ITEM 1. BUSINESS THE COMPANY
Netegrity, Inc. ("Netegrity" or the "Company") designs, develops, markets and supports software for controlling user access to electronic commerce (e-commerce) applications. Netegrity also offers a full range of professional services to integrate, implement and support its software product offering. Netegrity's customers are Global 2000 companies and smaller organizations who possess large and dispersed numbers of customers and business partners. These companies are using e-commerce as a means to interact with their customers, suppliers, partners and employees. Typical industries utilizing e-commerce include the financial services, high tech, manufacturing, telecommunications and insurance industries, as well as educational and the governmental organizations..
Netegrity's flagship product, SiteMinder, is the industry's first directory-enabled secure user management system providing centralized access control, single sign-on, distributed user management and personalized content for e-commerce applications. SiteMinder manages the process of identifying an individual and assigning that individual his/her privileges. These assigned privileges control what information an individual can see and what transactions an individual can perform. This new category of software enables Web administrators to centrally control access to e-commerce sites requiring secure log-in, while distributing the administrative responsibilities to various individuals. SiteMinder's open and extensible architecture integrates easily with leading security technologies, Web servers, and application development platforms.
The Company has been a leader in the network security market since 1994, when it became the first North American distributor and reseller of Check Point Software Technologies, Ltd.'s ("Check Point") FireWall-1-TM-Today, the Company is a leading U. S. value-added reseller for FireWall-1, distinguishing itself by providing comprehensive pre-and post-sales support and consulting services.
BUSINESS STRATEGY
Netegrity's objective is to become the market leader in security management for e-commerce, defined as the secure user management and access control market. This market is expected to grow dramatically as companies adopt e-commerce and begin to transact business over the Internet. Early experience with the Internet and a clear understanding of its customers' and their security requirements, have enabled Netegrity to become a leading developer of secure user management and access control products and services. The following are key elements of the Company's strategy:
- Continue to enhance the SiteMinder product line. In June of 1998, Netegrity launched SiteMinder 3.0 as the first directory-enabled secure user management solution. It plans to continue to enhance product features to meet customer needs in deploying large-scale and complex transaction-based e-commerce applications. The Company plans to continue to adopt the latest industry standards and technologies allowing for the deployment of secure e-commerce applications. Furthermore, the Company expects to develop versions for other Web servers and operating systems as market needs dictate. In March of 1999, Netegrity began shipping SiteMinder 3.5 with increased scalability, support for broader authentication methods, and expanded support for UNIX platforms. The Company plans to expand its product line to include support for legacy systems and business applications that are critical to future customer requirements.
- Expand domestic distribution. The Company currently supports a multi-channel domestic distribution strategy including a direct sales force, a reseller/systems integrator channel and OEM relationships. The Company plans to expand its sales force and support organizations with the objective of gaining broad market acceptance of its product through adoption into strategic accounts. This will differentiate the Company's product from those of its competitors and allow it to obtain insights
into the future security requirements of its customers. The Company expects to continue to establish strategic marketing and other third-party relationships with vendors of Internet-related systems and application software. The Company is also focused on building its reseller channel by establishing relationships with systems integrators and consultants.
- Expand international distribution channel. It currently distributes its product in four major European countries: the United Kingdom, Italy, The Netherlands, and France. The Company manages its international distribution channel through an office in France opened in the fourth quarter of 1998. Future international plans include additional distributors in Europe as well as Asia.
- Continue to build its service offerings. The Company's service organization was launched in April, 1996 as a result of its FireWall-1 customer support efforts. The Company offers fixed-price services that assist companies in the integration, implementation and support of Netegrity's products. With the addition of its SiteMinder product, the Company plans to expand its offerings to include system integration services to complement its product line.
- Maximize profitability of the firewall reseller business. The Company will continue to sell FireWall-1 and related services to new and existing customers. It also plans to continue offering related third-party network security products to its base of FireWall-1 customers.
