UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 2001
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number: 000-28897
EXTENSITY, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
68-0368868
(IRS Employer Identification Number)
2200 POWELL STREET, SUITE 300, EMERYVILLE, CALIFORNIA 94608
(Address of principal executive offices and zip code)
(510) 594-5700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of the Registrant's Common Stock outstanding as of July 31,
2001 was 24,553,636
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited) 1
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 21
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 21
ITEM 2. Changes in Securities and Use of Proceeds 21
ITEM 3. Defaults Upon Senior Securities 22
ITEM 4. Submission of Matters to a Vote of Security Holders 22
ITEM 5. Other Information 22
ITEM 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
EXTENSITY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
ASSETS
June 30, December 31,
2001 2000
--------- ---------
Current assets:
Cash and cash equivalents $ 37,945 $ 40,695
Short-term investments 21,924 38,925
Restricted short-term investments 1,397 1,436
Accounts receivable, net 5,483 8,527
Prepaids and other current assets 3,557 3,443
--------- ---------
Total current assets 70,306 93,026
Property and equipment, net 6,581 6,279
Other assets 619 457
--------- ---------
Total assets $ 77,506 $ 99,762
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,139 $ 6,434
Accrued liabilities 3,930 5,125
Deferred revenue 8,929 16,041
Notes payable and capital lease obligations 687 1,269
--------- ---------
Total current liabilities 19,685 28,869
Capital lease obligations and other 427 647
--------- ---------
Total liabilities 20,112 29,516
--------- ---------
Stockholders' equity:
Common stock 24 24
Additional paid-in capital 147,531 147,475
Deferred stock compensation (1,358) (2,679)
Notes receivable from stockholders (380) (380)
Cumulative translation adjustment 298 295
Accumulated deficit (88,721) (74,489)
--------- ---------
Total stockholders' equity 57,394 70,246
--------- ---------
Total liabilities and stockholders' equity $ 77,506 $ 99,762
========= =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
1
EXTENSITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues:
License $ 5,651 $ 3,034 $ 11,673 $ 5,259
Service and maintenance 3,480 2,299 7,260 3,797
-------- -------- -------- --------
Total revenues 9,131 5,333 18,933 9,056
-------- -------- -------- --------
Cost of revenues:(*)
License 263 131 708 215
Service and maintenance 3,444 3,781 7,518 6,870
-------- -------- -------- --------
Total cost of revenues 3,707 3,912 8,226 7,085
-------- -------- -------- --------
Gross profit 5,424 1,421 10,707 1,971
-------- -------- -------- --------
Operating expenses:(*)
Sales and marketing 7,043 6,812 14,957 12,945
Research and development 3,945 3,412 7,737 6,548
General and administrative 1,856 1,487 4,005 3,091
-------- -------- -------- --------
Total operating expenses 12,844 11,711 26,699 22,584
-------- -------- -------- --------
Loss from operations (7,420) (10,290) (15,992) (20,613)
Interest income, net 687 1,425 1,760 2,411
-------- -------- -------- --------
Net loss $ (6,733) $ (8,865) $(14,232) $(18,202)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.28) $ (0.39) $ (0.60) $ (0.93)
Shares used in computing
basic and diluted net loss per share 23,735 22,472 23,562 19,540
(*) Amounts include non-cash based compensation as follows:
Cost of revenues:
Service and maintenance $ 9 $ 185 $ 59 $ 424
Operating expenses:
Sales and marketing 18 393 112 901
Research and development 11 243 68 557
General and administrative 17 336 109 769
-------- -------- -------- --------
$ 55 $ 1,157 $ 348 $ 2,651
======== ======== ======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
2
EXTENSITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30,
-------------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net loss $(14,232) $(18,202)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization 1,402 731
Amortization of deferred stock compensation and other 433 2,651
Amortization of debt discount and lease line issuance costs 35 50
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 3,044 (2,335)
Increase in prepaids and other current assets (114) (1,357)
Increase in other non current assets (162) --
Increase (decrease) in accounts payable (295) 2,131
Increase (decrease) in accrued liabilities (1,195) 2,313
Increase (decrease) in deferred revenue (7,112) 2,954
Increase in other current liabilitiies -- 65
-------- --------
Cash used in operating activities (18,196) (10,999)
-------- --------
Cash flows from investing activities:
Purchases of short-term investments (20,207) (54,839)
Sales of short-term investments 37,208 17,864
Capital expenditures (1,704) (2,047)
(Increase) decrease in restricted cash 39 (929)
-------- --------
Cash provided by (used in) investing activities 15,336 (39,951)
-------- --------
Cash flows from financing activities:
Payments on notes payable (614) (605)
Payments on capital lease obligations (225) (224)
Proceeds from employee stock plans 944 675
Net proceeds from issuance of common stock through IPO -- 83,348
-------- --------
Cash provided by financing activities 105 83,194
-------- --------
Effect of exchange rate on cash and cash equivalents 5 10
Increase (decrease) in cash and cash equivalents (2,750) 32,254
Cash and cash equivalents, beginning of period 40,695 10,416
-------- --------
Cash and cash equivalents, end of period $ 37,945 $ 42,670
======== ========
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, 2000 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 March 30, 2001.
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Extensity Europe Limited, which
commenced operations in September 1999, and Extensity Australia PTY Limited,
which commenced operations in February of 2001. 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.
4
The following table sets forth the computation of basic and diluted net loss per
share for the periods indicated (in thousands, except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
Numerator:
Net loss $ (6,733) $ (8,865) $(14,232) $(18,202)
Denominator:
Weighted average shares 24,422 23,629 24,309 20,735
Weighted average unvested common shares (687) (1,157) (747) (1,195)
-------- -------- -------- --------
Total weighted average shares 23,735 22,472 23,562 19,540
-------- -------- -------- --------
Basic and diluted net loss per share $ (0.28) $ (0.39) $ (0.60) $ (0.93)
======== ======== ======== ========
Diluted net loss per share does not include the effect of the following
potential common shares at June 30, 2001 and 2000 (in thousands):
June 30
-------------
2001 2000
----- -----
Shares issuable under stock options 3,737 3,575
Shares of unvested stock subject to repurchase 388 1,058
Shares issuable pursuant to warrants to purchase common stock 20 160
----- -----
4,145 4,793
===== =====
The weighted-average exercise price of stock options outstanding was $5.75 and
$4.88 as of June 30, 2001 and 2000, respectively. The weighted average
repurchase price of unvested stock was $1.64 and $1.91 as of June 30, 2001 and
2000, respectively. The weighted average exercise price of warrants was $14.50
and $3.30 as of June 30, 2001 and 2000, respectively.
