SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K/A
AMENDMENT NO. 1
FOR ANNUAL OR TRANSITION REPORTS PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-10139
NETEGRITY, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 04-2911320
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
52 SECOND AVENUE
WALTHAM, MASSACHUSETTS 02451
(Address of principal executive offices, including Zip Code)
(781) 890-1700
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). |X| Yes No | |
The aggregate market value of the voting Common Stock held by
non-affiliates of the registrant was $190,634,555 based on the closing price of
the registrant's Common Stock on June 30, 2002 as reported by the NASDAQ
National Market ($6.16 per share). As of February 10, 2003, there were
34,311,460 shares of Common Stock outstanding.
DOCUMENT INCORPORATED BY REFERENCE:
Portions of the registrant's definitive Proxy Statement for its Annual
Meeting of Stockholders for the year ended December 31, 2002, which will be
filed with Securities and Exchange Commission within 120 days after the end of
the registrant's fiscal year, are incorporated by reference into Part III
hereof.
2
EXPLANATORY NOTE
THIS AMENDMENT NO. 1 TO ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 2002 IS BEING FILED TO REFLECT THE INCREASE, FROM 55,000,000
TO 135,000,000, IN THE AUTHORIZED NUMBER OF SHARES OF OUR COMMON STOCK, AS
APPROVED BY OUR STOCKHOLDERS ON MAY 30, 2001. THE REVISED NUMBER OF AUTHORIZED
SHARES IS INCLUDED IN THE AMENDED AND RESTATED FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (ITEM 8) FILED HEREWITH. THERE HAVE BEEN NO OTHER CHANGES TO
OUR FINANCIAL STATEMENTS SET FORTH HEREIN.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements and the related auditors'
reports are presented in the following pages. The consolidated financial
statements filed in this Item 8 are as follows:
Reports of Independent Accountants
Consolidated Balance Sheets -- December 31, 2002 and 2001
Consolidated Statements of Operations for the years ended December 31,
2002, 2001 and 2000
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000
Notes to Consolidated Financial Statements
3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of Netegrity, Inc.:
We have audited the accompanying consolidated balance sheet of Netegrity,
Inc. and subsidiaries as of December 31, 2002, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. The 2001 consolidated
financial statements were audited by other auditors who have ceased operations.
Those auditors expressed an unqualified opinion on those consolidated financial
statements, before the restatement described in Note 1 to the consolidated
financial statements, in their report dated January 30, 2002.
We conducted our audit 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Netegrity, Inc. and
subsidiaries as of December 31, 2002, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
As discussed above, the consolidated financial statements of Netegrity,
Inc. and subsidiaries as of December 31, 2001 and for the year then ended were
audited by other auditors who have ceased operations. As described in Note 1,
those financial statements have been restated. In our opinion, the adjustments
are appropriate and have been properly applied. However, we were not engaged to
audit, review, or apply any procedures to the 2001 consolidated financial
statements of Netegrity, Inc. and subsidiaries other than respect to such
adjustments and, accordingly, we do not express an opinion or any form of
assurance on the 2001 consolidated financial statements taken as a whole.
KPMG LLP
Boston, Massachusetts
January 29, 2003
4
THE FOLLOWING REPORT OF ARTHUR ANDERSEN LLP (ANDERSEN) IS A COPY OF THE REPORT
PREVIOUSLY ISSUED BY ANDERSEN ON JANUARY 30, 2002. THE REPORT OF ANDERSEN IS
INCLUDED IN THIS ANNUAL REPORT ON FORM 10-K PURSUANT TO RULE 2-02(E) OF
REGULATION S-X. AFTER REASONABLE EFFORTS THE COMPANY HAS NOT BEEN ABLE TO OBTAIN
A REISSUED REPORT FROM ANDERSEN. ANDERSEN HAS NOT CONSENTED TO THE INCLUSION OF
ITS REPORT IN THIS ANNUAL REPORT ON FORM 10-K. BECAUSE ANDERSEN HAS NOT
CONSENTED TO THE INCLUSION OF ITS REPORT IN THIS ANNUAL REPORT, IT MAY BE
DIFFICULT TO SEEK REMEDIES AGAINST ANDERSEN AND THE ABILITY TO SEEK RELIEF
AGAINST ANDERSEN MAY BE IMPAIRED.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of Netegrity, Inc.:
We have audited the accompanying consolidated balance sheet of Netegrity,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 2001, and the
related consolidated statement of operations, stockholders' equity and cash
flows for the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Netegrity, Inc. and
subsidiaries as of December 31, 2001, and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 30, 2002
5
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of Netegrity, Inc.:
In our opinion, the consolidated statements of operations, stockholders'
equity and cash flows for the year ended December 31, 2000 present fairly, in
all material respects, the results of operations and cash flows of Netegrity,
Inc. and its subsidiaries for the year ended December 31, 2000, 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 audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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 audit provides a
reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
January 25, 2001
6
NETEGRITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------
2002 2001
--------- ---------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................ $ 25,707 $ 29,332
Short-term marketable securities ......................... 48,361 73,651
Accounts receivable -- trade, net of allowances of $922
at December 31, 2002; $1,579 at December 31, 2001 ..... 15,046 16,122
Prepaid expenses and other current assets ................ 2,949 3,418
Restricted cash .......................................... 281 --
--------- ---------
Total Current Assets .................................. 92,344 122,523
Long-term marketable securities ............................ 12,655 6,083
Property and equipment, net ................................ 6,837 8,494
Restricted cash ............................................ 790 631
Goodwill ................................................... -- 57,262
Other intangible assets, net ............................... 5,398 10,846
Other assets ............................................... 338 340
--------- ---------
Total Assets .......................................... $ 118,362 $ 206,179
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable -- trade ................................ $ 1,906 $ 1,707
Accrued compensation and benefits ........................ 4,293 5,152
Other accrued expenses ................................... 6,530 9,956
Deferred revenue ......................................... 14,875 13,223
--------- ---------
Total Current Liabilities ............................. 27,604 30,038
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, voting, $.01 par value; 135,000 shares
authorized; 34,346 shares issued and 34,308 shares
outstanding at December 31, 2002; 33,866 issued and 33,828
outstanding at December 31, 2001 ......................... 343 339
Additional paid-in capital ................................. 197,250 196,492
Accumulated other comprehensive income (loss) .............. 106 (44)
Accumulated deficit ........................................ (106,741) (20,432)
Loan to officer ............................................ (116) (130)
--------- ---------
90,842 176,225
Less -- Treasury Stock, at cost: 38 shares ................. (84) (84)
--------- ---------
Total Stockholders' Equity ................................. 90,758 176,141
--------- ---------
Total Liabilities and Stockholders' Equity ................. $ 118,362 $ 206,179
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
7
NETEGRITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Software licenses ........................... $ 36,072 $ 55,314 $ 37,688
Services .................................... 30,158 29,199 13,902
Other ....................................... 3,034 3,633 3,655
-------- -------- --------
Total revenues ........................... 69,264 88,146 55,245
-------- -------- --------
Cost of revenues:
Cost of software licenses ................... 2,071 1,931 2,549
Non-cash cost of software licenses .......... 5,449 153 --
Cost of services ............................ 13,664 15,113 8,624
Cost of other ............................... 1,827 2,221 2,169
-------- -------- --------
Total cost of revenues ................... 23,011 19,418 13,342
-------- -------- --------
Gross profit .................................. 46,253 68,728 41,903
Selling, general and administrative expenses .. 52,755 51,989 36,094
Research and development costs ................ 22,701 15,791 9,103
Impairment charge ............................. 57,374 -- --
Acquired in-process research and development .. -- 3,000 --
Restructuring and other non-recurring charges . 2,080 529 --
-------- -------- --------
Loss from operations .......................... (88,657) (2,581) (3,294)
Other income, net ............................. 2,418 4,831 6,103
-------- -------- --------
Income (loss) before provision for income taxes (86,239) 2,250 2,809
Provision for income taxes .................... 70 607 75
-------- -------- --------
Net income (loss) ............................. $(86,309) $ 1,643 $ 2,734
======== ======== ========
Earnings (loss) per share:
Basic ....................................... $ (2.53) $ 0.05 $ 0.09
Diluted ..................................... $ (2.53) $ 0.05 $ 0.08
Weighted average shares outstanding:
Basic ....................................... 34,078 31,076 29,010
Diluted ..................................... 34,078 32,936 33,407
The accompanying notes are an integral part of the
consolidated financial statements.