MARKETS AND PRODUCTS
THE MARKET: The market for transacting business over the Internet is called the electronic commerce market. This market has evolved significantly in 1998, helping companies to not only redefine the way they do business, but to become more competitive and acquire new customers and revenue streams in the process. Recent market studies call for dramatic growth for commercial software license revenue, and online business penetration is expected to grow exponentially. A recent study by Forrester Research contained the following: "By the year 2002, 98% of companies with greater than 1,000 employees and 85% of companies with greater than 100 employees will go online; Business trade will mushroom to $1.3 trillion by 2003, while online retail will hit $108 billion by 2003; The market space for commerce license revenue is expected to grow from $121 million in 1997 to $3.8 billion in 2002; International revenue is expected to grow to over $1 billion by 2002; and Corporations will prefer buying to building."
Typical business applications being developed for e-commerce include online retail, customer service, supply chain procurement, and delivery of operational and transactional data. These applications contain sensitive data that require controlled access, such as customer account status, financial account status, personnel files, customer files, document distribution, and other critical business information. New applications emerging include secure portal sites, secure Web hosting, and buy-side applications such as procurement management. To date, security on the Internet has been restrictive, focused on "keeping people out." However, as more companies attempt to "do business" on the Internet, e-commerce sites need to provide a secure, truly open trading environment. A large market opportunity is evolving as products are being developed to solve the security challenge of controlling users once they enter an e-commerce site.
SITEMINDER-REGISTERED TRADEMARK- PRODUCT: The Internet has enabled a new generation of e-commerce applications that offer dramatic change in the way companies do business. Companies are deploying strategic e-commerce applications to transact business, manage customer and supplier relationships, and distribute information to employees and partners. SiteMinder is a secure user management system providing single sign-on, centralized control of all access, and distributed management for those e-commerce Web sites. SiteMinder allows an organization to easily deploy and efficiently administer e-commerce sites, managing millions of users while leveraging the existing technology platforms they have deployed. Its extensible, standards-based framework works across Web servers, application servers, security technologies, and directory services from all major vendors.
Four major technologies are used to build e-commerce sites: authentication products to identify users, directory servers to store user names, application servers to transact business, and Web servers to publish the information. These four disparate technologies are not easily integrated, resulting in an e-commerce site that is both difficult to navigate and to manage. SiteMinder provides the solution to simplify the development and management of a secure e-commerce site. Its core capabilities include centralized control of user access, role-based delegated management, native integration with existing directories, auditing and tracking of user access to sensitive data, and single sign-on and personalized content delivery for users.
SiteMinder consists of two primary components, the SiteMinder Policy Server, and the SiteMinder Web Agent. The Policy Server is a UNIX or Windows NT-based server that provides authentication, authorization, and audit services for Web applications. The SiteMinder Web Agent runs on industry-standard Microsoft and Netscape Web servers for both Windows NT and major UNIX platforms and extends the SiteMinder Policy Server's capabilities to these servers.
Pricing for the SiteMinder Policy Server is based on the number of users licensed to access the SiteMinder-protected applications. Customers must also purchase a SiteMinder Web Agent for each Web Server secured by the product.
The Company receives revenue from the sale of SiteMinder from four sources; the Policy Server, the Web Agent, annual maintenance subscriptions, and add-on professional services. An initial deployment typically consists of one or two Policy Servers and several Web Agents. The Company receives additional product and services revenue as customers expand the number of end-users and/or the number of SiteMinder installations.
SALES, MARKETING AND SUPPORT
SALES: Netegrity directly markets its products and services domestically through field sales and through telemarketing efforts. The Company also indirectly markets through strategic partnerships and other third-party relationships with vendors of Internet-related systems and application software as well as through resellers and systems integrators. Netegrity's strategic partnerships include a worldwide reseller agreement with Netscape Communications Corporation, an OEM agreement with Network Associates, and licensing agreements with Allaire Corporation and Banyan Systems, Inc.
Netegrity's sales strategy involves initially qualifying prospects to determine their e-commerce plans and requirements and deploying a solution-selling approach once customers are qualified. Netegrity's field sales group conducts on-site meetings with accounts that have substantial product and service requirements. Netegrity markets its product and services to large, corporate customers and smaller firms that need to protect access to mission critical information. A customer's decision to use Netegrity's products and services may involve a substantial financial commitment including license costs, maintenance fees, service fees, training, and in many cases the cost of computer systems to implement e-commerce applications.
In addition to SiteMinder, Netegrity resells Check Point Software's FireWall-1 product through a dedicated internal telesales organization and a small group of resellers.
