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 March 31, 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 April
30, 2002 was 25,137,476.
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 20
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 20
ITEM 2. Changes in Securities and Use of Proceeds 21
ITEM 3. Defaults Upon Senior Securities 21
ITEM 4. Submission of Matters to a Vote of Security Holders 21
ITEM 5. Other Information 21
ITEM 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 21
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
EXTENSITY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
ASSETS
March 31, December 31,
2002 2001
------------ ------------
Current assets:
Cash and cash equivalents $ 10,890 $ 19,456
Short-term investments 32,965 26,883
Accounts receivable, net 3,396 5,393
Prepaid and other current assets 1,649 1,835
------------ ------------
Total current assets 48,900 53,567
Property and equipment, net 3,348 3,657
Restricted long-term investments 1,397 1,397
Other assets 359 601
------------ ------------
Total assets $ 54,004 $ 59,222
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,708 $ 3,672
Accrued liabilities 3,993 3,977
Deferred revenue 3,515 3,488
Capital lease obligations 228 240
Sublease loss accrual 756 787
------------ ------------
Total current liabilities 12,200 12,164
Capital lease obligations - 54
Sublease loss accrual and other noncurrent liabilities 624 809
------------ ------------
Total liabilities 12,824 13,027
============ ============
Stockholders' equity:
Common stock 25 25
Additional paid-in capital 147,237 147,394
Deferred stock compensation (292) (504)
Notes receivable from stockholders (440) (433)
Accumulated comprehensive income 187 155
Accumulated deficit (105,537) (100,442)
------------ ------------
Total stockholders' equity 41,180 46,195
------------ ------------
Total liabilities and stockholders' equity $ 54,004 $ 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
March 31,
-----------------------------
2002 2001
-------- --------
Revenues:
Licenses $ 1,206 $ 6,022
Services and maintenance 3,123 3,780
Hosted 194 -
-------- --------
Total revenues 4,523 9,802
-------- --------
Cost of revenues: (*)
Licenses 105 445
Services and maintenance 2,404 4,074
Hosted 266 -
-------- --------
Total cost of revenues 2,775 4,519
-------- --------
Gross profit 1,748 5,283
-------- --------
Operating expenses: (*)
Sales and marketing 3,516 7,914
Research and development 2,104 3,792
General and administrative 1,493 2,149
-------- --------
Total operating expenses 7,113 13,855
-------- --------
Loss from operations (5,365) (8,572)
Interest income, net 270 1,073
-------- --------
Net loss $ (5,095) $ (7,499)
======== ========
Basic and diluted net loss per share $ (0.21) $ (0.32)
Shares used in computing basic and diluted net loss per share 24,534 23,389
(*) Amounts include non-cash stock based compensation as follows:
Cost of revenues:
Services and maintenance $ 3 $ 50
Operating expenses:
Sales and marketing 7 94
Research and development 4 57
General and administrative 7 92
-------- --------
$ 21 $ 293
======== ========
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)
Three Months Ended
March 31,
2002 2001
--------- ---------
Cash flows from operating activities:
Net loss $ (5,095) $ (7,499)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 432 681
Amortization of deferred stock compensation and other 21 293
Amortization of debt discount and lease line issuance costs 3 25
Interest earned on notes from stockholders (7) -
Changes in operating assets and liabilities:
Accounts receivable 1,997 (1,195)
Prepaids and other current assets 186 (56)
Other assets 242 (66)
Accounts payable 36 1,344
Accrued liabilities 16 (283)
Other liabilities (192) -
Deferred revenue 27 9
--------- ---------
Cash used in operating activities (2,334) (6,747)
--------- ---------
Cash flows from investing activities:
Purchases of short-term investments (15,034) (12,973)
Maturities of short-term investments 8,952 29,976
Capital expenditures (123) (706)
Restricted long-term investments - 39
--------- ---------
Cash provided by (used in) investing activities (6,205) 16,336
--------- ---------
Cash flows from financing activities:
Payments on notes payable - (374)
Payments on capital lease obligation (69) (38)
Proceeds from exercise of stock options and warrants 32 165
--------- ---------
Cash used in financing activities (37) (247)
--------- ---------
Effect of exchange rate on cash and cash equivalents 10 -
Increase (decrease) in cash and cash equivalents (8,566) 9,342
Cash and cash equivalents, beginning of year 19,456 40,695
--------- ---------
Cash and cash equivalents, end of year $ 10,890 $ 50,037
========= =========
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 subsidiaries, 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 March 31, 2002 and 2001 (in thousands):
March 31,
----------------------------
2002 2001
---------- ---------
Shares issuable under stock options 1,008 1,832
Shares of unvested stock subject to repurchase 18 455
---------- ---------
1,026 2,287
========== =========
The weighted-average exercise price of stock options outstanding was $.64
and $1.50 as of March 31, 2002 and 2001, respectively. The weighted average
repurchase price of unvested stock was $.62 and $.38 as of March 31, 2002 and
2001, respectively.
