UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 30, 2003
NETEGRITY, INC.
(Exact name of registrant as specified in its charter)
Delaware 1-10139 04-2911320
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
201 Jones Road
Waltham, MA 02451
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (781) 890-1700
Not Applicable
(Former name or former address, if changed since last report)
INTRODUCTORY NOTE
On December 30, 2003, Netegrity, Inc. (the "Company") completed its
acquisition (the "Acquisition") of Business Layers, Inc. On January 9, 2004, the
Company filed a Current Report on Form 8-K (the "Current Report") to report the
Acquisition. The purpose of this Amendment No. 1 to the Current Report is to
file the financial statements required by Item 7.
The Company hereby amends Item 7 of the Current Report to read in its entirety
as follows:
ITEM 7. FINANCIAL STATEMENTS, UNAUDITED PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS.
(a) Financial Statements of Businesses Acquired.
The required financial statements are attached hereto on pages 3
through 19.
(b) Unaudited Pro Forma Financial Information.
The required unaudited pro forma financial information is attached
hereto on pages 20 through 24.
(c) Exhibits.
2.1* Agreement and Plan of Merger, dated as of December 30, 2003, by and among Netegrity
Inc., Tuna Merger Corp. and Business Layers, Inc.
23.1 Consent of Kost Forer, Gabbay & Kassierer, A Member of Ernst & Young Global
----------
* Previously filed.
-2-
ITEM 7. (a)
BUSINESS LAYERS, INC. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Report of Independent Auditors.................................................................. 4
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2002 (audited) and September 30,
2003 (unaudited)................................................................................ 5
Consolidated Statements of Operations for the year ended December 31, 2002 (audited)
and for the nine months ended September 30, 2003 and 2002 (unaudited)........................ 7
Consolidated Statement of Changes in Shareholders' Equity for the year ended December 31, 2002
(audited).................................................................................... 8
Consolidated Statements of Cash Flows for the year ended December 31, 2002 (audited) and the
nine months ended September 30, 2003 and 2002 (unaudited).................................... 9
Notes to Consolidated Financial Statements...................................................... 10
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS OF
BUSINESS LAYERS INC. AND ITS SUBSIDIARIES
We have audited the accompanying consolidated balance sheet of Business
Layers Inc. (the "Company") and its subsidiaries as of December 31, 2002 and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for the year ended December 31, 2002. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company and its subsidiaries as of December 31, 2002, and the consolidated
results of their operations and cash flows for the year ended December 31, 2002,
in conformity with accounting principles generally accepted in the United
States.
Tel-Aviv, Israel KOST FORER & GABBAY
February 6, 2003 A Member of Ernst & Young Global
BUSINESS LAYERS, INC. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN 000S, EXCEPT SHARE DATA)
DECEMBER 31, SEPTEMBER 30,
2002 2003
------------ -------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $10,627 $2,845
Restricted cash 99 139
Short-term deposits 532 537
Accounts receivable (net of allowance for
doubtful accounts of $0 and $155 at
December 31, 2002 and September 30, 2003,
respectively) 1,361 1,722
Prepaid expenses and other accounts receivable 1,149 1,211
------- ------
Total current assets 13,768 6,454
------- ------
OTHER ASSETS 599 581
PROPERTY AND EQUIPMENT, NET 1,028 800
------- ------
Total assets $15,395 $7,835
======= ======
The accompanying notes are an integral part of the consolidated financial
statements
-5-
BUSINESS LAYERS, INC. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN 000S, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, SEPTEMBER 30,
2002 2003
------------ -------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank credit $ 124 $ 124
Accounts payable 1,048 573
Accrued liabilities 2,738 1,452
Deferred revenues 1,143 2,626
-------- --------
Total current liabilities 5,053 4,775
-------- --------
OTHER LIABILITIES 387 486
-------- --------
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY:
Convertible Preferred A stock of $ 0.001 par value - Authorized:
5,200,000 shares at December 31, 2002 and September 30, 2003:
Issued 5,070,000 shares at December 31, 2002 and September 30,
2003. Outstanding: 4,940,000 shares at December 31, 2002 and
September 30, 2003. Liquidation preference of $3,233 and $3,384
as of December 31, 2002 and September 30, 2003, respectively 5 5
Convertible Preferred B stock of $ 0.001 par value - Authorized,
issued and outstanding: 8,160,000 shares at December 31, 2002
and September 30, 2003. Liquidation preference of $12,594 and
$13,204 as of December 31, 2002 and September 30, 2003,
respectively 8 8
Convertible Preferred C stock of $ 0.001 par value - Authorized:
6,000,000 shares at December 31, 2002 and September 30, 2003;
Issued and outstanding: 5,000,000 shares at December 31, 2002
and September 30, 2003. Liquidation preference of $14,689 and
$15,485 as of December 31, 2002 and September 30, 2003,
respectively 5 5
Convertible Preferred D stock of $ 0.001 par value - Authorized:
22,800,000 shares at December 31, 2002 and September 30, 2003;
Issued and outstanding: 21,739,130 shares at December 31, 2002
and September 30, 2003. Liquidation preference of $27,686 and
$29,181 as of December 31, 2002 and September 30, 2003,
respectively 22 22
Common stock of $ 0.001 par value - Authorized: 65,000,000 shares
at December 31, 2002 and September 30 ,2003; Issued: 4,866,627 and
5,145,751 shares at December 31, 2002 and September 30, 2003,
respectively. Outstanding: 4,863,627 and 5,142,751 shares at
