SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT
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 14, 2001
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.)
52 Second Avenue
Waltham, MA 02451
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (781) 890-1700
N/A
(Former name or former address, if changed since last report)
INTRODUCTORY NOTE
On December 14, 2001, Netegrity, Inc. (the "Company") completed its
acquisition (the "Acquisition") of DataChannel, Inc. On December 24, 2001, 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 AND EXHIBITS.
(a) Financial Statements of the Business Acquired.
The required financial statements are attached hereto on pages 3
through 32.
(b) Pro Forma Financial Information.
The required pro forma financial information is attached hereto on
pages 33 through 39.
(c) Exhibits.
2.1* 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 the Second Amendment to
the Agreement and Plan of Merger, dated as of
December 7, 2001.
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Arthur Andersen, LLP
--------------------------
* Previously filed.
2
Item 7. (a)
DATACHANNEL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Report of Ernst & Young LLP, Independent Auditors............................... 4
Report of Independent Public Accountants........................................ 5
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1999 and 2000
and September 30, 2001..................................................... 6
Consolidated Statements of Operations for the years ended
December 31, 1999 and 2000 and for the nine months ended
September 30, 2000 and 2001................................................ 7
Consolidated Statements of Convertible Preferred Stock and Shareholders'
Deficit for the years ended December 31, 1999 and 2000..................... 8
Consolidated Statements of Cash Flows for the years ended
December 31, 1999 and 2000 and the nine months
ended September 30, 2000 and 2001.......................................... 9
Notes to Consolidated Financial Statements...................................... 11
3
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors
DataChannel, Inc.
We have audited the accompanying consolidated balance sheet of DataChannel, Inc.
as of December 31, 2000, and the related consolidated statements of operations,
convertible preferred stock and shareholders' deficit, 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
DataChannel, Inc. as of December 31, 2000, and the consolidated results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 1 to the consolidated financial statements, the Company's
recurring net losses and negative cash flows from operations raise substantial
doubt about its ability to continue as a going concern. Management's plans as to
these matters are described in Note 1. The 2000 consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Ernst & Young LLP
Seattle, Washington
June 1, 2001
4
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
DataChannel, Inc.
We have audited the accompanying consolidated balance sheet of DataChannel, Inc.
(a Washington corporation) and subsidiary as of December 31, 1999, and the
related consolidated statements of operations, convertible preferred stock and
shareholders' deficit 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 DataChannel, Inc. and
subsidiary as of December 31, 1999, 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.
/s/ Arthur Andersen LLP
Seattle, Washington
May 24, 2000
5
DataChannel, Inc.
Consolidated Balance Sheets
DECEMBER 31 SEPTEMBER 30
1999 2000 2001
--------------------------------------------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,250,518 $ 3,083,744 $ 2,756,029
Short-term investments -- 18,349,083 --
Accounts receivable, net of allowance of $198,000 and
$150,000 at December 31, 1999 and 2000, respectively
(150,000 at September 30, 2001) 2,515,160 1,963,153 2,400,221
Prepaid expenses and other current assets 210,594 1,354,774 869,286
--------------------------------------------------------
Total current assets 6,976,272 24,750,754 6,025,536
Property and equipment, net 1,204,852 3,383,520 2,740,374
Other assets 69,639 97,187 105,048
Goodwill and other intangible assets, net of accumulated
amortization of $1,281,738 and $3,244,648
at December 31, 1999 and 2000, respectively
($5,123,937 at September 30, 2001) 2,417,713 1,771,165 969,879
--------------------------------------------------------
Total assets $ 10,668,476 $ 30,002,626 $ 9,840,837
========================================================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 1,156,795 $ 2,508,859 $ 1,971,142
Accrued payroll and other accrued expenses 785,659 2,202,721 1,079,977
Deferred revenue 1,463,033 4,143,911 3,259,449
Convertible subordinated notes payable 5,023,014 -- --
Current portion of notes payable 12,215 1,416,812 712,988
--------------------------------------------------------
Total current liabilities 8,440,716 10,272,303 7,023,556
Notes payable, less current portion 1,815,457 40,977 909,540
Commitments
Convertible preferred stock, $0.01 par value; authorized
shares -- 6,935,073 and 14,977,838 at December 31, 1999
and 2000, respectively (14,977,838 at September 30, 2001);
issued and outstanding 6,853,744 and 14,898,511 at December 31,
1999 and 2000, respectively (14,898,511 at September 30, 2001),
preference in liquidation of $57,823,334 at December 31, 2000 and
September 30, 2001 12,295,044 57,129,620 57,129,620
Shareholders' deficit:
Common stock, $0.01 par value; authorized shares
-- 25,000,000 and 75,000,000 at December 31, 1999
and 2000, respectively (75,000,000 at September 30, 2001);
issued and outstanding shares
-- 10,179,612 and 14,743,032 at December 31, 1999 and 2000,
respectively (13,404,441 at September 30, 2001) 1,644,521 6,218,933 5,006,885
Notes receivable on restricted stock -- (1,870,448) (380,559)
Deferred stock compensation (463,102) (451,840) (154,227)
Accumulated other comprehensive income -- 11,192 --
Accumulated deficit (13,064,160) (41,348,111) (59,693,978)
--------------------------------------------------------
Total shareholders' deficit (11,882,741) (37,440,274) (55,221,879)
--------------------------------------------------------
Total liabilities and shareholders' deficit $ 10,668,476 $ 30,002,626 $ 9,840,837
========================================================
See accompanying notes.
6
DataChannel, Inc.
Consolidated Statements of Operations
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
1999 2000 2000 2001
----------------------------------------------------------------
(unaudited) (unaudited)
Revenue:
License $ 2,776,039 $ 5,975,239 $ 4,672,633 $ 3,675,548
Services 4,624,007 8,573,703 5,952,827 8,588,338
----------------------------------------------------------------
Total revenue 7,400,046 14,548,942 10,625,460 12,263,886
Cost of sales:
Cost of license fees 159,544 877,228 815,442 212,588
Cost of services 2,571,416 6,640,180 4,587,661 5,956,667
----------------------------------------------------------------
Total cost of sales 2,730,960 7,517,408 5,403,103 6,169,255
----------------------------------------------------------------
Gross profit 4,669,086 7,031,534 5,222,357 6,094,631
Operating expenses:
Sales and marketing (including stock-based compensation
of $62,717 and $147,299 in the years ended December 31,
1999 and 2000, respectively, and $68,602 and $59,872
in the nine months ended September 30, 2000 and 2001,
respectively) 6,157,473 18,790,495 14,570,253 11,245,586
Product development (including stock-based compensation
of $63,523 and $149,192 in the years ended December 31,
1999 and 2000, respectively and $112,064 and $59,350
in the nine months ended September 30, 2000 and 2001,
respectively) 3,957,597 9,531,927 6,231,279 8,616,591
General and administrative (including stock-based
compensation of $422,142 and $991,455 in the years ended
December 31, 1999 and 2000, respectively and $879,807
and $(715,220) in the nine months ended September 30,
2000 and 2001, respectively) 2,170,580 5,453,551 4,148,620 3,053,551
Amortization of goodwill and other intangible assets 1,281,738 1,962,911 1,437,299 1,879,289
----------------------------------------------------------------
Total operating expenses 13,567,388 35,738,884 26,387,451 24,795,017
----------------------------------------------------------------
Operating loss (8,898,302) (28,707,350) (21,165,094) (18,700,386)
Interest income 117,839 1,589,971 1,082,018 444,246
Interest expense (67,814) (1,166,572) (1,125,978) (89,727)
----------------------------------------------------------------
Net loss $ (8,848,277) $(28,283,951) $(21,209,054) $(18,345,867)
================================================================
Basic and diluted loss per share $ (.91) $ (2.67) $ (2.02) $ (1.48)
================================================================
Weighted average shares used in basic and diluted loss per
share computation 9,705,031 10,589,966 10,509,848 12,421,167
================================================================
See accompanying notes.
7
DataChannel, Inc.