8
NETEGRITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE LOAN TOTAL
COMMON PAID-IN INCOME ACCUMULATED TO TREASURY STOCKHOLDERS'
STOCK CAPITAL (LOSS) DEFICIT OFFICER STOCK EQUITY
--------- --------- ------------- ----------- --------- --------- -------------
(IN THOUSANDS)
BALANCE AT DECEMBER 31,
1999 ............................. 257 131,200 -- (24,809) (130) (84) 106,434
Net income ......................... -- -- -- 2,734 -- -- 2,734
Issuance of common stock from
warrant exercises (2,251
shares) .......................... 22 2,980 -- -- -- -- 3,002
Issuance of common stock under stock
plans (2,247 shares) ............. 23 5,414 -- -- -- -- 5,437
Recognition of compensation expense
on warrant ....................... -- 292 -- -- -- -- 292
--------- --------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31,
2000 ............................. 302 139,886 -- (22,075) (130) (84) 117,899
Comprehensive income, net of taxes:
Net income ....................... -- -- -- 1,643 -- -- 1,643
Other comprehensive loss --
translation adjustment ......... -- -- (44) -- -- -- (44)
---------
Total comprehensive income ....... -- -- -- -- -- -- 1,599
---------
Issuance of common stock for
acquisition (2,500 shares) ....... 25 49,674 -- -- -- -- 49,699
Issuance of common stock under stock
plans (1,114 shares) ............. 12 6,909 -- -- -- -- 6,921
Issuance of warrants ............... -- 23 -- -- -- -- 23
--------- --------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31,
2001 ............................. $ 339 $ 196,492 $ (44) $ (20,432) $ (130) $ (84) $ 176,141
Comprehensive loss, net of taxes:
Net loss ......................... -- -- -- (86,309) -- -- (86,309)
Other comprehensive income ....... -- -- 150 -- -- -- 150
---------
Total comprehensive loss ......... -- -- -- -- -- -- (86,159)
---------
Issuance of common stock under stock
plans (476 shares) ............... 4 758 -- -- -- -- 762
Repayment of loan to officer ....... -- -- -- -- 14 -- 14
--------- --------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31,
2002 ............................. $ 343 $ 197,250 $ 106 $(106,741) $ (116) $ (84) $ 90,758
========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
9
NETEGRITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------------
2002 2001 2000
--------- --------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss) ......................................... $ (86,309) $ 1,643 $ 2,734
Adjustments to reconcile net income (loss) to net cash
(used for) provided by operating activities:
Depreciation, amortization and impairment ............... 67,531 2,906 1,124
Provision (recoveries) for doubtful accounts
receivable ........................................... (132) 2,573 1,409
Acquired in-process research and development ............ -- 3,000 --
Compensation expense related to warrant ................. -- -- 292
Loss on disposal of property and equipment .............. -- -- 46
Other ................................................... 282 291 --
Changes in operating assets and liabilities, net of effects
of acquisition:
Accounts receivable -- trade ............................ 1,208 (2,601) (12,436)
Prepaid expenses and other current assets ............... 153 (1,058) 56
Other assets ............................................ 318 (140) 15
Accounts payable -- trade ............................... 200 (820) 607
Accrued compensation and benefits ....................... (859) (3,290) 6,275
Other accrued expenses .................................. (3,539) 2,337 1,932
Deferred revenue ........................................ 1,652 3,490 7,130
--------- --------- ---------
Net cash (used for) provided by operating activities ...... (19,495) 8,331 9,184
--------- --------- ---------
INVESTING ACTIVITIES:
Proceeds from sales of marketable securities .............. 60,868 30,680 --
Proceeds from maturities of marketable securities ......... 120,619 160,610 --
Purchases of marketable securities ........................ (162,868) (271,315) --
Purchases of property and equipment ....................... (3,052) (4,598) (3,813)
Cash used for acquisition, net of cash acquired ........... -- (17,518) --
Restricted cash ........................................... (440) 311 (942)
--------- --------- ---------
Net cash (used for) provided by investing activities ...... 15,127 (101,830) (4,755)
--------- --------- ---------
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock ................ -- -- 3,002
Issuance of common stock under stock plans ................ 762 6,921 5,437
Repayment of loan to officer and other principal payments
under capital leases .................................... 14 172 --
--------- --------- ---------
Net cash provided by financing activities ................. 776 7,093 8,439
--------- --------- ---------
Effect of exchange rate changes on cash and cash
equivalents ............................................. (33) (9) --
Net change in cash and cash equivalents ................... (3,625) (86,415) 12,868
Cash and cash equivalents at beginning of year ............ 29,332 115,747 102,879
--------- --------- ---------
Cash and cash equivalents at end of year .................. $ 25,707 $ 29,332 $ 115,747
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
ACTIVITIES:
Acquisition of DataChannel, Inc.:
Fair value of assets acquired ............................. $ -- $ 70,196 $ --
Less:
Cash paid ............................................... -- 16,087 --
Fair value of stock issued .............................. -- 49,699 --
Accrued acquisition costs ............................... -- 2,970 --
--------- --------- ---------
Liabilities assumed ....................................... $ -- $ 1,440 $ --
========= ========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
10
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Netegrity, Inc. and its wholly-owned subsidiaries (Netegrity or the
Company) is a leading provider of security software solutions for securing
access to corporate assets and for managing and securing the identities of users
accessing those assets. Netegrity's flexible, standards-based solutions are
designed to enable companies to conduct business securely with customers,
partners, suppliers and employees across the Internet, intranets and extranets.
Netegrity's products help customers ensure that only the people or
business processes that are entitled to access corporate resources and
applications access them. Netegrity's products enable customers to manage the
population that needs to access those resources and applications. In addition,
Netegrity's products provide a more automated way to grant, modify or revoke
account access to applications and resources.
The Company is integrating its core products, SiteMinder, IdentityMinder,
and TransactionMinder, with its new provisioning technology into an identity and
access management solution to provide Web access control and management, user
administration, provisioning and de-provisioning of account access. Netegrity's
solution supports a broad range of technology environments, and aims to ensure
that companies optimize their existing information technology investments while
incorporating new technologies. The Company believes that through these
solutions it helps companies to address some of the most critical requirements
for conducting business securely.
We also offer various levels of consulting and support services that
enable our customers to successfully implement our products in their
organizations.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company also include the
accounts and operations of its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
REVENUE RECOGNITION
The Company's revenues have been primarily generated from the sale of
perpetual licenses for its proprietary SiteMinder and DMS (renamed
IdentityMinder in the fourth quarter of 2002) products and services. In the
future, the Company anticipates generating its revenue primarily from the sale
of perpetual licenses for SiteMinder, IdentityMinder, TransactionMinder and
provisioning products and services as well as from new product offerings. The
Company generates its services revenue from consulting and training services
performed for customers and from maintenance and support. As described below,
significant management judgments and estimates must be made and used in
connection with the revenue recognized in any accounting period. Management
analyzes various factors, including a review of specific transactions,
historical experience, credit worthiness of customers and current market and
economic conditions. Changes in judgments based upon these factors could impact
the timing and amount of revenue and cost recognized.
We generally license our software products on a perpetual basis. We apply
the provisions of Statement of Position No. 97-2, "Software Revenue
Recognition," as amended by Statement of Position No. 98-9, "Software Revenue
Recognition, with Respect to Certain Transactions," to all transactions
involving the sale of software products. We recognize revenue from the sale of
software licenses when persuasive evidence of an arrangement exists, the product
has been delivered, the fees are fixed or determinable and collection of the
resulting receivable is reasonably assured. This policy is applicable to all
sales, including sales to resellers and end users. The Company does not offer a
right of return on its products.
For all sales, we use either a binding purchase order or signed license
agreement as evidence of an arrangement. For arrangements with multiple
obligations (for example, product, undelivered maintenance and support, and
training and consulting), we allocate revenue to each component of the
arrangement using the residual value method based on the fair value of the
undelivered elements. We defer revenue from the arrangement equivalent to the
fair value of the undelivered elements. Fair values for the ongoing
11
maintenance and support obligations are based upon separate sales of renewals of
maintenance contracts. Fair value of services, such as training or consulting,
is based upon separate sales of these services to other customers.
At the time of the transaction, we assess whether the fee associated with
the transaction is fixed or determinable based on the payment terms associated
with the transaction. If a significant portion of the fee is due after our
normal payment terms, which are generally 30 to 90 days from invoice date, we
account for the fee as not being fixed or determinable. In these cases, we
recognize revenue as the fees become due. In addition, we assess whether
collection is probable or not based on the credit worthiness of the customer.
Initial credit worthiness is assessed through Dun & Bradstreet or similar credit
rating agencies. Credit worthiness for follow-on transactions is assessed
through a review of the transaction history with the customer. We do not request
collateral from our customers. If we determine that collection of a fee is not
reasonably assured, we defer the fee and recognize revenue at the time
collection becomes reasonably assured, which is generally upon receipt of cash.
Installation by Netegrity is not considered essential to the functionality
of our products as these services do not alter the product capabilities, do not
require specialized skills and may be performed by the customer or other
vendors. Revenues for maintenance and support are recognized ratably over the
term of the support period. Revenues from consulting and training services are
recognized as the services are performed.
CASH AND CASH EQUIVALENTS AND STATEMENT OF CASH FLOWS SUPPLEMENTAL INFORMATION
Cash and cash equivalents include cash, money market investments and other
highly liquid investments with original maturities of three months or less at
the date of purchase.
Net cash used for operating activities reflect cash payments for income
taxes of approximately $57,000, $125,000 and $25,000 for the years ended
December 31, 2002, 2001 and 2000, respectively.
RESTRICTED CASH
Restricted cash represents time deposits held at financial institutions in
connection with the Company's lease of office space. As of December 31, 2002,
restricted cash is security for outstanding letters of credit expiring in
February 2003 and April 2003. The letter of credit expiring in April 2003 has an
automatic renewal clause.