3. Significant Customers
For the three months ended June 30, 2001, sales to three customers accounted for
21%, 13% and 12% of total revenues. For the three months ended June 30, 2000,
sales to two customers accounted for 17% and 14% of total revenues. For the six
months ended June 30, 2001, sales to one customer accounted for 12% of total
revenues. For the six months ended June 30, 2000, sales to one customer
accounted for 17% of total revenues.
4. Stock Option Exchange
Pursuant to a Tender Offer Statement filed with the SEC on May 4, 2001,
employees surrendered for cancellation 1,744,400 options to purchase shares of
the Company's common stock at exercise prices ranging from $5.44 to $38.81. In
exchange, the Company on June 5, 2001 granted short-term options to purchase
174,440 shares of the Company's common stock at an exercise price of $8.82
covering ten percent (10%) of the number of shares that were cancelled. The
short-term Options will become 100% vested six months after the date of grant
and will expire if not exercised before March 5, 2002 or earlier if employment
is terminated.
5
On a date between December 6, 2001 and December 12, 2001, subject to continued
employment, the Company will grant a new option ("New Option") equal to ninety
percent (90%) of the number of shares that were cancelled. The exercise price of
the New Option will be equal to the closing price of the Company's Common Stock
on the date of grant.
The grant of short-term options will result in compensation charges over the
nine-month life of the options as prescribed under the provisions of FIN No. 44,
"Accounting for Certain Transactions Involving Stock Compensation". The
compensation expense associated with such options amounted to approximately
$37,000 during the quarter ended June 30, 2001.
5. Comprehensive Loss
The components of comprehensive loss are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
----------------- ------------------
2001 2000 2001 2000
------ ------ ------- -------
Net Loss $(6,733) $(8,865) $(14,232) $(18,202)
Foreign currency translation adjustment 3 16 3 19
------- ------- -------- --------
Total comprehensive loss (6,730) (8,849) (14,229) (18,183)
======= ======= ======== ========
6. Recent Accounting Pronouncements
In July of 2001 the Financial Accounting Standards Board (FASB) issued SFAS No.
141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible
Assets". SFAS No. 141 requires business combinations initiated after June 30,
2001 to be accounted for using the purchase method of accounting, and broadens
the criteria for recording intangible assets separately from goodwill. Recorded
goodwill and intangibles will be evaluated against these new criteria and may
result in certain intangibles being subsumed into goodwill, or alternatively,
amounts initially recorded as goodwill may be separately identified and
recognized apart from goodwill. SFAS No. 142 requires the use of a
non-amortization approach to account for purchased goodwill and certain
intangibles. Under a non-amortization approach, goodwill and certain intangibles
will not be amortized into results of operations, but instead would be reviewed
for impairment and written down and charged to results of operations only in the
periods in which the recorded value of goodwill and certain intangibles is more
than its fair value. The provisions of each statement, which apply to goodwill
and intangible assets acquired prior to June 30, 2001, will be adopted by the
Company on January 1, 2002. We do not expect the adoption of these accounting
standards to result in a significant impact on our financial position or results
of operations for any historic transactions.
7. Subsequent Event
In July of 2001, the Company took steps to reduce expenses which included
reducing full-time equivalent employees at the Company by approximately 23%
through mandatory staff reductions. The Company is also evaluating a reduction
in its lease commitments for office space, as well as write downs of certain
assets. The Company expects to incur a related pretax charge in the range of $3
- $5 million in the third quarter of 2001.
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 Statements, 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 generate revenue principally from licensing our applications and
providing related services, including product installation, maintenance and
support, consulting and training. We license our applications individually or as
an integrated suite of products. The pricing of our software and services
fluctuates on a per transaction basis depending on various factors, such as the
number of seats covered by a contract and the degree of customization requested
by the particular customer. The dollar amounts of our contracts depend on the
number of users and applications being used and the professional services
requested.
Our software products typically require significant customization,
installation and other services. Prior to the release in July 1999 of Version
4.0 of our application suite, it was difficult to generate dependable estimates
of the costs necessary to complete product implementations. Therefore, we
accounted for our software licenses and implementation revenues using the
completed contract method of contract accounting as required under the
provisions of SOP 97-2, "Software Revenue Recognition," and SOP 81-1,
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts."
Following the release of Version 4.0 in July 1999, we were able to generate
dependable estimates of the costs necessary to complete product implementations.
Consequently, we accounted for our software licenses and implementation revenues
using the percentage-of-completion method of contract accounting. In the
intervening year, we released several new versions of our software culminating
in our most recent release of version 5.6 which further simplified the
implementation process. We have also formed relationships with several
implementation partners who have performed a significant number of
implementations over the last year. As a result, implementations of our software
have been further streamlined and are no longer deemed essential to the
functionality of the software. Further, an increasing trend of software sales
without accompanying services have allowed us to further develop vendor specific
objective evidence for the fair value of our software licenses. Therefore, in
the third quarter of 2001, we will recognize license revenue on shipment and
recognize implementation revenue as services are performed.
7
We defer amounts billed for maintenance and recognize such amounts ratably
over the maintenance period.
In the second quarter of 2001, JD Edwards, a reseller of Extensity's
products, and the Company jointly decided to change their relationship from a
reseller to a referral arrangement. This event resulted in the Company
accelerating recognition of revenue of approximately $1.1 million in prepaid
royalties that would have been recognized in the third and fourth quarters of
2001.
Payments received in advance of revenue recognition are recorded as
deferred revenues. All of our customers enter into one-year maintenance and
support contracts when they purchase their initial Extensity applications and
have the option to purchase additional contracts after completion of the initial
contract period. Although we do not grant any rights to our customers to return
products, we do provide warranties that our products will function according to
written documentation.
We promote and sell our software products through our direct sales force
and through indirect channels, including Elite Information Group and
Item4you.com, a joint venture between Terra Network and Meta4. We also have
marketing referral arrangements in place with Cisco Systems, JD Edwards, IBM,
Commerce One, WebEx, Digital Think, EventSource, Visa, GetThere.com, Pro Act
Technologies and Elcom.
In February of 2001, we opened a sales office in Sydney, Australia.
However, in July of 2001, after close evaluation of our business model and the
current economic climate, we decided to close the Sydney office. We have
continued to support our European operations in advance of anticipated revenues,
though we have also significantly reduced costs in this geography. We do,
however, expect our costs for establishing international sales to exceed related
revenues as we invest in international operations. For the six months ended June
30, 2001, revenues derived from our international sales represented 12.2% of the
total revenues.