SUPPORT SERVICES: Netegrity believes that a customer's decision to purchase its products is based, in part, on the services provided by the Company that help to quickly and effectively install, integrate and implement an e-commerce solution, and to educate the customer's staff and support its ongoing operations. It also provides another source of revenue for the Company.
Netegrity's Professional Services organization provides consulting and integration services that enable SiteMinder customers to successfully manage secure access to their e-commerce applications and enhance the integration of SiteMinder within their organization. Follow-on and Full Deployment services are offered for organizations with multiple SiteMinder locations and centralized multi-SiteMinder configurations. Professional Services are available for Application Infrastructure Planning, Application Prototyping
and Integration, SiteMinder Deployment, SiteMinder Extensions and Custom Agents, Self-Registration, and Onsite Training for Developers and Solution Architects.
In addition to Professional Services offerings, annual support maintenance contracts are generally purchased for the first year of a customer's use of the SiteMinder product and are renewable on an annual basis. The Company offers its customers a variety of maintenance options, from providing support during normal business hours to providing support 24-hours per day, 7 days per week. Maintenance fees are typically equal to approximately 20% to 25% of the list price for the product.
The Company also offers its FireWall-1 customers a similar set of support offerings, which has differentiated the Company from other resellers of FireWall-1.
MARKETING: In support of its sales efforts, the Company conducts its own marketing programs intended to position and promote its products and services. Marketing activities include trade shows, seminars, direct mail, Internet marketing, public relations, and participation in industry programs and forums. The Company also benefits from joint marketing programs conducted with strategic partners, such as joint seminars, direct mailings, and lead sharing.
Because the Company's plans call for SiteMinder to produce a substantial portion of its future product and services revenue, any factor adversely affecting sales of its products and services would have a material adverse effect on the Company. The Company's future financial performance will depend in part on the successful development, introduction and customer acceptance of new and enhanced versions of its products and its services. There can be no assurance that the Company will continue to be successful in marketing its products or any new or enhanced products. In addition, competitive pressures or other factors may result in significant price erosion thereby having a material adverse effect on the Company's financial condition or results of operations.
MERCHANDISING AND CUSTOMERS
The Company markets its products and services to large global organizations that face tremendous pressure to transact business over the Internet. The Company targets various people within an organization responsible for analyzing and selecting e-commerce solutions, such as Web application development managers, Internet architects, security administrators and network/systems administrators. Typical industries include the financial services, publishing, high-tech, manufacturing, telecommunications and insurance industries, as well as educational and governmental organizations. Its dedicated focus on e-commerce security enables Netegrity to help clients design security solutions that effectively respond to ever-present and constantly-arising security threats, while accommodating long-range, enterprise-level technology goals.
In June of 1998, Netegrity launched SiteMinder 3.0 as the first directory-enabled secure user management solution. Sales of its SiteMinder product and related services represented 41% of the Company's revenue for the year ended December 31, 1998, and 5% in 1997.
In addition to the sales and marketing of SiteMinder, the Company is also a non-exclusive distributor of Check Point Software Technologies, Ltd.'s FireWall-1 product. The Company sells FireWall-1 and its proprietary products and services directly to end-users and through a channel of value-added resellers in the U.S. The Company also benefits from the marketing programs conducted by Check Point. Many of Check Point's activities result in the generation of qualified leads, some of which are provided to the Company.
CUSTOMERS: As of December 31, 1998, the Company licensed SiteMinder to 46 end-user customers. Its customers represent a broad cross-section of industries including financial services, telecommunications, publishing, insurance, high-tech and the government. The Company also has distributors, resellers and system integrators around the world, including distributors in five major European Countries. The Company has been able to increase its customer base by combining post-sales support services, including
training and customer support. The Company expects that its customer base will grow incrementally with the future releases of SiteMinder as the market matures.
Netegrity has approximately 325 Check Point Software FireWall-1 customers and it continues to provide support to a large majority of these customers.
No single customer, including direct end-users or resellers, accounted for more than 10% of the Company's total revenue during each of the years ended December 31, 1998, 1997 and 1996.
PURCHASING
The Company purchases 100% of its FireWall-1 product directly through Check Point Software Technologies, Ltd. The Company also purchases firewall-related accessory products through various third-party vendors. The Company has not experienced any material difficulties or delays in acquiring any of the products that it distributes.