December 31, 2002 and September 30, 2003, respectively 5 5
Additional paid-in capital 50,352 50,376
Treasury stock, at cost (66) (66)
Accumulated other comprehensive loss 40 (31)
Accumulated deficit (40,416) (47,750)
-------- --------
Total shareholders' equity 9,955 2,574
-------- --------
Total liabilities and shareholders' equity $ 15,395 $ 7,835
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
-6-
BUSINESS LAYERS, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN 000S, EXCEPT SHARE DATA)
NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
2002 2003 2002
----------- -----------------------
(unaudited)
Revenues:
Software licenses $ 4,027 $ 2,679 $ 3,535
Maintenance and services 4,241 3,396 3,271
-------- -------- --------
Total revenues 8,268 6,075 6,806
-------- -------- --------
Cost of revenues:
Software licenses 20 706 4
Maintenance and services 3,270 2,016 2,733
-------- -------- --------
Total cost of revenues 3,290 2,722 2,737
-------- -------- --------
Gross profit 4,978 3,353 4,069
-------- -------- --------
Operating expenses:
Research and development 4,607 4,136 3,894
Selling and marketing 9,495 3,494 7,143
General and administrative 5,381 3,070 3,900
-------- -------- --------
Total operating expenses 19,483 10,700 14,937
-------- -------- --------
Operating loss (14,505) (7,347) (10,868)
Interest and other income, net 252 13 256
-------- -------- --------
Net loss $(14,253) $ (7,334) $(10,612)
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
-7-
BUSINESS LAYERS, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(AMOUNTS IN 000S, EXCEPT SHARE DATA)
PREFERRED A PREFERRED B PREFERRED C PREFERRED D
COMMON STOCK STOCK STOCK STOCK STOCK ADDITIONAL
------------------ ---------------- ----------------- ---------------- ----------------- PAID-IN
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT CAPITAL
--------- ------ --------- ------ --------- ------ --------- ------ ---------- ------ ----------
Balance as of
December 31, 2001 4,841,460 $ 5 5,200,000 $ 5 8,160,000 $ 8 5,000,000 $ 5 21,739,130 $ 22 $ 50,349
Exercise of
employee stock
Options 25,167 (* - - - - - - - - 3
Foreign currency
translation
adjustments - - - - - - - - - - -
Treasury stock (3,000) (* (130,000) (* - - - - - - -
Net loss - - - - - - - - - - -
--------- --- --------- --- --------- --- --------- --- ---------- ---- --------
Total
comprehensive loss
Balance as of
December 31,
2002 4,863,627 $ 5 5,070,000 $ 5 8,160,000 $ 8 5,000,000 $ 5 21,739,130 $ 22 $ 50,352
==== ========= === ========= === ========= === ========= === ========== ==== ========
ACCUMULATED TOTAL
OTHER OTHER
COMPREHENSIVE COMPREHENSIVE TOTAL
TREASURY INCOME ACCUMULATED INCOME SHAREHOLDERS'
STOCK (LOSS) DEFICIT (LOSS) EQUITY
-------- ------------- ----------- ------------ ------------
Balance as of
December 31, 2001 $ - $ (9) $ (26,163) $ 24,222
Exercise of
employee stock
Options - - - 3
Foreign currency
translation
adjustments - 49 - $ 49 49
Treasury stock (66) - - - (66)
Net loss - - (14,253) (14,253) (14,253)
----- ---- --------- ----------- ---------
Total
comprehensive loss $ (14,204)
=========
Balance as of
December 31,
2002 $ (66) $ 40 $ (40,416) $ 9,955
==== ===== ==== ========= =========
*) Represents an amount lower than $ 1.
The accompanying notes are an integral part of the consolidated financial
statements.
-8-
BUSINESS LAYERS, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(INFORMATION AS OF SEPTEMBER 30, 2003 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2003 IS UNAUDITED)
(AMOUNTS IN 000S)
FOR THE YEAR
ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
2002 2003 2002
------------ -------- --------
Cash flows from operating activities: (unaudited)
-----------------------
Net loss $(14,253) $ (7,334) $(10,612)
Adjustments required to reconcile net loss to
net cash used in operating activities:
Depreciation 419 388 313
Loss on sale of property and equipment -- 8 --
Increase in accounts receivable (801) (359) (498)
Increase in prepaid expenses and other accounts
receivable (696) (24) (139)
Increase (decrease) in accounts payable 364 (475) (22)
Increase (decrease) in accrued liabilities 1,459 (1,293) 957
Increase in deferred revenues 389 1,486 421
Accrued severance pay, net (4) 31 (4)
-------- -------- --------
Net cash used in operating activities (13,123) (7,572) (9,584)
-------- -------- --------
Cash flows from investing activities:
Investment in short-term deposits, net (13) (5) (11)
Purchase of property and equipment (523) (170) (415)
Proceeds from sale of property and equipment -- 2 --
Investment in long-term deposits, net 4 30 16
Increase in restricted cash (12) (40) (12)
Loans to employees, net (14) 17 (5)
-------- -------- --------
Net cash used in investing activities (558) (166) (427)
-------- -------- --------
Cash flows from financing activities:
Purchase of treasury stock (66) -- (82)
Proceeds from exercise of employee stock options 3 24 27
-------- -------- --------
Net cash provided by (used in) financing
activities (63) 24 (55)
-------- -------- --------
Effect of changes in foreign exchange rate on
cash and cash equivalents 36 (68) --
-------- -------- --------
Decrease in cash and cash equivalents (13,708) (7,782) (10,066)
Cash and cash equivalents at the beginning of
the period 24,335 10,627 24,335
-------- -------- --------
Cash and cash equivalents at the end of the period $ 10,627 $ 2,845 $ 14,269
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
-9-
SEPTEMBER 30, 2002 AND 2003 IS UNAUDITED)
(AMOUNTS IN 000S, EXCEPT SHARE DATA)
BUSINESS LAYERS, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 2003 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2003 IS UNAUDITED)
(AMOUNTS IN 000S EXCEPT SHARE DATA)
NOTE 1: GENERAL
a. Business Layers Inc. (the "Company" or "Business Layers") was
incorporated in New Jersey and commenced operations in March
1999 and reincorporated in Delaware in May 2001. Business
Layers is a provider of eProvisioning software solutions that
help organizations to implement a core part of their Internet
infrastructure.
