Item 1. Business 4 Item 2.
ITEM 2. PROPERTIES
Our primary administrative, sales, marketing, research and development facility is located in Emeryville, California. Our primary office space is held under a lease agreement. In addition, we also lease sales offices in Boston, Chicago, Los Angeles and Mahwah, NJ. We also lease sales and support offices outside of North America including locations in London and Frankfurt. We believe our existing facilities meet our current needs and that we will be able to obtain additional commercial space as needed.
ITEM 3.
ITEM 3. 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 initial public offering ("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 captioned FELZEN V. EXTENSITY, INC., ET AL., Case No. 01-CV-11246. In the complaint, the plaintiffs allege that the Company, certain of its officers and directors and its IPO underwriters 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 (together with FELZEN V. EXTENSITY, INC., ET AL., 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 any of the complaints, and no discovery has been served on the Company.
At a further status conference on March 11, 2002, Judge Scheindlin stated that she would appoint lead plaintiffs counsel in the IPO Lawsuits in mid-March 2002, and would require the appointed lead plaintiffs counsel to file amended, consolidated complaints by April 17, 2002. Defendants will not be expected to file motions to dismiss the amended, consolidated complaints until the summer of 2002. The Company, with the assistance of its legal counsel, intends to defend its position in this matter vigorously.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders.
EXECUTIVE OFFICERS AND OTHER OFFICERS OF THE REGISTRANT
The executive officers and other officers of Extensity are as follows:
ROBERT A. SPINNER has served as Extensity's President, Chief Executive Officer and director since April 1999. Prior to joining Extensity, from January 1995 to January 1999, Mr. Spinner served as Senior Vice President of Worldwide Sales and International Operations at Clarify, Inc., a provider of integrated sales and service solutions for the front office. From October 1988 to December 1994, Mr. Spinner served as Director of Western Regional Sales at Sybase, Inc., a relational database management software company. Mr. Spinner has also held technical positions at Applied Data Research, Inc. and Chevron Corporation. Mr. Spinner received a B.A. in mathematics from Washington University.
SHARAM I. SASSON is the founder and Chairman of the board of directors of Extensity and has served as a director since our inception in 1995. Mr. Sasson served as our President and Chief Executive Officer until March 1999. Prior to founding Extensity, Mr. Sasson was an executive at Scopus Technology, a provider of enterprise customer information management systems which he co-founded in 1991. Mr. Sasson has also served as a research scientist at Lockheed Missile and Space Company and as a developer of structural modeling software at PMB/Bechtel Corporation. Mr. Sasson received a B.S. in civil engineering from Queen Mary College, University of London, an M.S. in structural engineering from City University in London, and a Master in Engineering from the University of California at Berkeley.
KENNETH R. HAHN was appointed Extensity's Chief Financial Officer in December 1999, has served as Vice President of Finance and Administration since January 1999 and previously served as Corporate Controller from January 1998 to January 1999. From September 1995 to December 1997, Mr. Hahn was employed as a management consultant with The Boston Consulting Group, a strategy consulting firm. Mr. Hahn attended the Stanford Graduate School of Business, where he earned an MBA and was named an Arjay Miller Scholar. Mr. Hahn also held various positions at Price Waterhouse LLP, most recently as an Audit Manager. He received a B.A. in business administration from California State University, Fullerton and is a Certified Public Accountant and has held a Certified Management Accountant's license.
ELIZABETH A. IRELAND has served as Extensity's Vice President of Marketing since January 1998. Prior to joining Extensity, Ms. Ireland was employed at MapInfo Corporation, a software company, from 1989 to October 1997, most recently as Vice President and General Manager of Internet Businesses. Additional positions held by Ms. Ireland at MapInfo Corporation include Vice President of Marketing and Business Development and Vice President of Information Products. Ms. Ireland received a B.S. in business administration from the University of South Carolina and has held a Certified Public Accountant's license.
ALLEN F. NORDGREN has served as Extensity's Vice President of Professional Services since November 1997. Prior to joining Extensity, Mr. Nordgren was employed from June 1996 to November 1997 at Logica, Inc., a systems integrator, as Vice President and General Manager of Western U.S. Operations. From October 1992 to May 1996, Mr. Nordgren was employed at Sybase, Inc., a relational database management software company, most recently as Practice Director of Professional Services for the Northwest Region. Mr. Nordgren attended Bernard Baruch University and served four years in the U.S. Military.
MARK K. ONEY has served as Extensity's Vice President of Engineering since July 1999. Prior to joining Extensity, from May 1999 to June 1999, Mr. Oney served as the Vice President of Engineering for Ringer Software, a consumer information Internet company. From September 1998 through January 1999, Mr. Oney was a co-founder of and served as Vice President of Software Engineering for Crag Technologies, Inc., a developer and supplier of data storage solutions. Crag Technologies was acquired by Western Digital Corporation in February 1999. From July 1997 through May 1998, Mr. Oney was a co-founder of and served as Vice President of Software Engineering for Ridge Technologies, a Windows NT storage company which was acquired by Adaptec, Inc., in May 1998. Prior to founding Ridge, from May 1988 through June 1997, Mr. Oney served in a variety of engineering and management roles at Apple Computer, Inc., most recently as Director of Software Development for the PowerBook line of business. Mr. Oney received a B.S. in electrical engineering from Rochester Institute of Technology.
DONALD E. SMITH has served as Extensity's Vice President of Hosted Operations and Customer Advocacy since January 2000. Mr. Smith co-founded Clarify, Inc. in 1990, and held various management positions at Clarify until January 2000, including Vice President of Sales Engineering and Director of Quality Assurance, Product Design and Customer Support. Mr. Smith received a B.S.E.E. from the University of Nebraska at Lincoln.
DAVID A. YARNOLD has served as Extensity's Vice President of Worldwide Sales since January 2002; previously, he served as Vice President of North American Sales from January of 2001 to December 2001, and Vice President of Business Development from August 1999 to January 2001. Prior to joining Extensity, from January 1996 to July 1999, Mr. Yarnold was employed at Clarify, Inc., most recently as Vice President of Northern American Sales. From January 1993 to October 1995, Mr. Yarnold served as Regional Vice President of Platinum Software Corporation, a financial software provider. Mr. Yarnold received a B.S. in accounting from San Francisco State University and has held a Certified Public Accountant's license.
DR. RICK L. SPICKELMIER has served as Extensity's Chief Technology Officer since July 2000, and prior to this position he was Extensity's Server Architect. Prior to joining Extensity, from 1990 to 1998, Dr. Spickelmier served as the Director of Development at Objectivity, a supplier of object database management systems, and from 1988 to 1990 managed CAD framework development at the University of California at Berkeley. Dr. Spickelmier holds a Ph.D. and an M.S. in Electrical Engineering and Computer Sciences from the University of California at Berkeley and a B.S. in Electrical Engineering from Oregon State University.
JENNIFER H. BURT has served as Extensity's Vice President of Human Resources since September 2000. Prior to joining Extensity, from May 2000 to September 2000, Ms. Burt served as Senior Director of Human Resources at Fatbrain, an online retailer, and from August of 1985 to May of 2000, at Viking Freight Inc., an overnight delivery company, she served as a Director of Human Resources.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our Common Stock commenced trading on the Nasdaq National Market on January 27, 2000 under the symbol "EXTN" following our initial public offering at an offering price of $20.00 per share. Our present policy is to retain earnings, if any, to finance future growth. We have never paid a cash dividend and do not have plans to pay cash dividends in the foreseeable future. As of December 31, 2001, there were approximately 200 stockholders of record and the price per share of our common stock was $2.18.
The following table sets forth, for the periods indicated, the high and low sales prices for our common stock as reported by the Nasdaq National Market:
High ($) Low ($) -------- ------- Year Ended December 31, 2001 First Quarter 9.500 4.250 Second Quarter 10.300 4.938 Third Quarter 10.090 2.475 Fourth Quarter 3.490 1.800 Year Ended December 31, 2000 First Quarter 83.500 39.000 Second Quarter 51.500 9.500 Third Quarter 44.750 14.000 Fourth Quarter 20.750 3.781
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the notes to the consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The consolidated statements of operations data for each of the three years ended December 31, 2001, 2000 and 1999 and the consolidated balance sheet data at December 31, 2001 and 2000 are derived from our audited consolidated financial statements. The consolidated statements of operations data for the year ended 1998 and 1997 are derived from our audited consolidated statement of operations not included herein. The selected consolidated balance sheet data as of December 31, 1999, 1998 and 1997 are derived from our audited balance sheets not included herein.
SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
- - See Note 1 to the Consolidated Financial Statements for an explanation of the determination of the number of shares used to compute basic and diluted net loss per share.
- - The Company paid no cash dividends during the 5 year period
ITEM 7:
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE STRATEGIES THAT ARE SIGNIFIED BY THE WORDS "EXPECTS," "ANTICIPATES," "INTENDS," "BELIEVES," OR SIMILAR LANGUAGE. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. IN EVALUATING THE COMPANY'S BUSINESS, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH BELOW UNDER THE CAPTION "RISK FACTORS" IN ADDITION TO THE OTHER INFORMATION SET FORTH HEREIN. THE COMPANY CAUTIONS INVESTORS THAT ITS BUSINESS AND FINANCIAL PERFORMANCE ARE SUBJECT TO SUBSTANTIAL RISKS AND UNCERTAINTIES.
The following discussion and analysis of the financial condition and results of operations of Extensity should be read in conjunction with "Selected Consolidated Financial Data" and our consolidated financial statements and related notes appearing elsewhere in this report.
OVERVIEW
Extensity was formed in November 1995 and introduced its first commercial product for general availability in March 1998. During this period, our operating activities consisted of the design and development of our product architecture and our first application, the building of our corporate infrastructure, and the development of our professional services and customer support organizations. Our first application, Extensity Expense Reports, was released for general availability in March 1998. We released Extensity Travel Plans in December 1998 and Extensity Timesheets and Extensity Purchase Reqs in July 1999. Extensity Connect, our portalized application front end, role-based reporting tool, and content and commerce gateway was released in March 2000. We expect to introduce the newest version of our suite of products, Extensity 6.0, 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.
In February 2001, we opened a sales office in Sydney, Australia; however, we closed the Sydney office in July of 2001, as part of our restructuring plan. 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 twelve months ended December 31, 2001 and 2000 revenues derived from our international operations represented approximately 10% and 11%, respectively, of total revenues. In 1999, all of the Company's revenues were derived from U.S. customers.
CRITICAL ACCOUNTING POLICIES
Our critical and significant accounting policies are more fully described in Note 2 to our consolidated financial statements. However, certain of our accounting policies are particularly important to an understanding of our financial position and results of operations. Application of many of these policies requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosures. In general, these estimates or judgments are based on the historical experience of our management, prevailing industry trends, information provided by our customers and information available from other outside sources, each as appropriate. Actual results may differ from these estimates under different conditions. Our critical accounting policies include:
Revenue recognition
Revenues are derived from software licenses and related services, which include implementation and integration, technical support, training and consulting. For contracts with multiple elements, and for which vendor-specific objective evidence of fair value for the undelivered elements exists, revenue is recognized for the delivered elements based upon the residual contract value as prescribed by Statement of Position No. 98-9, "Modification of SOP No. 97-2 with Respect to Certain Transactions".
Revenue from license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable and collectibility is probable. Arrangements for which the fees are not deemed fixed or determinable are recognized in the period they become due.
Services revenue primarily comprises revenue from consulting fees, maintenance contracts and training. Services revenue from consulting and training is recognized as the service is performed.
Maintenance contracts include the right to unspecified upgrades and ongoing support. Maintenance revenue is deferred and recognized on a straight-line basis as services revenue over the life of the related contract, which is typically one year.
In the event the Company enters into a contract involving significant implementation, customization or services which are essential to the functionality of the software, license and service revenues are recognized over the period of each engagement, using the percentage-of-completion method. Labor hours incurred is used as the measure of progress towards completion. Revenue for these arrangements is classified as license revenue and services revenue based upon our estimates of fair value for each element and recognizes the revenue based on the percentage-of-completion ratio for the arrangement. A provision for estimated losses on engagements is made in the period in which the loss becomes probable and can be reasonably estimated.
The Company has entered into agreements under which value added resellers receive unspecified future products during the terms of the arrangements (typically two years) in consideration for upfront non-refundable fees. Consistent with the provisions of SOP 97-2, the Company recognizes such fees ratably, on a subscription basis, over the terms of the arrangements.
The Company has accumulated relevant information from contracts to use in determining the availability of vendor-specific objective evidence and believes that such information complies with the criteria established in Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2") as follows:
o Customers are required to pay separately for annual maintenance. Future renewal rates are included as a term of the contracts. The Company uses the renewal rate as vendor-specific objective evidence of fair value for maintenance.
o The Company charges standard hourly rates for consulting services based upon the nature of the services and experience of the professionals performing the services. The Company has a history of selling services separately.
o For training, the Company charges standard course rates for each course based upon the duration of the course, and such courses are separately priced in contracts. The Company has a history of selling such courses separately.
o Customer billing occurs in accordance with contract terms. Customer advances and amounts billed to customers in excess of revenue recognized are recorded as deferred revenue.
Bad Debt Allowance:
The Company bills its customers only if collectibility is reasonably assured. The Company estimates the amount of uncollectible receivables each period and establishes an allowance for uncollectable amounts. The amount of the allowance is based on the age of unpaid amounts, information about the ongoing creditworthiness of customers, and other relevant information. Estimates of uncollectable amounts are revised each period, and changes are recorded in the period they become known.
Deferred Tax Assets:
The Company has provided a full valuation reserve related to its net deferred tax assets. In the future, if sufficient evidence of the Company's ability to generate sufficient future taxable income becomes apparent, the Company may be required to reduce its valuation allowance. Management evaluates the realizability of the deferred tax assets and the need for a valuation allowance quarterly.
Restructuring:
The calculation of the estimated sublease loss reserve for vacated facilities requires that management must make estimates of potential future sublease income. Management analyzes current market conditions for real estate with the assistance of reputable commercial real estate brokers. However, future actual sublease income may materially differ from estimated amounts.
Recent Accounting Pronouncements:
In July of 2001, the 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, were adopted by the Company on January 1, 2002. The adoption of these accounting standards did not result in a significant impact on our financial position or results of operations for any historic transactions.
In October 2001, the FASB issued SFAS No. 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS". SFAS No.144 supersedes SFAS No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" and applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles Board Opinion No. 30 ("APB 30"), "REPORTING RESULTS OF OPERATIONS REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS." SFAS No. 144 develops one accounting model (based on the model in SFAS No. 121) for long-lived assets that are to be disposed of by sale, as well as addresses the principal implementation issues. SFAS No.144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. That requirement eliminates APB 30's requirement that discontinued operations be measured at net realizable value or that entities include under "discontinued operations" in the financial statements amounts for operating losses that have not yet occurred. Additionally, SFAS No.144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS No.144 is effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company does not expect the adoption of SFAS No.144 to have a material impact on the Company's financial position or results of operations.
In November 2001, the FASB Emerging Issues Task Force ("EITF") reached a consensus on EITF Issue 01-09, "Accounting for Consideration Given to a Customer or a Reseller of the Vendor's Products". This issue presumes that consideration from a vendor to a customer or a reseller should not be recorded as revenue unless (1) the vendor receives an identifiable benefit in return for the consideration paid that is sufficiently separable from the sale to the customer, such that the vendor could have entered into an exchange transaction with a party other than a purchaser of its products and services in order to receive that benefit and (2) the benefit's fair value can be reasonably estimated. This Issue is to be adopted no later than in annual or interim financial statements for periods beginning after December 15, 2001. We adopted the provisions of this consensus in the fourth quarter of fiscal 2001. Such adoption had no impact on our financial position or results of operations.
In November 2001, the FASB issued Announcement D-103, which states that out-of-pocket expenses should be recorded as revenue in fiscal periods commencing after December 15, 2001. We will adopt the provisions of this Announcement as of January 1, 2002.
RESULTS OF OPERATIONS
The following table sets forth certain statements of operations data in absolute dollars for the periods indicated. The data has been derived from the consolidated financial statements contained in this report. The operating results discussed below do not include the amortization of non-cash stock based compensation. These amounts are discussed separately within this discussion.
SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS)
YEARS ENDED DECEMBER 31, --------------------------- 2001 2000 1999 ------- ------- ------- Revenues: Licenses $20,790 $14,596 $ 3,750 Services and maintenance 14,091 10,272 3,064 Hosted 199 -- -- ------- ------- ------- Total revenues $35,080 $24,868 $ 6,814 ======= ======= =======
Cost of revenues:(*) Licenses $ 1,430 $ 705 $ 195 Services and maintenance 12,960 14,236 4,758 Hosted 422 -- -- ------- ------- ------- $14,812 $14,941 $ 4,953 ======= ======= =======
Operating expenses:(*) Sales and marketing $23,453 $26,783 $11,202 Research and development 11,932 13,288 7,052 General and administrative 6,756 5,136 2,810 Restructuring, impairment loss and other 6,174 -- -- In-process research and development -- 318 --
Interest income, net $ 2,621 $ 5,111 $ 166
(*) Amounts exclude the amortization of non-cash stock based compensation as follows:
Cost of revenues: Services and maintenance $ 65 $ 677 $ 344 Operating expenses: Sales and marketing 244 1,279 989 Research and development 76 774 1,045 General and administrative 124 1,247 1,974 ------- ------- ------- $ 509 $ 3,977 $ 4,352 ======= ======= =======
REVENUES
Total revenues were $35.1 million, $24.9 million and $6.8 million in 2001, 2000 and 1999, respectively, representing increases of 41% from 2000 to 2001 and 265% from 1999 to 2000. For the year ended December 31, 2001, no customer accounted for 10% or more of total revenues. For the years ended December 31, 2000 and December 31, 1999 sales to one customer accounted for 10% and 11%, respectively, of total revenues.
LICENSE REVENUES. License revenues were $20.8 million, $14.6 million and $3.8 million in 2001, 2000 and 1999, respectively, representing increases of 42% from 2000 to 2001 and 289% from 1999 to 2000. The increase in these periods was attributable to our growing customer base, an increase in amount of license revenue recognized upon shipment (while continuing to recognize revenue from our deferred balances for contracts initiated prior to the third quarter of 2001), 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. Revenues from our indirect channels may decrease in 2002.
SERVICE AND MAINTENANCE REVENUES. Service and maintenance revenues were $14.1 million, $10.3 million and $3.1 million in 2001, 2000 and 1999, respectively, representing increases of 37% from 2000 to 2001 and 235% from 1999 to 2000. The increase in these periods were 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 entered into by our customers.
HOSTED REVENUES. Our hosted revenues were $199,000 for the year ended December 31, 2001. This is the first fiscal year 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. As discussed in Note 12 of the Notes to the Financial Statements, we incurred an impairment charge associated with our hosted offering.
COST OF REVENUES
Total cost of revenues were $14.8 million, $14.9 million and $5.0 million in 2001, 2000 and 1999, respectively, representing approximately no increase from 2000 to 2001 and an increase of 202% from 1999 to 2000.
COST OF LICENSE REVENUES. Cost of license revenues consists primarily of third-party license and support fees and, to a lesser extent, costs of duplicating media and documentation and shipping. Cost of license revenues were $1.4 million, $705,000 and $195,000 in 2001, 2000 and 1999 respectively, representing increases of 103% from 2000 to 2001 and 262% from 1999 to 2000. The increase in both periods was due primarily to increased sales activity. As a percentage of license revenues, cost of license revenues was 6.9%, 4.8% and 5.2% in 2001, 2000 and 1999, respectively. Cost of revenues as a percentage of license revenue may increase over the current level in the future as we incorporate additional third-party products in our offerings.
COST OF SERVICE AND MAINTENANCE REVENUES. Cost of service and maintenance revenues consists of compensation and related overhead costs for personnel engaged in consulting, training, maintenance and support services for our customers as well as costs for third parties contracted to provide such services to our customers. Cost of service and maintenance revenues were $13.0 million, $14.2 million and $4.8 million in 2001, 2000 and 1999, respectively, representing a decrease of 9% from 2000 to 2001 and an increase of 199% from 1999 to 2000. As a percentage of service and maintenance revenues, cost of service and maintenance revenues were 92%, 139% and 155% in 2001, 2000 and 1999. The decrease from 2000 to 2001 was attributed to a 246% decrease in third party consulting costs offset in part by 40% higher payroll costs as the Company replaced third party consultants with permanent employees. Approximately 34% of the increase from 1999 to 2000 was attributed to our hiring of additional service and maintenance personnel, and approximately 49% was due to an increase in costs for third party contractors. Total service and maintenance revenues exceeded costs of service and maintenance revenues in 2001. Total cost of service and maintenance revenues exceeded our service and maintenance revenues in 2000 and 1999, as we have built our consulting and customer support groups in advance of growing contract volume. We are seeking to reduce our cost of service revenues as a percentage of total revenues and are also seeking to engage third parties to provide 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. We started recognizing revenue for the hosted product in the third quarter of 2001. The cost of hosted revenues for 2001
was $422,000, representing expenses for the third and fourth quarters of 2001 therefore, on a year-to-year comparison, cost of hosted revenues will increase. However, on a quarter-to-quarter basis, the Company does not expect these costs to significantly increase.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses consist primarily of compensation and related costs for sales and marketing personnel, including commissions and marketing program costs. Sales and marketing expenses were $23.5 million, $26.8 million and $11.2 million in 2001, 2000 and 1999 respectively, representing a decrease of 12% from 2000 to 2001 and an increase of 139% from 1999 to 2000. As a percentage of total revenues, sales and marketing expenses were 67%, 108% and 164% in 2001, 2000 and 1999. Approximately 63% of the decrease from 2000 to 2001 was attributed to lower marketing program spending and 21% to lower payroll costs associated with our restructuring plan implemented in July of 2001. Approximately 67% of the increase from 1999 to 2000 was attributable to increased compensation, commissions and other related costs associated with hiring additional sales representatives, management and marketing personnel and 19% of the increase was attributable to increased spending on marketing programs. 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 were $11.9 million, $13.3 million and $7.1 million in 2001, 2000 and 1999, respectively, representing a decrease of 10% from 2000 to 2001 and an increase of 88% from 1999 to 2000. As a percentage of total revenues, research and development expenses were 34%, 53% and 103% in 2001, 2000 and 1999. Approximately 60% of the decrease from 2000 to 2001 was attributed to lower costs for third party consultants. Approximately 66% of the increase from 1999 to 2000 was attributed to the addition of personnel and 19% due to an increase in consulting services. 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. 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 were $6.8 million, $5.1 million and $2.8 million in 2001, 2000 and 1999, respectively, representing increases of 32% from 2000 to 2001 and 83% from 1999 to 2000. As a percentage of total revenues, general and administrative expenses were 19%, 21% and 41% in 2001, 2000 and 1999. The increase from 2000 to 2001 was primarily attributed to hiring additional human resources and internal information technology personnel. Approximately 60% of the increase from 1999 to 2000 was attributable to hiring additional executive and financial personnel and 40% to general administrative costs. General and administrative expenses may increase in the long term if we expand our operations.
RESTRUCTURING, IMPAIRMENT LOSS AND OTHER. For the year ended December 31, 2001, restructuring, impairment loss and other expenses were $6.2 million comprised of $4.5 million in restructuring, a $1.3 million impairment of assets associated with building the hosted offering and $377,000 of other expenses. The $4.5 million in restructuring charges were made up of $2.2 million in lease costs, a $1.6 million write-off of property and equipment and $700,000 in severance and benefits.
AMORTIZATION OF NON-CASH STOCK BASED COMPENSATION
Prior to our IPO, we granted certain stock options to our officers and employees at prices deemed to be below the fair value of the underlying stock. The cumulative difference between the deemed fair value of the underlying stock at the date the
options were granted and the exercise price of the granted options was $12.1 million as of the IPO date. This amount is being amortized, using the accelerated method of the Financial Accounting Standards Board ("FASB") Interpretation No. 28, "ACCOUNTING FOR STOCK APPRECIATION RIGHTS AND OTHER VARIABLE OR AWARD PLANS", over the four-year vesting period of the granted options. Accordingly, our results from operations will include deferred compensation expense at least through 2003. We recognized $509,000, $4.0 million and $4.4 million of this expense in 2001, 2000 and 1999, respectively. The lower expense in 2001 is primarily attributable to the impact of forfeitures and the use of an accelerated method of amortization. The remaining expense to be recognized in 2002 and 2003 is $504,000. We estimate that we will recognize approximately $450,000 of expense in fiscal 2002; however, this amount may change as employee terminations and accelerated vesting impact the amortization schedule.