DISTRIBUTION AND BACKLOG
The Company generally ships product within 24 hours of the receipt of an order from a customer. Consequently, backlog is currently not a material factor.
COMPETITION
The market for secure user management and access control is currently immature and somewhat competitive. This market is expected to become highly competitive based on the anticipated growth of the e-Commerce market. This market is subject to rapid technological change, and competition is beginning to intensify as a result of the increasing demand for e-commerce security products. Up until recently, the Company's primary source of competition was from its customers' internal information services departments that had been building their own solutions. Today, the Company is also experiencing competition from a number of new technologies from companies like Aventail Corporation; DASCOM; enCommerce, Inc; Intellisoft, SecureSoft, Inc., and Sirrus Corporation. Additional competition may develop as the market matures and other companies begin to offer similar products, and as the Company's product offerings expand to other segments of the marketplace. Current and potential competitors have established or may in the future establish cooperative relationships with third parties to increase the distribution of their products to the marketplace. Accordingly, it is possible that new competitors or alliances may emerge and rapidly acquire significant market share.
The Company's firewall reseller business experiences competition from companies that compete with Check Point's FireWall-1 product such as Axent Technologies; Trusted Information Systems, Inc.; Cisco Systems, Inc.; as well as other resellers of the FireWall-1 product.
Significant factors such as the emergence of new products, fundamental changes in technology and aggressive pricing and marketing strategies may also affect the Company's competitive position. Many current and potential competitors have significantly greater financial, marketing, technical and other competitive resources than Netegrity. Many of these factors are out of the Company's control, and there can be no assurance that Netegrity can maintain or enhance its competitive position against current and future competitors.
PRODUCT RESEARCH AND DEVELOPMENT
The market for e-Commerce security products is characterized by rapid technological change, changes in customer requirements, new product introductions and enhancements, and emerging industry standards.
E-commerce applications have extreme requirements for scalability, reliability, sophisticated security and ease of administration. These increased demands, combined with the growing trend to centrally control access to formerly isolated applications, drives the need for a unified access control model for administrators and a single point of access for end users. With a growing need for standards-based user directories (LDAP) and the proliferation of flexible and easy-to-use security products, businesses are compelled to take advantage of best-of-breed solutions as they deploy e-commerce applications across heterogenous networks. The Company devotes significant time and resources analyzing and responding to changes in the industry such as changes in operating systems, application software, security standards, networking software, and evolving customer requirements. For the year ended December 31, 1998, the Company spent approximately $1,991,239, or 42% of revenue, on research and development of its SiteMinder product. The Company will continue its product development efforts for its current product, as well as developing next generation versions of its product line.
The Company believes its future success will depend largely on its ability to enhance and broaden its existing product line to meet the evolving needs of the market. There can be no assurance that the Company will be able to respond effectively to technological changes or new industry standards or developments. In addition, the Company could be adversely affected if it were to incur significant delays or be unsuccessful in developing new products or enhancing its existing products, or if any such enhancements or new products do not gain market acceptance. In addition, a number of factors, including the timing of product introductions and enhancements by the Company or its competitors, market acceptance of new products, or customer order deferrals in anticipation of new products, may cause variations in the Company's future operating results.
PROPRIETARY RIGHTS
The Company depends upon a combination of patent and trademark laws, license agreements, non-disclosure and other contractual provisions to protect proprietary and distribution rights in its products. In addition, the Company attempts to protect its proprietary information and those of its vendors and partners through confidentiality and/or license agreements with its employees and others. Despite these precautions, it may be possible for unauthorized third parties to obtain information that the Company regards as proprietary and/or confidential.
Management believes that, due to the rapid pace of innovation within the high-tech industry, factors such as technical and creative skills of its personnel and ongoing reliable services and support are as important in establishing and maintaining a leadership position within the industry as are the various forms of legal protections.
EMPLOYEES
At December 31, 1998, the Company had a total of 64 full-time employees, of which 20 were involved in research and development, 34 in sales, marketing and customer support, and 10 in administration and finance. None of the Company's employees are represented by a labor union. The Company has not experienced any work stoppages and believes that its relationships with employees are good.
ITEM 2.
