total revenues general
and administrative expenses increased to 30% for the nine months ended September
30, 2002 from 20% for the nine months ended September 30, 2001. The decrease in
general and administrative expenses in the three and nine-month periods ended
September 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.
11
Restructuring and other charges. Other charges for the three months ended
September 30, 2002 were $833,000. These charges were incurred in connection with
exploring merger and acquisition transactions primarily related to the proposed
merger with the Geac Corporation. For the nine months ended September 30, 2002,
restructuring and other charges were approximately $2.5 million comprised of
$523,000 of severance and benefits, $946,000 of accrued lease costs, and $1.1
million of merger expenses. For the three months ended September 30, 2001,
restructuring and other charges were $5.8 million. Approximately $4.5 million of
these expenses were incurred in connection with our July 2001 restructuring plan
and $1.3 million was incurred in connection with the write-down of assets
associated with our hosted offering. For the nine months ended September 30,
2001, restructuring and other charges were $6.2 million comprised of the $4.5
million in restructuring, $1.3 million in write-down of assets and $377,000 of
other charges associated with exploring merger and acquisition opportunities.
Interest Income, Net
Interest income, net was $178,000 for the three months ended September 30,
2002 and $565,000 for the three months ended September 30, 2001, a decrease of
68%. Interest income, net was $668,000 for the nine months ended September 30,
2002 and $2.3 million for the nine months ended September 30, 2001, a decrease
of 71%. 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 nine-month periods ended September 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
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. For the three months ended September 30, 2002, amortization of
non-cash based compensation was $43,000. For the three months ended September
30, 2001, there was no compensation expense. For the nine months ended September
30, 2002, amortization of non-cash based compensation was $64,000 and for the
nine months ended September 30, 2001, amortization of non-cash based
compensation was $348,000. The lower expense in the nine-month period ended
September 30, 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 $25,000 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 September 30, 2002, we had $35.2 million in cash, cash equivalents
and short-term investments, $1.4 million in restricted long-term investments and
$30.3 million in working capital.
Net cash used in operating activities was $11.0 million for the nine
months ended September 30, 2002 and $27.5 million for the nine months ended
September 30, 2001. For the nine months ended September 30, 2002 cash used in
operating activities was primarily attributed to a net loss of $13.6 million,
adjusted for depreciation and amortization of $1.2 million, a decrease in
accrued liabilities of $1.3 million and a decrease in accounts receivable of
$2.6 million. For the nine months ended September 30, 2001 net cash used in
operating activities was primarily attributable to a net loss of $23.6 million,
adjusted for a non-cash charge associated with the write-off of computer
equipment and software of $2.9 million, depreciation and amortization of $1.9
million, a decrease in deferred revenue of $10.1 million, and a decrease in
accrued liabilities of $845,000 million offset by a decrease in accounts
receivable of $2.3 million and an increase in other liabilities of $1.4 million.
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Net cash provided by investing activities was $7.7 million for the nine
months ended September 30, 2002 and net cash provided by investing activities
was $5.6 million for the nine months ended September 30, 2001. Net cash provided
by investing activities for the nine month periods ended September 30, 2002 and
2001 were primarily attributable to the maturities of short-term investments.
Net cash provided by financing activities was $131,000 for the nine months
ended September 30, 2002 due to payments on capital lease obligations of
$191,000 offset by proceeds from employee stock plans of $322,000. Net cash used
in financing activities was $50,000 for the nine months ended September 30,
2001, primarily due to payments on notes payable and capital lease obligations
of $1.1 million, offset by proceeds from employee stock plans of $1.0 million.
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
The Company faces numerous risks in connection with the proposed transaction
with Geac, which may adversely affect our results of operations whether or not
the merger is completed, and the merger may not be completed on a timely basis
or at all.
On August 26, 2002, the Company entered into an agreement to combine its
business with Geac. The planned merger could have an adverse effect on the
Company's revenues in the near-term if customers delay, defer, or cancel
purchases due to uncertainty about the direction of our product offerings
following the merger and our willingness to support and service existing
products. To the extent a prolonged delay in completing the planned merger
creates uncertainty among those persons and organizations contemplating
purchases of products or services such that several large customers, or a
significant group of small customers, delay purchase decisions pending
resolution of the planned merger, this could have an adverse effect on the
Company's results of operations, and quarterly revenues could be substantially
below the expectations of market analysts and could cause a reduction in stock
price. Additionally, speculation regarding the likelihood of the closing of the
merger could increase the volatility of the Company's stock price.
In addition, the market values of the Company's common stock and Geac
common stock will continue to vary prior to completion of the merger transaction
due to changes in the business, operations or prospects of the Company or Geac,
market assessments of the merger, regulatory considerations, market and economic
considerations, fluctuations in exchange rates between the Canadian dollar and
the United States dollar, or other factors. The merger agreement provides for a
downward or upward adjustment to the purchase price based on changes in the
Company's working capital relative to a standard set forth in the agreement,
unless the working capital balance is within three percent of the working
capital balance standard as calculated the day prior to the close of the
transaction. There is no guarantee that at the close of the transaction the
working capital balance will be within three percent of the working capital
standard at that time. There will be no adjustment for changes in the market
price of either the Company's common stock or Geac common stock.