3. Significant Customers
Sales to one customer accounted for approximately 10% and 24% of total
revenues for the three months ended March 31, 2002 and 2001, respectively.
4
4. Comprehensive Loss
The components of comprehensive loss are as follows (in thousands):
Three Months Ended
March 31,
-----------------------------
2002 2001
---------- ------------
Net loss $ (5,095) $ (7,499)
Foreign currency translation adjustment 32 -
---------- ------------
Total comprehensive loss $ (5,063) $ (7,499)
========== ============
5. Restructuring
In response to the continuing economic slowdown, the Company implemented a
restructuring plan in the third quarter of fiscal 2001 and recorded a
restructuring charge of $4.5 million. The goal of the restructuring plan is to
reduce costs and improve operating efficiencies in order to match the current
business environment. The restructuring charge consisted of severance and
benefits of $729,000 related to the involuntary termination of 70 employees,
which was fully paid as of December 31, 2001. These terminations were from all
functions across the Company. In addition, the Company accrued for lease costs
of $2.2 million pertaining to the estimated obligations for non-cancelable lease
payments for excess facilities in the United States and Europe. The Company also
wrote off computer equipment and software with a net book value of $1.6 million
as these assets were taken out of service because they were deemed unnecessary
due to the reductions in workforce.
The sublease loss accrual as of December 31, 2001 was $1,286,000. The
Company made payments of $165,000 against the accrual in the three-month period
ending March 31, 2002. The Sublease loss accrual balance as of March 31, 2002 is
$1,121,000. 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
The Company and certain of its officers and directors, as well as certain
of the underwriters from the Company's initial public offering were named as
defendants in a class action shareholder complaint filed in the United States
District Court for the Southern District of New York and captioned Felzen v.
Extensity, Inc. et al., Case No. 01-CV-11246. The plaintiffs seek unspecified
monetary damages and other relief. The Company believes these charges to be
without merit and therefore, has not accrued any amounts in connection with this
matter.
We are also subject to various other claims and legal actions arising in
the ordinary course of business. The ultimate disposition of these various other
claims and legal actions is not expected to have a material effect on our
business, financial condition or results of operations.
7. 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
5
accounting, and broadens the criteria for recording intangible assets separately
from goodwill. Recorded goodwill and intangibles will be evaluated against these
new criteria and may result in certain intangibles being subsumed into goodwill,
or alternatively, amounts initially recorded as goodwill may be separately
identified and recognized apart from goodwill. SFAS No. 142 requires the use of
a non-amortization approach to account for purchased goodwill and certain
intangibles. Under a non-amortization approach, goodwill and certain intangibles
will not be amortized into results of operations, but instead would be reviewed
for impairment and written down and charged to results of operations only in the
periods in which the recorded value of goodwill and certain intangibles is more
than its fair value. The provisions of each statement, which apply to goodwill
and intangible assets acquired prior to June 30, 2001, were adopted by the
Company on January 1, 2002. The adoption of these accounting standards had no
impact on our financial position or results of operations for any historic
transactions.
8. Subsequent Event
In April of 2002, the Company took steps to reduce expenses, which included
reducing full-time equivalent employees at the Company by approximately 18%. The
Company is also evaluating the adequacy of their sublease loss accrual for its
lease commitments for office space. The Company expects to incur a related
pretax restructuring charge in the range of $1 million to $1.5 million in the
second quarter of 2002.
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
expect to introduce the newest version of our suite of products, Extensity 6, in
the first half of 2002.
We generate revenue principally from licensing our applications and
providing related services, including product installation, maintenance and
support, consulting and training. We license our applications individually or as
an integrated suite of products. The pricing of our software and services
fluctuates on a per transaction basis depending on various factors, such as the
number of seats covered by a contract and the degree of customization requested
by the particular customer. The dollar amounts of our contracts depend on the
number of users and applications being used and the professional services
requested. In the third quarter of 2001, we began recognizing revenue from our
hosted offering. Under this offering, customers pay a monthly usage fee based on
the number of users and a one-time set-up fee to access the Extensity
application on our servers.
We promote and sell our software products through our direct sales force
and through indirect channels, including Elite Information Group and Emplaza,
S.A., a joint venture between Terra Networks and Meta4. We also have marketing
referral arrangements in place with Cisco Systems, IBM, US Bank,
Amadeus/eTravel, Rosenbluth Travel, WebEx, Digital Think, Visa, GetThere.com,
and Pro Act Technologies.