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 OF CONDENSED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2001 2000 2001 2000
------- ------- ------- -------
Revenues:
License $ 5,651 $ 3,034 $11,673 $ 5,259
Service and maintenance 3,480 2,299 7,260 3,797
------- ------- ------- -------
Total revenues $ 9,131 $ 5,333 $18,933 $ 9,056
======= ======= ======= =======
Cost of revenues:(*)
License $ 263 $ 131 $ 708 $ 215
Service and maintenance 3,435 3,596 7,459 6,446
------- ------- ------- -------
Total cost of revenues $ 3,698 $ 3,727 $ 8,167 $ 6,661
======= ======= ======= =======
Operating expenses:(*)
Sales and marketing $ 7,025 $ 6,419 $14,845 $12,044
Research and development 3,934 3,169 7,669 5,991
General and administrative 1,839 1,151 3,519 2,322
Non-recurring general and administrative -- -- 377 --
(*) Amounts exclude the amortization of non-cash stock based compensation as
follows:
Cost of revenues:
Service and maintenance $ 9 $ 185 $ 59 $ 424
Operating expenses:
Sales and marketing 18 393 112 901
Research and development 11 243 68 557
General and administrative 17 336 109 769
------- ------- ------- -------
$ 55 $ 1,157 $ 348 $ 2,651
======= ======= ======= =======
REVENUES
Total revenues increased to $9.1 million for the three months ended June 30,
2001 from $5.3 million for the three months ended June 30, 2000, an increase of
71%. Total revenues increased to $18.9 million for the six months ended June 30,
2001 from $9.0 million for the six months ended June 30, 2000, an increase of
109%. For the three months ended June 30, 2001, sales to three customers
accounted for 21%, 13% and 12% of total revenues. For the three months ended
June 30, 2000, sales to two customers accounted for 17% and 14% of total
revenues. For the six months ended June 30, 2001, sales to one customer
accounted for 12% of total revenues. For the six months ended June 30, 2000,
sales to one customer accounted for 17% of total revenues.
License Revenues. Our license revenues increased to $5.7 million for the
three months ended June 30, 2001 from $3.0 million for the three months ended
June 30, 2000, an increase of 86%. Our license revenues increased to $11.7
million for the six months ended June 30, 2001 from $5.3 million for the six
months ended June 30, 2000, an increase of 122%. In the three months ended June
30, 2001, $1.9 million of license revenues were recognized through the Company's
relationship with a reseller. The Company and the reseller jointly decided to
change their relationship from a reseller to a referral arrangement. The
increase in the six months ended June 30, 2001, was attributable to our growing
customer
9
base and an increase in the revenue attributable to our indirect sales channels
and to a lesser extent, an increase in the average size of the sales contracts
entered into by our customers.
Service and Maintenance Revenues. Our service and maintenance revenues
increased to $3.5 million for the three months ended June 30, 2001 from $2.3
million for the three months ended June 30, 2000, an increase of 51%. Our
service and maintenance revenues increased to $7.3 million for the six months
ended June 30, 2001 from $3.8 for the six months ended June 30, 2000, an
increase of 91%. This increase was attributable to our growing customer base, an
increase in professional services revenues recognized on a time and materials
basis, an increase in revenues recognized from work performed on partner
integration, and to a lesser extent, an increase in the average size of the
sales contracts that customers have signed.
COST OF REVENUES
Total cost of revenues was $3.7 million for the three months ended June 30,
2001 and June 30, 2000. Total cost of revenues increased to $8.2 million for the
six months ended June 30, 2001 from $6.7 million for the six months ended June
30, 2000, an increase of 23%.
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. This cost increased to
$263,000 for the three months ended June 30, 2001 from $131,000 for the three
months ended June 30, 2000, due primarily to increased sales activity. The cost
increased to $708,000 for the six months ended June 30, 2001 from $215,000 for
the six months ended June 30, 2001 due primarily to increased sales activity. As
a percentage of license revenues, cost of license revenues increased to 5% for
the three months ended June 30, 2001 from 4% for the three months ended June 30,
2000. As a percentage of license revenues, cost of license revenues increase to
6% for the six months ended June 30, 2001 from 4% for the six months ended June
30, 2000. Cost of revenues as a percentage of license revenue may increase over
the current level in the future as we incorporate additional third-party
products into our offerings.
Cost of Service and Maintenance Revenues. Cost of service and maintenance
revenues consists of compensation and related overhead costs for personnel
engaged in consulting, training, maintenance and support services for our
customers as well as costs for third parties contracted to provide such services
to our customers. This cost decreased to $3.4 million for the three months ended
June 30, 2001 from $3.6 million for the three months ended June 30, 2000, a
decrease of 4%. This cost increased to $7.5 million for the six months ended
June 30, 2001 from $6.4 million for the six months ended June 30, 2001, an
increase of 16%. As a percentage of service revenues, cost of service revenues
decreased to 99% for the three months ended June 30, 2001 from 156% for the
three months ended June 30, 2000. As a percentage of service revenues, cost of
service revenues decreased to 103% for the six months ended June 30, 2001 from
170% for the six months ended June 30, 2000. Approximately 56% of the increase
for the six months ended June 30, 2001 in the cost of service revenues was due
to our hiring of additional service and maintenance personnel. These additional
costs were necessary to support our expanding customer base. Total costs of
service and maintenance revenues for the three months ended June 30, 2001 were
approximately equal to total service revenues for the same period. Total costs
exceeded our service and maintenance revenues for the six months period ended
June 30, 2001 as we have built our consulting and customer support groups in
advance of growing contract volume. We are seeking to further reduce our cost of
service revenues as a percentage of total revenue and are also seeking to engage
third parties to provide a substantial portion of services related to our
applications.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses consist primarily of
compensation and related costs for sales and marketing personnel, including
commissions and marketing program costs. Sales and marketing expenses increased
to $7.0 million for the three months ended June 30, 2001 from $6.4 million for
the three months ended June 30, 2000, an increase of 9%. Sales and marketing
expenses increased to $14.8 million for the six months ended June 30, 2001 from
$12.0 million for the six months ended June 30, 2000, an increase of 23%. As a
percentage of total revenues, sales and marketing expenses decreased to 77% for
the three months ended June 30, 2001 from 120% for the three months ended June
30, 2000. As a percentage of total revenues, sales and marketing expenses
decreased to 78% for the six months ended June 30, 2001 from 133% for the six
months ended June 30, 2000. The increase in sales and marketing expenses for
10
both periods was attributable to increased compensation, commissions and other
related costs associated with hiring additional sales representatives,
management and marketing personnel. We expect sales and marketing expenses to
decrease in the near term. Sales and marketing expenses may increase in the long
term as we expand our domestic and international sales force and increase our
marketing efforts to capitalize on the growth of our market.
