SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
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XX Quarterly report pursuant to Section 13 or 15(d) of the Securities
---- Exchange Act of 1934, For the quarterly period ended June 30, 1996, or
Transition report pursuant to Section 13 or 15(d) of the Securities
---- Exchange Act of 1934, For the transition period from ___________ to
___________
Commission File Number 1-10139
-----------------------------
NETEGRITY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2911320
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
245 WINTER STREET
WALTHAM, MA 02154
(Address of principal executive offices) (Zip Code)
(617)890-1700
(Registrant's Telephone Number)
Securities registered pursuant to Section 12(g) of the Act: NONE
-------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such other shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days XX Yes No
---- ----
As of July 31, 1995 there were 8,495,157 shares of Common Stock outstanding.
FORM 10-Q
QUARTERLY REPORT
----------------
TABLE OF CONTENTS
Facing Sheet..................................................................1
Table of Contents ............................................................2
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet .............................3
Consolidated Statement of Operations....................5
Consolidated Statement of Cash Flows....................6
Notes to Consolidated Financial Statements..............8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .......................................13
Item 2. Changes in Securities ...................................13
Item 3. Defaults Upon Senior Securities..........................13
Item 4. Submission of Matters to a Vote of Security Holders......13
Item 5. Other Information .......................................14
Item 6. Exhibits and Reports on Form 8-K ........................14
SIGNATURES ..................................................................15
Exhibit 11 - Computation of earnings per share...............................16
2
PART I. - FINANCIAL INFORMATION
NETEGRITY, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
June 30,
1996 March 31,
(unaudited) 1996
----------- ----------
Current assets:
Cash $10,405,378 $1,410,445
Accounts receivable - trade, net of
allowance for doubtful accounts of
$18,504 and $274,272 at June 30, 1996
and March 31, 1996, respectively 666,735 5,676,239
Accounts receivable - product, net of
allowance for doubtful accounts of
$73,714 at March 31, 1996 --- 83,237
Inventory 100,000 1,292,961
Other current assets 991,368 303,429
---------- ---------
TOTAL CURRENT ASSETS 12,163,481 8,766,311
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 171,997 745,268
INTANGIBLE ASSETS, NET, INCLUDING GOODWILL --- 834,266
OTHER ASSETS 66,734 109,900
----------- ---------
TOTAL ASSETS $12,402,212 $10,455,745
========== ==========
The accompanying notes are an integral part of the financial statements.
3
NETEGRITY, INC.
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30,
1996 March 31,
(unaudited) 1996
----------- -----------
Current liabilities:
Accounts payable - trade $1,317,146 $4,631,213
Line of credit --- 723,470
Other accrued expenses 2,297,760 2,029,303
Accrued payroll 1,142,849 498,769
Customer advances --- 69,480
Notes payable - related party 300,000 300,000
Current portion of capitalized lease
obligation --- 112,730
--------- ---------
TOTAL CURRENT LIABILITIES 5,057,755 8,364,965
LONG-TERM NOTES PAYABLE --- 187,417
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized
5,000,000 shares:
Series C, voting, non-cumulative,
603,906 issued and outstanding
at June 30, 1996 (628,330 issued
and outstanding at March 31, 1996) 6,039 6,283
Common stock, voting, $.01 par value,
authorized 25,000,000 shares;
8,449,660 issued and 8,424,559
outstanding at June 30, 1996 (8,197,887
issued and 8,172,786 outstanding at
March 31, 1996) 84,497 81,979
Additional paid-in capital 10,252,334 10,024,710
Cumulative translation adjustment 28,028 21,569
Cumulative deficit (2,742,784) (8,147,521)
---------- ---------
Loan to officer (200,000) ---
---------- ---------
Less treasury stock, at cost,
25,101 shares (83,657) (83,657)
---------- ---------
TOTAL STOCKHOLDERS' EQUITY 7,344,457 1,903,363
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $12,402,212 $10,455,745
========== ==========
The accompanying notes are an integral part of the financial statements.