We continue to support our European operations; however, as part of our
restructuring plan implemented in July 2001, we significantly reduced our
resources in this region to match the current business environment. For the
three months ended March 31, 2002 and 2001, revenues derived from our
international operations represented approximately 8% and 39%, respectively, of
total revenues.
7
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.
Summary Condensed Consolidated Financial Data
(In thousands)
(Unaudited)
Three Months Ended
March 31,
--------------------------
2002 2001
------ ------
Revenues:
License $1,206 $6,022
Service and maintenance 3,123 3,780
Hosted 194 -
------ ------
Total revenues $4,523 $9,802
====== ======
Cost of revenues:(*)
License $ 105 $ 445
Service and maintenance 2,401 4,024
Hosted 266 -
------ ------
Total cost of revenues $2,772 $4,469
====== ======
Operating expenses:(*)
Sales and marketing $3,509 $7,820
Research and development 2,100 3,735
General and administrative 1,486 1,680
Non recurring general and administrative - 377
Interest income $ 270 $1,073
(*) Amounts exclude the amortization of non-cash stock based
compensation as follows:
Cost of revenues:
Service and maintenance $ 3 $ 50
Operating expenses:
Sales and marketing 7 94
Research and development 4 57
General and administrative 7 92
------ ------
$ 21 $ 293
------ ------
Revenues
Total revenues decreased to $4.5 million for the three months ended March
31, 2002 from $9.8 million for the three months ended March 31, 2001, a decrease
of 54%. Sales to one customer accounted for approximately 10% and 24% of total
revenues for the three months ended March 31, 2002 and 2001, respectively.
8
License Revenues. Our license revenues decreased to $1.2 million for the
three months ended March 31, 2002 from $6.0 million for the three months ended
March 31, 2001, a decrease of 80%. The decrease in license revenue for the three
months ended March 31, 2002 was attributable to a decrease in revenue recognized
on shipment from our direct and indirect sales channels. This decrease is
primarily attributable to the decrease in capital spending associated with the
current global economic conditions.
Service and Maintenance Revenues. Our service and maintenance revenues
decreased to $3.1 million for the three months ended March 31, 2002 from $3.8
million for the three months ended March 31, 2001, a decrease of 17%. This
decrease was attributable to a decrease in professional services revenues
recognized on a time and materials basis and a decrease in revenue recognized on
partner integration resulting from a decrease in capital spending associated
with the current global economic conditions.
Hosted Revenues. Our hosted revenues were $194,000 for the three months
ended March 31, 2002. This is the third quarterly period the Company has
recognized revenue from this offering. The Company does not believe these
revenues will be a significant percentage of total revenues in the near term.
Cost of Revenues
Total cost of revenues decreased to $2.8 million for the three months ended
March 31, 2002 from $4.5 million for the three months ended March 31, 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. This cost decreased to
$105,000 for the three months ended March 31, 2002 from $445,000 for the three
months ended March 31, 2001, due primarily to decreased sales activity. As a
percentage of license revenues, cost of license revenues increased to 9% for the
three months ended March 31, 2002 from 7% for the three months ended March 31,
2001. Cost of revenues as a percentage of license revenue may increase over the
current level in the future if we incorporate additional third-party products
into our offerings.
Cost of Service and Maintenance Revenues. Cost of service and maintenance
revenues consists of compensation and related overhead costs for personnel
engaged in consulting, training, maintenance and support services for our
customers as well as costs for third parties contracted to provide such services
to our customers. This cost decreased to $2.4 million for the three months ended
March 31, 2002 from $4.0 million for the three months ended March 31, 2001, a
decrease of 40%. As a percentage of service revenues, cost of service revenues
decreased to 77% for the three months ended March 31, 2002 from 106% for the
three months ended March 31, 2001. The decrease for the three months ended March
31, 2002 was attributable to lower compensation costs associated with our
restructuring plan implemented in July of 2001 and lower costs for third party
consultants. We expect the cost of service and maintenance revenues to be lower
in the second quarter of 2002 as we begin realizing the impact of the
restructuring plan implemented in April of 2002. Overall, we are seeking to
further reduce our cost of service revenues as a percentage of total service
revenue and are also seeking to engage third parties to provide a substantial
portion of services related to our applications.