Consolidated Statements of Convertible Preferred Stock and Shareholders' Deficit
SHAREHOLDERS DEFICIT
CONVERTIBLE ----------------------------------
PREFERRED STOCK COMMON STOCK
-------------------------------|----------------------------------
SHARES AMOUNT | SHARES AMOUNT
-------------------------------|----------------------------------
|
Balance at January 1, 1999 5,737,222 $ 4,961,612 | 9,297,714 $ 464,886
Exercise of common stock options for cash -- -- | 381,898 68,151
Common stock issued in business acquisitions -- -- | 500,000 100,000
Repurchase of Series B preferred stock for |
cash (1,586,583) (1,697,961) | -- --
Series C preferred stock issued for cash, |
net of offering costs 2,703,105 9,031,393 | -- --
Deferred compensation -- -- | -- 1,011,484
Amortization of deferred compensation -- -- | -- --
Net loss -- -- | -- --
-------------------------------|----------------------------------
Balance at December 31, 1999 6,853,744 12,295,044 | 10,179,612 1,644,521
Exercise of common stock options -- -- | 5,091,319 2,200,135
Common stock issued in business acquisition 2 -- | 223,848 246,233
Repurchases of common stock -- -- | (751,747) (150,349)
Series D preferred stock issued for cash, |
and conversion of notes payable |
net of offering costs of $165,425 8,044,765 44,834,576 | -- --
Fair value of warrants and beneficial |
conversion feature related to convertible |
notes -- -- | -- 1,001,709
Employee stock-based compensation -- -- | -- 1,139,494
Nonemployee stock-based compensation expense -- -- | -- 137,190
Amortization of deferred compensation expense -- -- | -- --
Comprehensive loss: |
Change in net unrealized gain on investments -- -- | -- --
Net loss -- -- | -- --
|
Comprehensive loss |
-------------------------------|----------------------------------
Balance at December 31, 2000 14,898,511 $ 57,129,620 | 14,743,032 $ 6,218,933
===============================|==================================
------------------------------------------------------------------------------
NOTES ACCUMULATED
RECEIVABLE OTHER
FROM DEFERRED COMPREHENSIVE ACCUMULATED
SHAREHOLDERS COMPENSATION INCOME DEFICIT TOTAL
------------------------------------------------------------------------------
Balance at January 1, 1999 $ -- $ -- $ -- $ (1,312,753) $ (847,867)
Exercise of common stock options for cash -- -- -- -- 68,151
Common stock issued in business acquisitions -- -- -- -- 100,000
Repurchase of Series B preferred stock for
cash -- -- -- (2,903,130) (2,903,130)
Series C preferred stock issued for cash,
net of offering costs -- -- -- -- --
Deferred compensation -- (1,011,484) -- -- --
Amortization of deferred compensation -- 548,382 -- -- 548,382
Net loss -- -- -- (8,848,277) (8,848,277)
------------------------------------------------------------------------------
Balance at December 31, 1999 -- (463,102) -- (13,064,160) (11,882,741)
Exercise of common stock options (1,870,448) -- -- -- 329,687
Common stock issued in business acquisition -- -- -- -- 246,233
Repurchases of common stock -- -- -- -- (150,349)
Series D preferred stock issued for cash
and conversion of notes payable,
net of offering costs of $165,425 -- -- -- -- --
Fair value of warrants and beneficial
conversion feature related to convertible
notes -- -- -- -- 1,001,709
Employee stock-based compensation -- (338,250) -- -- 801,244
Nonemployee stock-based compensation expense
-- -- -- -- 137,190
Amortization of deferred compensation expense
-- 349,512 -- -- 349,512
Comprehensive loss:
Change in net unrealized gain on investments -- -- 11,192 -- 11,192
Net loss -- -- -- (28,283,951) (28,283,951)
------------
Comprehensive loss (28,272,759)
------------------------------------------------------------------------------
Balance at December 31, 2000 $ (1,870,448) $ (451,840) $ 11,192 $(41,348,111) $(37,440,274)
==============================================================================
See accompanying notes.
8
DataChannel, Inc.
Consolidated Statements of Cash Flows
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30,
1999 2000 2000 2001
---------------------------------------------------------------
(unaudited) (unaudited)
OPERATING ACTIVITIES
Net loss $ (8,848,277) $(28,283,951) $(21,209,054) $(18,345,867)
Adjustments to reconcile net loss to net cash and cash
equivalents used in operating activities:
Depreciation and amortization 1,720,813 3,038,951 2,159,538 2,975,651
Stock-based compensation 548,382 1,287,946 1,060,533 (595,998)
Noncash interest expense -- 1,075,540 1,075,540 --
Provision for doubtful accounts 91,022 (48,000) -- --
Changes in assets and liabilities, net of assets acquired
in business combination:
Accounts receivable (303,506) 600,007 (1,979,083) (437,068)
Prepaid expenses and other current assets (15,287) (1,144,180) (288,231) 485,488
Other assets 38,782 (27,548) (182,903) (7,861)
Accounts payable 763,391 1,352,064 1,303,623 (537,717)
Accrued payroll and other accrued expenses 455,069 817,062 859,922 (1,122,744)
Deferred revenue 203,465 2,680,878 2,345,557 (884,462)
---------------------------------------------------------------
Net cash and cash equivalents used in operating activities (5,346,146) (18,651,231) (14,854,558) (18,470,578)
INVESTING ACTIVITIES
Purchases of property and equipment (1,071,815) (3,198,570) (2,632,549) (453,216)
Business combinations (2,123,591) (470,129) -- --
Purchases of short-term investments -- (38,040,063) (36,246,470) (955,081)
Proceeds from sale of short-term investments -- 19,702,171 16,418,476 19,292,972
---------------------------------------------------------------
Net cash and cash equivalents used in investing activities (3,195,406) (22,006,591) (22,460,543) 17,884,675
FINANCING ACTIVITIES
Proceeds from sale of preferred stock, net of
offering costs 9,031,393 39,737,731 39,737,731 --
Stock options exercised 68,151 329,687 291,423 72,802
Repurchase of common and preferred stock (4,601,091) (150,349) (150,349) --
Payments on notes payable (56,171) (426,021) (409,168) (1,763,456)
Proceeds from issuance of debt -- -- -- 1,948,842
Proceeds from issuance of convertible subordinated
notes payable 5,000,000 -- -- --
---------------------------------------------------------------
Net cash equivalents provided by financing activities 9,442,282 39,491,048 39,469,637 258,188
---------------------------------------------------------------
Increase/(Decrease) in cash and cash equivalents 900,730 (1,166,774) 2,154,536 (327,715)
Cash and cash equivalents, beginning of year 3,349,788 4,250,518 4,250,518 3,083,744
---------------------------------------------------------------
Cash and cash equivalents, end of year $ 4,250,518 $ 3,083,744 $ 6,405,054 $ 2,756,029
===============================================================
9
DataChannel, Inc.
Consolidated Statements of Cash Flows (continued)
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30,
1999 2000 2001 2001
-------------------------------------------------------
(unaudited) (unaudited)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 34,353 $ 91,032 $ 50,438 $89,727
=======================================================
Income tax paid $ 1,600 $ 1,600 $ -- $ --
=======================================================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Business acquired through issuance of common stock $ 100,000 $ 246,233 $ -- $ --
Convertible subordinated notes payable converted into
preferred stock $ -- $5,096,845 $5,096,845 $ --
Deferred compensation resulting from grant of stock options $1,011,484 $ 338,250 $ 338,250 $ --
Accrual of earn-out in connection with the Isogen
acquisition $ -- $ 600,000 $ 600,000 $ --
Issuance of common stock in exchange for notes receivable $ -- $1,870,448 $1,870,448 $ --
Cancellation of notes receivable for common stock $ -- $ -- $ -- $1,489,889
Common stock issued for earnout in connection
with Habit.com acquisition $ -- $ -- $ -- $1,078,003
See accompanying notes
10
DataChannel, Inc.
Notes to Consolidated Financial Statements
(Information as of September 30, 2001 and for the nine months ended
September 30, 2000 and 2001 is unaudited)
1. ORGANIZATION AND NATURE OF OPERATIONS
DataChannel, Inc. (DataChannel or the Company) was founded in October 1996 and
is a provider of enterprise portal software solutions. DataChannel's products
and services enable clients to integrate their enterprise and share their
information anywhere, anytime, and with anyone. DataChannel also provides
complete solutions to its customers through its professional service group,
which includes consulting, training, and support.
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. In the course of its product
development and marketing activities, the Company has incurred substantial
operating losses and negative cash flows from operations and expects to incur
additional operating losses and negative cash flows from operations in 2001.
Therefore, the Company's business will require additional equity or debt
financing in order to meet its obligations through June 30, 2002.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of liabilities
that might be necessary should the Company be unable to continue as a going
concern. As discussed in Note 17, on October 24, 2001, the Company signed an
agreement with Netegrity, Inc. ("Netegrity"), whereby Netegrity will acquire all
outstanding stock of the Company. The transaction was closed on December 14,
2001.
2. SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The financial information at September 30, 2001 and for the nine months ended
September 30, 2000 and 2001 is unaudited, but includes all adjustments
(consisting only of normal recurring adjustments) that the Company considers
necessary for a fair presentation of the financial position at such date and
the operating results and cash flow for those periods. Operating results for
the September 30, 2001 period are not necessarily indicative of the results
that may be expected for the entire year.
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, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONSOLIDATION
The consolidated financial statements include the accounts of DataChannel and
its wholly owned subsidiaries. Significant intercompany transactions and
balances have been eliminated.
11
DataChannel, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2001 and for the nine months ended
September 30, 2000 and 2001 is unaudited)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid investments, including
commercial paper and money market funds with maturities of 90 days or less from
the date of purchase. The carrying amounts reported on the consolidated balance
sheets for cash and cash equivalents approximate their fair market value.
SHORT-TERM INVESTMENTS
Short-term investments consist principally of commercial paper and demand time
deposits with remaining maturities of one year or less. The Company determines
the appropriate classification of its short-term investments at the time of
purchase and reevaluates such designations as of each balance sheet date. All
short-term investments in the Company's portfolio are classified as
"available-for-sale" and are stated at fair market value. Unrealized gains and
losses are reported in a separate component of shareholders' deficit. The
amortized cost of debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity, and declines in value judged to be
other-than-temporary are included in interest income. The cost of securities
sold is based on the specific-identification method. Interest receivable on
securities is included in interest income.
ACCOUNTS RECEIVABLE
Included in accounts receivable are billed amounts also included in deferred
revenue of $310,000 at December 31, 1999, and $671,003 at December 31, 2000.
PROPERTY AND EQUIPMENT
Property and equipment consists primarily of computer-related equipment and
includes leasehold improvements that are stated at cost. Depreciation is
calculated on the straight-line basis over the estimated useful lives of related
assets, or lease terms, if shorter. Substantially all property and equipment is
depreciated over periods of three to seven years.
GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price over the fair value of net
assets acquired in business acquisitions accounted for under the purchase
accounting method. Other intangibles include identifiable intangible assets
purchased by the Company, primarily in connection with business acquisitions.
Goodwill and other intangibles are presented net of related accumulated
12
DataChannel, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2001 and for the nine months ended
September 30, 2000 and 2001 is unaudited)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amortization and are being amortized on a straight-line basis over lives of two
years. Amortization of goodwill and intangible assets was $1,281,738 in 1999,
$1,962,911 in 2000, $1,437,299 in the nine months ended September 30, 2000, and
$1,879,289 in the nine months ended September 30, 2001.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates impairment losses on goodwill and other long-lived assets
when events and circumstances indicate that such assets might be impaired and
the estimated fair value of the asset is less than its recorded amount.
Conditions that would necessitate an impairment assessment include material
adverse changes in operations, significant adverse differences in actual results
in comparison with initial valuation forecasts prepared at the time of
acquisition, a decision to abandon acquired products, services or technologies,
or other significant adverse changes that would indicate the carrying amount of
the recorded asset might not be recoverable. To date no such impairment charges
have been made.
REVENUE RECOGNITION
The Company derives revenue from the sale of software product licenses and from
professional consulting, training, maintenance, and support services.
The Company follows AICPA Statement of Position (SOP) 97-2, Software Revenue
Recognition, and amendments and recognizes revenue from licensing of software
products upon delivery unless the Company has significant related obligations
remaining as part of the sales contract. When significant obligations remain
after the software product has been shipped, revenue is deferred until such
obligations have been completed or are no longer significant.
If the services are considered essential to the functionality of the software
products, both the software product revenue and service revenue are recognized
using the percentage-of-completion method in accordance with the provisions of
SOP 81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts. Revenues are recognized based on the labor costs
incurred to date compared to total estimated labor costs for the contract.
Contract costs include all direct material, direct labor, and indirect costs
related to contract performance. Provisions for estimated losses on uncompleted
contracts are recorded in the period in which such losses become probable based
on the current contract estimates.
Services revenue consists of fees from professional services and from
maintenance and telephone support. Professional services include integration of
software, application development, training, and software installation. The
Company bills professional services fees either on a time-and-
13
DataChannel, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2001 and for the nine months ended
September 30, 2000 and 2001 is unaudited)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
materials or fixed-price basis. The Company recognizes professional services
fees billed on a time-and-materials basis as the services are performed and
recognizes professional services fees on fixed-price service arrangements on the
completion of specific contractual milestone events or based on an estimated
percentage of completion as work progresses.
Customers typically purchase annual maintenance agreements, which are priced
based on a percentage of the current product list price and vary according to
the level of support. The Company recognizes revenue from maintenance and
support agreements ratably over the term of the agreement, typically one year.
The Company records cash advances from clients and billed amounts due from
customers in excess of revenue recognized as deferred revenue. The timing and
amount of cash receipts from customers can vary significantly depending on
specific contract terms and can, therefore, have a significant impact on the
amount of deferred revenue in any given period.
SOFTWARE DEVELOPMENT
In accordance with Statement of Financial Accounting Standards (SFAS) No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed, the Company capitalizes eligible computer software development costs
upon the establishment of technological feasibility, which it has defined as
completion of a working model. For the years ended December 31, 1999 and 2000
and the nine months ended September 30, 2001, the amount of costs eligible
for capitalization, after consideration of factors such as realizable value, was
not material and, accordingly, all software development costs have been charged
to product development expense in the accompanying consolidated statements of
operations.
PRODUCT DEVELOPMENT
Product development costs are expensed as incurred and consist primarily of
salaries, travel, materials, supplies, and contract services.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expense was $180,550 and
$3,659,584 for the years ended December 31, 1999 and 2000, respectively.
14
DataChannel, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2001 and for the nine months ended
September 30, 2000 and 2001 is unaudited)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounts for income taxes using the liability method, which
recognizes the effect of temporary differences between the reporting of assets
and liabilities for financial statement and income tax return purposes. A
valuation allowance is provided for deferred tax assets when realization is
uncertain.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25
(APB No. 25), Accounting for Stock Issued to Employees, and related
interpretations in accounting for employee stock options rather than the
alternative fair value accounting allowed by Statement of Financial Accounting
Standards No. 123 (SFAS No. 123), Accounting for Stock-Based Compensation. APB
No. 25 provides that the compensation expense relative to the Company's employee
stock options is measured based on the intrinsic value of the stock option. The
Company recognizes this compensation expense using the accelerated method. SFAS
No. 123 requires companies that continue to follow APB No. 25 to provide a pro
forma disclosure of the impact of applying the fair value method of SFAS No. 123
(see Note 9). The Company accounts for stock issued to nonemployees in
accordance with the provisions of SFAS No. 123 and the Emerging Issues Task
Force consensus in Issue No. 96-18, Accounting for Equity Instruments that Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services.
CONCENTRATION OF CREDIT RISK
The Company invests its cash, cash equivalents, and short-term investments with
financial institutions with high credit standings and, by policy, limits the
amounts invested with any one institution, type of security, and issuer.
In the year ended December 31, 2000, and nine months ended September 30, 2000,
revenues to one customer represented 15% of total revenues in each period and
were generated in both segments of the Company. License revenues to the customer
were 29% of total license revenues for both periods. Revenues to another
customer represented 10% and 12% of total revenues for the year ended December
31, 2000 and nine months ended September 30, 2000, respectively, all of which
were in the services segment, representing 17% and 21%, respectively, if its
revenues.
In 1999, revenues to two customers represented 20% and 13% of total revenues,
respectively, all of which were in the services segment, of which they
represented 32% and 21%, respectively. License revenues to another customer
represented 15% of total sales and 34% of license revenues.
In the nine months ended September 30, 2001, revenues to one customer
represented 13% of total revenues and were generated in both segments of the
Company. License revenues to the customer were 33% of total license revenues.
Revenues to two other customers each were 14% of total services revenues.
15
DataChannel, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2001 and for the nine months ended
September 30, 2000 and 2001 is unaudited)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company generally does not require collateral from its customers. The
Company maintains allowances for potential credit losses.
FINANCIAL INSTRUMENTS
Financial instruments consist of cash and cash equivalents, short-term
investments, accounts receivable and payable, accrued liabilities, convertible
subordinated notes payable and notes payable. The carrying values of cash and
cash equivalents, short-term investments, accounts receivable and payable,
accrued liabilities and notes payable approximate their fair values based on the
liquidity of these financial instruments or based on their short-term nature.
The fair values of convertible subordinated notes payable are not practicable to
estimate due to unique characteristics of these instruments, as described in
Note 6.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the current
year presentation.