MARKETABLE SECURITIES
Investments, which primarily consist of debt securities, are accounted for
under Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" issued by the Financial
Accounting Standards Board (FASB). Pursuant to the provisions of SFAS No. 115,
the Company has classified its investment portfolio as "trading",
"available-for-sale" or "held to maturity". "Trading" securities are bought and
held principally for the purpose of selling them in the near term and are
recorded at fair value. Fair value is based upon quoted market prices.
Unrealized gains and losses on trading securities are included in the
determination of net earnings. "Available-for-sale" securities include debt
securities that are being held for an unspecified period of time and may be used
for liquidity or other corporate purposes and are recorded at fair value.
Unrealized gains and losses on available-for-sale securities are reported as a
separate component of comprehensive income (loss) in stockholders' equity. "Held
to maturity" securities are debt securities that the Company intends to hold to
maturity and are recorded at amortized cost. See Note 4 for further information
on the Company's marketable securities.
OFF-BALANCE-SHEET AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents, marketable
securities and accounts receivable -- trade. The Company has no significant
off-balance-sheet risk such as foreign exchange contracts, option contracts or
other foreign hedging arrangements. Cash and cash equivalents are held with high
quality financial institutions. Marketable securities are primarily held in high
quality corporate debt instruments and government obligations. Concentration of
credit risk with respect to accounts receivable -- trade is limited due to a
large customer base. The Company periodically performs credit evaluations of its
customers and maintains reserves for potential losses. One customer accounted
for approximately 24% of accounts receivable as of December 31, 2002. No other
customer accounted for more than 10% of accounts receivable as of December 31,
2002 and no one customer accounted for more than 10% of accounts receivable as
of December 31, 2001. No one customer accounted for more than 10% of revenue for
each of the three years ended December 31, 2002.
12
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments consist principally of cash equivalents, restricted
cash, marketable securities, accounts receivable -- trade, accounts payable,
accrued expenses and letters of credit. The estimated fair value of these
financial instruments approximates their carrying value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization is provided using the
straight-line method, based upon the following asset lives:
Computer equipment and purchased software........ 3-5 years
Furniture and office equipment................... 5-7 years
Leasehold improvements........................... Shorter of lease term or useful life of asset
Maintenance and repairs are charged to operations as incurred. Renewals
and betterments which materially extend the life of assets are capitalized and
depreciated. Upon disposal, the asset cost and related accumulated depreciation
are removed from their respective accounts and any resulting gain or loss is
reflected in earnings.
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS
The Company uses the provisions of SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to undiscounted 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 or fair value less cost to sell.
OTHER INTANGIBLE ASSETS, NET
The Company accounts for purchased technology and software development
costs in accordance with SFAS No. 86, "Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed". Under SFAS No. 86, the
Company is required to test for recoverability of its capitalized software costs
as of each balance sheet date or an interim period if events and circumstances
indicate that the carrying amount may not be recoverable. Impairment is recorded
as the excess of the unamortized cost over the expected future net realizable
value of the products.
Software development costs subsequent to the establishment of
technological feasibility are capitalized and amortized to non-cash cost of
software. Based on the Company's product development process, technological
feasibility is established upon completion of all planning, designing, coding
and testing activities. Such costs are amortized over the estimated life of the
product. During 2002, 2001 and 2000, costs incurred by the Company between
completion of all planning, designing, coding and testing activities and the
point at which the product is ready for general release were insignificant and
therefore, no such costs have been capitalized during this time period.
OTHER ACCRUED EXPENSES
Other accrued expenses consist of the following (in thousands):
DECEMBER 31,
--------------------
2002 2001
------ ------
Acquisition related lease obligations .. $1,053 $1,834
Accrued acquisition costs .............. -- 1,585
Accrued income taxes ................... 353 607
Accrued sales taxes .................... 1,486 1,500
Other .................................. 3,638 4,430
------ ------
$6,530 $9,956
====== ======
13
COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources, including foreign currency translation adjustments and
unrealized gains and losses on marketable securities held as
"available-for-sale". For the year ended December 31, 2002, the difference of
approximately $150,000 between the comprehensive loss of ($86.2) million and the
net loss is due to the effect of an unrealized gain on marketable securities of
approximately $177,000, partially offset by an unfavorable cumulative
translation adjustment of approximately ($27,000). For the year ended December
31, 2001, the difference of approximately $44,000 between the comprehensive
income of $1.6 million and net income is due to the effect of an unfavorable
cumulative translation adjustment. For the year ended December 31, 2000, there
was no difference between comprehensive income and net income.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to operations as
incurred.
INCOME TAXES
The Company accounts for income taxes using the asset and liability method
in accordance with SFAS No. 109, "Accounting for Income Taxes", pursuant to
which deferred income taxes are recognized based on temporary differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the temporary differences are
expected to reverse. Valuation allowances are provided if based upon the weight
of available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share (EPS) are calculated by dividing net
income (loss) by the weighted average number of shares outstanding during the
period. Diluted EPS is calculated by dividing net income by the weighted average
number of shares outstanding plus the dilutive effect, if any, of outstanding
stock options and warrants using the "treasury stock" method. During periods of
net loss, diluted net loss per share does not differ from basic net loss per
share since potential common shares from stock options and warrants are anti-
dilutive and therefore are excluded from the calculation. The following table
presents the calculation for both basic and diluted EPS (in thousands, except
per share data):
YEAR ENDED
---------------------------------
2002 2001 2000
-------- -------- --------
Net income (loss) ........................... $(86,309) $ 1,643 $ 2,734
Basic weighted average shares outstanding ... 34,078 31,076 29,010
Dilutive effect of stock options and warrants -- 1,860 4,397
Diluted shares outstanding .................. 34,078 32,936 33,407
Basic EPS ................................... $ (2.53) $ 0.05 $ 0.09
Diluted EPS ................................. $ (2.53) $ 0.05 $ 0.08
Options to purchase a total of 771,714, 1,347,000 and 285,000 shares for
the years ended December 31, 2002, 2001 and 2000, respectively, were excluded
from the computation of diluted EPS because the impact was anti-dilutive.
STOCK-BASED COMPENSATION
The Company accounts for its stock option plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based compensation cost is
reflected in net income for these plans, as all options granted under these
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant. The following table illustrates the effect on net
income (loss) and earnings (loss) per share if the Company had applied the fair
value recognition provisions of FASB Statement No. 123, Accounting for Stock
Based Compensation, to stock based compensation.
14
YEAR ENDED DECEMBER 31,
-------------------------------------------
2002 2001 2000
----------- ----------- -----------
Net income (loss), as reported .................. $ (86,309) $ 1,643 $ 2,734
Add: Stock-based employee compensation expense
included in reported net income, net of related
tax effects ................................... (86,431) (95,688) (23,552)
----------- ----------- -----------
Pro-forma net (loss) ............................ $ (172,740) $ (94,045) $ (20,818)
=========== =========== ===========
Earnings (loss) per share:
Basic -- as reported .......................... $ (2.53) $ 0.05 $ 0.09
Basic -- pro-forma ............................ $ (5.07) $ (3.03) $ (0.72)
=========== =========== ===========
Diluted -- as reported ........................ $ (2.53) $ 0.05 $ 0.08
Diluted -- pro-forma .......................... $ (5.07) $ (3.03) $ (0.72)
=========== =========== ===========
The fair value of each stock option is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions:
DECEMBER 31
-------------------------------------------------------------------------------
2002 2001 2000
------------------ ------------------------------- -------------------
STOCK STOCK STOCK
OPTIONS ESPP OPTIONS ESPP1 ESPP 2 OPTIONS ESPP
-------- ------- ------- ------- ------- ------- -------
Risk-free interest rate ........ 2.95% 1.65% 5.39% 2.71% 4.44% 6.45% 6.25%
Expected dividend yield ........ 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Expected volatility ............ 140% 106% 126% 131% 143% 107% 96%
Expected life (years) .......... 5.0 0.4 4.0 0.6 0.6 5.0 0.6
Weighted average fair value of
options granted during the
year ......................... $ 11.51 $ 0.65 $ 25.22 $ 3.80 $ 11.70 $ 34.94 $ 18.54
The pro-forma net loss for the years ended December 31, 2002 and 2001
includes the effects of options that were canceled by the Company in connection
with the tender offers described in Note 10 to the consolidated financial
statements. The remaining unamortized pro-forma compensation expense at the date
of cancellation for these options in the amount of approximately $51.9 million
and $63.0 million, respectively, is reflected as an expense in these pro-forma
amounts.
FOREIGN CURRENCY
The functional currencies of the Company's wholly-owned subsidiaries are
the local currencies. The financial statements of the subsidiaries are
translated to U.S. dollars using period-end exchange rates for assets and
liabilities and average exchange rates during the corresponding period for
revenues, cost of revenues and expenses. Translation gains and losses (amounting
to a loss of approximately $27,000 as of December 31, 2002) are deferred and
accumulated as a separate component of stockholders' equity (accumulated other
comprehensive income (loss)). Net gains and losses resulting from foreign
exchange transactions, amounting to a gain of approximately $16,000 and $325,000
for the years ended December 31, 2002 and 2001, are included in other income,
net in the accompanying consolidated statements of operations and was not
material for the year ended December 31, 2000.
EXPORT SALES
The Company generates revenues from international business. Export sales
amounted to approximately $13.1 million, or 19%, $16.1 million, or 18%, and
$10.0 million, or 18%, of total revenue for the years ended December 31, 2002,
2001 and 2000, respectively.