Research and Development. Research and development expenses consist
primarily of compensation and related personnel costs, and fees associated with
contractors. Research and development expenses increased to $3.9 million for the
three months ended June 30, 2001 from $3.2 million for the three months ended
June 30, 2000, an increase of 24%. Research and development costs increased to
$7.7 million for the six months ended June 30, 2001 from $6.0 million for the
six months ended June 30, 2000, an increase of 28%. As a percentage of total
revenues, research and development expenses decreased to 43% for the three
months ended June 30, 2001 from 59% for the three months ended June 30, 2000. As
a percentage of total revenues, research and development expenses decreased to
41% for the six months ended June 30, 2001 from 66% for the six months ended
June 30, 2000. Approximately 60% of the cost increase for the three months ended
June 30, 2001 and six months ended June 30, 2001 was attributable to the
addition of personnel and costs related to contractors, and approximately 40% of
the increase was attributable to expenses associated with localizing our
products. These increases resulted from our continuing efforts to add
enhancements to our existing software applications and to develop software
applications that incorporate new functionality into our integrated suite. We
expect research and development expenses to decrease in the near term. Research
and development expenses may increase in the long term as we make additional
investments in our technology and products.
General and Administrative. General and administrative expenses consist
primarily of compensation and related costs for our executive, finance and
administrative personnel and other related expenses. General and administrative
expenses increased to $1.8 million for the three months ended June 30, 2001 from
$1.2 million for the three months ended June 30, 2000, an increase of 60%.
General and administrative expenses, excluding the non-recurring charge,
increased to $3.5 million for the six months ended June 30, 2001 from $2.3
million for the six months ended June 30, 2000, an increase of 52%. For the six
months ended June 30, 2001 non-recurring general and administrative expenses
were $377,000. These expenses were incurred in connection with exploring
potential merger and acquisition transactions. The entire charge was expensed in
the three months ended March 31, 2001 as these discussions were terminated. As a
percentage of total revenues, general and administrative expenses decreased to
20% for the three months ended June 30, 2001 from 22% for the three months ended
June 30, 2000. As a percentage of total revenues, general and administrative
expenses, excluding the non-recurring charge, decreased to 19% for the six
months ended June 30, 2001 from 26% for the six months ended June 30, 2001.
Approximately 40% of the increase in general and administrative expenses in the
three-month period ended June 30, 2001 and the six month period ended June 30,
2001 was attributable to hiring additional financial, human resources and
internal information technology personnel. We expect general and administrative
expenses to decrease in the near term. General and administrative expenses may
increase in the long term as we expand our operations.
AMORTIZATION OF NON-CASH STOCK BASED COMPENSATION
Prior to our IPO, we granted certain stock options to our officers and
employees at prices deemed to be below the fair value of the underlying stock.
The cumulative difference between the 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
will include deferred compensation expense at least through 2003. We recognized
$55,000 of this expense for the three months ended June 30, 2001 and $1.2
million for the three months ended June 30, 2000. We recognized $348,000 for the
six months ended June 30, 2001 and $2.7 million for the six months ended June
30, 2000.
INTEREST INCOME, NET
Interest income, net was $687,000 for the three months ended June 30, 2001
and $1.4 million for the three months ended June 30, 2000. Interest income, net
was $1.8 million for the six months ended June 30, 2001 and $2.4 million for the
six months ended June 30, 2000. Interest income is attributed to interest earned
on the proceeds from the Company's IPO. Interest income will fluctuate depending
upon the overall interest rate environment and our cash, cash equivalent
balances and short-term investments.
11
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations and funded our capital
expenditures through funds raised from our initial public offering completed in
January 2000 and the private sale of equity securities, supplemented by loan
facilities and equipment leases. Aggregate net proceeds from private equity
financings totaled $42.3 million and proceeds from the Company's IPO were $83.3
million, net of offering costs of approximately $2.2 million. As of June 30,
2001 we had $59.9 million in cash, cash equivalents and short-term investments
and $50.6 million in working capital.
Net cash used in operating activities was $18.2 million for the six months
ended June 30, 2001 and $11.0 million for the six months ended June 30, 2000.
For the six months ended June 30, 2001, cash used in operating activities was
primarily attributable to a net loss of $14.2 million, adjusted for depreciation
and amortization of $1.4 million and amortization of deferred stock compensation
and other of $433,000, a decrease in deferred revenue of $7.1 million and a
decrease in accrued liabilities of $1.2 million offset by a decrease in accounts
receivable of $3.0 million. For the six months ended June 30, 2000, cash used in
operating activities was primarily attributed to a net loss of $18.2 million,
adjusted for the amortization of deferred stock compensation of $2.7 million and
offset by an increase in accounts payable of $2.1 million, an increase in
accrued liabilities of $2.3 million and an increase in deferred revenue of $3.0
million
Net cash provided by investing activities was $15.3 million for the six
months ended June 30, 2001 and net cash used in investing activities was $40.0
million for the six months ended June 30, 2000. For the six months ended June
30, 2001, investing activities consisted primarily of a decrease in short-term
investments of $17.0 million offset by capital expenditures of $1.7 million. For
the six months ended June 30, 2000, investing activities consisted primarily of
an increase in short-term investments and capital expenditures.
Net cash provided by financing activities was $105,000 for the six months
ended June 30, 2001 due to payments on notes payable and capital lease
obligations of $839,000, offset by proceeds from employee stock plans of
$944,000. Net cash provided by financing activities was $83.2 million for the
six months ended June 30, 2000, primarily due to the net proceeds of $83.3
million from the Company's IPO.
Presently, we anticipate that our existing capital resources will meet our
operating and investing needs for at least the next 12 months. After that time,
we cannot be certain that additional funding will be available on acceptable
terms or at all. 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.
RISK FACTORS
The following is a discussion of certain factors that currently impact or may
impact our business, operating results and/or financial condition. Any
investment in our common stock involves a high degree of risk. You should
consider carefully the following information about these risks, together with
the risks and other information contained in the Company's annual filing on Form
10-K (File No.000-28897) and its periodic reports filed pursuant to the Exchange
Act in evaluating our business. The market price of our common stock could
decline, and you may lose all or part of the money you paid to buy our common
stock.
RISKS RELATED TO OUR BUSINESS
OUR 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
12
encountered by companies in their early stages of development, particularly
companies in new and rapidly evolving markets such as the market for
Internet-based software applications. Risks and difficulties include our ability
to:
- expand our base of customers with fully installed and deployed systems
that can serve as reference accounts for our ongoing sales efforts;
- expand our pipeline of sales prospects in order to promote greater
predictability in our period-to-period sales levels;
- continue to offer new products that complement our existing product
line, in order to make our suite of applications more attractive to
customers;
- continue to develop and upgrade our technology to add additional
features and functionality;
- continue to attract and retain qualified personnel;
- expand sales channels through geographic expansion and the development
of indirect channels such as relationships with OEM customers and
distributors;
- increase awareness of our brand; and
- maintain our current and develop new third-party relationships,
including but not limited to third-party implementers.