Cost of Hosted Revenues. Cost of hosted revenues consists primarily of
compensation and related overhead costs for personnel engaged in supporting the
hosted customer base, server costs, and telecommunications charges. For the
three months ended March 31, 2002, cost of hosted revenues was $266,000. The
Company does not expect these costs to significantly increase in the near term.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
compensation and related costs for sales and marketing personnel, including
commissions and marketing program costs. Sales and marketing expenses decreased
to $3.5 million for the three months ended March 31, 2002 from $7.8 million for
the three months ended March 31, 2001, a decrease of 55%. As a percentage of
total
9
revenues, sales and marketing expenses decreased to 78% for the three months
ended March 31, 2002 from 80% for the three months ended March 31, 2001. The
decrease in sales and marketing expenses for the three months ended March 31,
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 plan implemented in July 2001. We expect sales
and marketing expenses, excluding commission charges, to be lower in the second
quarter of 2002 as we begin realizing the impact of the restructuring plan
implemented in April of 2002. Commission charges will vary depending upon the
sales activity. Sales and marketing expenses may increase in the long term if we
expand our domestic and international sales force and increase our marketing
efforts.
Research and Development. Research and development expenses consist
primarily of compensation and related personnel costs, and fees associated with
contractors. Research and development expenses decreased to $2.1 million for the
three months ended March 31, 2002 from $3.7 million for the three months ended
March 31, 2001, a decrease of 44%. As a percentage of total revenues, research
and development expenses increased to 46% for the three months ended March 31,
2002 from 38% for the three months ended March 31, 2001. The decrease in
research and development cost for the three months ended March 31, 2002 was
attributable to reduced compensation costs associated with our restructuring
plan implemented in July of 2001. The increase in costs as a percentage of total
revenues for the three months ended March 31, 2002 is attributed to the
company's 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 in the second quarter of 2002 to be somewhat lower than the first
quarter expenses; however, the restructuring plan implemented in April of 2002
will not significantly impact this area. Research and development expenses may
increase in the long term if we make additional investments in our technology
and products.
General and Administrative. General and administrative expenses consist
primarily of compensation and related costs for our executive, finance and
administrative personnel and other related expenses. General and administrative
expenses, excluding non-recurring general and administrative charges, decreased
to $1.5 million for the three months ended March 31, 2002 from $1.7 million for
the three months ended March 31, 2001, a decrease of 12%. As a percentage of
total revenues, general and administrative expenses, excluding non-recurring
general and administrative charges, increased to 33% for the three months ended
March 31, 2002 from 17% for the three months ended March 31, 2001. The decrease
in general and administrative expenses in the three-month period ended March 31,
2002 was primarily attributable to the impact of our restructuring plan
implemented in July of 2001. General and administrative expenses may increase in
the long term if we expand our operations.
Non-Recurring General and Administrative. There were no non-recurring
general and administrative charges for the three months ended March 31, 2002,
compared to non-recurring general and administrative charges of $377,000 for the
three months ended March 31, 2001. The $377,000 of non-recurring general and
administrative expenses was incurred in connection with exploring potential
merger and acquisition transactions. The entire charge was expensed in the three
months ended March 31, 2001 as these discussions were terminated.
Interest Income, Net
Interest income, net was $270,000 for the three months ended March 31, 2002
and $1.1 million for the three months ended March 31, 2001, a decrease of 75%.
Interest income is attributed to interest earned on the proceeds from the
Company's initial public offering ("IPO"). The decrease in interest income 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
10
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. Amortization of non-cash stock based compensation
decreased to $21,000 for the three months ended March 31, 2002 from $293,000 for
the three months ended March 31, 2001. The lower expense in 2002 is primarily
attributable to the impact of forfeitures and the use of an accelerated method
of amortization. We estimate that we will recognize approximately $284,000 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 March 31, 2002, we had $43.9 million in cash, cash equivalents and
short-term investments, $1.4 million in restricted long-term investments and
$36.7 million in working capital.
Net cash used in operating activities was $2.3 million for the three months
ended March 31, 2002 and $6.7 million for the three months ended March 31, 2001.
For the three months ended March 31, 2002 cash used in operating activities was
primarily attributed to a net loss of $5.1 million, adjusted for a depreciation
and amortization of $432,000, and a decrease in accounts receivable of $2.0
million. For the three months ended March 31, 2001 net cash used in operating
activities was primarily attributable to a net loss of $7.5 million, adjusted
for the amortization of deferred stock compensation of $681,000 and offset by an
increase in accounts receivable of $1.2 million and an increase in accounts
payable of $1.3 million.
Net cash used in investing activities was $6.2 million for the three months
ended March 31, 2002 and net cash provided by investing activities was $16.3
million for the three months ended March 31, 2001. Net cash used in investing
activities for the three months ended March 31, 2002 was primarily attributable
to the purchases of short-term investments. Net cash provided by investing
activities for the three months ended March 31, 2001 was primarily attributable
to maturities of short-term investments.