LOSS PER SHARE
Basic loss per share is computed by dividing net loss by the weighted average
number of shares of common stock outstanding during the year, net of shares
subject to repurchase. Diluted loss per share is computed by dividing net loss
by the weighted average number of common and common equivalent shares
outstanding, unless the calculation is antidilutive.
For all periods presented, the effect of dilutive securities is antidilutive. As
such, the denominator used in determining loss per share is the same for both
basic and dilutive loss per share.
If the Company had reported net income for the year ended December 31, 1999 and
2000 and the nine months ended September 30, 2001, diluted earnings per share
would have been reduced due to the effect of common equivalent shares related to
outstanding options to purchase common stock, outstanding convertible preferred
stock, and outstanding warrants to purchase common stock.
16
DataChannel, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2001 and for the nine months ended
September 30, 2000 and 2001 is unaudited)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOSS PER SHARE (CONTINUED)
The following represents the reconciliation between the weighted-average number
of shares of common stock outstanding and the number of shares of common stock
used for basic and diluted loss per share computations:
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
-----------------------------------------------------
1999 2000 2000 2001
-----------------------------------------------------
(unaudited) (unaudited)
Weighted-average number of shares
outstanding 9,705,031 14,186,218 14,053,980 14,196,455
Weighted average number of common shares
issued subject to repurchase agreements - (3,596,252) (3,544,132) (1,775,288)
-----------------------------------------------------
Shares used in computation of basic and
diluted net loss per share 9,705,031 10,589,966 10,509,848 12,421,167
=====================================================
3. SHORT-TERM INVESTMENTS
Short-term investments consist of available-for-sale debt securities that are
carried at fair value. Unrealized gains and losses on short-term investments
represent the difference between the fair market value and the amortized cost.
The following is a summary by major security type of the Company's short-term
investments:
GROSS GROSS
December 31, AMORTIZED UNREALIZED UNREALIZED ESTIMATED
2000 COST GAINS LOSSES FAIR VALUE
------------------------------------------------------------------------------------------
Commercial paper $ 6,913,195 $ -- $ (5,835) $ 6,907,360
U.S. government securities 1,006,355 1,828 -- 1,008,183
Corporate securities 10,418,341 15,199 -- 10,433,540
----------------------------------------------------------
$ 18,337,891 $ 17,027 $ (5,835) $ 18,349,083
==========================================================
At December 31, 2000, the securities available-for-sale had contractual
maturities through August 2001. Gross realized gains and losses on sales of
investments are immaterial during the year ended December 31, 2000.
17
DataChannel, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2001 and for the nine months ended
September 30, 2000 and 2001 is unaudited)
4. BUSINESS COMBINATIONS
ACQUISITION OF ISOGEN
On April 12, 1999, DataChannel entered into a Stock Purchase Agreement with
Isogen, a professional services organization located in Dallas, Texas, under
which the Company agreed to purchase all of the outstanding capital shares of
Isogen for a total purchase price of $4,226,528, including 500,000 shares of the
Company's common stock with a fair value of $100,000 (common stock at $0.20 per
share), $4.0 million in cash, and acquisition costs of $126,528. Of the $4.0
million in cash, $2 million was paid in 1999 and $1.4 million was paid
subsequent to December 31, 2000, and is recorded as a short-term note payable at
December 31, 2000. Included in the transaction also was $600,000 earn-out bonus,
which was contingent on Isogen achieving certain financial goals by December 31,
2000. On January 31, 2001, the Company paid out the earn-out bonus of $600,000
to the principals of Isogen based on the achievement of the financial goals set
forth in the Isogen Stock Purchase Agreement. The earn-out bonus was allocated
to goodwill and will be amortized over the remaining life of the goodwill.
The acquisition was accounted for using the purchase method of accounting and,
accordingly, the purchase price of the acquisition was allocated to assets,
goodwill, and liabilities assumed on the basis of their fair values. The
Company's consolidated statements of operations and cash flows for the year
ended December 31, 1999 include the operations of Isogen since April 12, 1999.
ACQUISITION OF HABIT.COM
On November 30, 2000, the Company acquired Habit.com, a Seattle-based software
company, in exchange for 223,848 shares of its common stock. The aggregate
purchase price of the acquired company was $316,362. In addition, the Company
issued one share of Series X Junior Preferred and one share of Series Y Junior
Preferred. If certain technical milestones are met within specified dates, the
Series X and Y Junior Preferred shares will each convert into 490,001 shares of
common stock and 980,002 in the aggregate. The Company's consolidated statements
of operations and cash flows for the year ended December 31, 2000 include the
operations of Habit.com since November 30, 2000. The transaction was accounted
for using the purchase method of accounting. Accordingly, the purchase price of
the acquisition was allocated to goodwill.
In connection with the Habit.com acquisition, the Company entered into a
noncompete agreement with two principal founders of Habit.com. Consideration for
the noncompete agreement of $400,000 was paid in cash and will be amortized over
its life of two years.
18
DataChannel, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2001 and for the nine months ended
September 30, 2000 and 2001 is unaudited)
4. BUSINESS COMBINATIONS (CONTINUED)
On February 28, 2001 and March 23, 2001, the Company converted and issued one
share of Series X Junior Preferred stock into 490,001 shares of common stock and
one share of Series Y Junior Preferred stock into 490,001 shares of common stock
to the shareholders of Habit.com for achieving certain technical milestones. The
value of these shares, which approximates $1,078,000, was allocated to goodwill
and will be amortized over its estimated useful life of 2 years.
A summary of the purchase price for the acquisitions as of December 31, 2000 is
as follows:
ISOGEN HABIT.COM
----------------------------
Common stock $ 100,000 $ 246,233
Cash paid to shareholders 2,000,000 400,000
Notes and bonus payable to shareholders 2,000,000 --
Accrued acquisition costs 126,528 70,129
----------------------------
$4,226,528 $ 716,362
============================
The purchase price was allocated as follows as of December 31, 2000:
ISOGEN HABIT.COM
----------------------------
Estimated fair values:
Assets acquired $ 868,297 $ 400,000
Liabilities assumed (941,220) --
Goodwill 4,299,451 316,362
-----------------------------
Purchase price $ 4,226,528 $ 716,362
=============================
The following unaudited pro forma summarized results of operations assume that
the Company's acquisitions of Isogen occurred as of January 1, 1999 and
Habit.com occurred as of January 1, 1999 and 2000:
YEAR ENDED DECEMBER 31
1999 2000
-------------------------------
Pro forma total revenue $ 7,945,652 $ 14,548,942
Pro forma net loss $ (9,661,906) $(29,793,007)
Pro forma basic and diluted loss per share $ (0.96) $ (2.76)
19
DataChannel, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2001 and for the nine months ended
September 30, 2000 and 2001 is unaudited)
4. BUSINESS COMBINATIONS (CONTINUED)
The unaudited pro forma results do not purport to be indicative of the results
of operations which actually would have resulted had the acquisitions occurred
on January 1, 1999 and 2000, nor are they necessarily indicative of future
operating results.
5. PROPERTY AND EQUIPMENT
Property and equipment was as follows:
DECEMBER 31 SEPTEMBER 30
1999 2000 2001
----------------------------------------------------
(Unaudited)
Computers and office equipment $ 1,456,361 $ 3,604,313 $ 3,939,126
Software 216,125 614,386 596,108
Furniture and fixtures 149,160 424,261 470,078
Leasehold improvements 20,587 453,981 544,845
----------------------------------------------------
1,842,233 5,096,941 5,550,157
Less accumulated depreciation (637,381) (1,713,421) (2,809,783)
----------------------------------------------------
Property and equipment, net $ 1,204,852 $ 3,383,520 $ 2,740,374
====================================================
Depreciation expense was $461,294 and $1,076,040 for the years ended December
31, 1999 and 2000, respectively, and $722,241 and $1,096,362 for the nine months
ended September 30, 2000 and 2001, respectively.