401(K) PLAN
The Company maintains a 401(k) Plan for its employees, which is intended
to be a retirement and tax deferred savings vehicle. The Company may make
discretionary contributions to the plan. The Company has made no contributions
to date.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures 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.
RESTATEMENT ADJUSTMENTS
15
The Company has recorded certain restatement adjustments to its previously
issued 2001 and 2000 consolidated financial statements. The Company adopted EITF
01-14 effective January 1, 2002, and as a result, reclassified approximately
$1.6 million and $1.2 million into revenues from reduction of cost of revenues
for the years ended December 31, 2001 and 2000, respectively, to comply with
this guidance. Additionally, the Company has restated the previously reported
2001 and 2000 pro-forma impact of the fair value recognition provisions of SFAS
No. 123 to properly reflect pro-forma expense associated with its employee stock
purchase plans. The adjustment reflects additional pro-forma expense of
approximately $364,000 and $300,000 in 2001 and 2000, respectively, and results
in a pro-forma basic and diluted loss per share of ($3.03) and ($0.72) in 2001
and 2000, respectively. The Company has also reclassified $3.0 million from
short-term marketable securities to cash and cash equivalents at December 31,
2001.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that all
business combinations initiated after June 30, 2001, be accounted for using the
purchase method of accounting. SFAS No. 142 discusses how intangible assets that
are acquired should be accounted for in financial statements upon their
acquisition. In addition, under SFAS No. 142, goodwill and other indefinite
lived intangible assets are no longer amortized but are reviewed at least
annually for impairment (or more frequently if impairment indicators arise).
Separable intangible assets that are not deemed to have indefinite lives will
continue to be amortized over their useful lives.
The acquisition discussed in Note 3 was accounted for in accordance with
the transition provisions of SFAS No. 141 and No. 142. In connection with the
adoption of SFAS No. 142, goodwill is to be tested at least annually and on an
interim basis if an event or circumstance indicates that it is more likely than
not that an impairment loss has been incurred. We currently operate as a single
reporting unit and all of our goodwill was associated with the entire company. A
transitional impairment test was performed on January 1, 2002. See Note 3
regarding the impairment of goodwill recorded during the quarter ended September
30, 2002.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which is effective for the Company
on January 1, 2002. SFAS No. 144 addresses accounting and reporting of certain
long-lived assets, except goodwill, that are either held and used or disposed of
through sale or other means.
The Company adopted SFAS No's. 141, 142 and No. 144 during the first
quarter of 2002 without a material impact on its financial position or results
of operations. If the Company had accounted for goodwill and other intangibles
in accordance with SFAS 142 during the years ended December 31, 2001 and 2000,
the results of operations would not be materially different from those
previously reported.
In November 2001, the Emerging Issues Task Force issued Topic No. D-103
(Topic D-103), subsequently recharacterized as EITF 01-14, relating to the
accounting for reimbursements received from customers for the Company's
out-of-pocket expenses for the delivery of services. In accordance with EITF
01-14, reimbursements received for out-of-pocket expenses incurred should be
characterized as revenue in the statement of operations. The Company has
historically accounted for reimbursements received for out-of-pocket expenses
incurred as a reduction to the cost of service revenues in the statement of
operations to offset the costs incurred. The Company adopted EITF 01-14
effective January 1, 2002 and reclassified approximately $1.6 million and $1.2
million into revenues from cost of revenues for the years ended December 31,
2001 and 2000, respectively, to comply with this guidance.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit of Disposal Activities". SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
This statement is effective for fiscal years beginning after December 31, 2002.
We do not believe that the impact of adopting SFAS No. 146 will have a material
impact on the consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others", which clarifies disclosure and
recognition/measurement requirements related to certain guarantees. The
disclosure requirements are effective for financial statements issued after
December 15, 2002 and the recognition/measurement requirements are effective on
a prospective basis for guarantees issued or modified after December 31, 2002.
The application of the requirements of FIN 45 did not have a material impact on
the Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure". SFAS No. 148 amends SFAS
No. 123, to provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation.
In addition, SFAS No. 148 amends the disclosure requirements of
16
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
transition guidance and annual disclosure provisions of SFAS No. 148 are
effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. As the Company
did not make a voluntary change to the fair value based method of accounting for
stock-based employee compensation in 2002, the adoption of SFAS No. 148 did not
have a material impact on the Company's financial position and results of
operations.
NOTE 2: RESTRUCTURING AND OTHER NON-RECURRING CHARGES
The Company recorded restructuring and other non-recurring expenses of
$2.1 million and $529,000 for the years ended December 31, 2002 and 2001,
respectively. These expenses are associated with the Company's restructuring
plans and other non-recurring expenses.
During 2002, the Company, as a result of changing market dynamics and
economic factors, reduced its workforce through restructurings by approximately
32%. The reductions in workforce were primarily in the development group as well
as in the sales and services departments, both domestically and internationally.
The majority of the reductions in the development group were concurrent with the
Company's decision to stop developing, marketing or selling its portal product
on a stand-alone basis. As a result of the 2002 restructurings, the Company
recorded restructuring charges, which related primarily to severance payments
and the closing of several sales offices, of approximately $2.1 million during
the year ended December 31, 2002. Approximately $1.3 million was paid as of
December 31, 2002. The remainder is expected to be paid prior to March 31, 2003.
During 2001, the Company reduced its workforce by approximately 8% in
order to reduce expenses and realign its cost structure. The reduction in
workforce was primarily in the sales, development and general and administrative
groups. The Company recorded a charge of $303,000 during the year ended December
31, 2001, for severance payments ($278,000) and the consolidation of excess
facilities ($25,000). Approximately $275,000 was paid as of December 31, 2001
and the remainder was paid during 2002.
Additionally, the Company recorded non-recurring charges of $226,000
during the year ended December 31, 2001 primarily attributable to a contribution
to the James Hayden Memorial Fund, established in the memory of the Company's
former Chief Financial Officer, and the acceleration of 15,300 of his options
that would have vested by December 31, 2001.
NOTE 3: ACQUISITION
On December 14, 2001, the Company acquired all of the outstanding stock of
DataChannel, Inc., a Washington corporation (DataChannel) and a provider of
enterprise portal solutions. DataChannel became a wholly-owned subsidiary of the
Company. The aggregate consideration included approximately $17.5 million in
cash (including assumed debt of approximately $1.4 million), $3.0 million in
acquisition costs and 2,499,968 shares of the Company's common stock valued at
approximately $49.7 million. The acquisition was accounted for using the
purchase method of accounting. Accordingly, the excess of the purchase price
over the fair value of the assumed tangible net liabilities of approximately
$71.4 million was allocated to acquired technology, in-process research and
development, and goodwill in the amounts of approximately $11.0 million, $3.0
million and $57.4 million, respectively. The results of operations of
DataChannel from the acquisition date are included in the Company's consolidated
results of operations.
In connection with the acquisition, the Company initiated an overall
integration plan that included the elimination of redundant headcount and
facilities. The Company accrued approximately $2.2 million of cost related to
the integration plan consisting of approximately $1.8 million of facilities
costs and $0.4 million for planned workforce reductions consisting primarily of
duplicative general and administrative functions. Approximately $1.2 million and
$0 of these costs were paid during the years ended December 31, 2002 and 2001,
respectively. The remainder is expected to be paid by June 2005.
The Company initially amortized the acquired existing technology of
approximately $11.0 million over an estimated remaining useful life of three
years. This technology was embedded in the initial version of one of our
products that was released in the fourth quarter of 2002. During the fourth
quarter of 2002, the Company made the decision to remove the acquired technology
from its products. It is expected that the first version of our products that do
not include the portal technology will be released in August 2003 and will be
the only version sold in the third quarter of 2003. As a result of this
decision, we determined that there has been a change in the estimated useful
life of the acquired technology and therefore it is appropriate to amortize the
associated expense over a nine month period starting at the beginning of the
fourth quarter of 2002 (the period during which the change in estimated life was
identified) through June 30, 2003. Amortization expense related to the purchased
technology was $5.4 million and $153,000 for the
17
years ended December 31, 2002 and 2001, respectively, and has been classified as
non-cash cost of software licenses in the accompanying consolidated statements
of operations. Amortization expense for the purchased technology is estimated to
be approximately $5.4 million for the year ended December 31, 2003
The total goodwill of approximately $57.4 million related to the
acquisition was not amortized in accordance with SFAS No. 142. In lieu of being
amortized, goodwill is required to be tested for impairment annually or on an
interim basis if an event or circumstance indicates that it is more likely than
not that an impairment loss has been incurred. During the first quarter of 2002,
the Company performed a transitional impairment test on goodwill and concluded
that there was no impairment as of January 1, 2002. During the third quarter of
2002, the Company determined that a significant decline in its stock price as a
result of underperformance relative to recent and expected operating results and
the overall adverse change in the business climate had resulted in a triggering
event that warranted an impairment review in accordance with SFAS No. 142. As a
result, the Company tested for impairment based on a two-step approach. The
first step was to test for indicators of impairment of goodwill by comparing the
fair value of the Company with its carrying value. Since the Company operates as
an enterprise-wide reporting unit, it was determined that the market value of
the Company represents an approximation of its fair value as of September 30,
2002. Furthermore, it was determined that the fair value of the Company as of
September 30, 2002 was less than its carrying value and therefore, an indication
of impairment existed. The second step was to measure the amount of the
impairment of goodwill. As a result of the second step, we determined that the
implied fair value of the goodwill determined using the market capitalization of
the Company on September 30, 2002 was lower than its carrying value and
therefore, goodwill had been impaired. The Company recorded a charge of $57.4
million in the third quarter of 2002, classified as impairment charge in the
accompanying consolidated statements of operations, to write down goodwill to
its implied fair value of zero.