The Company may not be able to successfully address these risks or
difficulties and our business strategy may not be successful. If we fail to
address these risks or difficulties adequately, our business will likely suffer.
WE HAVE A HISTORY OF LOSSES AND NEGATIVE CASH FLOW AND EXPECT THIS TO CONTINUE
FOR THE CURRENT FISCAL YEAR.
Our business is new; we have offered products for a relatively short period
of time; and our base of customers and prospective customers is still relatively
small. We have spent significant funds to date to develop our current products
and to develop our sales and market resources. We have incurred significant
operating losses and have not achieved profitability. As of June 30, 2001, we
had an accumulated deficit of $88.7 million. We expect to continue to invest in
research and development to enhance current products and develop future
products. We also plan to continue to grow our sales force and to spend funds in
marketing to promote our company and our products. As a result, we will need to
increase our revenues significantly to achieve profitability. In addition,
because we expect to continue to invest in our business ahead of anticipated
future revenues, we expect that we will continue to incur operating losses
through the current fiscal year.
OUR BUSINESS IS CHANGING RAPIDLY, WHICH COULD CAUSE OUR QUARTERLY OPERATING
RESULTS TO VARY AND OUR STOCK PRICE TO FLUCTUATE.
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors, many of which are beyond our control. We
expect to continue to expend significant sums in all areas of our business,
particularly in our sales and marketing operations, in order to promote future
growth. Because the expenses associated with these activities are relatively
fixed in the short-term, we may be unable to adjust spending quickly enough to
offset any unexpected shortfall in revenue growth or any decrease in revenue
levels. As a result, we expect our quarterly operating results to fluctuate.
Moreover, because we use the percentage-of-completion method of contract
accounting on all new contracts with a service component, if our professional
service organization is unable to implement our applications for use by
customers within our anticipated time frames, our recognition of revenue for
those customers could be deferred, which could cause our quarterly revenue to
fluctuate. Our financial results may, as a consequence of quarterly revenue
fluctuations, fall short of the expectations of public market analysts or
investors. If this occurs, the price of our common stock may drop.
We also seek to develop and maintain a significant pipeline of potential
sales prospects, but it is difficult to predict when individual customer orders
will be closed. Our base of customers and the number of additional customer
13
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; and
- technical difficulties or "bugs" affecting the operation of our
software.
Due to our limited operating history, the early stage of our market and the
factors discussed above, you should not rely on quarter-to-quarter comparisons
of our results of operations as indicators of our future performance.
OUR BUSINESS WILL SUFFER IF WE DO NOT SIGNIFICANTLY EXPAND OUR SALES
CAPABILITIES.
We sell our workforce optimization applications primarily through our
direct sales force. We must significantly expand our direct sales operations to
increase our revenues. We cannot be certain that we will be successful in these
efforts. Our products and services require sophisticated sales efforts and our
ability to increase our direct sales operation will depend on our ability to
recruit, train and retain top sales people with effective sales skills and
advanced technical knowledge. Competition for qualified personnel is intense in
our industry. Moreover, new sales personnel require training and take time to
achieve full productivity. If we are unable to hire or retain qualified sales
personnel, if newly hired personnel fail to develop the necessary skills, or if
they reach productivity more slowly than anticipated, we may be unable to grow
our revenues as rapidly as planned, if at all, and our business could be harmed.
WE FACE INTENSE COMPETITION, WHICH COULD AFFECT OUR ABILITY TO INCREASE REVENUE,
MAINTAIN OUR MARGINS AND INCREASE MARKET SHARE.
The market for our Internet-based workforce optimization applications is
intensely competitive and we expect competition to increase in the future.
Competitors vary in size and in the scope and breadth of the products and
services they offer. Companies offering one or more products directly
competitive with our products include Ariba, Captura Software, Concur
Technologies, IBM, PeopleSoft Corporation and Oracle Corporation. As a result of
the large market opportunity for workforce optimization applications, we also
expect competition from other established and emerging companies.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition, and a larger installed base
of customers than us. In addition, many of our competitors have well-established
relationships with our current and potential customers and have extensive
knowledge of our industry. Current and potential competitors have established or
may establish cooperative relationships among themselves or with third parties
to increase the ability of their products to address customer needs.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. We also expect that
competition will increase as a result of industry consolidation. Increased
competition may result in price reductions, reduced margins and loss of market
share, any one of which could seriously harm our business.
IF WE DO NOT PROVIDE SOFTWARE APPLICATIONS AND RELATED SERVICES THAT MEET THE
CHANGING DEMANDS OF OUR CUSTOMERS, THE MARKET FOR OUR PRODUCTS WILL NOT GROW OR
MAY DECLINE, AND OUR PRODUCT SALES WILL SUFFER.
14
To successfully implement our business strategy, we have to provide
software applications and related services that meet the demands of our
customers and prospective customers as the market and customer requirements
evolve. We expect that competitive factors will create a continuing need for us
to improve and add to our suite of software applications. Not only will we have
to expend significant funds and other resources to continue to improve our
existing suite of applications, but we must also properly anticipate, address
and respond to customer preferences and demands. As organizations' needs change
with respect to their enterprise applications, our existing suite of software
applications may become obsolete or inefficient relative to our competitors'
offerings and may require modifications or improvements. The addition of new
products and services will also require that we continue to improve the
technology underlying our applications. These requirements could be significant,
and we may fail to fulfill them quickly and efficiently. If we fail to expand
the breadth of our applications quickly in response to customer needs or if
these offerings fail to achieve market acceptance, the market for our products
will not grow or may decline, and our business may suffer significantly.
Our workforce optimization software products and related services have
accounted for all of our revenues to date. We anticipate that revenues from
these products and related services will continue to constitute substantially
all of our revenues for the foreseeable future. Consequently, our future
financial performance will depend, in significant part, upon the successful
development, introduction and customer acceptance of enhanced versions of our
workforce optimization applications and any new products or services that we may
develop or acquire. We cannot assure you that we will be successful in
enhancing, upgrading or continuing to effectively market our workforce
optimization applications or that any new products or services that we may
develop or acquire will achieve market acceptance.
EVOLVING TECHNOLOGICAL DEVELOPMENTS AND EMERGING INDUSTRY STANDARDS WILL REQUIRE
US TO ENHANCE THE FUNCTIONALITY OF OUR WORKFORCE OPTIMIZATION APPLICATIONS, AND
ANY INABILITY TO ENHANCE FUNCTIONALITY COULD CAUSE OUR SALES TO DECLINE.
Because the market for our products is emerging and subject to rapid
technological change and evolving industry standards, the life cycles of our
products are difficult to predict. Competitors may introduce new products or
enhancements to existing products employing new technologies, which could render
our existing products and services obsolete and unmarketable. For example, our
currently available software applications are written entirely in the Java
computer language. While we believe that this provides our solution with
significant advantages in terms of functionality and flexibility, the market for
Java-based software is still relatively new and it is not clear whether
Java-based systems will continue to maintain commercial acceptance.