All shares and per share data in the accompanying consolidated
financial statements have been retroactively adjusted to
reflect the re-incorporation as a Delaware company.
b. The Company performs its operations in Europe through its
subsidiaries ("the subsidiaries") incorporated in the
Netherlands, France, Germany, England and Israel.
c. Interim financial statements:
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial
information. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting only of
normal recurring accruals) considered necessary for a fair
presentation have been included. These financial statements
and notes should be read in conjunction with the Company's
audited consolidated financial statements and notes thereto.
Operating results for the nine months ended September 30,
2003, are not necessarily indicative of the results that may
be expected for any future quarter or the year ending December
31, 2003.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance
with United States generally accepted accounting principles (US GAAP).
a. Use of estimates:
The preparation of financial statements, in conformity with
generally accepted accounting principles, requires management
to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
b. Foreign currency transactions:
The functional currency of the Company's Israeli subsidiary is
the U.S. dollar, as the U.S. dollar is the primary currency of
the economic environment in which the Israeli subsidiary has
operated and expects to continue to operate in the foreseeable
future. Financing and investing activities, are made in U.S.
dollars.
Accordingly, monetary accounts maintained in currencies other
than the dollar are remeasured into U.S. dollars in accordance
with Statement of the Financial Accounting Standard Board No.
52 "Foreign Currency Transaction" ("SFAS No. 52"). All
transaction gains and losses of the remeasured monetary
balance sheet items are reflected in the statement of
operations as financial income or expenses, as appropriate.
The financial statement of the Company's European subsidiaries
have been translated into U.S. dollars by translating balance
sheet amounts at period-end exchange rates and statement of
operations accounts at average exchange rates for the period.
Foreign currency translation gains and losses are reflect in
the equity section of the Company's consolidated balance sheet
as accumulated other comprehensive income (loss) in
stockholders' equity.
c. Principles of consolidation:
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. Intercompany
transactions and balances have been eliminated upon
consolidation.
-10-
BUSINESS LAYERS, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2003 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2003 IS UNAUDITED)
(AMOUNTS IN 000'S, EXCEPT SHARE DATA)
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONT.)
d. Cash and cash equivalents:
Cash and cash equivalents are short-term highly liquid
investments that are readily convertible to cash with original
maturities of three months or less.
e. Restricted cash:
Restricted cash is primarily invested in certificates of
deposit, which mature within one year.
f. Short-term deposits:
Bank deposits with maturities of more than three months but
less than one year are included in short-term deposits.
The deposits are in U.S. dollars and bear interest at an
average rate of 2%. The short-term deposits are presented at
their cost, including accrued interest.
g. Property and equipment, net:
Property and equipment is stated at cost, net of accumulated
depreciation. Depreciation is calculated by the straight-line
method over the estimated useful lives of the assets, which
typically range from one to five years. Leasehold improvements
are amortized using the straight-line method over the
remaining lease term or the estimated useful lives of the
related assets.
h. Value of long lived assets:
The Company and the subsidiaries' long-lived assets are
reviewed for impairment in accordance with Statement of
Financial Accounting Standard No. 144, "Accounting for the
Impairment or Disposal of Long- Lived Assets" ("SFAS No. 144")
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 the future
undiscounted cash flows expected to be generated by the
assets. 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. As of December 31, 2002, no impairment losses have
been identified.
BUSINESS LAYERS, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2003 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2003 IS UNAUDITED)
(AMOUNTS IN 000'S, EXCEPT SHARE DATA)
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONT.)
i. Revenue recognition:
The Company primarily generates its revenues from the sales of
licenses, professional services, and maintenance.
The Company accounts for its software license in accordance
with Statement of Position (SOP) 97-2 "Software Revenue
Recognition", as amended. SOP 97-2 generally requires revenue
earned on software arrangements involving multiple elements to
be allocated to each element based on the relative fair value
of the elements. The Company has also adopted SOP 98-9
"Modification of SOP 97-2, Software Revenue Recognition with
respect to Certain Transactions" for all multiple element
transactions entered into after January 1, 2000. SOP 98-9
requires that revenue be recognized under the "residual
method" when vendor specific objective evidence ("VSOE") of
fair value exists for all undelivered elements and VSOE does
not exist for all of the delivered elements. Revenues are
recognized when: a license agreement is executed, the product
has been delivered, all significant obligations are fulfilled,
the fee is fixed or determinable and collectibility is
probable. For those license agreements where customer
acceptance is required and it is not probable, license
revenues are recognized when the software has been accepted.
Maintenance and support revenue included in multiple element
arrangements is deferred and recognized ratably over the term
of the maintenance and support agreement. VSOE of fair value
of the undelivered elements (maintenance, unspecified
upgrades, support and consulting services) is determined based
on the price charged for the undelivered element when sold
separately. Arrangements that include consulting services are
not considered essential to the functionality of the software.
Software services revenues, not required to be recognized
using contract accounting, are typically billed on a time and
materials basis and are recognized as such services are
performed.
Revenues from software licenses that require significant
customization, integration and installation are recognized in
accordance with Statement of Position 81-1 "Accounting for
Performance of Construction - Type and Certain Production -
Type Contracts" ("SOP 81-1"), using contract accounting on a
completed contract method. After delivery, if uncertainty
exists about customer acceptance of the software, license
revenue is not recognized until acceptance. Provisions for
estimated losses on uncompleted contracts are made in the
period in which such losses are first determined, in the
amount of the estimated loss on the entire contract. As of
December 31, 2002 no such estimated losses were identified.
Estimated gross profit or loss from long-term contracts may
change due to changes in estimates resulting from differences
between actual performance and original forecasts. Such
changes in estimated gross profit are recorded in results of
operations when they are reasonably determinable by
management, on a cumulative catch-up basis.
The Company and its subsidiaries do not grant rights of
return.
Deferred revenue includes unearned amounts received from
customers but not recognized as revenues.