IN-PROCESS RESEARCH AND DEVELOPMENT
In process research and development expense was $318,000 for the year ended December 31, 2000. This expense was incurred in connection with the acquisition of a company. Substantially the entire purchase price was allocated to in-process research and development as technological feasibility of the acquired product had not been established and no future alternative use existed at the time of purchase. Furthermore, the acquired company had no revenues, no other tangible or intangible assets and only one employee. There were no acquisitions made in 2001 or 1999.
INTEREST INCOME, NET
Interest income, net was $2.6 million, $5.1 million and $166,000 in 2001, 2000 and 1999, respectively. The decrease from 2000 to 2001 was attributed to lower interest rates and lower cash, cash equivalent and short-term investment balances. The increase from 1999 to 2000 was attributed to interest earned on the proceeds from the Company's IPO. Interest income will fluctuate depending upon the overall interest rate environment and our cash, cash equivalent and short-term investment balances.
PROVISION FOR INCOME TAXES
Since inception, we have incurred net losses for federal and state tax purposes and have not recognized any material tax provision or benefit. As of December 31, 2001, we had net operating loss carryforwards of $82.7 million and $33.9 million for federal and state income tax purposes, respectively. The federal and state net operating loss carryforwards, if not utilized, expire through 2021 and 2011, respectively. We also have research and development credit carryforwards of $2.7 million for federal and state tax purposes. The federal research and development credits expire through 2021 and the state credits expire when exhausted. Federal and state tax laws will impose significant restrictions on the utilization of net operating loss carryforwards in the event of a shift in our ownership that constitutes an ownership change, as defined in Section 382 of the Internal Revenue Code.
We have placed a valuation allowance against our net deferred tax assets due to the uncertainty of the realization of these assets. The allowance totaled $33.0 million at December 31, 2001, resulting in no net deferred tax asset. We evaluate on a quarterly basis the recoverability of net deferred tax assets and the level of valuation allowance. When we have determined that it is more likely than not that the deferred tax assets are realizable, we will reduce the valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations and funded our capital expenditures through proceeds from our IPO completed in January 2000 and the private
sale of equity securities, supplemented by loan facilities and equipment leases. Aggregate net proceeds to date from private equity financings totaled $42.3 million and proceeds from the Company's IPO were $83.3 million, net of offering costs of approximately $2.2 million. As of December 31, 2001, we had $46.3 million in cash, cash equivalents and short-term investments and $41.4 million in working capital.
Net cash used in operating activities was $30.9 million for the year ended December 31, 2001, and $22.1 million for the year ended December 31, 2000. For the year ended December 31, 2001 cash used in operating activities was primarily attributed to a net loss of $26.0 million, adjusted for a non-cash charge associated with the write-off of computer equipment and software of $2.9 million, depreciation and amortization of $2.4 million, a decrease in deferred revenue of $12.6 million, a decrease of $2.8 million in accounts payable and a decrease in accrued liabilities of $1.1 million offset by a decrease in accounts receivable of $2.9 million, a decrease in prepaids of $1.4 million and an increase in other current and noncurrent liabilities of $1.3 million. For the year ended December 31, 2000 net cash used in operating activities was primarily attributable to a net loss of $34.5 million, adjusted for the amortization of deferred stock compensation of $4.0 million and offset by an increase in deferred revenue of $6.0 million, an increase in accounts payable of $4.6 million and an increase in accrued liabilities of $3.0 million. We expect that net cash used in operating activities will decrease in the year ending December 31, 2002.
Net cash provided by investing activities was $9.6 million for the year ended December 31, 2001 and net cash used in investing activities was $32.2 million for the year ended December 31, 2000. Excluding capital expenditures of $2.4 million and $5.7 million in 2001 and 2000, respectively, investing activities consisted of short-term investment maturities in 2001 and purchases of short-term investments in 2000.
Net cash provided by financing activities was $100,000 for the year ended December 31, 2001, due to payments on notes payable and capital lease obligations of approximately $1.4 million, offset by proceeds from employee stock plans of approximately $1.5 million. Net cash provided by financing activities was $84.4 million for the year ended December 31, 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 twelve months. We have $46.3 million in cash, cash equivalents and short-term investments. As discussed in Note 5 to the consolidated financial statements, we have approximately $12.7 million in capital and operating lease commitments coming due through 2006. In particular, we believe that our current uncommitted cash balances are sufficient to fund any existing cash obligations or commercial commitments as well as any cash needed for planned operating activities. After that time, we cannot be certain that additional funding will be available on acceptable terms or at all. 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.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
FOREIGN CURRENCY EXCHANGE RATE RISK
We develop products in the United States and market our products in North America and, to a lesser extent, in Europe and the rest of the world. As a result, our financial results could be affected by factors such as changes in foreign currency rates or weak economic conditions in foreign markets. Because our revenues are typically denominated in U.S. dollars, a strengthening of the dollar could make our products less competitive in foreign markets.
INTEREST RATE RISK
We have an investment portfolio of money market funds and fixed income certificates of deposit. The fixed income certificates of deposit, like all fixed income securities, are subject to interest rate risk and will fall in value if market interest rates increase. We attempt to limit this exposure by investing primarily in short-term securities. In view of the nature and mix of our total portfolio, a 10% movement in market interest rates would not have a significant impact on the total value of our portfolio as of December 31, 2001.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND NOTES TO THE FINANCIAL STATEMENTS
The following consolidated financial statements, and the related notes thereto, of Extensity and the Report of Independent Accountants are filed as part of this Form 10K.
INDEX
Page ----
Report of Independent Accountants 40
Consolidated Balance Sheets as of December 31, 41 2001 and 2000
Consolidated Statements of Operations for the years 42 ended December 31, 2001, 2000 and 1999
Consolidated Statements of Stockholders' Equity 43 (Deficit) for the years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the years 44 ended December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements 45
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Extensity, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive loss, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Extensity, Inc. and its subsidiary at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Jose, California January 15, 2002, except for the last paragraph of Note 9 as to which the date is March 6, 2002
EXTENSITY, INC. CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The accompanying notes are an integral part of these consolidated financial statements.
EXTENSITY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
YEARS ENDED DECEMBER 31, ------------------------------- 2001 2000 1999 --------- --------- --------- Revenues: Licenses $ 20,790 $ 14,596 $ 3,750 Services and maintenance 14,091 10,272 3,064 Hosted 199 -- -- --------- --------- --------- Total revenues 35,080 24,868 6,814 --------- --------- ---------
Cost of revenues: (*) Licenses 1,430 705 195 Services and maintenance 13,025 14,912 5,102 Hosted 422 -- -- --------- --------- --------- Total cost of revenues 14,877 15,617 5,297 --------- --------- ---------
Gross profit 20,203 9,251 1,517 --------- --------- ---------
Operating expenses: (*) Sales and marketing 23,697 28,063 12,191 Research and development 12,008 14,062 8,097 General and administrative 6,880 6,383 4,784 Restructuring, impairment loss and other 6,174 -- -- In-process research and development -- 318 -- --------- --------- --------- Total operating expenses 48,759 48,826 25,072 --------- --------- ---------
Loss from operations (28,556) (39,575) (23,555)
Interest income 2,768 5,460 667 Interest expense (147) (349) (501) Provision for income taxes (18) (45) -- --------- --------- --------- Net loss $(25,953) $(34,509) $(23,389) ========= ========= ========= Dividend relating to the beneficial conversion feature of Series F preferred stock -- -- (1,500) --------- --------- --------- Net loss attributable to common stockholders $(25,953) $(34,509) $(24,889) ========= ========= ========= Other comprehensive loss: Change in cumulative translation adjustment (140) 300 (5) --------- --------- --------- Total comprehensive loss $(26,093) $(34,209) $(23,394) ========= ========= =========
Basic and diluted net loss per share $ (1.09) $ (1.63) $ (11.20) Shares used in computing basic and diluted net loss per share 23,840 21,206 2,222
(*) Amounts include non-cash stock based compensation as follows:
Cost of revenues: Services and maintenance $ 65 $ 677 $ 344 Operating expenses: Sales and marketing 244 1,279 989 Research and development 76 774 1,045 General and administrative 124 1,247 1,974 --------- --------- --------- $ 509 $ 3,977 $ 4,352 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
EXTENSITY, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
The accompanying notes are an integral part of these consolidated financial statements.