ITEM 2. PROPERTIES
The Company's headquarters consists of two separate leased office suites located at 245 Winter Street in Waltham, Massachusetts. The Company occupies 5,760 square feet of space with current monthly payments of $8,880, expiring in May, 2001. Additionally, the Company sub-leases 8,015 square feet of office space in the same building with current monthly payments of $11,552, expiring in April, 1999.
The Company also leases office space in Los Angeles, California; New York, New York; Chicago, Illinois; Reston, Virginia and Paris, France to support field sales and consulting staff. The Company believes that its present and proposed facilities are adequate for its current needs and that suitable alternative space will be available should it need to expand.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims arising out of its operations in the normal course of business. The Company is not presently a party to any legal proceedings, the adverse outcome of which, in management's opinion, would have a material adverse effect on the Company's results of operations or financial position.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, whether through the solicitation of proxies or otherwise, during the quarter ended December 31, 1998.
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded principally on the NASDAQ SmallCap Market-SM- tier of the NASDAQ Stock Market-SM- under the symbol "NETE" and is also traded on the Boston Stock Exchange under the symbol "NTY." The following table sets forth the range of quarterly high and trade quotations for the Company's Common Stock as reported by NASDAQ. The trade quotations represent interdealer
quotations without adjustment for retail markups, markdowns or commissions, and may not necessarily represent actual transactions.
As of December 31, 1998, there were 122 holders of record and approximately 1,400 beneficial owners of the Company's 9,405,446 shares of Common Stock outstanding. The Company estimates that approximately 1,300 shareholders hold securities in street name.
On January 6, 1998, the Company entered into a transaction with Pequot Private Equity Fund, L.P. and Pequot Offshore Private Equity Fund, Inc. which is exempt from Federal Registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. See Item 7 hereof for a detailed discussion of the transaction.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial information should be reviewed in conjunction with Item 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 item 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.
A portion of the following overview reflects the divestiture of the Company's catalog related business in June 1996. Any comments relating to operating results or issues are reflective of the continuing network security business. The Company's revenue was generated by the sale of network security products, integration and support services to companies doing business on the Internet and internal networks. The divestiture of the Company's catalog related business is recorded as discontinued operations in the accompanying financial statements contained in Item 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements and the related auditors' reports are presented in the following pages. The consolidated financial statements filed in this Item 8 are as follows:
- Report of Independent Auditors
- Consolidated Balance Sheets--December 31, 1998 and 1997
- Consolidated Statements of Operations for the fiscal years ended December 31, 1998 and 1997, and the nine-month transition period ended December 31,
- Consolidated Statements of Stockholders' Equity for the fiscal years ended December 31, 1998 and 1997, and the nine-month transition period ended December 31, 1996
- Consolidated Statements of Cash Flows for the fiscal years ended December 31, 1998 and 1997, and the nine-month transition period ended December 31,
- Notes to Consolidated Financial Statements
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Netegrity, Inc.
In our opinion, the accompanying balance sheets and the related statements of operations, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Netegrity, Inc. (the "Company") at December 31, 1998 and 1997, and the results of its operations and its cash flows for the years ended December 31, 1998 and 1997, and the nine-month transition period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Mass. February 8, 1999
NETEGRITY, INC.
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of the consolidated financial statements.
NETEGRITY, INC.
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of the consolidated financial statements.
NETEGRITY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of the consolidated financial statements.
NETEGRITY, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of the consolidated financial statements.
NETEGRITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the consolidated financial statements.
NETEGRITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
The accompanying notes are an integral part of the consolidated financial statements.
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: NATURE OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS: The Company currently operates in the network security market. During June, 1996, the Company completed a full divestiture of its catalog business and changed its name from The Software Developer's Company, Inc. to Netegrity, Inc. The results of operations of the divested catalog business is presented as discontinued operations herein.
PRINCIPLES OF CONSOLIDATION: The financial statements of the Company also include the accounts and operations of its subsidiaries, Software Developers Company, GmbH ("SDC Germany") and Personal Computing Tools (PCT). The Company acquired 94% of the outstanding capital stock of PCT on June 29, 1993. The 6% equity interest in PCT not acquired by the Company would be shown as minority interest in the December 31, 1996 consolidated balance sheets and the statements of operations for the nine-month transition period ended December 31, 1996 and the fiscal years ended March 31, 1996, respectively. As of June 30, 1996, the Company discontinued all operations related to its SDC Germany and PCT catalog operation. The operating loss incurred in 1996 is accounted for in loss from discontinued operations.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include time deposits with a maturity of three months or less at the date of purchase.