BUSINESS LAYERS, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2003 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2003 IS UNAUDITED)
(AMOUNTS IN 000'S, EXCEPT SHARE DATA)
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONT.)
j. Software development costs:
Statement of Financial Accounting Standards No. 86 "Accounting
for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed" ("SFAS No. 86"), requires capitalization
of certain software development costs subsequent to the
establishment of technological feasibility.
Based on the Company's product development process,
technological feasibility is established upon completion of a
working model. The Company does not incur material costs
between the completion of the working model and the point at
which the products are ready for general release. Therefore,
research and development costs are charged to the statement of
operations as incurred.
k. Income taxes:
The Company and its subsidiaries account for income taxes in
accordance with Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes". This
Statement prescribes the use of the liability method whereby
deferred tax assets and liability account balances are
determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using
the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The Company and its
subsidiaries provide a valuation allowance, if necessary, to
reduce deferred tax assets to their estimated realizable
value.
l. Accounting for stock-based compensation:
The Company has elected to follow Accounting Principles Board
Opinion 25, "Accounting for Stock Issued to Employees" ("APB
25") and FASB Interpretation 44, "Accounting for Certain
Transactions Involving Stock Compensation" ("FIN 44") in
accounting for its employee stock option plans. Under APB 25,
when the exercise price of the Company's share options is less
than the market price of the underlying shares on the date of
grant, no compensation expense is recognized.
Pro-forma information regarding net loss and loss per share is
required by SFAS 123, and has been determined as if the
Company had accounted for its employee share options under the
fair value method prescribed by that Statement. The fair value
for these options was estimated at the date of grant, using a
minimum-value option pricing model, with the following
weighted-average assumptions for the year ended December 31,
2002, nine months ended September 30, 2003 and September 30,
2002: risk-free interest rates of 1.5%; dividend yields of 0%;
and a weighted-average expected life of the option of 4 years.
BUSINESS LAYERS, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2003 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2003 IS UNAUDITED)
(AMOUNTS IN 000'S, EXCEPT SHARE DATA)
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONT.)
For purposes of pro-forma disclosures, the estimated fair
value of the options is amortized to expense over the options'
vesting period.
Exercise price equals market price at date of grants.
WEIGHTED AVERAGE FAIR VALUE OF OPTION GRANTS
--------------------------------------------
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, -----------------------
2002 2003 2002
------------ ------- -------
$ 0.02 $ 0.02 $ 0.02
======= ======= =======
The Company's pro-forma information is as follows:
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ------------------------
2002 2003 2002
------------ ------ -------
Loss as reported $14,253 $7,334 $10,612
Add: stock based compensation
expense determined under the fair
value method for all rewards 68 42 31
------- ------ -------
Pro-forma loss $14,321 $7,376 $10,643
======= ====== =======
The Company applies SFAS 123 and EITF 96-18, "Accounting for
Equity Instruments that are Issued to Other than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services",
with respect to options issued to non-employees. SFAS 123
requires use of an option valuation model to measure the fair
value of these options at the date of grant.
m. Concentration of credit risks:
Financial instruments that potentially subject the Company and
its subsidiaries to concentration of credit risks consist
principally of cash and cash equivalents, restricted cash,
short-term deposits and accounts receivable, long-term
deposits and loans to employees. Cash and cash equivalents,
restricted cash and short-term and long-term bank deposits are
invested with high credit issuers.
The trade receivables of the Company and its subsidiaries are
mainly derived from sales to customers located primarily in
the United States and Europe. Management believes that credit
risks are moderated by the diversity of its end customers and
geographic sales areas. The Company performs ongoing credit
evaluations of its customers' financial condition. An
allowance for doubtful accounts is determined with respect to
those accounts that the Company has determined to be doubtful
of collection.
The Company has provided a long-term loan to its employees,
amounting to $81 as of December 31, 2002. The long-term loan
is unsecured and if not paid, an immaterial loss could result
to the Company.
The Company and its subsidiaries had no off-balance-sheet
concentration of credit risk such as foreign exchange
contracts, option contracts or other foreign hedging
arrangements.
Revenues derived from the Company's two largest customers in
2002 represented 41% and 11% of total sales (see Note 9b).
BUSINESS LAYERS, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2003 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2003 IS UNAUDITED)
(AMOUNTS IN 000'S, EXCEPT SHARE DATA)
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONT.)
n. Severance pay:
The Israeli subsidiary's liability for severance pay is
calculated pursuant to Israeli severance pay law based on the
most recent salary of the employees multiplied by the number
of years of employment, as of the balance sheet date.
Employees are entitled to one month's salary for each year of
employment or a portion thereof. The Israeli subsidiary's
liability for all of its employees, is fully provided by
monthly deposits with insurance policies and by an accrual.
The value of these policies is recorded as an asset in the
Company's balance sheet.
The deposited funds include profits accumulated up to the
balance sheet date. The deposited funds may be withdrawn only
upon the fulfillment of the obligation pursuant to Israeli
severance pay law or labor agreements. The value of the
deposited funds is based on the cash surrendered value of
these policies, and includes immaterial profits.
Severance expenses for the year ended December 31, 2002 and
the nine months ended September 30, 2003 and 2002 amounted to
approximately $136, $183 and $133, respectively.
o. Fair value of financial instruments:
The following methods and assumptions were used by the Company
in estimating fair value and disclosures for financial
statements:
The carrying amounts of cash and cash equivalents, restricted
cash, short-term deposits, accounts receivable, short-term
bank credit and accounts payable approximate their fair value
due to the short-term maturity of such instruments.
p. Advertising
Advertising costs are expensed as incurred and amounted to
$1,523 for the year ended December 31, 2002, and $1,069 and
$460 for the nine months ended September 30, 2003 and 2002,
respectively.