Net cash used in financing activities was $37,000 for the three months
ended March 31, 2002 due to payments on capital lease obligations of $69,000
offset by proceeds from employee stock plans of $32,000. Net cash used in
financing activities was $247,000 for the three months ended March 31, 2001,
primarily due to payments on notes payable of $374,000.
Presently, we anticipate that our existing capital resources will meet our
operating and investing needs for at least the next twelve months. In
particular, we believe that our current cash balances are sufficient to fund any
existing cash obligations or commercial commitments as well as any cash needed
for planned operating activities. Furthermore, should our operating results be
worse than expected, we could use more cash in funding operating activities
which would diminish our capital resources. While we do not presently anticipate
a need for additional capital, if we do require additional capital resources to
grow our business, execute our operating plans, or acquire complementary
technologies or businesses, at any time in the future, we may seek to sell
additional equity or debt securities or secure additional lines of credit, which
may result in additional dilution to our stockholders. Additional funding may or
may not be available on acceptable terms or at all.
11
RISK FACTORS
The following is a discussion of certain factors that currently impact or may
impact our business, operating results and/or financial condition. Any
investment in our common stock involves a high degree of risk. You should
consider carefully the following information about these risks in evaluating our
business. The market price of our common stock could decline, and you may lose
all or part of the money you paid to buy our common stock.
RISKS RELATED TO OUR BUSINESS
Our limited operating history and the fact that we operate in a new industry
make our business prospects difficult to evaluate.
We were incorporated in November 1995 and commenced licensing of our
software applications in March 1998. An investor in our common stock must
consider the risks, uncertainties, expenses and difficulties frequently
encountered by companies in their early stages of development, particularly
companies in new and rapidly evolving markets such as the market for employee
relationship management software applications. Risks and difficulties include
our ability to:
- expand our base of customers with fully installed and deployed systems
that can serve as reference accounts for our ongoing sales efforts;
- expand our pipeline of sales prospects in order to promote greater
predictability in our period-to-period sales levels;
- continue to offer new products that complement our existing product
line, in order to make our suite of applications more attractive to
customers;
- continue to develop and upgrade our technology to add additional
features and functionality;
- continue to attract and retain qualified personnel;
- expand direct sales channels and indirect channels such as
relationships with OEM customers and distributors;
- increase awareness of our brand; and
- maintain our current and develop new third-party relationships,
including but not limited to third-party implementers.
The Company may not be able to successfully address these risks or
difficulties and our business strategy may not be successful. If we fail to
address these risks or difficulties adequately, our business will likely suffer.
We have a history of losses and negative cash flow and expect this to continue
through 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 March 31, 2002, we
had an accumulated deficit of $105.5 million. We expect to continue to invest in
research and development to enhance current products and develop future products
and support our current sales and marketing efforts that promote our company and
our products in the marketplace. As a result, we will need to increase our
revenues significantly to achieve profitability. In addition, because we expect
to continue to
12
invest in our business ahead of anticipated future revenues, we expect that we
will continue to incur operating losses through the current fiscal year.
Our business is changing rapidly, which could cause our quarterly operating
results to vary and our stock price to fluctuate.
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors, many of which are beyond our control. Even
after our reorganization in April of 2002, where headcount was significantly
reduced, we expect to continue to make expenditures in all areas of our
businessin 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, Captura Software, Concur
Technologies, IBM, PeopleSoft and Oracle. As a result of the large market
opportunity for employee relationship management solutions we also expect
competition from other established and emerging companies.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition, and a larger
13
installed base of customers than us. In addition, many of our competitors have
well-established relationships with our current and potential customers and have
extensive knowledge of our industry. Current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to increase the ability of their products to address customer
needs. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. We also
expect that competition will increase as a result of industry consolidation.
Increased competition may result in price reductions, reduced margins and loss
of market share, any one of which could seriously harm our business.
If we do not provide software applications and related services that meet the
changing demands of our customers, the market for our products will not grow or
may decline, and our product sales will suffer.
To successfully implement our business strategy, we have to provide
software applications and related services that meet the demands of our
customers and prospective customers as the market and customer requirements
evolve. We expect that competitive factors will create a continuing need for us
to improve and add to our suite of software applications. Not only will we have
to expend additional funds and other resources to continue to improve our
existing suite of applications, but we must also properly anticipate, address
and respond to customer preferences and demands. As organizations' needs change
with respect to their enterprise applications, our existing suite of software
applications may become obsolete or inefficient relative to our competitors'
offerings and may require modifications or improvements. The addition of new
products and services will also require that we continue to improve the
technology underlying our applications. These requirements could be significant,
and we may fail to fulfill them quickly and efficiently. If we fail to expand
the breadth of our applications quickly in response to customer needs or if
these offerings fail to achieve market acceptance, the market for our products
will not grow or may decline, and our business may suffer significantly.