The following unaudited pro-forma financial information presents the
combined results of operations of the Company and DataChannel as if the
acquisition of DataChannel occurred on January 1, 2000, after giving effect to
certain adjustments, including amortization expense. Due to the non-recurring
nature of the in-process research and development charge, the amount has not
been included in the unaudited pro-forma financial information. The unaudited
pro-forma financial information does not necessarily reflect the results of
operations that would have occurred had the acquisition been completed as of the
dates indicated or of the results that may be obtained in the future (in
thousands except per share data).
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000
-------- --------
Revenues ........................................ $ 95,965 $ 63,466
Net loss ........................................ $(23,654) $(30,692)
Net loss per basic and fully diluted common share $ (0.70) $ (0.98)
NOTE 4: MARKETABLE SECURITIES
As of December 31, 2002 and 2001, based on management's intentions, all
marketable securities have been classified as "available-for-sale" and consist
of the following (in thousands):
DECEMBER 31,
------------------
2002 2001
------- -------
Municipal securities ................. $25,191 $18,065
Corporate bonds and notes ............ 25,342 19,889
Asset backed corporate debt securities 10,483 12,733
Commercial paper ..................... -- 17,037
U.S. Government-agency securities .... -- 12,010
------- -------
$61,016 $79,734
======= =======
The total carrying value of all marketable securities as of December 31,
2002 and 2001 includes approximately $12.7 million and $6.1 million that mature
during 2004 and 2003, respectively, and are therefore classified as long-term.
Net gains (losses) from the sales and maturities of marketable securities
amounting to approximately ($3,000) and $291,000 are included in other income,
net in the consolidated statements of operations for the years ended December
31, 2002 and 2001. The net unrealized holding gain of approximately $177,000 and
$0 has been included in "Accumulated other comprehensive income (loss)" on the
consolidated financial statements at December 31, 2002 and 2001, respectively.
NOTE 5: PROPERTY AND EQUIPMENT
18
Property and equipment are stated at acquisition cost and consist of the
following (in thousands):
DECEMBER 31,
---------------------
2002 2001
-------- --------
Computer equipment and purchased software $ 12,875 $ 10,771
Leasehold improvements .................. 1,504 654
Furniture and office equipment .......... 1,677 1,578
-------- --------
16,056 13,003
Less accumulated depreciation ........... (9,219) (4,509)
-------- --------
$ 6,837 $ 8,494
======== ========
Depreciation expense for the years ended December 31, 2002, 2001 and 2000
was $4,708,000, $2,753,000 and $1,124,000, respectively.
NOTE 6: COMMITMENTS AND CONTINGENCIES
The Company has commitments that expire at various times through 2010.
Operating leases shown below are primarily for facility costs for the Company's
corporate headquarters and world-wide sales offices. Other contractual
obligations primarily consist of minimum royalty fees payable by the Company in
connection with a software license and distribution agreement which the Company
entered into in January 2003.
OTHER CONTRACTUAL
YEARS ENDING DECEMBER 31, OPERATING LEASES OBLIGATIONS TOTAL
------------------------- ---------------- ----------------- ----------
2003....................... $ 4,626 $ 1,000 $ 5,626
2004....................... 2,380 1,400 3,780
2005....................... 1,788 1,600 3,388
2006....................... 1,734 -- 1,734
2006....................... 1,734 -- 1,734
Thereafter................. 632 -- 632
---------- -------- ----------
$ 12,894 $ 4,000 $ 16,894
========== ======== ==========
Included in the operating lease commitments above is approximately $1.1
million related to excess facilities which have been accrued in purchase
accounting.
The Company incurred total operating lease expense, primarily related to
certain facilities and equipment under non-cancelable operating leases, of
approximately $4.9 million, $3.7 million and $2.2 million for the years ended
December 31, 2002, 2001 and 2000, respectively.
In April 2002, the Company entered into an agreement with a system
integrator to assist the Company in the development and launch of one of its
products. Under the terms of the agreement, for consideration of the system
integrator's time in assisting with the development of the product, the Company
agreed to promote the system integrator as an integrator of the developed
product. The Company's obligation under the agreement will be considered
satisfied once the system integrator receives consulting revenues totaling
approximately $3.9 million from the Company's customers, or by April 2004,
whichever occurs first. In the event that the Company recommends a competitor of
the system integrator to do the integration work for a customer, the Company
could potentially owe a royalty to the system integrator based on the net
license fee. As of December 31, 2002, no royalties were due to the system
integrator.
In August 2002, the Company entered into a five year non-cancelable
operating lease for an office building for its Corporate headquarters. The
Company anticipates moving to the new facility in March 2003. In connection with
the lease agreement, the Company delivered an irrevocable, unconditional,
negotiable letter of credit in the amount of $760,000 as a security deposit. The
Company anticipates that it will spend approximately $1.0 million in leasehold
improvements to build out the new facility. As of December 31, 2002,
approximately $725,000 had been spent.
In January 2003, the Company entered into a software license and
distribution agreement under which Netegrity was granted the right to sublicense
the use of a provisioning application software program. In addition, Netegrity
was granted certain rights to integrate or combine the software into its
existing products. In exchange for these rights, Netegrity has agreed to pay a
quarterly royalty fee based on a percentage of the net license fees charged by
Netegrity for the software. The minimum royalty fees due in the first, second
and third years of the agreement are approximately $1.0 million, $1.4 million
and $1.6 million. The initial term of this agreement is
19
three years.
The Company has entered into indemnification agreements with the
non-employee members of its Board of Directors. Additionally, the Company has
entered into employment and executive retention agreements with certain
employees and executive officers which, among other things, include certain
severance and change of control provisions.
Under the terms of the Company's standard software license contracts, the
Company indemnifies its customers for the potential liability associated with
the infringement of other parties' technology based upon the Company's software
product. There is a possibility that the Company may be liable to its customers
in the event that there is infringement occurring. The Company is not aware of
any infringement related to the Company's technology, and therefore has not
accrued any amounts for the replacement or refund of any software products sold
through December 31, 2002.
From time to time, the Company is involved in litigation relating to
claims arising out of its operations in the normal course of business. The
Company is not presently a party to any legal proceedings, the adverse outcome
of which, in management's opinion, would have a material adverse effect on the
Company's results of operations or financial position.
NOTE 7: RELATED PARTY TRANSACTIONS
LOAN TO OFFICER
The consolidated balance sheets as of December 31, 2002 and 2001 include
$116,000 and $130,000, respectively, in loans to an officer of the Company
issued in connection with the exercise of stock options in 1996. The loan is
reflected as a reduction of stockholders' equity in the accompanying
consolidated balance sheets statements. The loan is payable upon demand and
bears interest at 7% per annum. The loan was originally represented by a secured
note however, in May 2002, the note was amended such that it became a full
recourse note. During the fourth quarter of 2002, the officer repaid
approximately $14,000 of the loan balance and repaid an advance made during 2002
of approximately $17,000.
MARKETING SERVICES
During the years ended December 31, 2002, 2001 and 2000, the Company paid
approximately $125,000, $68,000 and $15,000, respectively, to a company for
marketing services. The principal shareholder of such company, is the son-in-law
of one of the members of our Board of Directors. The Company has similar
arrangements with other marketing services firms and believes the arrangement
was entered into on substantially the same terms and conditions as its
arrangements with such other firms.
ACQUISITION TRANSACTIONS
On August 2, 2001, the Company entered into an agreement with Broadview
International LLC ("Broadview"), which called for Broadview to assist the
Company in negotiating and structuring acquisitions of a defined set of
companies with portal service products. The Chairman and Chief Executive Officer
of Broadview is a member of the Company's Board of Directors. Under the
agreement, Broadview was entitled to a transaction fee equal to $750,000 in
connection with the Company's acquisition of DataChannel. The Company had a
substantially similar agreement with an investment bank that was not related to
the Company and thus believes the agreement with Broadview was entered into on
the same terms and conditions as would have been granted on an arm's-length
basis.
The accompanying consolidated balance sheet as of December 31, 2001
includes $750,000 payable to Broadview in connection with the acquisition of
DataChannel discussed in Note 3. This amount was paid in 2002. The Company does
not expect to complete any additional acquisitions subject to this agreement.