20
DataChannel, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2001 and for the nine months ended
September 30, 2000 and 2001 is unaudited)
6. NOTES PAYABLE
Notes payable consist of the following:
DECEMBER 31 SEPTEMBER 30,
1999 2000 2001
-------------------------------------------------
(Unaudited)
Non-interest bearing note payable to the founders of Isogen,
repaid in 2001 $1,400,000 $1,400,000 $ --
Note payable to a bank -- -- $ 1,613,749
Notes payable to Bank of the West. The notes were repaid in
2000 411,740 --
Other 15,932 57,789 8,779
-------------------------------------------------
Total debt 1,827,672 1,457,789 $ 1,622,528
Less current portion (12,215) (1,416,812) (712,988)
-------------------------------------------------
Long-term portion $1,815,457 $ 40,977 $ 909,540
=================================================
In January 2001, the Company entered into a loan agreement with a bank to
borrow $3,500,000 under a revolving line of credit (Line) to support working
capital requirements and $4,000,000 under a term loan (Term) to purchase
capital equipment. The Line carries an interest rate equivalent to the bank's
prime rate and is payable at maturity, which is January 2002. The Term carries
an interest rate of the bank's prime rate plus 0.75% and is payable in 30 equal
monthly installments through January 2004. Both loans are collateralized by
substantially all of the Company's assets. In connection with the loan, the
Company issued warrants to purchase 18,771 shares of common stock at $5.59 per
share. The value of the warrants of $20,648 is being amortized to interest
expense over the term of the agreement. The Company must comply with certain
covenants under this arrangement, including liquidity ratios.
Maturities of notes payable as of December 31, 2000 are as follows:
2001 $ 1,416,812
2002 31,218
2003 9,759
-----------
$ 1,457,789
===========
CONVERTIBLE SUBORDINATED NOTES PAYABLE
In December 1999, the Company issued convertible promissory notes to two
investors in the amount of $2.5 million each ($5 million in the aggregate). The
notes were unsecured and accrued interest at the rate of 7% per annum. Principal
and interest were due on June 8, 2000. The unpaid principal balance and accrued
interest of $5,096,845 was converted into 911,176 shares of the Company's Series
D in March 2000 at a conversion price of $5.59 per share (see Note 7).
On the date of the preferred stock issuance, the effective conversion price of
the convertible debt (after allocating the portion of proceeds to the preferred
stock warrants, based on relative fair values) was at a discount to the price of
the preferred stock into which the convertible debt was convertible. The
discount of $500,563 associated with the beneficial conversion was recorded as
interest expense.
21
DataChannel, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2001 and for the nine months ended
September 30, 2000 and 2001 is unaudited)
6. NOTES PAYABLE (CONTINUED)
In connection with the convertible notes issuance in March 2000, the Company
issued a total of 455,588 warrants to purchase shares of common stock at an
exercise price of $0.001 per share. The estimated fair value of the warrants of
$501,146 was computed using the Black-Scholes valuation method and the following
assumptions: 10-year expected life; no dividend yield; risk-free interest rate
of 6.92%; and volatility of 100%. The fair value of the warrants was recorded as
interest expense.
At December 31, 2000, all warrants remain outstanding. The warrants expire
ten-years from the date of issue.
7. CONVERTIBLE PREFERRED STOCK
The Company has authorized 14,977,838 shares of convertible preferred stock. The
Board of Directors has the authority to establish and define, in one or more
series, the price, rights, preferences, and dividends of authorized but unissued
shares of preferred stock.
Preferred stock consisted of the following at
December 31 September 30
1999 2000 2001
-----------------------------------------------
(Unaudited)
Series A:
1,784,143 shares authorized, 1,784,143 issued and
outstanding in 1999, 2000 and 2001 $ 783,874 $ 783,874 $ 783,874
Series B:
2,366,496 shares authorized, 2,366,496 shares issued and
outstanding in 1999, 2000 and 2001 2,479,777 2,479,777 2,479,777
Series C:
2,782,434 shares authorized, 2,703,105 issued and
outstanding in 1999, 2000 and 2001 9,031,393 9,031,393 9,031,393
Series D:
8,044,765 shares authorized, 8,044,765
issued and outstanding in 2000 and 2001 -- 44,834,576 44,834,576
Junior X:
1 share authorized, 1 issued and outstanding in 2000
and 0 in 2001 -- -- --
Junior Y:
1 share authorized, 1 issued and outstanding in
2000 and 0 in 2001 -- -- --
-----------------------------------------------
$12,295,044 $57,129,620 $57,129,620
===============================================
22
DataChannel, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2001 and for the nine months ended
September 30, 2000 and 2001 is unaudited)
7. CONVERTIBLE PREFERRED STOCK (CONTINUED)
During 2000, the Company completed a private offering of 8,044,765 shares of
Series D at $5.59 per share or $39,903,156 in cash and conversion of convertible
notes and accrued interest of $5,096,845. Related offering costs were $165,425.
The rights and preferences of the convertible preferred stock are as follows:
DIVIDENDS
Dividends are noncumulative and declared only by resolution of the Company's
Board of Directors.
LIQUIDATION PREFERENCE
According to the Company's Articles of Incorporation, a liquidation event
includes any dissolution or winding up of the Company, a sale of substantially
all of the assets of the Company or a merger, consolidation or statutory share
exchange in which the Company's shareholders do not continue to own at least 50%
of the voting power of the surviving entity. Accordingly, the convertible
preferred stock has been classified outside of permanent equity. Upon a
liquidation event, the holders of Series D convertible preferred stock will be
entitled to receive $5.59 per share, holders of Series C convertible preferred
stock would be entitled to receive $3.34 per share, and holders of Series B
convertible preferred stock would be entitled to receive $1.07 per share, plus
any declared but unpaid dividends, prior and in preference to any distribution
to the holders of Series A convertible preferred stock or common stock. After
the distribution to Series B and C shareholders, the Series A shareholders would
be entitled to receive $0.70 per share, plus any declared but unpaid dividends,
prior and in preference to any distribution to the holders of common stock.
Assets will then be ratably distributed to holders of Series A, B, C, D, and
common stock on an as-if-converted common basis.
Each share of series X Junior preferred stock and Series Y Junior preferred
stock is subordinated to all other shares of preferred stock of the Company. For
liquidation purposes, each share of Series X and Series Y will be treated as if
those shares had been converted into the number of shares of common stock to
which they would then have equivalent voting rights.
23
DataChannel, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2001 and for the nine months ended
September 30, 2000 and 2001 is unaudited)
7. CONVERTIBLE PREFERRED (CONTINUED)
CONVERSION
Each share of convertible preferred stock is convertible at the option of the
holder into common stock at the conversion price in effect at such date.
Upon the earlier of (a) the closing of an initial public offering that meets
certain conditions or (b) the conversion of a majority of Series B, C, and D
stock into common stock, all outstanding convertible preferred stock will
automatically convert into shares of common stock at the conversion price in
effect on such date.
VOTING RIGHTS
Each holder of convertible preferred stock shall be entitled to the number of
votes equal to the number of shares of common stock on an as-if-converted common
basis.
8. SHAREHOLDERS' DEFICIT
COMMON STOCK WARRANTS
On December 2, 1999, the Company issued warrants to purchase 15,000 shares of
common stock, in exchange for services, at an exercise price of $0.60 per share,
which will vest over 5 years and will expire on December 2, 2009. The fair value
of these warrants, determined using a Black Scholes valuation option pricing
model, was not material.
During July 2000, warrants for 50,000 shares of common stock at an exercise
price of $5.60 per share were issued in connection with a commercial
relationship agreement. These warrants were fully vested when issued, expire on
May 1, 2006, and were valued at the fair value of $58,566 using a Black-Scholes
valuation option pricing model. In this connection, the Company recorded this
amount as stock-based compensation expense during 2000. All of the warrants
remain outstanding at December 31, 2000.
NONEMPLOYEE STOCK OPTIONS
During 2000, the Company also issued stock options to purchase 80,000 shares of
common stock ranging from $0.20 to $1.10 per share to consultants, which vest
over the service periods ranging from zero to five years. The Company recognized
stock-based compensation expense of $78,624 related to these equity awards. No
shares were exercised at December 31, 2000.
24
DataChannel, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2001 and for the nine months ended
September 30, 2000 and 2001 is unaudited)
8. SHAREHOLDERS' DEFICIT (CONTINUED)
NOTE RECEIVABLE FROM OFFICERS
During January 2000, the Company entered into an agreement with six officers to
exercise certain options (vested and unvested) in exchange for cash and
promissory notes. The Company has the right to repurchase certain of these
shares, at original issue price for vested shares, in the event the holder's
relationship with the Company terminates. The repurchase rights do not have an
expiration date. At December 31, 2000, 4,210,944 common shares were subject to
repurchase.
In connection with the exercise of these options, the officers elected to have
the Company carry notes for up to 91% of the purchase price, totaling
$1,870,448. The notes bear interest at 6.21% per annum. The Company recorded a
$801,244 non-cash compensation charge related to this transaction, while
simultaneously increasing the balance of common stock. During the nine month
period ended September 30, 2001, as the fair value of the Company's common
stock decreased to $0.19 per share, accordingly, all of the above compensation
expense was reversed and credited to the statement of operations.