EXTENSITY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
EXTENSITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Extensity, Inc. (the "Company") provides Internet-based workforce optimization software applications designed to improve the productivity of employees across the enterprise and to enhance enterprise operating efficiency. The Company was incorporated in Delaware in November 1995.
On January 27, 2000, the SEC declared effective the Company's Registration Statement on Form S-1. Pursuant to this Registration Statement, the Company completed an initial public offering ("IPO") of 4,600,000 shares of its common stock (including 600,000 shares sold pursuant to the exercise of the Underwriters' over-allotment option) at an initial offering price of $20.00 per share (the "Offering"). Proceeds to the Company from the Offering, after calculation of the Underwriters discounts, commissions, and concessions, totaled approximately $83.3 million, net of offering costs of approximately $2.2 million.
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Extensity Europe Limited, which commenced operations in September 1999. All significant intercompany balances and transactions have been eliminated in consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue recognition
Revenues are derived from software licenses and related services, which include implementation and integration, technical support, training and consulting. For contracts with multiple elements, and for which vendor-specific objective evidence of fair value for the undelivered elements exists, revenue is recognized for the delivered elements based upon the residual contract value as prescribed by Statement of Position No. 98-9, "Modification of SOP No. 97-2 with Respect to Certain Transactions".
Revenue from license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable and collectibility is probable. Arrangements for which the fees are not deemed fixed or determinable are recognized in the period they become due.
Services revenue primarily comprises revenue from consulting fees, maintenance contracts and training. Services revenue from consulting and training is recognized as the service is performed.
Maintenance contracts include the right to unspecified upgrades and ongoing support. Maintenance revenue is deferred and recognized on a straight-line basis as services revenue over the life of the related contract, which is typically one year.
In the event the Company enters into a contract involving significant implementation, customization or services which are essential to the functionality of the software, license and service revenues are recognized over the period of each engagement, using the percentage-of-completion method. Labor hours incurred is used as the measure of progress towards completion. Revenue for these arrangements is classified as license revenue and services revenue based upon our estimates of fair value for each element and recognizes the revenue based on the percentage-of-completion ratio for the arrangement. A provision for estimated losses on engagements is made in the period in which the loss becomes probable and can be reasonably estimated.
The Company has entered into agreements under which value added resellers receive unspecified future products during the terms of the arrangements (typically two years) in consideration for upfront non-refundable fees. Consistent with the provisions of SOP 97-2, the Company recognizes such fees ratably, on a subscription basis, over the terms of the arrangements.
The Company has accumulated relevant information from contracts to use in determining the availability of vendor-specific objective evidence and believes that such information complies with the criteria established in Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2") as follows:
o Customers are required to pay separately for annual maintenance. Future renewal rates are included as a term of the contracts. The Company uses the renewal rate as vendor-specific objective evidence of fair value for maintenance.
o The Company charges standard hourly rates for consulting services based upon the nature of the services and experience of the professionals performing the services. The Company has a history of selling services separately.
o For training, the Company charges standard course rates for each course based upon the duration of the course, and such courses are separately priced in contracts. The Company has a history of selling such courses separately.
o Customer billing occurs in accordance with contract terms. Customer advances and amounts billed to customers in excess of revenue recognized are recorded as deferred revenue.
CONCENTRATION OF CREDIT RISK AND CERTAIN RISKS
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, short-term investments and accounts receivable. The Company's accounts receivable are derived from revenue earned from customers located primarily in the United States. The Company performs credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. The Company maintains an allowance for doubtful accounts receivable based upon the expected collectibility of accounts receivable. The Company wrote off approximately $164,000 and $60,000 in accounts receivable in 2001 and 2000, respectively.
At December 31, 2001, no customers accounted for 10% or more of accounts receivable. At December 31, 2000, two customers accounted for 32% and 10% of total accounts receivable.
No customer accounted for 10% or more of total revenue in 2001. One customer accounted for approximately 10% and 11% of total revenues in 2000 and 1999, respectively. Approximately 10% and 11% of the Company's revenues were derived from our international business, primarily in Europe, in 2001 and 2000, respectively. In 1999, all of the Company's revenues were derived from U.S. customers.
The market in which the Company competes is characterized by changing customer needs, frequent new software product introductions and rapidly evolving industry standards. Significant technological change could adversely affect the Company's operating results.
The Company operates in one single reportable business segment and, therefore, no disclosures under SFAS No.131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION", are necessary. Virtually all of our long-lived assets are located in the United States of America.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's international subsidiary is the local currency of the country in which it operates. Assets and liabilities are translated using the exchange rate at the balance sheet date. Revenue, expenses, gains and losses are translated at the exchange rate on the date those elements are recognized. Translation adjustments are included in other comprehensive income (loss).
CASH AND CASH EQUIVALENTS
The Company considers all investments with an original maturity of three months or less to be cash equivalents. The Company periodically maintains cash balances at banks in excess of the Federal Deposit Insurance Corporation insurance limit of $100,000.
SHORT-TERM INVESTMENTS
The Company accounts for its investments in quality corporate debt securities under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES". The Company has classified all marketable debt securities as held-to-maturity and has accounted for these investments at amortized cost. As of December 31, 2001, the Company's carrying value of its short-term investments approximated their amortized cost basis.
RESTRICTED LONG-TERM INVESTMENTS
The restricted long-term investments consist of several one-year certificates of deposit required as collateral for the Company's letters of credit (Note 5).
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs under the provisions of SFAS No. 86, "ACCOUNTING FOR COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED". Capitalization of computer software development costs begins upon the establishment of technological feasibility, which the Company has defined as completion of a working model. The Company has not capitalized any software
development costs to date as costs that would qualify were immaterial and has charged software development costs as incurred to research and development expense in the accompanying consolidated statements of operations.
ADVERTISING COSTS
Amounts received under co-marketing agreements with strategic partners are recorded as a reduction of advertising expenses incurred in connection with such agreements. Immaterial amounts have been received during the three-year period ended December 31, 2001.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are calculated using the straight-line method over estimated useful lives of the assets. Currently, our computer hardware and software and assets under capital lease are amortized over three years and furniture and fixtures, leasehold improvements and office equipment are amortized over six years (Note 3).
When assets are sold or retired, the cost and related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is included in operations. Maintenance and repairs are charged to operations as incurred.
IMPAIRMENT OF LONG - LIVED ASSETS
The company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of any asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount of fair value less costs to sell (Note 12).
INCOME TAXES
Income taxes are accounted for in accordance with SFAS No. 109, "ACCOUNTING FOR INCOME" TAXES. Under SFAS No. 109, deferred income tax liabilities and assets are determined based on the difference between the financial reporting amounts and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates in effect for the years in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities.
STOCK BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES"(APB No. 25) and complies with the disclosure provisions of SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION". Under APB No. 25, compensation expense is based on the difference, if any, between the fair value of the Company's stock and the exercise price of the option on the measurement date, which is typically the date of grant.
In March of 2000, the Financial Accounting Standards Board ("FASB") issued FIN 44, "ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION," an interpretation of APB No.25. FIN 44 was effective July 1, 2000. In June of 2001, the Company executed a stock option exchange program and accounted for the stock options exchange program according to FIN 44 (Note 9).
The Company accounts for options granted to non-employees under SFAS No. 123. Under SFAS No. 123 and EITF 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services", options are recorded at their fair value on the measurement date, which is typically the date of grant.
NET LOSS PER SHARE
Basic and diluted net loss per share are computed using the weighted average number of common shares outstanding. Options, warrants and convertible preferred stock were not included in the computation of diluted net loss per share because the effect would be antidilutive.