NOTE 8: INCOME TAXES
The components of income tax expense are as follows (in thousands):
20
YEAR ENDED
DECEMBER 31,
------------------------
2002 2001 2000
----- ----- -----
Current:
Federal ................... $(135) $ 223 $ 75
State ..................... 21 168 --
Foreign ................... 184 216 --
----- ----- -----
$ 70 $ 607 $ 75
----- ----- -----
Deferred:
Federal ................... $ -- $ -- $ --
State ..................... -- -- --
Foreign ................... -- -- --
----- ----- -----
-- -- --
----- ----- -----
Total income tax expense $ 70 $ 607 $ 75
===== ===== =====
The provision for income taxes differs from the federal statutory rate of
34% as follows (in thousands):
YEAR ENDED
DECEMBER 31,
----------------------------------
2002 2001 2000
-------- -------- --------
Expected federal tax provision (benefit) ......... $(29,321) $ 765 $ 955
State provision .................................. 14 288 --
Non-deductible in-process research and development -- 1,020 --
Other ............................................ (113) 282 81
Goodwill impairment .............................. 19,507 -- --
Change in valuation allowance .................... 9,983 (1,748) (961)
-------- -------- --------
$ 70 $ 607 $ 75
======== ======== ========
Significant components of the deferred tax assets and liabilities are as
follows (in thousands):
DECEMBER 31,
---------------------
2002 2001
-------- --------
Net operating loss carryforward .... $ 70,837 $ 63,407
Loss on investment ................. 908 908
Accruals and reserves .............. 2,274 1,487
Research and development tax credits 3,806 3,343
Intangible assets .................. (2,159) (4,400)
Other .............................. 236 1,103
Valuation allowance ................ (75,902) (65,848)
-------- --------
$ -- $ --
======== ========
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred taxes assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which the net operating losses are allowed to be carried forward or
temporary differences become deductible. Due to the uncertainty of the Company's
ability to realize the benefit of the deferred tax assets, the deferred tax
assets are fully offset by a valuation allowance. The net change in the
valuation allowance during 2002 and 2001 was an increase of approximately $10.1
million and $29.3 million (primarily due to the DataChannel acquisition),
respectively. The Company re-evaluates the positive and negative evidence on a
quarterly basis.
At December 31, 2002, the Company has available for federal income tax
purposes net operating loss carryforwards of approximately $177.0 million
expiring at various dates through fiscal 2022. The net operating loss
carryforward includes approximately $98.2 million of tax deductions relating to
stock options that will be credited to additional paid-in capital when realized.
Additionally, approximately $53.5 million of the net operating loss carryforward
at December 31, 2002 is attributable to the DataChannel acquisition that when
realized, will first reduce any remaining non-current intangible assets and the
remaining will be recorded to reduce income tax expense. The acquired loss
carryforwards are subject to an annual limitation under Internal Revenue Code
Section 382 of approximately $3.1 million. Under the Tax Reform Act of 1986, the
utilization of a corporation's net operating loss carryforward is limited
following a greater than 50% change in ownership over a three-year period. As of
December 31, 2002, no change in ownership has occurred, although such a change
can occur in a future period. If a change occurs, it could substantially limit
the utilization of the loss carryforward of the Company in the future.
NOTE 9: CAPITAL STOCK AND CAPITAL STOCK WARRANTS
AUTHORIZED CAPITAL STOCK
21
In May 2001, stockholders of Netegrity approved an amendment to the
Company's Restated Certificate of Incorporation to increase the number of
authorized shares of capital stock from 55.0 million to 135.0 million. As of
December 31, 2002, the authorized capital stock of the Company was comprised of
135.0 million shares of common stock (approximately 34.3 million shares issued),
and 5.0 million shares of preferred stock, $0.01 par value (see Preferred Stock
Issuances, below).
PREFERRED STOCK ISSUANCES
The 5.0 million shares of preferred stock were designated as Series D.
Between January 6, 1998 and June 30, 1998, the Company sold 3.3 million shares
of Series D Preferred Stock to an institutional investor under a Preferred Stock
and Warrant Purchase Agreement, as amended. When issued, each share of Series D
Preferred Stock in 1998 was convertible into one share of common stock, which
represented a discount from the fair value of common stock on the date of
issuance. The value attributable to this conversion feature represented a
beneficial conversion feature which was recognized as a return to preferred
stockholders. The Series D Preferred Stock converted one for one to common stock
in September 1999 and such shares cannot be reissued by the Company. The
remaining authorized shares of Series D Preferred Stock of approximately 1.7
million shares have not been issued by the Company.
In conjunction with the agreement as described above, warrants to purchase
a total of 2,251,000 shares of common stock exercisable at $1.33 were issued to
an institutional investor expiring on January 7, 2003. As part of the Agreement
with the institutional investor described above, James McNiel joined the Board
of Directors of the Company, as designee of the Pequot Entities and the Company
granted Mr. McNiel a warrant for the purchase of 150,000 shares of common stock
exercisable at $1.00 expiring on January 7, 2003 for his services as a director.
Due to certain terms of the warrant, the warrant was accounted for as a variable
award. As a result, a non-cash compensation charge was recorded for the increase
in the fair market value of the Company's common stock compared to the exercise
price since the warrant was issued. The expense was recognized over the two year
vesting period of the warrant and through the date of exercise. During the year
ended December 31, 2000 compensation expense of $292,000 was recorded related to
this warrant. As of December 31, 2000, all of these warrants had been exercised.
WARRANTS
Outstanding warrants as of December 31, 2002 consisted of the following:
DATE GRANTED NUMBER OF WARRANTS EXERCISE PRICE EXPIRATION DATE
---------------------- ------------------ -------------- ---------------
August 2, 1999........ 37,500 $ 14.00 August 2, 2003
December 15, 2000..... 4,004 $ 62.50 December 15, 2004
June 29, 2001......... 6,965 $ 24.77 June 29, 2004
-------
48,469
=======
The outstanding warrants were granted to customers and accordingly revenue
was reduced on the grant date based on the value of the warrant using the
Black-Scholes option-pricing model.
NOTE 10: STOCK PLANS
STOCK OPTION PLANS
The Company has several stock option plans, as described hereunder, that
provide for the issuance of an aggregate of 12,647,000 shares of the Company's
common stock. All options issued under the plans are granted at fair market
value at the date of grant, become exercisable at varying rates, generally over
three or four years, as determined by the Board of Directors, and generally
expire seven to ten years from the date of grant.
Stock Option Plans for Outside Directors: The Company maintains stock
option plans intended only for members of the Company's Board of Directors who
are neither employees nor officers of the Company (the Directors' Plans). The
Directors' Plans provide for the grant of options to purchase up to 277,500
shares of Company common stock. The timing, amounts, recipients and other terms
of the option grants are determined by the provisions of or formulas in the
Directors' Plans. As of December 31, 2002, options for 71,562 shares were
available for future grant.
Stock Option Plans for Employees and Others: The Company maintains stock
option plans intended for employees, consultants and officers and, in the case
of one of the plans, directors, providing for the granting of options to
purchase up to 12,369,500 shares of
22
Company common stock as an inducement to obtain and retain the services of
qualified persons. Incentive stock options may be granted to officers and
employees, and non-qualified stock options may be granted to directors,
officers, employees or consultants. As of December 31, 2002, aggregate options
for 6,883,771 shares were available for future grant to employees and officers
of and consultants to the Company.
TENDER OFFERS
On August 9, 2001 and as subsequently amended, the Company filed a tender
offer statement with the Securities and Exchange Commission in connection with
certain stock options issued after December 1, 1999 (the Option Offer). Under
the Option Offer, the Company offered to exchange certain employee options to
purchase shares of the Company's common stock for new options to purchase shares
of its common stock. The Option Offer, which excluded executive officers,
directors and non-employees of the Company and which expired on September 7,
2001, provided for the grant of new options on March 11, 2002 to eligible
employees who were actively employed on the grant date. The number of shares
underlying the new options was equal to the number of shares underlying the
cancelled eligible options. The exercise price of the new options was equal to
the fair market value of one share of common stock on the date of grant of the
new options as determined in accordance with the applicable option plans. Each
new option will vest in accordance with a vesting schedule that is equivalent to
what would have been in place had the cancelled option remained in effect.
On March 11, 2002, the Company granted options to purchase an aggregate of
2,103,406 shares of its common stock at fair market value in connection with the
Option Offer. In accordance with FASB Interpretation No. 44, since the
replacement options were granted more than six months after cancellation of the
old options, the new options were considered a fixed award and therefore did not
result in any compensation expense.
On August 23, 2002 and as subsequently amended, the Company filed a tender
offer statement with the Securities and Exchange Commission in connection with
certain stock options outstanding under non-director stock plans (the Offer to
Exchange). Under the Offer to Exchange, the Company offered to exchange certain
employee options to purchase shares of the Company's common stock for new
options to purchase shares of its common stock. The Offer to Exchange, which
excluded directors and non-employees of the Company and which expired on
September 23, 2002, provided for the grant of new options on two different
dates. The Company expects to grant 50% of the new options on or about March 25,
2003 and the remaining 50% on or about April 25, 2003 to employees that are
continuously and actively employed from the date the employee tendered eligible
options for exchange to the date of the grant of the new options. The number of
shares underlying the new options will be equal to the number of shares
underlying the cancelled eligible options, except that certain options granted
to certain executive officers will be exchanged at a rate of one share
underlying a new option for each two shares underlying the tendered options. The
exercise price of the new options will be equal to the fair market value of one
share of common stock on the date of grant of the new options as determined in
accordance with the applicable option plans. Each new option will vest in
accordance with a schedule tied to the length of time of an individual's
employment with the Company.