Completion of the merger also is subject to numerous risks and
uncertainties. The merger agreement contains conditions that must be fulfilled
or waived in order that one or both of the parties be obligated to complete the
merger, and the merger agreement may be terminated by either Geac or the Company
under specified circumstances. In addition, the Company may be unable to obtain
stockholder approval, which is required to complete the merger. Under certain
circumstances, the merger may be subject to governmental reporting obligations
and statutory waiting periods, which could result in a delay of the completion
of the merger or result in the merger not being completed at all. If the merger
is not completed, the Company could be subject to a number of risks that may
adversely affect its business and stock price, including:
- the Company would not realize the benefits it expects by being part of a
combined company with Geac, as well as the potentially enhanced financial and
competitive position as a result of being part of the combined company;
- the diversion of management attention from the Company's day-to-day
business and the unavoidable disruption to its employees and its relationships
with customers as a result of efforts and uncertainties relating to the
Company's anticipated merger with Geac may detract from its ability to grow
revenues and minimize costs, which, in turn may lead to a loss of market
position that the Company could be unable to regain if the merger does not
occur;
14
- the market price of shares of the Company's common stock may decline to
the extent that the current market price of those shares reflects a market
assumption that the merger will be completed;
- the Company must pay the costs related to the merger, such as legal,
accounting and financial advisory fees, whether or not the merger is completed;
- under specified circumstances, the Company may be required to pay Geac a
termination fee of $1.5 million, plus Geac's fees and expenses, in connection
with the termination of the merger agreement; and
- the Company may not be able to continue its present level of operations,
may need to scale back its business, may have to consider additional reductions
in force, may have to consider alternative sources of funding, may be subject to
delisting from the Nasdaq National Market and may not be able to take advantage
of future opportunities or effectively respond to competitive pressures, any of
which could have a material adverse effect on its business and results of
operations.
Covenants in the merger agreement may impede our ability to make
acquisitions or complete other transactions that are not in the ordinary course
of business pending completion of the merger. As a result, if the merger is not
completed, we may be at a disadvantage to our competitors. In addition, while
the merger agreement is in effect and subject to very narrowly defined
exceptions, we are prohibited from soliciting, initiating, encouraging or
entering into certain extraordinary transactions, such as a merger, sale of
assets or other business combination outside the ordinary course of business,
with any third party. Any such transactions could be favorable to our
stockholders.
As a result of the proposed merger with Geac, the Company may be unable to
retain key employees, which could result in the merger not being completed. It
is a condition of Geac's obligation to complete the merger that certain
specified executives of the Company remain employed by the Company. If the
Company is unable to retain these executives, Geac would have the option to not
complete the merger. If the merger is not completed and the Company is unable to
retain key employees, the Company could face disruptions in its operations, loss
of existing customers, loss of key information, expertise or know-how, and
unanticipated additional recruitment and training costs.
If the merger is completed, we will continue to face risks associated with
integration of the businesses and operations of the Company and Geac, and we may
not realize the anticipated benefits or synergies of the merger to the extent,
or in the timeframe, anticipated. The combined company will need to overcome
significant challenges in order to realize any benefits or synergies from the
merger, including execution of a number of post-merger events such as:
- integrating the operations and technologies of the two companies;
- retaining and assimilating the key personnel of each company;
- retaining existing customers of both companies and attracting additional
customers;
- retaining strategic partners of each company and attracting new
strategic partners; and
- creating uniform standards, controls, procedures, policies and
information systems.
In addition to the integration risks previously discussed, our ability to
realize these benefits and synergies could be impacted adversely by practical or
legal constraints on combining operations or implementing workforce reductions.
The execution of these post-merger events will involve considerable risks and
may not be successful. These risks include:
- the potential disruption of the combined company's ongoing business and
distraction of its management;
- the potential strain on the combined company's financial and managerial
controls and reporting systems and procedures;
15
- unanticipated expenses and potential delays related to integration of
the operations, technology and other resources of the two companies;
- the impairment of relationships with employees, suppliers and customers
as a result of any integration of new management personnel; and
- potential unknown liabilities associated with the merger and the
combined operations.
The combined company may not succeed in addressing these risks or any
other problems encountered in connection with the merger. The inability to
successfully integrate operations, technology and personnel with Geac, or any
significant delay in achieving integration, could have a material adverse effect
on the combined company after the merger and, as a result, on the market price
of Geac's common stock.
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 relationships and develop new third-party
relationships.
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.
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
September 30, 2002, we had an accumulated deficit of $114.0 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.
16
Our business is changing rapidly, which could cause our quarterly operating
results to vary and our stock price to fluctuate.
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors, many of which are beyond our control. We
expect to continue to make expenditures in all areas of our business 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.
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.
17
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.
To successfully implement our business strategy, we will need 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.
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.
In the past the closing price of our stock has been 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 Nasdaq. 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
Nasdaq 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 SmallCap 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.
18
For the three and nine-month periods ended September 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.