CONCENTRATION OF CREDIT RISK: Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash and cash equivalents and trade receivables. The Company restricts investment of temporary cash investments to financial institutions with high credit standing. Credit risk on trade receivables is minimal.
REVENUE RECOGNITION: The Company's revenues from continuing operations are primarily generated from the sale of its proprietary SiteMinder products and services and from licensing the rights to use software products developed by Checkpoint Software Technologies, Ltd. to end users and resellers. The Company generates its services revenue from consulting and training services performed for customers and from support and software update rights (i.e., maintenance). Revenues from perpetual software license agreements are recognized as revenue upon delivery of the software as long as there are no significant post-delivery obligations.
Revenues for maintenance are recognized ratably over the term of the support period. If maintenance is included in a license agreement, such amounts are unbundled from the license fee at their fair market value based on the value established by independent sale of such maintenance to customers. Consulting revenues are primarily related to implementation services performed under separate service arrangements related to the installation of software products. Such services do not include customization or modification of the underlying software code. If included in a license agreement, such services are unbundled at their fair market value based on the value established by the independent sale of such services to customers. Revenues from consulting and training services are recognized as the services are performed.
In October, 1997, the American Institute of Certified Public Accountants issued a Statement of Position (SOP) 97-2, "Software Revenue Recognition." The Company intends to adopt this pronouncement and does not expect it to have a material affect on the revenue recognition practices of the Company.
CAPITALIZATION OF SOFTWARE COSTS: The Company capitalizes certain internally generated software development costs after technological feasibility of the product has been established. Such costs are amortized over the estimated life of the product. The Company continually compares the unamortized costs of capitalized software to the expected future revenues for the products. If the unamortized costs
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A: NATURE OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) exceed the expected future net realizable value, the excess amount is written off. At December 31, 1998, the Company amortized $134,262 of software development costs.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS: Equipment and leasehold improvements are stated at cost, less accumulated depreciation and amortization. Depreciation is provided using the straight-line method over estimated useful lives from five to seven years. Amortization of leasehold improvements is provided using the straight-line method over the lives of the respective leases or the useful lives of the improvements, whichever is shorter.
Maintenance and repairs are charged to operations as incurred. Renewals and betterments which materially extend the life of assets are capitalized and depreciated. Upon disposal, the asset cost and related accumulated depreciation are removed from their respective accounts. Any resulting gain or loss is reflected in earnings.
CUSTOMER ADVANCES: Prepayments made by customers are included as customer advances and recorded as sales when shipments are made.
INCOME TAXES: Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements which are temporarily different than the tax basis. The amount of deferred tax asset or liability recognized, net of valuation allowances, is based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
INVESTMENTS: Investments in equity securities, other than investments accounted for by the equity method are recorded at cost. Management determines the appropriate classification of its investments at the time of purchase and reevaluates such determinations, as well as potential impairments of value on a periodic basis, but at a minimum, quarterly.
MARKETING EXPENSES: Marketing expenses are charged to sales & marketing expenses as incurred.
SUPPORT SERVICES: The Company provides, free of charge, pre-sale telephone technical support and product literature. The Company provides post-sales support to its customers who are covered under maintenance agreements. The costs relating to these services are expensed as incurred and included in Selling, General & Administrative expenses.
EARNINGS (LOSS) PER SHARE: The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share" and has retroactively restated the earnings per share (EPS) for 1996 and 1995. SFAS 128 requires presentation of basic and diluted EPS. Basic EPS is computed by dividing net income by the number of weighted average common shares outstanding. Diluted EPS reflects potential dilution from outstanding stock options, using the treasury stock method. Potentially dilutive securities at December 31, 1998 include stock options outstanding to purchase 4,704,229 common shares, warrants to purchase 1,600,787 common shares and 3,333,333 shares of convertible preferred stock (see Note I); however, such securities have not been included in the net loss per share calculation because their effect would be anti-dilutive.
SEGMENT REPORTING: The Company is in one business segment, the design, development, marketing and support of software for controlling user access to electronic commerce. The Company follows the
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A: NATURE OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) requirements of Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information."