Diluted net loss per share does not include the effect of the following potential common shares for the periods presented (in thousands):
The weighted-average exercise price of stock options outstanding was $4.29, $9.73 and $2.10 as of December 31, 2001, 2000 and 1999, respectively. The weighted average repurchase price of unvested stock was $2.22, $1.50 and $0.38 as of December 31, 2001, 2000 and 1999, respectively. The exercise price of warrants outstanding was $14.50 as of December 31, 2001 and 2000 and $3.08 as of December 31, 1999.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July of 2001, the 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, were adopted by the Company on January 1, 2002. The adoption of these accounting standards did not result in a significant impact on our financial position or results of operations for any historic transactions.
In October 2001, the FASB issued SFAS No. 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS". SFAS No.144 supersedes SFAS No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" and applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles Board Opinion No. 30 ("APB 30"), "REPORTING RESULTS OF OPERATIONS REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS." SFAS No. 144 develops one accounting model (based on the model in SFAS No. 121) for long-lived assets that are to be disposed of by sale, as well as addresses the principal implementation issues. SFAS No.144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. That requirement eliminates APB 30's requirement that discontinued operations be measured at net realizable value or that entities include under "discontinued operations" in the financial statements amounts for operating losses that have not yet occurred. Additionally, SFAS No.144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS No.144 is effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company does not expect the adoption of SFAS No.144 to have a material impact on the Company's financial position or results of operations.
In November 2001, the FASB Emerging Issues Task Force ("EITF") reached a consensus on EITF Issue 01-09, "Accounting for Consideration Given to a Customer or a Reseller of the Vendor's Products". This issue presumes that consideration from a vendor to a customer or a reseller should not be recorded as revenue unless (1) the vendor receives an identifiable benefit in return for the consideration paid that is sufficiently separable from the sale to the customer, such that the vendor could have entered into an exchange transaction with a party other than a purchaser of its products and services in order to receive that benefit and (2) the benefit's fair value can be reasonably estimated. This issue is to be adopted no later than in annual or interim financial statements for periods beginning after December 15, 2001. We adopted the provisions of this consensus in the fourth quarter of fiscal 2001. Such adoption had no impact on our financial position or results of operations.
In November 2001, the FASB issued Announcement D-103 which states that out-of-pocket expenses should be recorded as revenue in fiscal periods commencing after December 15, 2001. We will adopt the provisions of this Announcement as of January 1, 2002.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31, --------------------- 2001 2000 -------- -------- (In thousands) Computer hardware and software $ 4,256 $ 6,013 Furniture and fixtures 1,479 1,209 Leasehold improvements 705 385 Office equipment 219 219 Assets under capital leases 1,847 1,847 -------- -------- 8,506 9,673 Less accumulated depreciation and amortization (4,849) (3,394) -------- -------- Total property and equipment, net $ 3,657 $ 6,279 ======== ========
Accumulated amortization relating to assets under capital leases amounted to $1,846,950 and $1,291,437 as of December 31, 2001 and 2000, respectively.
4. INCOME TAXES
The provision for income taxes for the years ended December 31, 2001 and 2000 relate to foreign income tax associated with the Company's European subsidiary. The difference between the amount of income tax benefit recorded of zero and the amount of income tax benefit calculated using the federal statutory rate of 34% is primarily due to net operating losses being fully offset by a valuation allowance. Significant components of the Company's deferred tax balances are as follows (in thousands):
December 31, ----------------------- 2001 2000 --------- --------- Deferred tax assets: Net operating loss carry forwards $ 30,100 $ 23,000 Research and development credit carryforwards 2,650 1,900 Other 200 300 --------- --------- Total deferred tax assets 32,950 25,200 Valuation allowance (32,950) (25,200) --------- --------- Net deferred tax assets $ -- $ -- ========= =========
Due to the uncertainty of realization, a valuation allowance has been provided to offset net deferred tax assets at December 31, 2001 and 2000. The increase in the valuation allowance was $7.7 million, $11.4 million and $8.0 million during the years ended December 31, 2001, 2000 and 1999, respectively.
As of December 31, 2001, the Company had net operating loss carryforwards of approximately $82.7 million and $33.9 million for federal and state income tax purposes, respectively. Such carryforwards expire through 2021 and 2011 for federal and state income tax purposes, respectively. At December 31, 2001, the Company also had research and experimentation tax credit carryforwards of $2.7 million for federal and state purposes, respectively. The federal research and experimentation credits expire through 2021 and the state credits expire when exhausted.
Under the Tax Reform Act of 1986, the benefits from net operating loss and tax credit carry-forwards may be impaired or limited in certain circumstances including as a result
of a cumulative ownership change of more than 50%, as defined, over a three-year period. The issuance of the Company's convertible preferred securities may have resulted in a limitation on utilization of such net operating loss carryforwards.
5. COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment under various non-cancelable capital leases. The capital leases expire through 2003. The Company leases office space under various non-cancelable operating leases expiring through 2006. Rental expense was approximately $3,021,000, $2,212,000 and $864,000 for the years ended December 31, 2001, 2000 and 1999, respectively, net of sublease income of approximately $156,000 in 2001. Minimum future rental payments under capital and operating leases at December 31, 2001 are as follows (in thousands):
DECEMBER 31, 2001 CAPITAL OPERATING - ------------------------------------------------- ------- --------- 2002 $ 257 $ 3,067 2003 55 2,622 2004 -- 2,688 2005 -- 2,688 2006 -- 1,687 ------- --------- Total minimum lease payments 312 12,752 Less sublease income (350) --------- Less amount representing interest and discount (18) $12,402 ------- ========= Present value of minimum lease payments 294 Less current portion of capital lease obligations (240) ------- Long term portion $ 54 =======
In connection with certain capital lease transactions, in 1999, the Company granted to the lessor warrants to purchase 22,425 shares of Series D preferred stock at an exercise price of $3.30 per share. Such warrants were valued at approximately $44,000 using the Black-Scholes valuation model with the following assumptions: expected volatility of 40%, risk-free interest rate of 6% and expected life of 10 years. The value of these warrants was recorded as a long-term asset, which is being amortized over the capital lease term of 4 years. Such amortization amounted to $17,000, $11,000 and $11,000 during the years ended December 31, 2001, 2000 and 1999, respectively. On the effective date of the company's IPO all outstanding preferred stock was converted to common stock. These warrants were exercised in 2000 in exchange for common stock. There were no outstanding warrants as of December 31, 2001.
The Company has established letters of credit totaling $1,397,000 for the benefit of the Company's office space lessor and credit card processor. These letters of credit are collateralized by certificates of deposit amounting to $1,397,000. As of December 31, 2001, no amounts were outstanding under these letters of credit.
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.
6. DEBT
In March 1998, the Company entered into a loan and security agreement with a lender for $3,500,000. Borrowings under this loan accrued interest at an average rate of 11.4% per annum and matured through December 31, 2001. The agreement provided the lender with the right to exercise warrants to purchase 137,878 shares of Series D preferred stock at an exercise price of $3.30 per share. The Company recorded the loan at a discount of approximately $265,000, which was allocated to the warrants. The debt discount was calculated in accordance with the provisions of APB No. 14, "ACCOUNTING FOR CONVERTIBLE DEBT AND DEBT ISSUED WITH STOCK PURCHASE WARRANT". The fair value of the warrants was estimated on the date of grant using the Black-Scholes valuation model with expected volatility of 40%, risk-free interest of 6% and expected life of 10 years. Amortization of the debt discount was recorded as interest expense and amounted to $36,000, $88,000 and $88,000 for the years ended December 31, 2001, 2000 and 1999. On the effective date of the company's IPO all outstanding preferred stock was converted to common stock. These warrants were exercised in 2000 in exchange for common stock. There were no outstanding warrants as of December 31, 2001. The loan was repaid in full during fiscal 2001.
7. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND PREFERRED STOCK WARRANTS
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
Mandatorily Redeemable Convertible Preferred Stock consists of the following (in thousands except share data):
OUTSTANDING SHARES AMOUNT ------------ --------- Balance at December 31, 1998 10,361,729 21,269 Issuance of Series E preferred stock 3,732,820 22,379 Issuance of Series F preferred stock 500,000 4,500 Series F beneficial conversion feature -- 1,500 ------------ --------- Balance at December 31, 1999 14,594,549 49,648 Conversion to common stock (14,594,549) (49,648) ------------ --------- Balance at December 31, 2000 -- $ -- ============ =========
On December 16, 1999, the Company sold 500,000 shares of its Series F Preferred Stock at a price of $9.00 per share for gross proceeds of $4.5 million in cash to an investor. The difference between the deemed fair value of the series F preferred stock of $12.00 and the price per share of $9.00 was deemed to be a beneficial conversion feature analogous to a dividend to the preferred stockholders as prescribed under the provisions of EITF 98-5, "ACCOUNTING FOR CONVERTIBLE SECURITIES WITH BENEFICIAL CONVERSION FEATURES OR CONTINGENTLY ADJUSTABLE CONVERSION RATIOS". The value of the beneficial conversion feature of $1.5 million was recognized immediately at the date of issuance as the preferred stockholders had the right to convert their preferred shares at their option.
On January 27, 2000, the SEC declared effective the Company's Registration Statement on Form S-1. Pursuant to this Registration Statement, the Company completed an initial public offering ("IPO") of 4,600,000 shares of its common stock (including 600,000 shares sold pursuant to the exercise of the Underwriters' over-allotment option) at an initial offering price of $20.00 per share (the "Offering"). All preferred stock was converted to common stock on the effective date of the company's IPO. Each share of Series A, B, C, D, E, and F preferred stock was converted into common stock at the option of the stockholder on a one-for-one basis, subject to certain adjustments. Holders of preferred stock received one vote for each share of common stock into which such shares were converted.
PREFERRED STOCK WARRANTS ISSUED IN CONNECTION WITH FINANCINGS
On January 29, 1997, the Company entered into a loan and security agreement with a bank. During fiscal 1997, $250,000 was drawn on the loan and was repaid in the same year. This loan expired on June 15, 1997. In conjunction with this loan agreement, the Company issued to the lender a warrant to purchase 23,585 shares of Series B preferred stock at an exercise price per share of $1.59. The Company recorded the loan at a discount of $24,000 which was allocated to the warrant and amortized as interest expense during 1997. The fair value of the warrant was estimated on the date of grant using the Black-Scholes valuation model with expected volatility of 60%, risk-free interest of 5.50% and expected life of 5 years. On the effective date of the company's IPO all outstanding preferred stock was converted to common stock. These warrants were exercised in 2000 in exchange for common stock. There were no outstanding warrants in connection with this transaction as of December 31, 2001.
During 1998, the Company entered into financing agreements with a financial institution (see Note 6). In conjunction with these transactions, the Company issued to the financial institution warrants to purchase shares of Series D preferred stock at an exercise price of $3.30 per share. On the effective date of the company's IPO all outstanding preferred stock was converted to common stock. These warrants were exercised in 2000 in exchange for common stock. There were no outstanding warrants in connection with this transaction as of December 31, 2001.
8. COMMON AND PREFERRED STOCK
During 2000, the Company's Board of Directors approved an amendment to the Company's Certificate of Incorporation to increase the number of its authorized shares of common stock to 75,000,000 and authorized 5,000,0000 shares of preferred stock.
During the year ended December 31, 1999, the Company loaned to three officers an aggregate of $230,000 to exercise options to purchase 933,439 shares of the Company's common stock. The officers paid $193,750 in cash in conjunction with these exercises. A promissory note of $100,000 to one of the officers, bearing interest at 4.77% and due on February 28, 2004 was repaid in full, including interest of $3,000, in November of 1999. The notes of the other two officers bear interest at 5.87%, are due on July 16, 2004 and are collateralized by their personal assets.
During the year ended December 31, 2000, the Company loaned $250,000 to an officer to exercise options to purchase 90,000 shares of the Company's stock. The officer paid $560,000 in cash in conjunction with this exercise. The promissory note is due January 17, 2005 and bears interest at a rate of 6.12% per annum and is collateralized by the officer's personal assets.
COMMON STOCK WARRANTS
In October of 2000, The Company granted warrants to a service provider to purchase 20,000 shares of the Company's common stock at an exercise price of $14.50 per share. These warrants vest ratably over a two-year period and expire in October 2007. The Company is accounting for these warrants under the variable accounting provisions of FIN 44. The charge for fiscal 2001 and 2000 amounted to $66,000 and $10,500, respectively, using the Black Scholes valuation model with the following variables: expected volatility of 90%, risk free interest of 6% and expected life of 7 years. The warrants were not exercised as of December 31, 2001.
9. STOCK OPTIONS
1996 STOCK OPTION PLAN
In 1996, the Company adopted the 1996 Stock Option Plan (the 1996 Plan) under which eligible employees, directors, and consultants can receive options to purchase shares of the Company's common stock at a price generally not less than 100% of the fair value of the common stock on the date of the grant for incentive stock options and nonstatutory stock options. The 1996 Plan, as amended through December 31, 2001, allows for the issuance of a maximum of 8,960,462 shares of the Company's common stock and an annual replenishment of the shares of common stock authorized for issuance there under equal to the lesser of (a) 1,300,000 shares, (b) 4% of the outstanding shares on such date or (c) a lesser amount to be determined by the Board. The options granted under the 1996 Plan vest according to varying schedules determined by the 1996 Plan Administrator, currently the Board of Directors. Options generally vest over four years and expire ten years from the date of grant.
2000 NONSTATUTORY STOCK OPTION PLAN
In August 2000, the Board of Directors adopted the 2000 Nonstatutory Stock Option plan (the 2000 Plan) under which eligible employees can receive options to purchase shares of the Company's common stock at a price generally not less than 100% of the fair value of the common stock on the date of grant for non statutory options. The 2000 Plan as amended through December 31, 2001, allows for a maximum of 3,394,845 shares of the Company's common stock and an annual replenishment of the shares of common stock authorized for issuance on the first day of the Company's fiscal year (the "calculation date") beginning on January 1, 2002, equal to 4% of the outstanding shares on the calculation date. The Board may act, prior to the first day of any fiscal year of the Company, to increase the share reserve by such number of shares as the Board shall determine, which number shall be less than 4% of the outstanding shares on the calculation date. The options granted under the 2000 Plan vest according to varying schedules determined by the 2000 Plan Administrator. Options generally vest over four years and expire ten years from the date of grant. The 2000 plan explicitly excludes Officers and Directors, however, the company may grant Options to Officers in connection with the Officer's initial employment.
A summary of the activity under the 1996 and 2000 Plans since inception is set forth below:
Options Outstanding ---------------------------------------------- Number of Price Aggregate Shares Per Share Price ---------- --------------- -------------- (In thousands)
Balance at December 31, 1997 1,012,923 $0.100 - $ 0.160 $ 149 Options granted 1,066,500 $0.160 - $ 0.330 280 Options exercised (357,001) $0.100 - $ 0.160 (53) Options forfeited (115,874) $0.100 - $ 0.160 (18) ----------- --------- Balance at December 31, 1998 1,606,548 $0.050 - $ 0.330 359 Options granted 3,495,872 $0.330 - $ 9.000 6,336 Options exercised (1,855,091) $0.050 - $ 1.500 (623) Options forfeited (304,747) $0.160 - $ 9.000 (134) ----------- --------- Balance at December 31, 1999 2,942,582 $0.100 - $ 9.000 5,938 Options granted 2,959,950 $5.375 - $38.813 46,853 Options exercised (432,966) $0.100 - $ 9.000 (1,068) Options forfeited (381,127) $0.100 - $38.813 (2,205) ----------- --------- Balance at December 31, 2000 5,088,439 $0.100 - $38.813 49,504 Options granted 3,398,950 $2.150 - $ 9.090 13,935 Options exercised (414,009) $0.100 - $ 7.500 (446) Options forfeited (3,039,429) $0.160 - $38.813 (41,422) ----------- --------- Balance at December 31, 2001 5,033,951 $0.160 - $37.250 $ 21,571 =========== =========
The following table summarizes information with respect to stock options outstanding at December 31, 2001:
The Plans allows certain option holders to exercise their options prior to vesting. However, such exercises are subject to repurchase by the Company if not vested. The Company's repurchase right lapses over a four year period. As of December 31, 2001, 146,873 shares of common stock acquired by option holders are subject to repurchase by the Company.