SUMMARY OF OPTION ACTIVITY
Stock option activity for the years ended December 31 is as follows (in
thousands, except average life and price data):
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------
2002 2001 2000
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
Options outstanding at
beginning of year............. 4,114 $ 20.11 6,500 $ 24.58 6,530 $ 9.98
Option activity during the
year:
Granted....................... 5,025 13.06 1,898 34.38 2,427 43.54
Exercised..................... (364) 1.62 (1,073) 5.57 (2,215) 2.10
Forfeited..................... (899) 19.80 (1,031) 31.48 (242) 25.00
Option Offer.................. (5,745) 20.02 (2,180) 45.62 -- --
------ ------ -----
Options outstanding at end of
year.......................... 2,131 $ 7.63 4,114 $ 20.11 6,500 $ 24.58
===== ======= ===== ======= ===== =======
Options exercisable............. 1,030 1,896 1,831
===== ===== =====
Stock options outstanding at December 31, 2002 are as follows (in
thousands, except price data):
23
OPTIONS EXERCISABLE
OPTIONS OUTSTANDING -------------------
-------------------------- WEIGHTED
WEIGHTED WEIGHTED AVERAGE
SHARES AVERAGE AVERAGE EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE(A) EXERCISE PRICE SHARES PRICE
------------------------ ----------- -------- -------------- ------ -----
$.83-$1.42.............. 474 3.6 $ 0.95 474 $ 0.95
$1.46-$2.05............. 300 6.8 1.99 11 1.47
$2.06-$2.46............. 321 6.5 2.27 173 2.29
$2.67-$2.99............. 410 6.8 2.72 73 2.74
$3.25-$15.25............ 201 6.7 7.05 76 8.23
$15.37-$17.34........... 156 7.4 16.14 16 17.28
$17.70-$78.00........... 269 8.5 35.12 207 35.00
----- -----
$.83-$78.00............. 2,131 6.3 $ 7.63 1,030 $ 8.93
===== === ======= ===== =======
----------
(a) Average contractual life remaining in years.
EMPLOYEE STOCK PURCHASE PLAN
During May 2002, the Company established the 2002 Employee Stock Purchase
Plan ("2002 Stock Purchase Plan") under which eligible employees could purchase
shares of the Company's common stock, subject to certain limitations, at 85% of
the market value. Purchases were limited to 10% of an employee's eligible
compensation, up to a maximum of 1,000 shares per purchase period. The 2002
Stock Purchase Plan originally authorized the issuance of 700,000 shares of
common stock (subject to adjustment for capital changes) pursuant to the
exercise of nontransferable options granted to participating employees and the
maximum number of shares which are available in any single purchase period is
112,500. Prior to establishing the 2002 Stock Purchase Plan, the Company
maintained the 1990 Employee Stock Purchase Plan ("1990 Stock Purchase Plan")
under which eligible employees could purchase shares of the Company's common
stock, subject to certain limitations, at 85% of the market value. Purchases
were limited to 10% of an employee's eligible compensation, up to a maximum of
500 shares per purchase period. The 1990 Stock Purchase Plan originally
authorized the issuance of 150,000 shares of common stock (subject to adjustment
for capital changes) pursuant to the exercise of nontransferable options granted
to participating employees. During the year ended December 31, 2002, 112,000
shares of the Company's common stock were issued under the 2002 Stock Purchase
Plan and during the years ended December 31, 2001 and 2000, 41,000 and 32,000
shares of the Company's common stock were issued under the 1990 Stock Purchase
Plan, respectively. As of October 1, 2001, all authorized shares had been issued
under the 1990 Stock Purchase Plan and the plan was terminated.
STOCK AWARD
During November 2001, the Company issued an aggregate of 5,291 shares of
common stock to certain employees as a stock award. This award resulted in
compensation expense of approximately $52,000 which is included in the
accompanying consolidated statement of operations for the year ended December
31, 2001.
NOTE 11: OPERATING SEGMENTS AND GEOGRAPHICAL INFORMATION
Based on the information provided to the Company's chief operating
decision maker for purposes of making decisions about allocating resources and
assessing performance, the Company's continuing operations have been classified
into a single segment. The Company operates primarily in three geographic
regions: North America, Europe and Asia Pacific. Revenues (based on the location
of the customer) and long-lived assets by geographic region are as follows (in
thousands):
2002 2001 2000
------- ------- -------
Revenues:
North America .. $56,155 $72,022 $45,278
Europe ......... 10,145 11,293 8,114
Asia Pacific ... 2,964 4,831 1,853
------- ------- -------
Total .......... $69,264 $88,146 $55,245
======= ======= =======
Long-Lived Assets:
North America .. $19,852 $14,822
Europe ......... 389 170
Asia Pacific ... 379 556
------- -------
Total .......... $20,620 $15,548
======= =======
24
NOTE 12: SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following financial information reflects all normal recurring
adjustments that are, in the opinion of management, necessary for a fair
statement of the results of the interim periods. Summarized quarterly data for
fiscal 2002 and 2001 is as follows (in thousands, except per share data):
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
2002
Revenues ........................ $ 21,971 $ 15,808 $ 15,179 $ 16,306
Gross profit .................... 16,180 10,528 9,758 9,787
Operating loss .................. (3,370) (10,677) (66,673) (7,937)
Net loss ........................ (2,754) (9,953) (66,153) (7,449)
Basic loss per share ............ (0.08) (0.29) (1.94) (0.22)
Diluted loss per share .......... (0.08) (0.29) (1.94) (0.22)
2001
Revenues ........................ $ 26,286 $ 25,346 $ 17,185 $ 19,329
Gross profit .................... 20,568 20,064 13,019 15,077
Operating income (loss) ......... 2,164 2,118 (3,715) (3,148)
Net income (loss) ............... 3,348 3,101 (2,392) (2,414)
Basic earnings (loss) per share . 0.11 0.10 (0.08) (0.08)
Diluted earnings (loss) per share 0.10 0.09 (0.07) (0.07)
25
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
1. Financial Statements
The following financial statements are included in Item 8:
a. Reports of Independent Accountants
b. Consolidated Balance Sheets -- December 31, 2002 and 2001
c. Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000
d. Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2002, 2001 and 2000
e. Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000
f. Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 2002 (File No. 1-10139) filed with the Securities
and Exchange Commission on February 13, 2003.
3. List of Exhibits
The following exhibits, required by Item 601 of Regulation S-K, are filed
as part of this Annual Report on Form 10-K/A. Exhibit numbers, where applicable,
in the left column correspond to those of Item 601 of Regulation S-K.
EXHIBIT
ITEM NO. ITEM AND REFERENCE
-------- ------------------
2.01 Agreement and Plan of Merger, dated as of October 24, 2001, by and
among Netegrity, Inc., LKN Acquisition Corp., and DataChannel, Inc.,
as amended by the First Amendment to the Agreement and Plan of
Merger dated as of December 3, 2001 and by the Second Amendment to
the Agreement and Plan of Merger, dated as of December 7, 2001
(filed as Exhibit 2.1 to Current Report on Form 8-K dated December
24, 2001 and incorporated by reference).
3.01 Restated Certificate of Incorporation, as amended, of the Registrant
(filed as Exhibit 3.1 to Registration Statement on Form S-3 filed
February 12, 2002 and incorporated by reference).
3.02 Amended and Restated By-Laws of the Registrant (filed as Exhibit
3.03 to the Registrant's annual report on Form 10-K for the year
ended December 31, 1998, and incorporated by reference).
4.01 Specimen certificate for shares of Common Stock of the Registrant
(filed as Exhibit 4.01 to the Registrant's Registration Statement on
Form S-18, No. 33-24446-B, and incorporated by reference).
10.01(1) 1991 Director Stock Plan (filed as Exhibit 10.10 to Annual Report on
Form 10-K for the fiscal year ended March 31, 1991, and incorporated
by reference).
10.02 Form of Non-Qualified Stock Option Agreement for the Registrant's
1993 Non-Employee Director Stock Option Plan(filed as Exhibit 10.12
to Annual Report on Form 10-K for the fiscal year ended March 31,
1993, and incorporated by reference).
10.03(1) 1994 Stock Plan (filed as Exhibit 4 to Registration Statement on
Form S-8, filed on January 26, 1998, and incorporated by reference).
26
10.04(1) 1997 Stock Option Plan (filed with the Definitive Proxy Statement
filed on March 19, 1999 and incorporated by reference).
10.05(1) 1997 Non-Employee Director Stock Option Plan (filed as Exhibit 10.16
to Annual Report on Form 10-K for the fiscal year ended December
1997, and incorporated by reference).
10.06(1) 2001 Interim General Stock Incentive Plan (filed as Exhibit4.1 on
Form S-8, filed on October 31, 2002, and incorporated by reference).
10.07(1) 2002 Employee Retention General Incentive Plan (filed as Exhibit 4.1
on Form S-8, filed on October 31, 2002, and incorporated by
reference).
10.08(1) 2002 General Stock Incentive Plan (filed as Exhibit 4.1 on Form S-8,
filed on October 31, 2002, and incorporated by reference).
10.09(1) 2002 Employee Stock Purchase Plan (filed as Exhibit 4.1 on Form S-8,
filed on October 31, 2002, and incorporated by reference).
+10.10 Commercial Lease dated as of March 31, 2000 between the Registrant
and Renaissance Worldwide, Inc. (filed as Exhibit 10.09 on Form 10-K
for the year ended December 31, 2001 and incorporated by reference).