EXPORT SALES: The Company generates some revenues from international business. For all periods reported herein, the Company's export sales are deemed immaterial.
FOREIGN CURRENCY TRANSLATION: The functional currency of the Company's former foreign subsidiary is the local currency. Balance sheet accounts of the Company's former foreign subsidiary are translated into U.S. dollars at current exchange rates. Income statement items are translated at the average rates during the year. Net translation gains or losses are recorded directly to a separate component of stockholders' equity. Foreign currency transaction gains and losses are included in the determination of net income for the fiscal year ended December 31, 1996.
POST-RETIREMENT BENEFITS OTHER THAN PENSIONS: The Company does not offer post-employment benefits to its retirees and as a result, is unaffected by Statement of Financial Accounting Standards No. 106 or 112 issued in December 1990 and November 1992, respectively.
401K PLAN: The Company maintains a 401K Plan for its employees. The Plan is intended as a retirement and tax deferred savings vehicle. All employees of the Company whose customary employment is for more than 20 hours per week are eligible to participate in the 401K Plan. Employees make their contributions through semi-monthly payroll deductions which are invested in any combination of several investment funds. The Company has made no matching contributions and has no current plans to do so.
FAIR VALUE OF FINANCIAL INSTRUMENTS: Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments," requires the Company to disclose estimated fair values for its financial instruments, exclusive of leases, for which it is practicable to estimate fair value.
For financial instruments including cash, accounts receivable and payable, and accrued expenses it is assumed that the carrying amount approximates fair value due to their short maturities.
RISKS AND UNCERTAINTIES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reported period. Actual results could differ from those estimates.
RECLASSIFICATIONS: Certain items on the prior year financial statements presented herein have been reclassified to conform to the current year presentation.
NEW ACCOUNTING PRONOUNCEMENTS: In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. The statement requires companies to recognize all derivatives as either assets or liabilities, with the instruments measured at fair value. The accounting for changes in fair value, gains or losses, depends on the intended use of the derivative and its resulting designation. The
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A: NATURE OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Adoption of this standard will no impact the financial results of the Company.
In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". SOP 98-1 requires computer software costs associated with internal use software to be charged to operations as incurred until certain capitalization criteria are met. SOP 98-1 is effective beginning January 1, 1999. We do not expect adoption of this statement to have a material effect on consolidated financial position or results of operations.
NOTE B: EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost and consist of the following:
Depreciation is computed on the straight-line method based upon estimated useful lives ranging from three to seven years. The depreciation expense recognized for the fiscal years ended December 31, 1998 and 1997, and the nine-month transition period ended December 31, 1996, was $231,713, $116,187 and $26,487, respectively.
NOTE C: INVESTMENT AND JOINT VENTURE
In October of 1996, the Company invested $1,000,000 for a 10% equity interest in Encotone, LTD., a Jerusalem, Israel high-technology firm which develops technology and products that provide enhanced security for both voice and data network transactions. The Company accounted for its investment in Encotone, LTD. under the cost method. In the quarter ended September 30, 1997, the Company determined that the value of the investment was permanently impaired and wrote off the entire amount.
In October of 1996, the Company and Encotone, LTD. formed a joint venture in the U.S., Encotone, Inc., which was equally funded by both companies. The Company accounted for its investment in Encotone, Inc. under the equity method, and as of December 31, 1997, has reduced its investment by $131,801, its share of Encotone, Inc.'s operating loss for the initial period ended December 31, 1997.
In January, 1998, the Company sold to Encotone, LTD. its full interest in Encotone, Inc. In return, the Company received an additional 9.9% of the common stock of Encotone, LTD., providing the Company with an equity position of 19.9%. The Company also received $81,656 in cash.
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D: COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities under noncancellable operating leases. For the years ended December 31, 1998, 1997 and 1996, the Company incurred total operating lease expense of $299,825, $173,600, and $55,440, respectively. Future minimum lease payments under these leases are as follows:
NOTE E: LOAN TO OFFICER
In May, 1996, an Officer of the Company exercised an option to purchase 200,000 shares of the Company's common stock at a price of $1.00 per share. The Company's Board of Directors approved a loan to the Officer as payment for this transaction. The Officer issued the Company a full recourse note that is secured by the 200,000 shares of common stock. This note has an interest rate of 7% per annum.