In February and March 2001, the Company repurchased and retired 2,433,148 shares
of the restricted common stock at original issue price from three officers who
terminated their employment. As a result, certain notes were retired totaling
$1,489,890.
STOCK REPURCHASE AGREEMENT
In 1999, the Company agreed to grant to an officer nonqualified options to
purchase 1,503,494 shares of common stock. In connection, the Company also
entered into a stock repurchase agreement with the founder to repurchase from
the founder the number of shares equal to one-half of the shares of common stock
issued and exercised by the officer. The amount of shares to be repurchased from
the founder is not to exceed 751,747 shares, and the repurchase price will be
equal to the exercise price of the stock options issued to the officer.
In March 2000, the Company purchased 751,747 shares of the Company's common
stock from the founder at $0.20 per share as a result of the officer exercising
1,202,795 shares. The agreement permits the founder to repurchase the shares in
the event the Company has the right to repurchase any unvested shares from the
officer.
25
DataChannel, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2001 and for the nine months ended
September 30, 2000 and 2001 is unaudited)
8. SHAREHOLDERS' DEFICIT (CONTINUED)
SHARES RESERVED
A summary of common stock reserved for issuance as of December 31, 2000 is as
follows:
SHARES
-----------
Conversion of Series A preferred stock 1,784,143
Conversion of Series B preferred stock 2,366,496
Conversion of Series C preferred stock 2,782,434
Conversion of Series D preferred stock 8,044,765
Series X junior preferred stock 490,001
Series Y junior preferred stock 490,001
Warrants 570,588
Stock options:
Outstanding 7,384,504
Available for future grants 6,134,960
-----------
30,047,892
==========
9. STOCK OPTION PLAN
In June 1997, the Company adopted the 1997 Stock Option Plan (the Plan). Under
the terms of the Plan, nonqualified stock options may be granted to employees,
directors, officers, and consultants at a price determined by the Board of
Directors. Options have a term of up to ten years and vest over a schedule
determined by the Board of Directors, generally five years. The Board of
Directors amended the vesting term retroactively from five years to four years
in February 2000. Incentive stock options granted under this program may only be
granted to employees of the Company, have a term of up to ten years, and shall
be granted at a price equal to the fair market value of the Company's stock on
the date of grant.
Also, in May 2000, the Company adopted the 2000 Non-employee Director Stock
Option Plan, which grants new members of the Board of Directors a non-statutory
stock option to purchase 50,000 shares of common stock and all Board members an
additional 10,000 shares at each annual Board of Directors meeting for their
year of service. The Company reserved 200,000 shares of common stock for this
plan. The exercise price is at fairmarket value on the date of grant. The 50,000
stock options vest 25% after the first year, and 1/48th of the total option for
each month beyond the first year, and the additional 10,000 vest immediately
upon grant. The occurrence of any change in control will cause all outstanding
stock options to become immediately and fully exercisable and vested.
26
DataChannel, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2001 and for the nine months ended
September 30, 2000 and 2001 is unaudited)
9. STOCK OPTION PLAN (CONTINUED)
The Company applies APB No. 25 and related interpretations in accounting for its
stock option plan. Accordingly, $1,150,756 and $548,382 in compensation costs
were recognized in the accompanying financial statements for stock options
granted to employees in 2000 and 1999, respectively, because the fair value of
the underlying common stock on the date of grant was greater than the exercise
price of the stock options granted. During the nine months ended September 30,
2001, as the fair value of the Company's common stock reduced, $801,244 of the
above compensation expense was reversed and credited to the statement of
operations. Total net credit for compensation expense to employees was $595,988
during the nine months ended September 30, 2001.
SFAS No. 123 requires pro forma disclosure of net income as if the fair value
method were used. The fair value of each option grant is estimated on the date
of grant using the minimum value option-pricing model with the following
weighted-average assumptions: risk-free interest rate of 5.93% and 5.5% in 2000
and 1999, respectively; expected life of 4 years and expected dividend yields of
0%. Had the stock compensation expense for the Company's stock option plan been
determined based on the fair value at the grant dates for options granted during
the year, consistent with the fair value method of SFAS No. 123, the Company's
net loss would have been increased to the following pro forma amount:
1999 2000
---- ----
Net loss as reported $(8,848,277) $ (28,283,951)
Pro forma net loss under SFAS No. 123 $(8,940,991) $ (28,814,370)
Basic and diluted loss per share as reported $ (0.91) $ (2.79)
Pro forma basic and diluted loss per share $ (0.92) $ (2.84)
27
DataChannel, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2001 and for the nine months ended
September 30, 2000 and 2001 is unaudited)
9. STOCK OPTION PLAN (CONTINUED)
Option activity under the plan was as follows:
WEIGHTED-
AVERAGE
OPTIONS EXERCISE
OUTSTANDING PRICE
----------- --------
Balances at January 1, 1999 3,518,994 $0.17
Granted at fair market value 2,296,350 $0.23
Granted below fair market value 3,517,649 $0.60
Exercised (381,898) $0.18
Terminated/canceled (893,001) $0.19
-----------
Balances, December 31, 1999 8,058,094 $0.39
Granted at fair market value 4,347,412 $1.02
Granted below fair market value 733,500 $0.60
Exercised (5,091,319) $0.43
Terminated/canceled (663,183) $0.59
-----------
Balances at December 31, 2000 7,384,504 $0.77
===========
As of December 31, 1999 and 2000, 1,731,383 and 1,062,290 options, respectively,
were exercisable, with weighted-average exercise prices of $0.39 and $0.29,
respectively.
The weighted-average grant date fair value of options granted during 2000 was
$0.69 and $0.81 for options granted at fair market value and below fair market
value, respectively. The weighted-average grant date fair value of options
granted during 1999 was $0.05 and $0.33 for options granted at fair market value
and below fair market value, respectively.
28
DataChannel, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2001 and for the nine months ended
September 30, 2000 and 2001 is unaudited)
9. STOCK OPTION PLAN (CONTINUED)
Options outstanding at December 31, 2000 had exercise prices and remaining
contractual lives as follows:
WEIGHTED-AVERAGE
NUMBER OF REMAINING NUMBER OF
SHARES CONTRACTUAL LIFE OF SHARES
EXERCISE OUTSTANDING SHARES OUTSTANDING EXERCISABLE
PRICE
----------------------------------------------------------------------------
$0.05 - $0.10 174,480 6.6 years 120,520
$0.20 1,670,944 8.2 years 675,109
$0.60 1,410,167 8.9 years 266,661
$1.10 4,128,913 9.4 years -
-----------------------------------------------------
7,384,504 8.9 years 1,062,290
=====================================================
10. SEGMENT REPORTING
The Company considers that it has the following two reportable operating
segments based on differences in products and services. Operating segments are
defined as components of the enterprise about which separate financial
information is available that is reviewed regularly by the chief operating
decision maker, or decision-making group, in deciding how to allocate resources
and in assessing their performance. Summarized financial information is as
follows:
YEAR ENDED DECEMBER 31 NINE MONTHS ENDED SEPTEMBER 30
1999 2000 2000 2001
--------------------------------------------------------------------------------------------------------
GROSS GROSS GROSS GROSS
REVENUE MARGIN REVENUE MARGIN REVENUE MARGIN REVENUE MARGIN
---------------------------------------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Operating
segments:
Software $ 2,776,039 $ 2,616,495 $ 5,975,239 $ 5,098,011 $ 4,672,633 $3,932,191 $ 3,675,548 $3,462,960
Services 4,624,007 2,052,591 8,573,703 1,933,523 5,952,827 1,123,343 8,588,338 2,631,671
---------------------------------------------------------------------------------------------------------
Totals $ 7,400,046 $ 4,669,086 $14,548,942 $ 7,031,534 $10,625,460 $5,055,534 $12,263,886 $6,094,631
=========================================================================================================
The Company does not review any other financial information for these reportable
segments. Revenue generated from foreign operations was immaterial for the years
ended December 31, 1999 and 2000 and for the nine months ended September 30,
2000 and 2001.
29
DataChannel, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2001 and for the nine months ended
September 30, 2000 and 2001 is unaudited)
11. INCOME TAXES
At December 31, 2000, the Company had a net operating loss carryforward and
research and development credits of approximately $34,232,000 and $484,000,
respectively, which are available to offset future federal taxable income and
expire between 2011 and 2020. The Company's ability to utilize net operating
loss carryforwards may be limited in the event that a change in ownership, as
defined in the Internal Revenue Code, occurs in the future. To the extent that
any single-year loss is not utilized to the full amount of the limitation, such
unused loss is carried forward to subsequent years until the earlier of its
utilization or the expiration of the relevant carryforward period. To the extent
that net operating losses, when realized, relate to stock option deductions of
approximately $988,000, the resulting benefits will be credited to shareholders'
equity. A valuation allowance has been recognized to offset the related deferred
tax assets due to the uncertainty of realizing the benefit of the Company's net
operating loss carryforward. While the need for this allowance is subject to
periodic review, the tax benefits of the carryforward will be recorded when
recognized as a reduction of the Company's income tax expense.