To be successful, our products and services must keep pace with
technological developments and emerging industry standards, address the
ever-changing and increasingly sophisticated needs of our customers and achieve
market acceptance. Our results of operations would be seriously harmed if we are
unable to develop, release and market new software product enhancements on a
timely and cost-effective basis, or if new products or enhancements do not
achieve market acceptance or fail to respond to evolving industry or technology
standards.
In developing new products and services, we may also fail to develop and
market products that respond to technological changes or evolving industry
standards in a timely or cost-effective manner, or experience difficulties that
could delay or prevent the successful development, introduction and marketing of
these new products and services.
OUR REVENUES HAVE BEEN DERIVED FROM A RELATIVELY SMALL NUMBER OF CUSTOMERS, AND
THE LOSS OF A SMALL NUMBER OF MAJOR CUSTOMERS OR POTENTIAL CUSTOMERS COULD
ADVERSELY IMPACT OUR REVENUES OR OPERATING RESULTS.
We licensed our first workforce optimization application in March 1998 and
have fully implemented our applications for only a limited number of customers
to date due to the time required to implement. Moreover, as of June 30, 2001, we
had not completed an implementation of our Extensity Purchase Reqs application
for any customer. We expect that we will continue to derive a significant
portion of our revenues from a relatively small number of customers in the
future. Accordingly, the loss of a small number of major customers could
materially and adversely affect our business, and the deferral or loss of
anticipated orders from a small number of prospective customers could materially
and adversely impact our revenues and operating results in any period.
15
IF WE FAIL TO MAINTAIN POSITIVE MARGINS ON SERVICE REVENUES IN THE FORESEEABLE
FUTURE, OUR RESULTS OF OPERATIONS COULD SUFFER.
For the three months ended June 30, 2001, our service margins were
positive. While we anticipate that our margins will continue to be positive in
the current year, we cannot guarantee that they will remain positive. Failure to
achieve positive margins on service revenues could cause our business to suffer.
For more information related to our costs associated with our service revenues,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
WE HAVE LIMITED EXPERIENCE WITH LARGE-SCALE IMPLEMENTATIONS, WHICH ARE IMPORTANT
TO OUR FUTURE SUCCESS.
We have limited experience in implementing our applications on a large
scale. As of June 30, 2001, our largest implementation included approximately
13,400 employee users. We believe that the ability of large customers to
roll-out our products across large numbers of users is critical to our future
success. If our customers cannot successfully deploy our applications on a large
scale, or if they determine for any reason that our products cannot accommodate
large-scale deployments, our business could be harmed.
IF WE FAIL TO EXPAND OUR RELATIONSHIPS WITH THIRD PARTIES THAT CAN PROVIDE
IMPLEMENTATION AND CONSULTING SERVICES TO OUR CUSTOMERS, WE MAY BE UNABLE TO
GROW OUR REVENUES AND OUR BUSINESS COULD BE HARMED.
In order for us to focus more effectively on our core business of
developing and licensing software solutions, we 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 workforce optimization applications by new
customers. To date, we have established relationships with a few third-party
implementation and consulting firms. In general, however, if we are unable to
establish and maintain effective, long-term relationships with implementation
and consulting providers, or if these providers do not meet the needs or
expectations of our customers, we may be unable to grow our revenues and our
business could be seriously harmed. As a result of the limited resources and
capacities of many third-party implementation providers, we may be unable to
attain sufficient focus and resources from the third-party providers to meet all
of our customers' needs, even if we establish relationships with these third
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.
CUSTOMER SATISFACTION AND DEMAND FOR OUR PRODUCTS WILL DEPEND ON OUR ABILITY TO
EXPAND OUR PROFESSIONAL SERVICES ORGANIZATION.
We believe that growth in our product sales depends on our ability to
provide our customers with professional services to assist with support,
training, consulting and initial implementation and deployment of our products
and to educate third-party systems integrators in the use of our products. As a
result, we may need to increase the number of professional services personnel to
meet these needs. New professional services personnel will require training and
take time to reach full productivity. We may not be able to attract or retain a
sufficient number of highly qualified professional services personnel.
Competition for qualified professional services personnel is intense due to the
limited number of people who have the requisite knowledge and skills. To meet
our customers' needs for professional services, we may also need to use more
costly third-party consultants to supplement our own professional services
group. In addition, we could experience delays in recognizing revenue if our
professional services group fails to complete implementations in a timely
manner.
16
OUR EXPECTATIONS OF FUTURE GROWTH DEPEND ON OUR ABILITY TO EXPAND
INTERNATIONALLY, AND FACTORS SPECIFIC TO OUR INTERNATIONAL EXPANSION MAY PREVENT
US FROM ACHIEVING OUR ANTICIPATED GROWTH.
Over time, we intend to expand our international operations to achieve our
anticipated growth, but we may face significant challenges to our international
expansion. The expansion of our existing international operations and entry into
additional international markets will require significant management attention
and financial resources. To achieve broad acceptance in international markets,
our products must be localized to handle a variety of factors specific to each
international market, such as tax laws and local regulations. The incorporation
of these factors into our products is a complex process and often requires
assistance from third parties. We have limited experience in localizing our
products and 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 work with third parties to develop localized products. To date, we
have localized our product for the markets where English language is the native
language and completed translations for the German, French, Italian and Spanish
languages.
We have only a limited history of marketing, selling and supporting our
products and services internationally. In 1999, we opened a regional office in
the United Kingdom and established a relationship with an international
reseller. In 2000, we expanded our European Operations through opening a second
office in Frankfurt, Germany. As of June 30, 2001, we had a total of 30
employees in our international operations. For the six months ended June 30,
2001, we derived 12% of our revenues from our international operations. To
succeed internationally, we must react quickly to the business environment in
which we operate overseas. Thus we must effectively monitor the size of our
international workforce and make adjustments as necessary. During periods of
growth we must hire and train experienced international personnel as well as
recruit and retain qualified domestic personnel to staff and manage our
international operations. However, we may experience difficulties in recruiting
and training additional international staff. We must also be able to enter into
strategic relationships with companies in international markets. If we are not
able to maintain successful strategic relationships internationally or recruit
additional companies to enter into strategic relationships, our future growth
could be limited. We also face other risks inherent in conducting business
internationally, such as:
- difficulties in collecting accounts receivable and longer collection
periods;
- seasonal business activity in certain parts of the world;
- fluctuations in currency exchange rates; and
- trade barriers.
Any of these factors could seriously harm our international operations and,
consequently, our business.