4
NETEGRITY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
For the three months ended
June 30,
1996 1995
---- ----
Net revenues $1,129,972 730,365
Costs and expenses:
Costs of products sold 751,836 455,290
Selling, general and
administrative expenses 445,845 166,827
--------- ---------
1,199,681 622,117
--------- ---------
(LOSS) INCOME BEFORE INTEREST (67,709) 108,248
Interest income (11,095) (3,549)
--------- ---------
Operating (loss) income before income taxes (56,614) 111,797
Provision for taxes 19,000 57,602
(LOSS) INCOME FROM CONTINUING
OPERATIONS $ (75,614) $ 54,195
========= =========
NET (LOSS) INCOME FROM DISCONTINUED
OPERATIONS $ (520,245) $ 155,137
========= =========
GAIN ON SALE OF ASSETS OF
DISCONTINUED OPERATIONS $6,000,000 $ ---
========= =========
NET INCOME $5,404,141 $ 209,332
========= =========
Per Share amounts:
Net (loss) income from
continuing operations $(0.01) $0.01
Net income from discontinued
operations (0.05) 0.02
Gain on sale of assets of discontinued
Operations 0.62 ---
---- ----
NET INCOME PER SHARE $0.56 $0.03
==== ====
Weighted average shares outstanding 9,747,000 9,139,000
The accompanying notes are an integral part of the financial statements.
5
NETEGRITY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the three months ended
June 30,
1996 1995
---- ----
OPERATING ACTIVITIES
Net (loss) income $(75,614) $54,195
Adjustments to reconcile net (loss)
income to net cash provided by operating
activities:
Depreciation and amortization 6,498 1,054
Provision for doubtful accounts
receivable 7,500 ---
Changes in operating assets
and liabilities:
Accounts receivable 266,480 (78,388)
Inventory (78,600) ---
Other current assets (42,982) (20,718)
Other assets 8,679 69
Accounts payable (158,898) 216,948
Accrued payroll (45,653) 57,602
Other accrued expenses (65,711) 20,011
Customer advances (6,000) ---
--------- ---------
Total adjustments (108,687) 196,578
--------- ---------
Net cash (used for) provided by
continuing operating activities (184,301) 250,773
Net cash provided by discontinued
operating activities 2,370,156 359,260
--------- ---------
Net cash provided by operating
activities 2,185,855 610,033
--------- ---------
The accompanying notes are an integral part of the financial statements.
6
NETEGRITY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Cont.)
(Unaudited)
For the three months ended
June 30,
1996 1995
---- ----
INVESTING ACTIVITIES
Purchase of equipment $ (121,521) $ (8,561)
Proceeds from sale of certain assets 6,159,455 ---
---------- -------
Net cash provided by (used for)
investing activities 6,037,934 (8,561)
FINANCING ACTIVITIES
Issuance of common stock 29,898 ---
Paydown of line of credit 741,248 (48,168)
---------- --------
Net cash used for financing activities 771,146 (48,168)
---------- ---------
Net increase in cash 8,994,933 553,304
Cash at beginning of period 1,410,445 672,386
---------- ---------
Cash at end of period $10,405,378 $1,225,690
========== =========
Supplemental disclosures of cash flow
information:
Interest paid $ 20,256 $ 37,030
========== =========
Supplemental schedule of noncash investing
and financing activities:
Collection of products in satisfaction
of accounts receivable - product $ 108,012 $ 315,274
========== =========
The accompanying notes are an integral part of the financial statements.
7
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - The unaudited financial information furnished herein reflects
all adjustments which are of a normal recurring nature, which in the opinion of
management are necessary to fairly state the Company's financial position, cash
flows and the results of its operations for the periods presented. Certain
information and footnote disclosure normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. This information should be read in conjunction with the
Company's audited financial statements for the fiscal year ended March 31, 1996,
included in Form 10-K filed on June 28, 1996.
NOTE 2 - The results of operations for the three-month period ended
June 30, 1996 are not necessarily indicative of the results to be expected for
the entire year ending March 31, 1997.