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 international
sales of our products, 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
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our products is a complex process and often requires assistance from third
parties. We may not adequately address all of the factors necessary to achieve
broad acceptance in our target international markets. Further, to achieve broad
usage by employees across international organizations, our products must be
localized to handle native languages and cultures in each international market.
Localizing our products is also a complex process and we intend to continue
working with third parties to develop localized products. To date, we have
localized our product for the markets where the English language is the local
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
September 30, 2002, we had a total of 10 employees in our international
operations. For the nine months ended September 30, 2002, we derived
approximately 11.0% 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.
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 three to ten 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. 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 can be 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.
20
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 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. 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
21
us to litigation, loss of customers, or otherwise harm our business. In
addition, any person who is able to circumvent our security measures could
misappropriate proprietary or confidential customer information or cause
interruptions in our operations. We may be required to incur significant costs
to protect against security breaches or to alleviate problems caused by
breaches. Additionally, in the past, computer viruses and software programs that
disable or impair computers have been distributed and have rapidly spread over
the Internet. Computer viruses could be introduced into our systems or those of
our customers or suppliers, which could disrupt our software solutions or make
them inaccessible to customers or suppliers. Further, a well-publicized
compromise of security could deter people from using the Internet to conduct
transactions that involve transmitting confidential information. Our failure to
prevent security breaches, or well-publicized security breaches affecting the
Internet in general, could significantly harm our business, operating results
and financial condition.
We may face costly damages or litigation costs if a third party claims that we
infringe its intellectual property.
There has been a substantial amount of litigation in the software industry
and the Internet industry regarding intellectual property rights. It is possible
that in the future, third parties may claim that we or our current or potential
future products infringe upon their intellectual property. We expect that
software product developers and providers of Internet-based software
applications will increasingly be subject to infringement claims as the number
of products and competitors in our industry segment grows and the functionality
of products in different industry segments overlaps. Any claims, with or without
merit, could be time consuming, result in costly litigation, cause product
shipment delays or require us to enter into royalty or licensing agreements.
Royalty or licensing agreements, if required, may not be available on terms
acceptable to us or at all, which could seriously harm our business.
We are the target of a securities class action complaint and are at risk of
securities class action litigation, which may result in substantial costs and
divert management attention and resources.
In November 2001, the Company and certain of its officers and directors
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 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. 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, financial
position, results of operations and cash flows.
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.
22
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 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 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.
23
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 September 30, 2002.
ITEM 4. Evaluation of Disclosure Controls and Procedures.
(a) Evaluation of disclosure controls and procedures. Our chief executive
officer and our acting chief financial officer, after evaluating the
effectiveness of our "disclosure controls and procedures" (as defined in the
Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c)) as of a date (the
"Evaluation Date") within 90 days before the filing date of this quarterly
report, have concluded that as of the Evaluation Date, our disclosure controls
and procedures were adequate and designed to ensure that material information
relating to us and our consolidated subsidiary would be made known to them by
others within those entities.
(b) Changes in internal controls. There were no significant changes in our
internal controls or, to our knowledge, in other factors that could
significantly affect our disclosure controls and procedures subsequent to the
Evaluation Date.
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.
24
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 a global motion to dismiss the IPO Lawsuits on July 15, 2002, as to which
the Company does not expect a decision until late 2002. On October 9, 2002, the
Court entered an order dismissing the Company's named officers and directors
from the IPO Lawsuits without prejudice, pursuant to an agreement tolling the
statute of limitations with respect to these officers and directors until
September 30, 2003. The Company believes that this litigation is without merit
and intends to defend against it vigorously. This litigation, however, as well
as any other litigation that might be instituted, could result in substantial
costs and a diversion of management's attention and resources.
We are subject to legal proceedings and claims, either asserted or
unasserted, that arise in the ordinary course of business. While the outcome of
these proceedings and claims cannot be predicted with certainty, management does
not believe that the outcome of any of these legal matters will have a material
adverse effect on our consolidated financial position, results of operations or
cash flows.
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
None.
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
Exhibit 99.1 is filed as an update 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 99.1 - Certification by Chief Executive Officer and Chief Financial
Officer.
(b) Reports on Form 8-K:
On August 26, 2002, the Company filed a Form 8-K under Item 5 announcing that on
August 26, 2002 the Company entered into an Agreement and Plan of Merger with
Geac Computer Corporation Limited and Cage Acquisition, Inc., a wholly-owned
subsidiary of Geac Computer Corporation Limited.
25
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.
November 8, 2002 EXTENSITY, INC.
By /s/ Benjamin Netick
Vice President Finance and
Acting Chief Financial Officer (Principal Financial
and Accounting Officer)
26
CERTIFICATIONS
I, Robert A. Spinner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Extensity, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 8, 2002
/s/ Robert A. Spinner
-----------------------------
Robert A. Spinner
Chief Executive Officer
(Principal Executive Officer)
27
CERTIFICATIONS
I, Benjamin Netick, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Extensity, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 8, 2002
/s/ Benjamin Netick
-----------------------------
Benjamin Netick
Vice President of Finance and Acting Chief Financial Officer
(Principal Financial Officer)
28