Our employee relationship management software products and related services
have accounted for substantially all of our revenues to date. We anticipate that
revenues from these products and related services will continue to constitute
substantially all of our revenues for the foreseeable future. Consequently, our
future financial performance will depend, in significant part, upon the
successful development, introduction and customer acceptance of enhanced
versions of our employee relationship management software applications and any
new products or services that we may develop or acquire. We cannot assure you
that we will be successful in enhancing, upgrading or continuing to effectively
market our employee relationship management software applications or that any
new products or services that we may develop or acquire will achieve market
acceptance.
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.
14
In developing new products and services, we may also fail to develop and
market products that respond to technological changes or evolving industry
standards in a timely or cost-effective manner, or experience difficulties that
could delay or prevent the successful development, introduction and marketing of
these new products and services.
In any given quarter, our revenues have been derived from a relatively small
number of customers, and the loss of a small number of major customers or
potential customers could adversely impact our quarterly revenues or operating
results.
We expect that we will continue to derive a significant portion of our
revenues from a relatively small number of customers in the future. Accordingly,
the loss of a small number of major customers could materially and adversely
affect our business, and the deferral or loss of anticipated orders from a small
number of prospective customers could materially and adversely impact our
quarterly revenues and operating results in any period.
If we fail to maintain positive margins on service revenues in the foreseeable
future, our results of operations could suffer.
For the quarter ended March 31, 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."
If we fail to expand our relationships with third parties that can provide
implementation and consulting services to our customers, we may be unable to
grow our revenues and our business could be harmed.
In order for us to focus more effectively on our core business of
developing and licensing software solutions, we must continue to establish
relationships with third parties that can provide implementation and consulting
services to our customers. Third-party implementation and consulting firms can
also be influential in the choice of employee relationship management software
applications by new customers. To date, we have established relationships with
several third-party implementation and consulting firms. In general, however, if
we are unable to establish and maintain effective, long-term relationships with
implementation and consulting providers, or if these providers do not meet the
needs or expectations of our customers, we may be unable to grow our revenues
and our business could be seriously harmed. As a result of the limited resources
and capacities of many third-party implementation providers, we may be unable to
attain sufficient focus and resources from the third-party providers to meet all
of our customers' needs, even if we establish relationships with these third
parties. If sufficient resources are unavailable, we will be required to provide
these services internally, which could limit our ability to expand our base of
customers. A number of our competitors have significantly more established
relationships with these third parties and, as a result, these third parties may
be more likely to recommend competitors' products and services rather than our
own. Even if we are successful in developing additional relationships with
third-party implementation and consulting providers, we will be subject to
significant risk, as we cannot control the level and quality of service provided
by third-party implementation and consulting partners.
Our expectations of future growth depend on our ability to expand
internationally, and factors specific to our international expansion may prevent
us from achieving our anticipated growth.
Over time, we intend to expand our international operations to achieve our
anticipated growth, but we may face significant challenges to our international
expansion. The expansion of our existing international operations and entry into
additional international markets will require significant management attention
and financial resources. To achieve broad acceptance in international markets,
our products must be localized to handle a variety of factors specific to each
international market, such as tax laws and local
15
regulations. The incorporation of these factors into our products is a complex
process and often requires assistance from third parties. We may not adequately
address all of the factors necessary to achieve broad acceptance in our target
international markets. Further, to achieve broad usage by employees across
international organizations, our products must be localized to handle native
languages and cultures in each international market. Localizing our products is
also a complex process and we intend to continue working with third parties to
develop localized products. To date, we have localized our product for the
markets where the English language is the native language and completed
translations for the German, French, Italian and Spanish languages.
We have only a limited history of marketing, selling and supporting our
products and services internationally. In 1999, we opened a regional office in
the United Kingdom. In 2000, we expanded our European Operations through opening
a second office in Frankfurt, Germany; however, as part of our restructuring
plan implemented in April of 2002, we closed the Frankfurt office. As of March
31, 2002, we had a total of 13 employees in our international operations. For
the three months ended March 31, 2002, we derived approximately 8% 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 two to nine months. Our
customers have frequently viewed the purchase of our products as part of a
long-term strategic decision regarding the management of their workforce-related
operations and expenditures. This decision process has sometimes resulted in
customers taking a long period of time to assess alternative solutions by our
competitors or deferring a purchase decision until the market evolves. Sales
cycles continue to be long and the timing of purchase decisions by individual
customers remain at times uncertain. We must continue to educate potential
customers on the use and benefits of our products and services, as well as the
integration of our products and services with additional software applications
utilized by the individual customers. Because the sales cycle is long and timing
of individual orders is uncertain, our period-to-period revenues are difficult
to predict.