BUSINESS LAYERS, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2003 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2003 IS UNAUDITED)
(AMOUNTS IN 000'S, EXCEPT SHARE DATA)
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONT.)
q. Impact of recently issued accounting standards:
In June 2002, the FASB issued SFAS No. 146 "Accounting for
Costs Associated with Exit or Disposal Activities" which
addresses significant issues regarding the recognition,
measurement, and reporting of costs associated with exit and
disposal activities, including restructuring activities. SFAS
No. 146 requires that costs associated with exit or disposal
activities be recognized when they are incurred rather than at
the date of a commitment to an exit or disposal plan. SFAS No.
146 is effective for all exit or disposal activities initiated
after December 31, 2002. The Company does not expect the
adoption of SFAS No. 146 to have a material impact on its
results of operations or financial position.
In January 2003, the Emerging Issues Task Force ("EITF"),
published EITF Issue 00-21 ("EITF 00-21"), "Revenue
Arrangements with Multiple Deliverables," which requires
companies to determine whether an arrangement involving
multiple deliverables contains more than one unit of
accounting. In applying EITF 00-21, revenue arrangements with
multiple deliverables should be divided into separate units of
accounting if the deliverables in the arrangement meet certain
criteria. Arrangement consideration should be allocated among
the separate units of accounting based on their relative fair
values. This issue is effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003.
The Company's adoption of EITF 00-21 did not have a material
impact on the Company's results of operations or financial
position
NOTE 3: PROPERTY AND EQUIPMENT, NET
DECEMBER 31, SEPTEMBER 30,
2002 2003
----------- -------------
Cost:
Computers, software and related
Equipment $1,335 $1,473
Office furniture and equipment 294 283
Leasehold improvements 191 202
------ ------
1,820 1,958
------ ------
Accumulated depreciation:
Computers, software and related
Equipment 621 894
Office furniture and equipment 119 146
Leasehold improvements 52 118
------ ------
792 1,158
------ ------
$1,028 $ 800
====== ======
Depreciation expenses for the year ended December 31, 2002
amounted to $419, and for the nine months ended September 30,
2003 and 2002, amounted to $338 and $313, respectively.
BUSINESS LAYERS, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2003 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2003 IS UNAUDITED)
(AMOUNTS IN 000'S, EXCEPT SHARE DATA)
NOTE 4: OTHER ASSETS
DECEMBER 31, SEPTEMBER 30,
2002 2003
----------- ------------
Severance pay fund $347 $415
Long-term deposits 171 141
Loans to employees 81 25
---- ----
$599 $581
==== ====
NOTE 5: SHORT-TERM BANK CREDIT
As of December 31, 2002, the Company had an authorized credit
line in the amount of $500, which bears interest at the rate
of Banks's Prime Rate minus 0.25%. The weighted average
interest rate on the credit line as of December 31, 2002 was
4%.
BUSINESS LAYERS, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2003 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2003 IS UNAUDITED)
(AMOUNTS IN 000'S, EXCEPT SHARE AND PER SHARE DATA)
NOTE 6: COMMITMENTS AND CONTINGENT LIABILITIES
The facilities of the Company and its subsidiaries are rented
under operating leases for periods ending in March 2007. In
addition, the Company has operating lease agreements for
computers and motor vehicles, which terminate in 2004. Future
minimum lease commitments under non-cancelable operating
leases are as follows:
2003 $ 974
2004 650
2005 477
2006 231
2007 221
------
$2,553
======
Total rent and lease expenses for the year ended December 31,
2002 amounted to $ 1,147, and amounted to $502 and $456 for
the nine months ended September 30, 2003 and 2002,
respectively
NOTE 7: SHARE CAPITAL
a. Convertible preferred stock:
All convertible preferred stock has preference over the Common
shares, in the event of liquidation, dissolution or winding
up. This applies also to consolidation, merger or
reorganization, or a sale of all, or substantially all of the
Company's assets or share capital at a price per share up to
$7.50. The liquidation preference is equal to the full amount
originally paid plus annual interest of 8% and all declared
but unpaid dividends. Upon the Company's Initial Public
Offering, all of the Company's 39,969,130 outstanding
Preferred shares, will be converted into 41,827,628 Common
shares (this does not include the conversion of the warrants
into Common shares).
b. Treasury stock:
In January 2002, the Company purchased 3,000 shares of its
Common stock and 130,000 of its Preferred "A" shares from one
of the Company's investors, in consideration of approximately
$66. This amount was recorded as treasury stock.
c. Share option plan:
The Company has authorized through its 1999 Incentive Share
Option Plan the grant of options to officers, management,
consultants and other key employees of up to 8,050,500 shares
of the Company's Common shares. The options granted have
four-year vesting terms, become fully exercisable after four
consecutive years of employment and expire 10 years subsequent
to the date of grant.
BUSINESS LAYERS, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2003 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2003 IS UNAUDITED)
(AMOUNTS IN 000'S, EXCEPT SHARE DATA)
NOTE 7: SHARE CAPITAL (CONT.)
A summary of the Company's share option activity and related
information is as follows:
DECEMBER 31,
2002
------------------------------
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
---------- --------
$
----
Outstanding at beginning
of year 5,436,267 0.27
Granted 1,504,722 0.30
Exercised (25,167) 0.14
Forfeited (1,216,790) 0.39
---------- ----
Outstanding at end of year 5,699,032 0.25
========== ====
Exercisable options 2,492,263 0.21
========== ====
The options outstanding as of December 31, 2002, have been
classified by range of exercise price, as follows:
OPTIONS WEIGHTED
OUTSTANDING AVERAGE WEIGHTED
EXERCISE AS OF REMAINING AVERAGE
PRICE DECEMBER 31, CONTRACTUAL EXERCISE
(RANGE) 2002 LIFE YEARS PRICE
-------- ----------- ----------- --------
$0.00 - 0.10 592,476 7 $0.05
$0.10 - 0.25 1,552,994 8 $0.17
$0.30 3,054,230 9 $0.30
$0.60 499,332 8 $0.60
--------- -----
5,699,032 8 $0.27
========= = =====
BUSINESS LAYERS, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2003 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2003 IS UNAUDITED)
(AMOUNTS IN 000'S, EXCEPT SHARE DATA)
NOTE 7: SHARE CAPITAL (CONT.)