NOTE 3 - Minority interest represents the minority shareholders'
proportionate share of their equity of Personal Computing Tools, Inc. (PCT). At
June 30, 1996, the Company owned 94% of the capital stock of PCT.
NOTE 4 - Net income per share is based upon the weighted average number
of common shares outstanding including the dilutive effects of options and
warrants.
NOTE 5 - The Company provides for income taxes during interim reporting
periods based on reported earnings before income taxes using an estimate of the
annual effective tax rate. Deferred income taxes reflect the impact of temporary
differences between the amount of assets and liabilities recognized for tax
purposes. These deferred taxes are measured by applying currently enacted tax
laws.
NOTE 6 - Effective April 1, 1993, the Company changed its method of
accounting for incomes taxes from the deferred method to the liability method
required by FASB Statement No. 109 "Accounting for Income Taxes". The effect of
the adoption of this statement had no impact on the operating results,
components of income tax expense or financial position of the Company.
The principal components of the Company's deferred tax assets and
liabilities as of April 1, 1996 consisted of the following (in thousands):
Deferred tax assets:
Expenses not currently deductible $ 478
Operating loss carry forwards 2,810
-----
3,288
Deferred tax liabilities ---
-----
3,288
Valuation allowance (3,288)
-----
Net ---
=====
8
As a result of the divestiture described in Note 7, the Company
estimates the utilization of approximately $6,000,000 of its current available
operating loss carryforward.
NOTE 7 - As of June 28, 1996, the Company completed the divestiture of
its catalog related business, consisting of The Programmer's SuperShop
("TPS")catalog, the TPS web site, the corporate sales group, the German
subsidiary ("SDC Germany") and SDC Communications. The Company completed the
transaction for an aggregate price of $10,035,000. The aggregate price consisted
of payment of $9,300,000 in immediately available funds and the deposit of
$735,000 under an escrow arrangement. As of August 12, 1996, $135,000 of the
escrow has been returned to the Company. The final purchase price of $10,035,000
was a negotiated settlement. Prior to the closing, the parties had a dispute as
to how catalog revenue should be measured under the Agreement.
The aggregate price of $10,035,000 assumes that the Company will
transfer to the Purchaser as of the Closing date, tangible net assets of the
catalog related business that equal $1,500,000. These net assets are currently
being audited and the Company expects no material adjustments.
The Company incurred $2,587,000 in expenses and write-offs related to
the divestiture. These expenses were primarily comprised of write-off of
goodwill, severance costs, professional fees and facility shut-down costs for
its corporate offices and distribution facility. The Company reported a gain of
$6,000,000 from the sale of the assets of its catalog related business.
9
NETEGRITY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 contains certain
safe harbors regarding forward-looking statements. In that context, the
discussion in this Item contains forward-looking statements which involve
certain degrees of risk and uncertainties, including statements relating to
liquidity and capital resources. Except for the historical information contained
herein, the matters discussed in this section are such forward-looking
statements that involve risks and uncertainties, including the impact of
competitive pricing within the software industry, the effect any reaction to
such competitive pressures has on current inventory valuations, the need for and
effect of any business restructuring, the presence of competitors with greater
financial resources, capacity and supply constraints or difficulties, and the
Company's continuing need for improved profitability and liquidity.
OVERVIEW
The following overview reflects the recent divestiture of the Company's
catalog related business. Any comments relating to operating results or issues
are reflective of the continuing network security business. The Company's
revenues were generated by the sale of network security products, integration
and support services to companies doing business on the Internet and internal
networks.
RESULTS OF CONTINUING OPERATIONS
The following information should be read in conjunction with the
consolidated financial statements and notes thereto:
% to Net Revenue % Change
For the three months ended June 30, 1996 1995 96 v. 95
- ----------------------------------- ---- ---- --------
Net Revenues:
Product sales 100% 100% ---
Gross Margins:
Product sales 33% 38% (13%)
Selling, general and administrative
expenses 39% 22% 77%
Net income (7%) 7% (200%)
Revenues: Total net revenues for the first quarter ended June 30, 1996 increased
$399,607, or 55%, to $1,129,972 from $730,365 the first quarter ended June 30,
1995. This increase in revenue was primarily due to the increasing need for
network security as companies connect to the Internet.