WE ARE GROWING RAPIDLY, AND OUR FAILURE TO MANAGE THIS GROWTH COULD HARM OUR
BUSINESS.
We have experienced a period of significant growth. Our full-time employees
increased from 83 at December 31, 1998 to 175 at December 31, 1999 to 289 at
December 31, 2000 to 297 at June 30, 2001. Our revenues have grown 265% between
fiscal 1999 and 2000. We expect that any future growth would cause increased
strains on our resources. As part of this growth, we will have to continually
enhance our operational and financial systems, procedures and controls; expand,
train and manage our employee base; and maintain close coordination among our
17
technical, accounting, finance, marketing and sales staffs. As discussed in the
Notes to Consolidated Financial Statements in July of 2001, the Company took
steps to reduce expenses which included reducing full time equivalent employees
at the Company by approximately 23% through staff reductions. If we are unable
to manage our growth effectively, our business, results of operations and
financial condition could be adversely affected.
WE MAY BE UNABLE TO ATTRACT AND RETAIN HIGHLY SKILLED EMPLOYEES THAT ARE
NECESSARY FOR THE SUCCESS OF OUR GROWTH PLAN.
In addition to our dependence on our sales and professional services
personnel as previously discussed, our ability to execute our growth plan and be
successful also depends on our continued ability to attract and retain highly
skilled employees. We depend on the services of senior management and other
personnel, particularly Robert A. Spinner, our Chief Executive Officer. As we
continue to grow, we will need to hire additional personnel in all operational
areas. Competition for personnel in our industry is intense. We have in the past
experienced, and we expect to continue to experience in the future, difficulty
in hiring and retaining highly skilled employees with appropriate
qualifications. If we do not succeed in attracting or retaining personnel, our
business could be adversely affected.
OUR SALES CYCLES ARE LONG AND UNPREDICTABLE, WHICH MAKES PERIOD-TO-PERIOD
REVENUES DIFFICULT TO PREDICT.
Because the market for our workforce optimization software products and
related services is new, we experience long and unpredictable sales cycles. The
sales cycle for our workforce optimization applications typically ranges from
two to nine months. In the early stages of this market, our customers have
frequently viewed the purchase of our products as part of a long-term strategic
decision regarding the management of their workforce-related operations and
expenditures. This decision process has sometimes resulted in customers taking a
long period of time to assess alternative solutions by our competitors or
deferring a purchase decision until the market evolves. Sales cycles continue to
be long and the timing of purchase decisions by individual customers remain at
times uncertain. We must continue to educate potential customers on the use and
benefits of our products and services, as well as the integration of our
products and services with additional software applications utilized by the
individual customers. Because the sales cycle is long and the time of individual
orders is uncertain, our period-to-period revenues are difficult to predict.
SOFTWARE DEFECTS COULD LEAD TO LOSS OF REVENUE OR DELAY THE MARKET ACCEPTANCE OF
OUR APPLICATIONS.
Our enterprise applications software is complex and, accordingly, may
contain undetected errors or failures when first introduced or as new versions
are released. This may result in loss of, or delay in, market acceptance of our
products. We have in the past discovered software errors in our new releases and
new products after their introduction. In the event that we experience
significant software errors in future releases, we could experience delays in
release, customer dissatisfaction and potentially lost revenues during the
period required to correct these errors. We may in the future discover errors,
and additional scalability limitations, in new releases or new products after
the commencement of commercial shipments. Any of these errors or defects could
cause our business to be materially harmed.
WE MAY BECOME INCREASINGLY DEPENDANT ON THIRD-PARTY SOFTWARE INCORPORATED IN OUR
PRODUCTS AND, IF SO, IMPAIRED RELATIONS WITH THESE THIRD PARTIES, ERRORS IN
THIRD-PARTY SOFTWARE OR INABILITY TO ENHANCE THE SOFTWARE OVER TIME COULD HARM
OUR BUSINESS.
We incorporate third-party software into our products. Currently, the
third-party software we use includes application server software that we license
from BEA Systems, off-line database software from Pointbase, off-line client
server software from PUMATECH and synchronization software from AETHER Systems.
We 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
18
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, 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.
Our means of protecting our proprietary rights may not be adequate and our
competitors may independently develop similar technology, duplicate our
products, or design around our proprietary intellectual property.
WE MAY FACE COSTLY DAMAGES OR LITIGATION COSTS IF A THIRD PARTY CLAIMS THAT WE
INFRINGE ITS INTELLECTUAL PROPERTY.
There has been a substantial amount of litigation in the software industry
and the Internet industry regarding intellectual property rights. It is possible
that in the future, third parties may claim that we or our current or potential
future products infringe upon their intellectual property. We expect that
software product developers and providers of Internet-based software
applications will increasingly be subject to infringement claims as the number
of products and competitors in our industry segment grows and the functionality
of products in different industry segments overlaps. Any claims, with or without
merit, could be time consuming, result in costly litigation, cause product
shipment delays or require us to enter into royalty or licensing agreements.
Royalty or licensing agreements, if required, may not be available on terms
acceptable to us or at all, which could seriously harm our business.
ANY FUTURE ACQUISITIONS OF COMPANIES OR TECHNOLOGIES MAY RESULT IN DISTRACTION
OF OUR MANAGEMENT AND DISRUPTIONS TO OUR BUSINESS.
We may acquire or make investments in complementary businesses,
technologies, services or products if appropriate opportunities arise. From time
to time we may engage in discussions and negotiations with companies regarding
our acquiring or investing in such companies' businesses, products, services or
technologies. We cannot make assurances that we will be able to identify future
suitable acquisition or investment candidates, or if we do identify suitable
candidates, that we will be able to make such acquisitions or investments on
commercially acceptable terms or at all. If we acquire or invest in another
company, we could have difficulty assimilating that company's personnel,
operations, technology or products and service offerings. In addition, the key
personnel of the acquired company may decide not to work for us. These
difficulties could disrupt our ongoing business, distract our management and
employees, increase our expenses and adversely affect our results of operations.
Furthermore, we may incur indebtedness or issue equity securities to pay for any
future acquisitions. The issuance of equity securities could be dilutive to our
existing stockholders.
WE HAVE ANTI-TAKEOVER PROVISIONS IN OUR CHARTER AND IN OUR CONTRACTS THAT COULD
DELAY OR PREVENT AN ACQUISITION OF OUR COMPANY, EVEN IF SUCH AN ACQUISITION
WOULD BE BENEFICIAL TO OUR STOCKHOLDERS.
Provisions of our certificate of incorporation, our bylaws, Delaware law
and the employment agreements of some of our key officers could make it more
difficult for a third party to acquire us, even if doing so might be beneficial
to our stockholders.
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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 Quarterly 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 SOLUTIONS.