10.11 Preferred Stock and Warrant Purchase Agreement among the Company,
Pequot Private Equity Fund L.P. and Pequot Offshore Private Equity
Fund, Inc. (filed as Exhibit 4 to Report on Form 8-K filed on
January 15, 1998, and incorporated by reference).
10.12(1) Employment Agreement between Netegrity, Inc. and Barry Bycoff dated
as of May 31, 1996 (filed as Exhibit 10.1 to Annual Report on Form
10-K/A for the year ended December 31, 1998, and incorporated by
reference).
10.13(1) Netegrity Inc. 2000 Stock Incentive Plan as amended (filed as
Exhibit 10.12 to Annual Report on Form 10-K for the year ended
December 31, 2001, and incorporated by reference).
10.14 Lease Agreement by and between Netegrity, Inc., and Stonybrook
Associates, LLC dated August 2002 (filed as Exhibit 10.1 to
Quarterly Report on Form 10-Q for the quarter ended September 30,
2002, and incorporated by reference).
10.15(1) Offer letter from Netegrity, Inc., to Thomas Thimot, dated September
6, 2002 (filed as Exhibit 10.2 to Quarterly Report on Form 10-Q for
the quarter ended September 30, 2002, and incorporated by
reference).
10.16(1) Indemnification Agreement by and between Netegrity, Inc., a Delaware
corporation, and Eric Giler, a director of the Corporation (filed as
Exhibit 10.3 to Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002, and incorporated by reference).
10.17(1) Indemnification Agreement by and between Netegrity, Inc., a Delaware
corporation, and Lawrence D. Lenihan, Jr., a director of the
Corporation (filed as Exhibit 10.4 to Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002, and incorporated by
reference).
10.18(1) Indemnification Agreement by and between Netegrity, Inc., a Delaware
corporation, and Michael L. Mark, a director of the Corporation
(filed as Exhibit 10.5 to Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002, and incorporated by reference).
10.19(1) Indemnification Agreement by and between Netegrity, Inc., a Delaware
corporation, and Ralph B. Wagner, a director of the Corporation
(filed as Exhibit 10.6 to Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002, and incorporated by reference).
10.20(1) Consulting Agreement by and between Netegrity, Inc. and Thomas Palka
(filed as Exhibit 10.7 to Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002, and incorporated by reference).
10.21(1) Transition Agreement by and between Netegrity, Inc. and Thomas Palka
(filed as Exhibit 10.8 to Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002, and incorporated by reference).
27
10.22(1) Executive Retention Agreement by and between Netegrity, Inc., and
Barry Bycoff (filed as Exhibit 10.9 to Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002, and incorporated by
reference).
10.23(1) Executive Retention Agreement by and between Netegrity, Inc., and
Regina O. Sommer (filed as Exhibit 10.10 to Quarterly Report on Form
10-Q for the quarter ended September 30, 2002, and incorporated by
reference).
10.24(1) Executive Retention Agreement by and between Netegrity, Inc., and
Deepak Taneja (filed as Exhibit 10.11 to Quarterly Report on Form
10-Q for the quarter ended September 30, 2002, and incorporated by
reference).
10.25(1) Executive Retention Agreement by and between Netegrity, Inc., and
James Rosen (filed as Exhibit 10.12 to Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002, and incorporated by
reference).
10.26(1) Executive Retention Agreement by and between Netegrity, Inc., and
William Bartow (filed as Exhibit 10.13 to Quarterly Report on Form
10-Q for the quarter ended September 30, 2002, and incorporated by
reference).
10.27(1) Executive Retention Agreement by and between Netegrity, Inc., and
Thomas Thimot (filed as Exhibit 10.14 to Quarterly Report on Form
10-Q for the quarter ended September 30, 2002, and incorporated by
reference).
10.28(1) Executive Retention Agreement by and between Netegrity, Inc., and
Scott Sullivan (filed as Exhibit 10.15 to Quarterly Report on Form
10-Q for the quarter ended September 30, 2002, and incorporated by
reference).
10.29(1) Executive Retention Agreement by and between Netegrity, Inc., and
Carmen Parisi (filed as Exhibit 10.16 to Quarterly Report on Form
10-Q for the quarter ended September 30, 2002, and incorporated by
reference).
10.30(1) Executive Retention Agreement by and between Netegrity, Inc., and
Bradley Nelson (filed as Exhibit 10.17 to Quarterly Report on Form
10-Q for the quarter ended September 30, 2002, and incorporated by
reference).
10.31(1) Executive Retention Agreement by and between Netegrity, Inc., and
Mary Jefts (filed as Exhibit 10.18 to Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002, and incorporated by
reference).
10.32(1) Executive Retention Agreement by and between Netegrity, Inc., and
Vadim Lander (filed as Exhibit 10.19 to Quarterly Report on Form
10-Q for the quarter ended September 30, 2002, and incorporated by
reference).
10.33(1) Executive Retention Agreement by and between Netegrity, Inc., and
Amit Jasuja (filed as Exhibit 10.20 to Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002, and incorporated by
reference).
10.34(1) Executive Retention Agreement by and between Netegrity, Inc., and
Thomas Locke (filed as Exhibit 10.21 to Quarterly Report on Form
10-Q for the quarter ended September 30, 2002, and incorporated by
reference).
10.35(1) Executive Retention Agreement by and between Netegrity, Inc., and
Mary Colette Cooke (filed as Exhibit 10.22 to Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002, and incorporated
by reference).
10.36(1) Executive Retention Agreement by and between Netegrity, Inc., and
Geoffrey Charron (filed as Exhibit 10.23 to Quarterly Report on Form
10-Q for the quarter ended September 30, 2002, and incorporated by
reference).
10.37(1) Executive Retention Agreement by and between Netegrity, Inc., and
Michael Hyman (filed as Exhibit 10.24 to Quarterly Report on Form
10-Q for the quarter ended September 30, 2002, and incorporated by
reference).
10.38(1) Executive Retention Agreement by and between Netegrity, Inc., and
Jill Maunder (filed as Exhibit 10.25 to Quarterly Report on Form
10-Q for the quarter ended September 30, 2002, and incorporated by
reference).
10.39(1) Offer letter from Netegrity, Inc., to Stephanie Feraday, dated
October 30, 2002 (filed as Exhibit 10.39 to Annual Report on Form
10-K for the year ended December 31, 2002, and incorporated by
reference).
10.40(1) Executive Retention Agreement by and between Netegrity, Inc., and
Stephanie Feraday, dated November 4, 2002, (filed as Exhibit 10.40
to Annual Report on Form 10-K for the year ended December 31, 2002,
and incorporated by reference).
28
21.01 Subsidiaries of the Registrant (filed as Exhibit 21.01 to Annual
Report on Form 10-K for the year ended December 31, 2002, and
incorporated by reference).
23.01 Consent of PricewaterhouseCoopers LLP (filed as Exhibit 23.01 to
Annual Report on Form 10-K for the year ended December 31, 2002, and
incorporated by reference).
23.03 Consent of KPMG LLP (filed herewith).
----------
+ Confidential treatment has been reported as to certain provisions, which
have been omitted and filed separately with the Commission.
(1) Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 15(c) of Form 10-K.
29
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 on Form 10-K/A
to be signed on its behalf by the undersigned, thereunto duly authorized.
NETEGRITY, INC.
By: /s/ BARRY N. BYCOFF
---------------------------
Barry N. Bycoff
President and Chief Executive Officer
March 5, 2003
30
CERTIFICATIONS
I, Barry N. Bycoff, President and Chief Executive Officer, certify that
1. I have reviewed this annual report on Form 10-K/A of Netegrity,
Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated
in this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
By: /s/ BARRY N. BYCOFF
------------------------------------
Barry N. Bycoff
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 5, 2003
31
CERTIFICATIONS
I, Regina O. Sommer, Chief Financial Officer and Treasurer, certify that:
1. I have reviewed this annual report on Form 10-K/A of Netegrity,
Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated
in this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
By: /s/ REGINA O. SOMMER
------------------------------
Regina O. Sommer
Chief Financial Officer and Treasurer
(Principal Financial Officer and Principal
Accounting Officer)
Date: March 5, 2003
32
NETEGRITY, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES/OXLEY ACT OF 2002
In connection with the Annual Report of Netegrity, Inc. (the "Company") on
Form 10-K/A for the year ended December 31, 2002 as filed with the Securities
and Exchange Commission (the "Report"), I, Barry N. Bycoff, President and Chief
Executive Officer of the Company, certify, pursuant to Section 1350 of Chapter
63 of Title 18, United States Code, that this Report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
and that the information contained in this Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
By: /s/ BARRY N. BYCOFF
-----------------------------------
Barry N. Bycoff
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 5, 2003
NETEGRITY, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES/OXLEY ACT OF 2002
In connection with the Annual Report of Netegrity, Inc. (the "Company") on
Form 10-K/A for the year ended December 31, 2002 as filed with the Securities
and Exchange Commission (the "Report"), I, Regina O. Sommer, Chief Financial
Officer and Treasurer of the Company, certify, pursuant to Section 1350 of
Chapter 63 of Title 18, United States Code, that this Report fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934 and that the information contained in this Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
By: /s/ REGINA O. SOMMER
---------------------------------------
Regina O. Sommer
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
Date: March 5, 2003