10
Gross Margin: Total gross margin dollars increased $296,546, or 65%, to $751,836
in the first quarter of fiscal 1997 from $455,290 in the first quarter of fiscal
1996. Gross margin improved as a result of the increase in sales and the growth
in the network security market.
Selling, General and Administrative Expenses: Selling, General and
Administrative (SG&A) expenses increased 167% to $445,845 in the quarter ended
June 30, 1996 from $166,827 in the quarter ended June 30, 1995. The increase was
mainly attributable to planned headcount additions in the sales and technical
support groups as the Company began to build its operation in preparation for
future growth.
Interest Expense: Net interest income increased in the quarter ended June 30,
1996 to $11,095 from $3,549 in the same period last year. This increase is
mainly attributable to lower borrowing levels on the Company's line of credit.
The Company's quarterly operating results have varied and may continue
to vary significantly depending on external factors. Substantially all of the
Company's revenue in a quarter is derived from orders received in that quarter.
Accordingly, delays in orders are likely to result in the associated revenue not
being realized by the Company in the period. Moreover, the Company's expense
levels are based in part on expectations of future revenue levels, and a
shortfall in expected revenue could therefore result in a disproportionate
decrease in the Company's net income.
LIQUIDITY AND CAPITAL RESOURCES
(in thousands, except ratios)
June 30, March 31,
Financial Condition as of 1996 1996
- ------------------------- -------- --------
Cash and cash equivalents $10,405 $1,410
Working capital 7,306 401
Current ratio 2.44 1.05
Cash Flow Activity Summary for June 30, June 30,
the Three Months Ended 1996 1995
- ------------------------------ -------- --------
Net cash (used for) provided by
continuing operating activities $(184) $359
Net cash provided by (used for)
investing activities 6,037 (45)
Net cash provided by (used for)
financing activities 771 (6)
The Company's net cash balance increased by $8,995,000 to $10,405,000
at June 30, 1996 from $1,410,000 at March 31, 1996. This increase was
attributable to the proceeds received from the divestiture of the catalog
related business.
11
Accounts receivable-trade decreased 88% to $667,000 at June 30, 1996
from $5,676,000 at March 31, 1996. This decrease resulted from the Company's
divestiture of its catalog business.
Working capital increased by $6,905,000 to $7,306,000 at June 30, 1996
from $401,000 at March 31, 1996. This increase was the result of the divestiture
of its catalog business.
The Company anticipates that its existing cash resources and cash flow
from operations will be sufficient to fund its operations through March 31,
1997. The Company currently anticipates that its available cash, expected cash
flows from operations, and its borrowing capacity will be sufficient to fund
operations through fiscal year 1997.
12
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES
There have been no changes in securities during the quarter ended June
30, 1996.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At June 30, 1996, the Company was not in default upon senior
securities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 16, 1996, the Company entered into an agreement of Purchase and
Sale of Assets with Programmer's Paradise, Inc. (the "Agreement") to sell
substantially all of its operating assets relating to its catalog operations
"The Programmer's SuperShop," its Web Site relating to its catalog operations,
its corporate sales group, inbound and outbound telemarketing operations,
reseller operations, and the operations of its German subsidiary, Software
Developer's Company GmbH.
On June 4, 1996, the Board of Directors caused to be distributed to
stockholders of record as of May 24, 1996, a Notice and Consent Solicitation
Statement for action to be taken by Written Consent in Lieu of a Meeting of
Stockholders. As of the record date, there were issued and outstanding 8,405,017
shares of Common Stock and 628,330 shares of Series C Preferred Stock, each
share entitled to one vote per share, in connection with the approval of the
proposal put forth in the Consent Solicitation Statement.