The market for our workforce optimization applications and services is at
an early stage of development. Our success will depend upon the continued
development of this market and the increasing acceptance by customers of the
benefits to be provided by workforce optimization applications and services. In
addition, as the market evolves, it is unclear whether the market will accept
our suite of applications as a preferred solution for workforce optimization
needs. Accordingly, our products and services may not achieve significant market
acceptance or realize significant revenue growth. Unless a critical mass of
organizations and their suppliers use our solutions and recommend them to new
customers, our solutions may not achieve widespread market acceptance, which may
cause our business to suffer.
CUSTOMERS MAY NOT ACCEPT THE INTERNET AS A MEANS TO ACCESS ENTERPRISE
APPLICATIONS, AND THIS WOULD LIKELY CAUSE OUR BUSINESS MODEL TO BE UNSUCCESSFUL.
To date, enterprises have generally managed operational functions through
internal computer or manual systems rather than over the Internet. Our business
model assumes that enterprises and their employees will increasingly adopt the
Internet or corporate intranets as a means of managing important business
functions. This business model is not yet proven, and if we are unable to
successfully implement our business model, our business will be materially
adversely affected.
MARKET PRICES OF 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 especially this past year, and the market prices of technology
companies generally, and Internet-related software companies particularly, have
been extremely volatile. Recent initial public offerings by technology
companies, including ours, have been accompanied by exceptional share price and
trading volume changes. Technology companies that have been publicly traded for
a long period of time have also experienced extreme fluctuations in the price of
their common stock. Investors may not be able to resell their shares at or above
the price they paid for the stock. In the past, following periods of volatility
in the market price of a public company's securities, securities class action
litigation has often been instituted against the company. Such litigation could
result in substantial costs and diversion of management's attention and
resources.
SECURITY RISKS AND CONCERNS MAY DETER THE USE OF THE INTERNET FOR CONDUCTING
ELECTRONIC COMMERCE.
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. Advances
in computer capabilities, new discoveries in the field of cryptography or other
events or developments could result in compromises or breaches of our security
systems or those of other websites that protect proprietary information. If any
well-publicized compromises of security were to occur, it could have the effect
of substantially reducing the use of the Internet for commerce and
communications. Anyone who circumvents our security measures could
misappropriate proprietary information or cause interruptions in our services or
operations. The Internet is a public network, and data is sent over this network
from many sources. In the past, computer viruses and software programs that
disable or impair computers have been distributed and have rapidly spread over
the Internet. Computer viruses could be introduced into our systems or those of
our customers or suppliers, which could disrupt our software solutions or make
them inaccessible to customers or suppliers. We may be required to expend
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significant capital and other resources to protect against the threat of
security breaches or to alleviate problems caused by breaches. To the extent
that our activities may involve the storage and transmission of proprietary
information, such as credit card numbers, security breaches could expose us to a
risk of loss or litigation and possible liability. Our security measures may be
inadequate to prevent security breaches, and our business would be harmed if we
do not prevent them.
INCREASING GOVERNMENT REGULATION COULD LIMIT THE MARKET FOR, OR IMPOSE SALES AND
OTHER TAXES ON THE SALE OF, OUR PRODUCTS AND SERVICES.
As Internet commerce evolves, we expect that federal, state or foreign
agencies will adopt regulations covering issues such as user privacy, pricing,
taxation of goods and services provided over the Internet, and content and
quality of products and services. It is possible that legislation could expose
companies involved in electronic commerce to liability, which could limit the
growth of electronic commerce generally. Legislation could dampen the growth in
Internet usage and decrease its acceptance as a communications and commercial
medium. If enacted, these laws, rules or regulations could limit the market for
our products and services.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
We develop products in the United States and market our products in North
America and, to a lesser extent, in Europe and the rest of the world. As a
result, our financial results could be affected by factors such as changes in
foreign currency rates or weak economic conditions in foreign markets. Because
the majority of our revenues are currently denominated in U.S. dollars, a
strengthening of the dollar could make our products less competitive in foreign
markets.
INTEREST RATE RISK
We have an investment portfolio of money market funds and fixed income
certificates of deposit. The fixed income certificates of deposit, like all
fixed income securities, are subject to interest rate risk and will fall in
value if market interest rates increase. We attempt to limit this exposure by
investing primarily in short-term securities. In view of the nature and mix of
our total portfolio, a 10% movement in market interest rates would not have a
significant impact on the total value of our portfolio as of June 30, 2001.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is not involved in any legal proceedings that are material to its
business or financial condition.
ITEM 2. Changes in Securities and Use of Proceeds
a. Not applicable
b. Not applicable
c. Not applicable
d. Use of proceeds from sale of Registered Securities.
On January 27, 2000, the SEC declared effective the Company's Registration
Statement on Form S-1/A. Pursuant to this Registration Statement, the Company
completed an initial public offering of 4,600,000 shares of its common stock
(including 600,000 shares sold pursuant to the exercise of the Underwriters'
over-allotment option) at an initial public offering price of $20.00 per share
("the Offering"). Proceeds to the Company, after deduction of the underwriters'
discount and commission, from the Offering totaled approximately $83.3 million,
net of offering costs of approximately $2.2 million.
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To date we have used $76.7 million to fund working capital. All remaining
proceeds are invested in cash, cash equivalents, or short-term investments
consisting of highly liquid money market funds, commercial paper,
government/federal notes and bonds, certificates of deposit, and auction rate
preferred stock. The use of these proceeds does not represent a material change
in the use of proceeds described in the prospectus.
Upon completion of the Offering, the Company's preferred stock was converted
into 14,594,549 shares of common stock. Upon conversion of the preferred stock,
all rights to accrued and unpaid dividends were terminated.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters To a Vote of Security Holders
The Company's annual meeting of stockholders was held on June 1, 2001 (the
"Annual Meeting"). The following matters were voted upon at the Annual Meeting:
Proposal I - To elect directors to hold office until the 2002 Annual Meeting of
Stockholders and until their successors are elected.
FOR WITHHELD AUTHORITY
---------- ------------------
Robert A. Spinner 18,047,223 757,725
Sharam I. Sasson 18,734,880 70,068
Christopher D. Brennan 18,734,884 70,064
John R. Hummer 18,734,837 70,111
David A. Reed 18,734,884 70,064
Ted E. Schlein 18,734,880 70,068
Maynard G. Webb 18,734,880 70,068
Proposal II - To ratify selection of PricewaterhouseCoopers LLP as independent
auditors of the Company for its fiscal year ending December 31, 2001.
FOR AGAINST ABSTAIN
---------- ------- -------
18,778,951 15,992 10,005
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K:
None
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
August 14, 2001 EXTENSITY, INC.
By /s/ Kenneth R. Hahn
Chief Financial Officer (Principle
Financial and Accounting Officer)
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