d. Warrants issued to consultants:
1. The Company's outstanding warrants to consultants as
of December 31, 2002, are as follows:
WARRANTS FOR EXERCISE PRICE WARRANTS
ISSUANCE DATE COMMON SHARES PER SHARE EXERCISABLE
------------- ------------- -------------- -----------
April 1999 - October 1999 151,500 $ 0.10 151,500
November 1999 - January 2000 351,000 $ 0.13 351,000
February 2000 - September 2000 18,000 $ 0.25 18,000
October 2000 - July 2001 43,000 $ 0.60 43,000
August 2001 - December 2001 5,000 $ 0.30 5,000
January 2002 - December 2002 15,000 $ 0.30 15,000
------- -------
583,500 583,500
======= =======
2. The Company had accounted for its warrants to vendors
and consultants under the fair value method of SFAS
123 and EITF 96-18. The fair value for these warrants
was estimated using a Black-Scholes Option Pricing
Model with the following weighted-average assumptions
for the year ended December 31, 2002: risk-free
interest rates of 1.5%, dividend yields of 0%,
volatility factors of the expected market price of
the Company's Common shares of 0.80, and a
weighted-average contractual life of the warrants of
approximately four years.
3. In connection with the granting of warrants to
vendors and consultants, the Company has not recorded
nor recognized stock compensation expenses due to
immateriality through the year December 31, 2002 and
the nine months ended September 30, 2003.
BUSINESS LAYERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2003 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2003 IS UNAUDITED)
(AMOUNTS IN 000s, EXCEPT SHARE DATA)
NOTE 8: INCOME TAXES
a. Through December 31, 2002, Business Layers Inc. had U.S.
federal net operating loss carryforward of approximately
$21,000 that can be carried forward and offset against taxable
income and expire from 2014 to 2017. In addition, the Company
has operating loss carryforward in foreign tax jurisdictions
amounting to approximately $17,471.
Management currently believes that since the Company has a
history of losses it is more likely than not that the deferred
tax regarding the loss carry forwards will not be utilized in
the foreseeable future.
Utilization of U.S. net operating losses may be subject to
substantial annual limitation due to the "change in ownership"
provisions of the Internal Revenue Code of 1986 and similar
state provisions. The annual limitation may result in the
expiration of net operating losses before utilization.
b. Deferred income taxes:
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Company and its subsidiaries' deferred tax liabilities and
assets are as follows:
DECEMBER 31,
2002
------------
Operating loss carryforward $10,886
Reserves and allowances 182
-------
Net deferred tax asset before valuation allowance 11,068
Valuation allowance 11,068
-------
Net deferred tax asset $ --
=======
As of December 31, 2002, the Company and its subsidiaries have
provided valuation allowances of approximately $11,068, in
respect of deferred tax assets resulting from tax loss
carryforward and other temporary differences. Management
currently believes that it is more likely than not that the
deferred tax regarding the tax loss carryforward and other
temporary differences will not be realized in the foreseeable
future.
c. Loss before taxes consists of the following:
DECEMBER 31,
2002
------------
Domestic $ 8,319
Foreign 5,934
-------
$14,253
=======
d. The main reconciling items between the statutory tax rate of
the Company and the effective tax rate are the non-recognition
of the benefits from accumulated net operating losses carry
forward among the various subsidiaries worldwide due to the
uncertainty of the realization of such tax benefits.
BUSINESS LAYERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2003 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2003 IS UNAUDITED)
(AMOUNTS IN 000s, EXCEPT SHARE DATA)
NOTE 9: OPERATING SEGMENTS AND GEOGRAPHICAL INFORMATION
a. Summary information about geographical areas:
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
geographical regions: The United States, Europe and the Middle
East. Revenues (based on the location of the customer) and
long-lived assets by geographic regions are as follows:
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
2002 2003 2002
------------ -----------------------
Revenues:
United States $7,595 $4,304 $6,269
Europe and others 673 1,771 537
------ ------ ------
$8,268 $6,075 $6,806
====== ====== ======
Long-Lived Assets:
United States $ 290 $ 280
Europe and others 738 520
------ ------
$1,028 $ 800
====== ======
b. Major customer data as a percentage of total revenues:
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
2002 2003 2002
----------- -------------------
Customer A 41% 19% 46%
Customer B 11% -- 13%
Customer C -- 24% --
NOTE 10: SUBSEQUENT EVENT (UNAUDITED)
On December 30, 2003, the Company was acquired by Netegrity,
Inc. pursuant to an Agreement and Plan of Merger dated
December 30, 2003. The consideration for the acquisition was
$15,000 in cash and 2,556,940 shares of common stock at fair
value of approximately $26,600.
ITEM 7.(b)
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION OF NETEGRITY, INC.
The following unaudited pro forma financial statements of Netegrity,
Inc. ("Netegrity") give effect to the acquisition of Business Layers, Inc.
("Business Layers) by Netegrity as if it had occurred on September 30, 2003 with
respect to the unaudited pro forma balance sheet and as if it had occurred on
January 1, 2002 with respect to the unaudited pro forma statements of
operations.
Pursuant to the terms of the definitive merger agreement, Netegrity
acquired Business Layers for 2,556,940 shares of Netegrity common stock, cash
payments of $15.0 million and estimated transaction cost of $0.9 million, for a
total purchase price of $42.5 million.