The Company's valuation allowance increased approximately $2,800,000 and
$9,200,000 in 1999 and 2000, respectively, primarily due to net operating losses
incurred during these periods.
Significant components of the Company's deferred tax assets are as follows:
DECEMBER 31
1999 2000
---------------------------------
Deferred tax assets:
Net operating loss carryforward $ 3,024,769 $ 11,638,912
Research and development tax credits 202,166 164,502
Other 386,221 931,845
---------------------------------
3,613,156 12,735,259
Less valuation allowance (3,613,156) (12,735,259)
---------------------------------
Net deferred tax assets $ -- $ --
=================================
12. COMMITMENTS
The Company leases its office facilities under operating leases with expiration
dates through April 2004. The leases generally require the Company to maintain
the property and contain certain renewal options for varying periods.
30
DataChannel, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2001 and for the nine months ended
September 30, 2000 and 2001 is unaudited)
12. COMMITMENTS (CONTINUED)
Future minimum lease commitments under noncancelable leases as of December 31,
2000 are as follows:
2001 $1,559,497
2002 1,580,896
2003 1,620,667
2004 615,698
Thereafter 49,176
----------
Total minimum lease payments $5,425,934
==========
Rent expense under operating leases totaled $562,663 and $1,150,854, net of
sublease rentals of approximately $148,432 and $397,170, for the years ended
December 31, 1999 and 2000, respectively.
13. 401(K) RETIREMENT PLAN
The Company has a retirement savings plan covering substantially all eligible
employees. This 401(k) plan provides for a discretionary matching contribution
by the Company, limited to eligible contributions by the employees. The Company
did not contribute or accrue amounts in 1999 and 2000.
14. RELATED-PARTY TRANSACTIONS
During the years ended December 31, 1999 and 2000, the CEO received no cash
compensation for services rendered. In 2000, the Company made payments of
$79,000 for services rendered to a company in which Isogen's former owners have
an equity interest.
During 2000, the Company sold approximately $1,800,000, $225,000, and $250,000
of software and services to three entities that were related to or affiliated
with the Company's Series D shareholders.
15. CONTINGENCIES
Various claims and legal proceedings relating to former employees are pending
against the Company. Management believes that all of these claims and
proceedings are without merit or otherwise will not have a material adverse
impact on the Company's consolidated financial position, liquidity or results of
operations.
31
DataChannel, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2001 and for the nine months ended
September 30, 2000 and 2001 is unaudited)
16. SUBSEQUENT EVENTS - (UNAUDITED)
On October 24, 2001, the Company signed a definitive agreement with Netegrity,
Inc. (Netegrity), whereby Netegrity will acquire all outstanding stock of the
Company. The consideration for the acquisition is approximately $15 million in
cash and 2.5 million in common shares. The transaction was closed on
December 14, 2001.
On November 30, 2001, the Company entered into an agreement to sell all the
identified assets relating to their professional services business unit for $1.3
million. The assets had a net book value of $1.15 million as of the purchase
date. The purchaser paid the Company $650,000 on November 30, 2001 with $325,000
due on April 30, 2002 and $325,000 due on September 31, 2002. The purchaser
assumed all liabilities, including customer obligations, of the business unit
sold and hired its employees.
In November 2001, the company was advanced $1,000,000 from Netegrity. The
advance was forgiven upon consummation of the business combination.
32
Item 7.(b)
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION OF NETEGRITY, INC.
The following unaudited pro forma financial statements of Netegrity
give effect to the acquisition of DataChannel by Netegrity as if it had occurred
on September 30, 2001 with respect to the pro forma balance sheet and as if it
had occurred on January 1, 2000 with respect to the unaudited pro forma
statements of operations.
Pursuant to the terms of the definitive merger agreement, Netegrity
acquired DataChannel for 2,499,968 shares of Netegrity common stock and cash
payments of $16,087,000, assumed debt of $1,440,000 and estimated transaction
cost of $2,970,000, for a total purchase price of $70,196,000.
The pro forma financial statements utilize the purchase method of
accounting for the merger of Netegrity and DataChannel. 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 DataChannel will be included in the results of
operations of the combined company from December 14, 2001 (the date of the
acquisition). The pro forma condensed 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 $11,000,000 of the purchase
price has been allocated to developed technology and $3,000,000 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 pro
forma statement of operations. The amount allocated to developed technology is
expected to be amortized over its estimated useful life of 3 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 32.5% discount rate. The technologies under development were approximately 50%
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 recently issued Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets," the goodwill resulting
from the acquisition of DataChannel will not be amortized but rather will be
tested at least annually for impairment.
33
The pro forma condensed 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 DataChannel 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 DataChannel, including the notes to all sets of financial statements.
34
\UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2001
HISTORICAL
DATACHANNEL DATACHANNEL PRO-FORMA PRO FORMA
NETEGRITY DATACHANNEL ADJUSTMENTS ADJUSTED ADJUSTMENTS COMBINED
--------- ----------- ----------- -------- ----------- --------
Current Assets:
Cash and cash equivalents $51,202,000 $2,756,000 $2,756,000 (16,087,000)(1) $37,871,000
Marketable securities 55,019,000 - - 55,019,000
Accounts receivable-trade, net 15,984,000 2,400,000 (1,447,000)(4) 953,000 16,937,000
Prepaid expenses and other
current assets 1,918,000 870,000 870,000 2,788,000
------------ ---------- ---------- ------------
Total Current Assets 124,123,000 6,026,000 4,579,000 112,615,000
Property and equipment, net 6,821,000 2,740,000 (87,000)(4) 2,653,000 9,474,000
Intangible assets - 970,000 970,000 11,000,000 (1) 68,260,000
57,260,000 (1)
(970,000)(7)
Long-term marketable securities 20,298,000 - - 20,298,000
Restricted cash 626,000 - - 626,000
Other assets 219,000 105,000 (7,000)(4) 98,000 317,000
------------ ---------- ---------- ------------
Total Assets $152,087,000 $9,841,000 $8,300,000 $211,590,000
============ ========== ========== ============
Current Liabilities:
Accounts payable 1,210,000 1,971,000 (59,000)(4) 1,912,000 3,122,000
Accrued compensation and benefits 4,723,000 - 4,723,000
Other accrued expenses 6,461,000 1,080,000 (141,000)(4) 939,000 2,970,000 (1) 13,118,000
2,124,000 (1)
624,000 (8)
Deferred revenue 11,190,000 3,259,000 (207,000)(4) 3,052,000 (440,000)(9) 13,802,000
Current portion notes payable - 713,000 713,000 713,000
------------ ---------- ---------- ------------
Total Current Liabilities 23,584,000 7,023,000 6,616,000 35,478,000
Notes payable - 910,000 910,000 910,000
Preferred Stock - 57,130,000 57,130,000 (57,130,000)(1) -
Stockholders Equity:
Common stock 312,000 5,007,000 5,007,000 25,000 (1) 337,000
(5,007,000)(1)
Additional paid-in-capital 146,442,000 - 49,674,000 (1) 196,116,000
Deferred stock compensation - (154,000) (154,000) 154,000 (1) -
Notes receivable on restricted
stock - (381,000) (381,000) 381,000 (1) -
Loan to officer (130,000) - (130,000)
Accumulated other comprehensive
income (20,000) - (20,000)
Accumulated deficit (18,017,000) (59,694,000) (1,134,000)(4) (60,828,000) (3,000,000)(1) (21,017,000)
60,828,000 (1)
------------ ----------- ----------- ------------
128,587,000 (55,222,000) (56,356,000) 175,286,000
Less - Treasury stock, at cost (84,000) - - (84,000)
------------ ---------- ---------- ------------
Total Stockholders Equity 128,503,000 (55,222,000) (56,356,000) 175,202,000
----------- ---------- ---------- -----------
Total Liabilities and
Stockholders' Equity $152,087,000 $9,841,000 $8,300,000 $211,590,000
============ ========== ========== ============
35
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