16
We may be unable to attract and retain highly skilled employees that are
necessary for the success of our business plan.
Our ability to execute our business plan and be successful also depends on
our continued ability to attract and retain highly skilled employees. We depend
on the services of senior management and other personnel, particularly Robert A.
Spinner, our Chief Executive Officer. Over time, we will need to hire additional
personnel in all operational areas. Competition for personnel in our industry is
intense. We have in the past experienced, and we expect to continue to
experience in the future, difficulty in hiring and retaining highly skilled
employees with appropriate qualifications. If we do not succeed in attracting or
retaining personnel, our business could be adversely affected.
Software defects could lead to loss of revenue or delay the market acceptance of
our applications.
Our enterprise applications software is complex and, accordingly, may
contain undetected errors or failures when first introduced or as new versions
are released. This may result in loss of, or delay in, market acceptance of our
products. We have in the past discovered software errors in our new releases and
new products after their introduction. In the event that we experience
significant software errors in future releases, we could experience delays in
the release, customer dissatisfaction and lower revenues and service margins
during the period required to correct these errors. We may in the future
discover errors, and additional scalability limitations, in new releases or new
products after the commencement of commercial shipments. Any of these errors or
defects could cause our business to be materially harmed.
We may become increasingly dependent on third-party software incorporated in our
products and, if so, impaired relations with these third parties, errors in
third-party software or inability to enhance the software over time could harm
our business.
We incorporate third-party software into our products. Currently, the
third-party software we use includes application server software that we license
from BEA Systems, off-line database software from Pointbase, off-line client
server software from PUMATECH, synchronization software from AETHER Systems and
reporting software from BUSINESS OBJECTS. We may incorporate additional
third-party software into our products as we expand our product line and broaden
the content and services accessible through our gateway. The operation of our
products would be impaired if errors occur in the third-party software that we
license. It may be more difficult for us to correct any errors in third-party
software because the software is not within our control. Accordingly, our
business would be adversely affected in the event of any errors in this
software. Furthermore, it may be difficult for us to replace any third-party
software if a vendor seeks to terminate our license to the software.
Our success depends in part upon our ability to protect our intellectual
property and we may not be able to do so adequately.
Our success depends in large part upon our proprietary technology. We rely
on a combination of copyright, trademark and trade secret protection,
confidentiality and nondisclosure agreements and licensing arrangements to
establish and protect our intellectual property rights. We license rather than
sell our solutions and require our customers to enter into license agreements,
which impose restrictions on their ability to utilize the software. In addition,
we seek to avoid disclosure of our trade secrets through a number of means,
including requiring those persons with access to our proprietary information to
execute nondisclosure agreements with us and restricting access to our source
code. We seek to protect our software, documentation and other written materials
under trade secret and copyright laws, which afford only limited protection.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect our
proprietary rights to as great an extent as do the laws of the United States of
America. Our means of protecting our proprietary rights may not be adequate and
our
17
competitors may independently develop similar technology, duplicate our
products, or design around our proprietary intellectual property.
Security and other concerns may discourage customers from purchasing our hosted
product.
If customers determine that our hosted product is not scaleable, does not
provide adequate security for the dissemination of information over the
Internet, or is otherwise inadequate for Internet-based use, or if for any other
reason customers fail to accept our hosted products for use on the Internet or
on a subscription basis, our business will be harmed. As a hosted provider, we
expect to receive confidential information including credit card, travel
booking, employee, purchasing, supplier, and other financial and accounting
data, through the Internet and there can be no assurance that this information
will not be subject to computer break-ins, theft, and other improper activity
that could jeopardize the security of information for which we are responsible.
Any such lapse in security could expose us to litigation, loss of customers, or
otherwise harm our business. In addition, any person who is able to circumvent
our security measures could misappropriate proprietary or confidential customer
information or cause interruptions in our operations. We may be required to
incur significant costs to protect against security breaches or to alleviate
problems caused by breaches. Additionally, in the past, computer viruses and
software programs that disable or impair computers have been distributed and
have rapidly spread over the Internet. Computer viruses could be introduced into
our systems or those of our customers or suppliers, which could disrupt our
software solutions or make them inaccessible to customers or suppliers. Further,
a well-publicized compromise of security could deter people from using the
Internet to conduct transactions that involve transmitting confidential
information. Our failure to prevent security breaches, or well-publicized
security breaches affecting the Internet in general, could significantly harm
our business, operating results and financial condition.