The unaudited pro forma financial statements utilize the purchase
method of accounting for the merger of Netegrity and Business Layers. Netegrity
is the acquiring company for accounting purposes. Under the purchase method of
accounting, the purchase price is allocated to assets acquired and liabilities
assumed based on their estimated fair value at the time of the merger. The
results of operations of Business Layers will be included in the results of
operations of the combined company from December 30, 2003 (the date of the
acquisition). The unaudited pro forma consolidated financial statements reflect
the preliminary purchase price allocation based on the Company's best estimate
of the fair value of the assets to be acquired and the liabilities to be
assumed. The Company does not expect the final purchase price allocation to be
materially different.
The Company engaged a third party appraiser to conduct a valuation of
the intangible assets and to assist in the determination of useful lives for
such assets. Based on the appraisal, approximately $7.5 million of the purchase
price has been allocated to developed technology and customer relationships and
$3.8 million has been allocated to in-process research and development, which
was expensed upon closing of the transaction. 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 statements of operations. The amount
allocated to developed technology is expected to be amortized over its
estimated useful life ranging from two to five years.
The valuation of in-process research and development was determined
using the income method. Revenue and expense projections for the in-process
research and development project were prepared by management. The value was
determined using the present value of the cash flows from the projections using
a 30% discount rate. The technologies under development were approximately 60%
complete based on project duration and costs. In the event that the project is
not completed and technological feasibility is not achieved, there is no
alternative future use for the in-process technology. The assumptions used for
the valuation of the in-process research and development are the responsibility
of management and are subject to change.
In accordance with Statement of Financial Accounting Standards No. 142
"Goodwill and Other Intangible Assets," the goodwill resulting from the
acquisition of Business Layers will not be amortized but rather will be tested
at least annually for impairment.
The unaudited pro forma consolidated financial data is for information
purposes only and is not necessarily indicative of the results of future
operations of the combined company or the actual results that would have been
achieved had the merger of Netegrity and Business Layers been consummated during
the periods indicated. You should read the unaudited pro forma financial data in
conjunction with the consolidated historical financial statements of Netegrity
and Business Layers, including the notes to all sets of financial statements.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2003
(IN 000S) HISTORICAL
--------------------------------- PRO-FORMA PRO FORMA
NETEGRITY BUSINESS LAYERS ADJUSTMENTS COMBINED
------------- --------------- ----------------- -------------
Current Assets:
Cash and cash equivalents..... $ 10,005 $ 2,845 $ (12,850)(1) $ --
Available-for-sale securities. 62,398 -- (2,150) (1) 60,248
Accounts receivable-trade, net 11,240 1,722 (292) (5) 12,670
Prepaid expenses and other
current assets.............. 2,501 1,748 4,249
Restricted cash............... -- 139 139
------------- ------------- -------------
Total Current Assets..... 86,144 6,454 77,306
Available-for-sale securities.... 20,671 -- 20,671
Property and equipment, net...... 5,380 800 (445)(6) 5,735
Goodwill......................... -- -- 29,978 (1) 29,978
Capitalized software............. -- -- 7,500 (1) 7,500
Restricted cash.................. 768 -- 768
Other assets..................... 336 581 917
------------- ------------- -------------
Total Assets............. $ 113,299 $ 7,835 $ 142,875
============= ============= =============
Current Liabilities:
Accounts payable.............. 2,430 573 (292)(5) 2,711
Accrued compensation and 4,387 -- 4,387
benefits....................
Other accrued expenses........ 4,899 1,452 3,303 (1) 9,654
Short-term bank credit -- 124 124
Deferred revenue.............. 16,585 2,626 (1,488)(7) 17,723
------------- ------------- -------------
Total Current Liabilities 28,301 4,775 34,599
Other Liabilities................ -- 486 486
------------- ------------- -------------
Total Liabilities........ $ 28,301 $ 5,261 $ 35,085
============= ============= =============
Stockholders Equity:
Preferred Stock............... -- 40 (40)(1) --
Common stock.................. 348 5 21 (1) 374
Additional paid-in-capital.... 198,364 50,376 (23,810)(1) 224,930
Loan to officer............... (116) -- (116)
Accumulated other comprehensive
loss........................ (43) (31) 31 (1) (43)
Accumulated deficit........... (113,471) (47,750) 43,950 (1) (117,271)
-------------- -------------- --------------
85,082 2,640 107,874
Less - Treasury stock, at cost.. (84) (66) 66 (1) (84)
------------- ------------- -------------
Total Stockholders Equity..... 84,998 2,574 107,790
------------- ------------- -------------
Total Liabilities and
Stockholders' Equity........ $ 113,299 $ 7,835 - $ 142,875
============= ============= =============
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(in 000s except per share data) HISTORICAL
------------------------------
PRO FORMA PRO FORMA
NETEGRITY BUSINESS LAYERS ADJUSTMENTS COMBINED
---------- ----------------- ----------- -------------
Revenues:
License software............. $ 30,536 $ 2,679 $ (742)(5) $ 32,473
Services..................... 23,274 3,396 26,670
Other........................ 2,130 -- 2,130
---------- ------------- -------------
Total revenues........... 55,940 6,075 61,273
Cost of Revenues:
Cost of license software..... 1,350 706 (742)(5) 1,314
Non-cash cost of license 5,398 -- 1,530 (2) 6,928
software...................