In connection with the solicitation, stockholders acted upon the
proposal to authorize and approve the proposed sale of certain assets of the
Company to Programmer's Paradise, Inc. pursuant to the terms and conditions of
the Agreement and to authorize such further action by the Company's Board of
Directors and proper officers as may in their discretion be necessary or
desirable to carry out the intents and purposes of the Agreement; and in
furtherance of the disposition contemplated by the Agreement, to authorize and
approve an amendment to the Company's Certificate of Incorporation to change the
Company's name to Netegrity, Inc.
13
Pursuant to the terms of the Agreement, the Company agreed to sell to
Programmer's Paradise, Inc. (the "Purchaser") substantially all of its operating
assets, comprised of all of the operating assets relating to its business of The
Programmer's SuperShop ("TPS") catalog, its TPS Web Site, its corporate sales
group, its German subsidiary, Software Developer's Company GmbH ("SDC Germany"),
and SDC Communications (collectively, the "Target Business") for a consideration
of $11,000,000 in cash, subject to certain adjustments based on revenues and
tangible net assets as of the Closing.
On June 14, 1996, the Company received sufficient shareholder consent
(57% of the outstanding shares of all classes of stock) necessary to approve the
transaction.
As of June 28, 1996, the Company closed completed the transaction for
an aggregate purchase price of $10,035,000. The aggregate purchase price
consisted of payment of $9,300,000 in immediately available funds and the
deposit of $735,000 under an escrow arrangement. The final purchase price of
$10,035,000 was a negotiated settlement. Prior to the closing, the parties had a
dispute as to how revenue should be recognized under the Agreement.
The aggregate purchase price of $10,035,000 assumes that the Company
will transfer to the Purchaser as of the Closing date, tangible net assets of
the Target Business that equal $1,500,000. These net assets are currently being
audited and the Company expects no material adjustments.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
1996.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NETEGRITY, INC.
Date: August 14, 1996 By:/s/ Barry N. Bycoff
--------------------
Barry N. Bycoff
President and Chief Executive
Officer (Principal Executive
Officer)
Date: August 14, 1996 By:/s/ James O'Connor, Jr.
-----------------------
James O'Connor, Jr.
Vice President, Finance and
Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)
15
EXHIBIT 11
NETEGRITY, INC.
COMPUTATION OF EARNINGS PER SHARE
Three months ended June 30,
(In thousands, except per share data)
1996 1995
---- ----
Weighted average shares outstanding 8,955 8,749
Neteffect of dilutive stock options
- - based on the treasury stock method using
the average market price 792 389
----- -----
Total 9,747 9,138
===== =====
Net (loss) income from
continuing operations $ (76) $ 54
Net income (loss) from
discontinued operations 5,480 155
----- -----
Net income for EPS computation $5,404 $ 209
===== ====
Per share amount:
Net (loss) income from
continuing operations $(0.01) $0.01
Net income from discontinued
operations (0.05) 0.02
Gain on sale of assets of discontinued
Operations 0.62 ---
---- ----
NET INCOME PER SHARE $0.56 $0.03
==== ====
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> JUN-30-1996
<CASH> 10,405,378
<SECURITIES> 0
<RECEIVABLES> 666,735
<ALLOWANCES> 0
<INVENTORY> 100,000
<CURRENT-ASSETS> 12,163,481
<PP&E> 171,997
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,402,212
<CURRENT-LIABILITIES> 5,057,755
<BONDS> 0
0
6,039
<COMMON> 84,497
<OTHER-SE> 7,253,921
<TOTAL-LIABILITY-AND-EQUITY> 12,402,212
<SALES> 1,129,972
<TOTAL-REVENUES> 1,129,972
<CGS> 751,836
<TOTAL-COSTS> 751,836
<OTHER-EXPENSES> 445,845
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (11,095)
<INCOME-PRETAX> (56,614)
<INCOME-TAX> 19,000
<INCOME-CONTINUING> (75,614)
<DISCONTINUED> (520,245)
<EXTRAORDINARY> 6,000,000
<CHANGES> 0
<NET-INCOME> 5,404,141
<EPS-PRIMARY> 0.55
<EPS-DILUTED> 0.55
</TABLE>