HISTORICAL
----------
DATACHANNEL DATACHANNEL PRO FORMA PRO FORMA
NETEGRITY DATACHANNEL ADJUSTMENTS ADJUSTED ADJUSTMENTS COMBINED
--------- ----------- ----------- -------- ----------- --------
Revenues:
License software $43,842,000 $3,676,000 $3,676,000 $47,518,000
Services 20,887,000 8,588,000 (4,975,000)(4) 3,613,000 24,500,000
Other 2,772,000 - - 2,772,000
----------- ---------- ---------- ------------
Total revenues 67,501,000 12,264,000 7,289,000 74,790,000
Cost of Revenues
Cost of license software 1,503,000 213,000 213,000 2,750,000 (2) 4,466,000
Cost of services 10,675,000 5,957,000 (2,855,000)(4) 3,102,000 13,777,000
Cost of other 1,671,000 - - 1,671,000
----------- ---------- ---------- ------------
13,849,000 6,170,000 3,315,000 19,914,000
----------- ---------- ---------- ------------
Gross profit 53,652,000 6,094,000 3,974,000 54,876,000
Selling, general and administrative
expenses 40,617,000 14,299,000 (230,000)(4) 14,069,000 54,686,000
Research and development expenses 11,865,000 8,617,000 8,617,000 20,482,000
Non recurring expenses 603,000 603,000
Amortization of intangible assets - 1,879,000 1,879,000 (1,879,000)(7) -
----------- ---------- ---------- ------------
Total operating expenses 53,085,000 24,795,000 24,565,000 75,771,000
Income (loss) from operations 567,000 (18,701,000) (20,591,000) (20,895,000)
Interest income 4,098,000 444,000 444,000 (543,000)(3) 3,999,000
Interest expense - (89,000) (89,000) (89,000)
----------- ---------- ---------- ------------
Income (loss) before provision for
income taxes 4,665,000 (18,346,000) (20,236,000) (16,985,000)
Provision for income taxes 607,000 - - 607,000
----------- ---------- ---------- ------------
Net income (loss) $4,058,000 $(18,346,000) $(20,236,000) $(17,592,000)
========== ============ ============ ============
Basic net income (loss) per share
attributable to common stockholders: $0.13 N/A N/A $(0.53)
========== ============
Basic weighted average shares
outstanding 30,850,000 N/A N/A 2,499,968 (5) 33,349,968
========== ============
Diluted net income (loss) per share
attributable to common stockholders: $0.12 N/A N/A $(0.53)
========== ============
Diluted weighted average shares
outstanding 32,962,000 N/A N/A 2,499,968 (5) 33,349,968
========== ==========
36
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2000
HISTORICAL
----------
DATACHANNEL DATACHANNEL PRO FORMA PRO FORMA
NETEGRITY DATACHANNEL ADJUSTMENTS ADJUSTED ADJUSTMENTS COMBINED
--------- ----------- ----------- -------- ----------- --------
Revenues:
License software 37,688,000 $5,975,000 $5,975,000 $43,663,000
Services 12,693,000 8,574,000 (6,328,000)(4) 2,246,000 14,939,000
Other 3,655,000 - - 3,655,000
---------- ---------- ----------- -----------
Total revenues 54,036,000 14,549,000 8,221,000 62,257,000
Cost of Revenues
Cost of license software 2,549,000 877,000 877,000 3,667,000 (2) 7,093,000
Cost of services 7,415,000 6,640,000 (4,272,000)(4) 2,368,000 9,783,000
Cost of other 2,169,000 - - 2,169,000
---------- ---------- ----------- -----------
Total cost of revenues 12,133,000 7,517,000 3,245,000 19,045,000
---------- ---------- ----------- -----------
Gross profit 41,903,000 7,032,000 4,976,000 43,212,000
Selling, general and administrative
expenses 36,094,000 24,244,000 (582,000)(4) 23,964,000 60,058,000
302,000 (6)
Research and development expenses 9,103,000 9,532,000 1,208,000 (6) 10,740,000 19,843,000
Amortization of intangible assets - 1,963,000 1,963,000 (1,963,000)(7) -
---------- ---------- ----------- -----------
Total operating expenses 45,197,000 35,739,000 36,667,000 79,901,000
Income (loss) from operations (3,294,000) (28,707,000) (31,691,000) (36,689,000)
Interest income 6,103,000 1,590,000 1,590,000 (724,000)(3) 6,969,000
Interest expense - (1,167,000) (1,167,000) (1,167,000)
Other expense, net - - - -
---------- ---------- ----------- -----------
Income (loss) before provision for
income taxes 2,809,000 (28,284,000) (31,268,000) (30,887,000)
Provision for income taxes 75,000 - - 75,000
---------- ---------- ----------- -----------
Net income (loss) $2,734,000 $(28,284,000) $(31,268,000) $(30,962,000)
========== ============ ============ ============
Basic net income (loss) per share $0.09 N/A N/A $(0.98)
attributable to common stockholders: ========== ============
Basic weighted average shares
outstanding 29,010,000 N/A N/A 2,499,968 (5) 31,509,968
========== ============
Diluted net income (loss) per share $0.08 N/A N/A $(0.98)
attributable to common stockholders:
Diluted weighted average shares
outstanding 33,407,000 N/A N/A 2,499,968 (5) 31,509,968
========== ============
(4,397,000)(5)
37
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
1. To record a) the issuance of 2,499,968 shares of Netegrity common stock and
the cash payment of $16,087,000 to the stockholders of DataChannel, b) the
allocation of the purchase price to the assumed fair value of the
identifiable assets acquired and liabilities assumed and c) the elimination
of the equity accounts of DataChannel. The fair market value of the common
stock has been valued at $19.88 per share based on the average fair value of
the common stock for two days before and after the closing of the
transaction. The allocation of the purchase price to the assumed fair value
of the identifiable assets acquired and liabilities assumed was calculated as
follows:
Consideration Exchanged:
Fair value of shares issued to DataChannel
stockholders (2,499,968 shares at $19.88) $49,699,000
Cash paid to DataChannel stockholders 16,087,000
Liabilities Assumed:
Notes payable 1,440,000
-----------
Total consideration exchanged 67,226,000
Estimated transaction costs 2,970,000
-----------
Total purchase price 70,196,000
Less fair value of the net tangible assets,
liabilities assumed, and identifiable intangible assets
Net tangible assets 1,060,000
Restructuring reserve (2,124,000)
Developed technology 11,000,000
In process research and development 3,000,000
-----------
Excess of purchase price over net tangible assets,
liabilities assumed and identifiable intangible assets $57,260,000
-----------
(Goodwill)
The restructuring reserve consists of severance costs of approximately
$290,000 related to duplicative functions, as well as excess facility costs
of approximately $1,834,000 which will be recorded in accordance with
Emerging Issue Task Force Consensus 95-3.
At the date of the acquisition, DataChannel had a tax net operating loss
carryforward of $54,923,000 (resulting in a deferred tax asset of
$21,970,000). Due in part to the fact the net operating loss carryforward
will be subject to an annual limitation in its usage by Netegrity of
approximately $3,100,000, Netegrity has provided a valuation allowance of
$17,700,000 against this deferred tax asset in connection with the purchase
price allocation. To the extent the valuation allowance is reduced in future
periods, any reduction will be recorded as a decrease to goodwill.
38
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 a 3-year useful life.
3. To eliminate historical interest income earned on the cash paid to
DataChannel.
4. To remove the assets and liabilities as of September 30, 2001 and results of
operations for the nine months ended September 30, 2001 and the year ended
December 30, 2000, of the Isogen division. The Isogen business was divested
by DataChannel prior to the completion of the acquisition.
5. To reflect the issuance of the 2,499,968 shares of Netegrity common stock as
of January 1, 2000 and eliminate the antidilutive impact of the common stock
equivalents.
6. To include the results of operations of Habit.com in the consolidated
DataChannel results of operations for the period prior to completion of the
acquisition of Habit.com which was acquired by DataChannel in November 2000.
7. To reverse the goodwill recorded by DataChannel related to the acquisition of
Habit.com and the related amortization expense.
8. To adjust the net assets of DataChannel to the net assets at December 14,
2001, the date of the acquisition.
9. To adjust deferred revenue to fair value as of the acquisition date.
39
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 11, 2002 NETEGRITY, INC.
By: /s/ Regina Sommer
--------------------------------
Regina Sommer
Chief Financial Officer
40
EXHIBIT INDEX
Exhibit No. Exhibit
2.1* 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 the Second Amendment to the Agreement and Plan of
Merger, dated as of December 7, 2001.
23.1 Consent of Ernst & Young LLP
23.2 Consent of Arthur Andersen, LLP
----------
* Previously filed.