Cost of services............. 8,539 2,016 10,555
Cost of other................ 1,319 -- 1,319
---------- ------------- -------------
16,606 2,722 20,116
---------- ------------ -------------
Gross profit...................... 39,334 3,353 41,157
Selling, general and administrative
expenses........................ 31,845 6,564 38,409
Research and development expenses. 15,292 4,136 19,428
---------- ------------ -------------
Loss from operations.............. (7,803) (7,347) (16,680)
Other income, net................. 1,195 13 (225)(3) 983
---------- ------------- -------------
Loss before provision for
income taxes...................... (6,608) (7,334) (15,697)
Provision for income taxes........ 122 -- 122
---------- ------------- -------------
Net loss.......................... $ (6,730) $ (7,334) $ (15,819)
=========== ============= ==============
Basic and diluted net loss per
share attributable to common
stockholders: $ (0.20) N/A $ (0.43)
============ ==============
Basic and diluted weighted average
shares Outstanding................ 34,453 N/A 2,557 (4) 37,010
============ =============
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2002
(in 000s, except per share data) HISTORICAL
------------------------------
PRO FORMA PRO FORMA
NETEGRITY BUSINESS LAYERS ADJUSTMENTS COMBINED
---------- --------------- ----------- -------------
Revenues:
License software............. $ 36,072 $ 4,027 $ 40,099
Services..................... 30,158 4,241 34,399
Other........................ 3,034 -- 3,034
---------- ------------- -------------
Total revenues........... 69,264 8,268 77,532
Cost of Revenues:
Cost of license software..... 2,071 20 2,091
Non-cash cost of license
software................... 5,449 -- $ 2,040 (2) 7,489
Cost of services............. 13,664 3,270 16,934
Cost of other................ 1,827 -- 1,827
---------- ------------- -------------
23,011 3,290 28,341
---------- ------------ -------------
Gross profit...................... 46,253 4,978 49,191
Selling, general and administrative
expenses........................ 52,755 14,876 67,631
Research and development expenses. 22,701 4,607 27,308
Impairment charge................. 57,374 -- 57,374
Restructuring and other
non-recurring expenses............ 2,080 -- 2,080
---------- ------------- -------------
Loss from operations.............. (88,657) (14,505) (105,202)
Other income, net................. 2,418 252 (300)(3) 2,370
---------- ------------ -------------
Loss before provision for
income taxes...................... (86,239) (14,253) (102,832)
Provision for income taxes........ 70 -- 70
---------- ------------- -------------
Net loss.......................... $ (86,309) $ (14,253) $ (102,902)
=========== ============= ==============
Basic and diluted net loss per
share attributable to common
stockholders: $ (2.53) N/A $ (2.81)
=========== ==============
Basic and diluted weighted average
shares outstanding................ 34,078 N/A 2,557 (4) 36,635
========== =============
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(1) To record the issuance of 2,556,940 shares of Netegrity common stock
and the cash payment of $15.0 million as consideration for the
acquisition of Business Layers, the allocation of the purchase price to
the assumed fair value of the identifiable assets acquired and
liabilities assumed and the elimination of the equity accounts of
Business Layers. The fair market value of the common stock has been
valued at $10.40 per share based on the fair value of the common stock
on the day of the closing of the transaction. The following represents
the allocation of the purchase price over the historical net book value
of the acquired assets and liabilities of Business Layers at September
30, 2003, and is for illustrative purposes only. Actual fair values
will be based on the financial information as of December 30, 2003, the
acquisition date. Assuming the transaction occurred on September 30,
2003, the allocation would have been as follows:
Consideration Exchanged: (in 000s)
Fair value of shares issued to Business Layers
stockholders (2,556,940 shares at $10.40) ......................................... $ 26,592
Cash paid as consideration for the acquisition of Business Layers ................... 15,000
--------
Total consideration exchanged .......................................................... 41,592
Estimated transaction costs ............................................................ 920
--------
Total purchase price ................................................................... 42,512
Less fair value of the net tangible and intangible assets and liabilities assumed:
Net tangible assets ................................................................. 3,617
Restructuring reserve ............................................................... (1,433)
Accrued expenses .................................................................... (950)
Developed technology ................................................................ 7,500
In process research and development ................................................. 3,800
--------
Excess of purchase price over net tangible and intangible assets and liabilities assumed $ 29,978
--------
In order to pay the cash consideration for the acquisition of Business
Layers, the Company would liquidate certain short-term
available-for-sale securities.
The restructuring reserve consists of severance costs of approximately
$888,000 related to duplicative functions, as well as excess facility
costs of approximately $545,000 which will be recorded in accordance
with Emerging Issue Task Force Consensus 95-3. The accrued expenses
consist of estimated transaction costs to be paid by Business Layers in
connection with the acquisition.
At the date of the acquisition, Business Layers had a tax net operating
loss carryforward of approximately $49.7 million (resulting in a
deferred tax asset of approximately $19.0 million). The Company has
recorded as part of purchase accounting a deferred tax liability on the
separately identified intangible assets. In addition, through purchase
accounting, the Company has recognized a deferred tax asset of $2.7
million related to book tax differences and net operating losses in the
opening balance sheet and has provided a valuation allowance on the
amount of deferred tax assets in excess of the deferred tax liabilities
as it is more likely than not the assets will not be realized. To the
extent the valuation allowance is reduced in future periods, any
reduction will be recorded as a decrease to goodwill.
(2) To record the amortization of the fair value of the developed
technology acquired in the transaction. Netegrity has estimated the
acquired developed technology has useful life ranging from two to five
years.
(3) To eliminate historical interest income earned on the cash paid to
Business Layers.
(4) The unaudited pro forma loss per common share is computed by dividing
the net loss by the weighted average number of common shares
outstanding. The calculation of the weighted average number of common
shares outstanding assumes that the 2,556,940 shares of the Company's
common stock issued in the acquisition of Business Layers were
outstanding for the entire period.
(5) To eliminate revenue, cost of license revenue, accounts receivable and
accounts payables recorded by Netegrity and Business Layers under an
OEM agreement signed by the companies in January 2003.
(6) To adjust fixed assets to estimated fair value based on certain assets
that were disposed as of the acquisition.
(7) To adjust deferred revenue to estimated fair value in accordance with
Emerging Issue Task Force Consensus 01-3.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
Date: February 6, 2004 NETEGRITY, INC.
By: /s/ Regina O. Sommer
---------------------------
Regina O. Sommer
Chief Financial Officer and
Treasurer
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT
----------- -------
2.1* Agreement and Plan of Merger dated as of December 30, 2003 by and among
Netegrity, Inc., Tuna Merger Corp., and Business Layers, Inc.
23.1 Consent of Kost Forer, Gabbay & Kassierer, A Member of Ernst & Young
Global
* Previously filed.