We may face costly damages or litigation costs if a third party claims that we
infringe its intellectual property.
There has been a substantial amount of litigation in the software industry
and the Internet industry regarding intellectual property rights. It is possible
that in the future, third parties may claim that we or our current or potential
future products infringe upon their intellectual property. We expect that
software product developers and providers of Internet-based software
applications will increasingly be subject to infringement claims as the number
of products and competitors in our industry segment grows and the functionality
of products in different industry segments overlaps. Any claims, with or without
merit, could be time consuming, result in costly litigation, cause product
shipment delays or require us to enter into royalty or licensing agreements.
Royalty or licensing agreements, if required, may not be available on terms
acceptable to us or at all, which could seriously harm our business.
We are the target of a securities class action complaint and are at risk of
securities class action litigation, which may result in substantial costs and
divert management attention and resources.
In November 2001, the Company and certain of its officers and directors, as
well as certain of the underwriters from the Company's 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 consolidated under the
caption, In re Extensity, Inc. Initial Public Offering Securities Litigation,
Case No. 01-CV-11246. 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. Similar complaints were filed in the same court
against numerous public companies that conducted IPOs of their common stock
since the mid-1990s. This action may divert the efforts and attention of
management and, if determined adversely to the Company, could have a material
impact on our business.
18
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 certain agreements entered into by or for the benefit of some of our key
officers could make it more difficult for a third party to acquire us, even if
doing so might be beneficial to our stockholders.
Our business may face additional risks and uncertainties not presently known to
us, which would cause our business to suffer.
In addition to the risks specifically identified in this Risk Factors
section or elsewhere in this Annual Report, we may face additional risks and
uncertainties not presently known to us or that we currently deem immaterial
which ultimately may impair our business, results of operations and financial
condition.
RISKS RELATED TO OUR INDUSTRY
Our success will depend upon the growth and acceptance of the market we address
and our ability to meet the needs of the emerging market for employee
relationship management software applications.
The market for our employee relationship management software applications
and services is at an early stage of development. Our success will depend upon
the continued development of this market and the increasing acceptance by
customers of the benefits to be provided by employee relationship management
applications and services. In addition, as the market evolves, it is unclear
whether the market will accept our suite of applications as a preferred solution
for employee relationship management needs. Accordingly, our products and
services may not achieve significant market acceptance or realize significant
revenue growth. Unless a critical mass of organizations and their suppliers use
our solutions and recommend them to new customers, our solutions may not achieve
widespread market acceptance, which may cause our business to suffer.
Market prices of technology companies have been highly volatile, and the market
for our stock may continue to be volatile as well.
The stock market has experienced significant price and trading volume
fluctuations and the market prices of technology companies generally, and
Internet-related software companies particularly, have been extremely volatile.
Investors may not be able to resell their shares at or above the price they paid
for the stock. In the past, following periods of volatility in the market price
of a public company's securities, securities class action litigation has often
been instituted against that company. Such litigation would likely result in
substantial costs and diversion of management's attention and resources.
19
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 March 31, 2002.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
In November 2001, the Company and certain of its officers and directors, as
well as certain of the underwriters from the Company's 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 consolidated under the
caption, In re Extensity, Inc. Initial Public Offering Securities Litigation,
Case No. 01-CV-11246. 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. Similar complaints were filed in the same court
against numerous public companies that conducted IPOs of their common stock
since the mid-1990s (collectively, the "IPO Lawsuits").
On August 8, 2001, the IPO Lawsuits were consolidated for pretrial purposes
before United States Judge Shira Scheindlin of the Southern District of New
York. Judge Scheindlin held an initial case management conference on September
7, 2001, at which time she ordered, among other things, that the time for all
defendants to respond to any complaint be postponed until further order of the
court. Thus, the Company has not been required to answer the complaint, and no
discovery has been served on the Company.
In accordance with Judge Scheindlin's orders at further status conferences
in March and April, the appointed lead plaintiffs' counsel filed amended,
consolidated complaints in the IPO Lawsuits on April 19,
20
2002. However, Judge Scheindlin does not expect any of the defendants to file
motions to dismiss the amended, consolidated complaints until at least summer of
2002. The Company believes that this lawsuit is without merit and intends to
defend against it vigorously.
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
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
There is no 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).
None
(b) Reports on Form 8-K:
None
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.
May 15, 2002 EXTENSITY, INC.
By /s/ Kenneth R. Hahn
Chief Financial Officer (Principal Financial
and Accounting Officer)
21