The Company accounts for employee and board of director stock options in accordance with the provisions of APB No. 25 and complies with the disclosure provisions of SFAS No. 123.
Under APB No. 25, compensation expense is recognized based on the amount by which the fair value of the underlying common stock exceeds the exercise price of the stock options at the measurement date, which in the case of employee stock options is typically the date of grant. For financial reporting purposes, the Company has determined that the deemed fair market value on the date of grant of certain employee stock options issued prior to the IPO was in excess of the exercise price of the options. This amount is recorded as deferred compensation and is classified as a reduction of stockholders' equity and is amortized as a charge to operations over the vesting period of the applicable options. The vesting period is generally four years. The fair value per share used to calculate deferred compensation was derived by reference to the preferred stock values and the Company's initial public offering price range. Consequently, the Company Recorded deferred stock compensation of $1,881,000 and $10,205,000 during the years ended December 31, 2000 and 1999, respectively. Amortization recognized for the years ended December 31, 2001, 2000 and 1999 totaled $509,000, $3,977,000 and $4,352,000, respectively.
The weighted average fair values of the options granted in fiscal 2001, 2000 and 1999 were $4.10, $15.83 and $1.80, respectively.
Had compensation cost for option grants to employees been determined consistent with SFAS No. 123, the Company's net loss would have been as follows (in thousands, except per share data):
Years Ended December 31, --------------------------------- 2001 2000 1999 --------- --------- --------- Net Loss: As reported $(25,953) $(34,509) $(24,889) Pro forma net loss $(27,765) $(38,042) $(24,762) Pro forma net loss per share, basic and diluted $ (1.16) $ (1.79) $ (11.14)
The above pro forma disclosures are not necessarily representative of the effects on reported income or loss for future years as additional grants are made each year and options vest over several years.
The fair value of each option grant was estimated on the date of grant using the minimum value options pricing model with the following weighted average assumptions by period:
Years Ended December 31, --------------------------------- 2001 2000 1999 --------- --------- --------- Risk-free interest rate 3.7% 6.2% 5.6% Expected volatility 108% 189% -- Expected life (in years) 1.7 1.5 4 Dividends -- -- --
Because the Company was not publicly traded until January 27, 2000, the date of the IPO, volatility was not considered in the determining the value of options granted to employees in the 1999.
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 6, 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 grant of short-term options was accounted for as prescribed under the provisions of FIN No. 44, "ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION". For the twelve months ended December 31, 2001, the Company did not incur any compensation expense associated with such options.
On December 12, 2001 the Company granted new options equal to ninety percent (90%) of the number of shares that were cancelled on June 5, 2001. The number of new options actually granted on December 12, 2001, totaling 1,366,560 shares is less than the amount cancelled on June 5, 2001 as a result of employee terminations related to our restructuring plan implemented in July 2001. The exercise price of the new options is $2.28, the closing price of the Company's Common Stock on the date of grant. The new
options have the same vesting schedule as the cancelled options and will expire if not exercised ten years from the grant date or earlier if employment is terminated.
The short-term options vested on December 6, 2001 and expired unexercised on March 6, 2002.
10. EMPLOYEE SAVINGS AND INVESTMENT PLANS
401(K) PLAN
In January 1998, the Company adopted a 401(k) plan for employees. All employees who meet certain service requirements are eligible to participate. Matching contributions are at the discretion of the Company. The Company made no matching or discretionary contributions during 2001, 2000 or 1999.
EMPLOYEE STOCK PURCHASE PLAN
The Company's 2000 Employee Stock Purchase Plan was adopted by the board of directors and stockholders of Extensity in November 1999 and became effective upon the closing of the IPO in January of 2000. A total of 1,235,241 shares have been reserved for issuance under the purchase plan. The purchase plan provides for automatic annual increases in the number of shares reserved for issuance under the plan in an amount equal to the lesser of 1) 1.5% of the outstanding shares on such date, 2) 500,000 shares or 3) such lesser amount as may be determined by the board. Under the purchase plan, eligible employees may purchase common stock in an amount not to exceed 15% of the employee's cash compensation. The purchase price will be 85% of the common stock fair value at the lower of certain plan-defined dates. As of December 31, 2001, there have been 428,679 shares issued and 805,910 shares reserved for future issuance.
11. ACQUISITION
In September of 2000, Extensity acquired all the outstanding shares of a company. The total acquisition cost was approximately $343,000 primarily comprised of $265,000 in cash, 2,500 shares of the Company's stock valued at $53,000 and approximately $25,000 in transaction costs. The transaction was accounted for as a purchase business combination. Substantially the entire purchase price was allocated to in-process research and development as technological feasibility of the acquired product had not been established and no future alternative use existed at the time of purchase. Furthermore, the acquired company had no revenues, no other tangible or intangible assets and only one employee.
12. RESTRUCTURING, IMPAIRMENT LOSS AND OTHER
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. 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, Europe and Australia. 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 of workforce.
The following table sets forth an analysis of the components of the restructuring charge and the payments made against the accrual through December 31, 2001 (in thousands):
The Company expects to pay the remaining obligations relating to the non-cancelable lease obligations over the remaining lease terms through 2006.
In the third quarter of 2001, the Company incurred an impairment loss of $1.3 million. This charge was attributed to the impairment of assets acquired in conjunction with building the hosted offering. These assets were written down to a level commensurate with the expected future cash flows as prescribed by SFAS No. 121 "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF".
During the first quarter of 2001, the Company incurred $377,000 in connection with exploring potential merger and acquisition transactions.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is unaudited financial data for 2001 and 2000 (amounts in thousands, except for per share amounts).
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.
None
PART III.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See the information in "Proposal No. 1 - Election of Directors" in Extensity's Proxy Statement for the 2002 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of Extensity's fiscal year ended December 31, 2001 (the "2002 Proxy Statement") which is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
See the information set forth in the section entitled "Executive Compensation" in the 2002 Proxy Statement, which is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the information set forth in the section entitled "Security Ownership of Certain Beneficial Owners and Management" in the 2002 Proxy Statement, which is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the information set forth in the section entitled "Certain Transactions" in the 2002 Proxy Statement, which is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, AND REPORTS ON FORM 8-K
1) FINANCIAL STATEMENTS.
The financial statements filed as part of this report are listed on the Index to Consolidated Statements on page 39
2) FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto.
3) EXHIBITS
Exhibit - ------- Number - ------
3.2.(1) Amended and Restated Certificate of Incorporation of the Registrant.
3.3.(1) Bylaws of the Registrant.
4.1.(1) Registrant's Common Stock Certificate
10.1.(1) Form of Indemnification Agreement entered into by and between the Registrant and each of its directors and executives.
10.8.(1) Lease agreement by and between the Registrant and Spieker Properties, Inc.
10.8.1(4) Amended Lease agreement dated December 12, 2000 by and between the Registrant and Spieker Properties, Inc.
10.9.(1) Offer letter dated February 16, 1999 by and between the Registrant and Robert A. Spinner.
10.10(1)(3) 1996 Stock Option Plan, as amended.
10.11(1)(3) 2000 Employee Stock Purchase Plan and related agreements.
10.11.1(2) 2000 Nonstatutory Stock Option, as amended.
10.12(4) Note Dated January 17, 2000 by and between the Registrant and Donald E. Smith
10.13(4) Note dated August 20, 1999 by and between the Registrant and Mark K. Oney.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants. - --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1 (No. 333-90979) and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Registration Statement on Form S-8 (No. 333-45748) and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Registration Statement on Form S-8 (No. 333-36336) and incorporated herein by reference.
(4) Filed as an exhibit to the Registrant's Annual Report on Form 10-K (No. 000-28897) and incorporated herein by reference.
(b) Reports on Form 8-K
None
(c) Exhibits
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
April 1, 2002 EXTENSITY, INC.
By /s/ Kenneth R. Hahn ---------------------- Kenneth R. Hahn Chief Financial Officer (Principal Financial and Accounting Officer)
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears below constitutes and appoints Robert A. Spinner and Kenneth R. Hahn, and each of them, his true and lawful attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with Exhibits thereto and other documents in connection therewith the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.