NOTE F: ASSET SALE
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, 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. During August, 1996, $135,000 of the escrow was returned to the Company.
The aggregate price of $10,035,000 was in exchange for the Company's tangible net assets of the catalog related business that at the time was estimated at approximately $1,500,000. The revenues of the divested catalog business were $11,800,000 for the nine month transition period ended December 31, 1996. These revenues are a component of the net income (loss) from discontinued operations.
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, buy-outs of capital leases, 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. The Company utilized a deferred tax benefit related to net operating loss carryforwards of approximately $2,200,000 to offset Federal and State corporate income taxes.
In September of 1998, the Company reached a settlement with Programmers Paradise, Inc. ("Programmer's") with regard to a valuation dispute arising from the 1996 divestiture of Software Developer's Company. The case was settled with the release of the escrow account ($600,000) to Programmer's and a payment of $50,000. The full amount was charged to a reserve maintained specifically for this purpose.
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G: INCOME TAXES
The components of the provision for income taxes are as follows:
Significant components of the deferred tax assets are as follows:
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G: INCOME TAXES (CONTINUED) The provision for income taxes differs from the federal statutory rate of 34% as follows:
Due to the uncertainty surrounding the realization of tax benefits in future tax returns of the continuing business, the net deferred tax assets at December 31, 1998 and 1997 have been offset by a valuation allowance.
At December 31, 1998, the Company has available for Federal income tax purposes net operating tax loss carryforwards of approximately $12,885,000 that are available to offset future taxable income at various dates through fiscal 2018. Certain provisions in the Internal Revenue Code may limit the net operating loss available for use in any given year in the event of any significant change of ownership.
NOTE H: CAPITAL STOCK AND CAPITAL STOCK WARRANTS
SERIES D PREFERRED STOCK: On January 6, 1998, the Company, entered into a Preferred Stock and Warrant Purchase Agreement (the "Agreement") with Pequot Private Equity Fund, L.P., a Delaware limited partnership ("PPEF") and Pequot Offshore Private Equity Fund, Inc., a British Virgin Islands corporation (together with PPEF, the "Pequot Entities"). Pursuant to the terms of the Agreement, on January 7, 1998, the Company sold 1,666,667 shares of Series D Preferred Stock, at $1.50 per share, and 750,393 Warrants to the Pequot Entities for an aggregate purchase price of $2,500,000.50. The Series D Preferred Stock is automatically convertible into Common Stock on a one-for-one basis, subject to adjustment. Series D Preferred Stock has one-for-one voting rights and has preferential distribution in the event of any voluntary or involuntary liquidation. When and if declared by the Board of Directors, Series D Preferred Stock shall have preference to receive cumulative dividends in the form of Common Stock at an annual rate of 7.5% from and after the Issue Date. The Company did not declare dividends in fiscal year 1998. In addition, the Series D Preferred Stock is subject to mandatory conversion into Common Stock upon certain circumstances.
The Company entered into an amendment on June 5, 1998 to the Preferred Stock and Warrant Purchase Agreement with the Pequot Entities. Pursuant to the terms of the amended Agreement, on June 5, 1998, the Company sold 833,333 shares of Series D Preferred Stock, at $1.50 per share, and 375,197 Warrants to the Pequot Entities for an aggregate purchase price of $1,250,001. On June 30, 1998, the Company sold an additional 833,333 shares of Series D Preferred Stock, at $1.50 per share, and 375,197 Warrants to the Pequot Entities for an aggregate purchase price of $1,250,000.
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H: CAPITAL STOCK AND CAPITAL STOCK WARRANTS (CONTINUED) WARRANTS: In conjunction with the Pequot Agreement as described above, 1,500,787 shares of common stock exercisable at $2.00 were issued to Pequot expiring on January 7, 2003.
As part of the Agreement with the Pequot Entities, described above, James McNiel joined the Board of Directors of the Company, as designee of the Pequot Entities, and has agreed to provide certain consulting services to the Company. In addition to consulting fees in connection with such service, the Company granted Mr. McNiel warrants for the purchase of 100,000 shares exercisable at $1.50 expiring on January 7, 2003.
SUBSEQUENT EVENT: On February 8, 1999, the Company entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") with an institutional investor and the Pequot Entities. Pursuant to the terms of the Stock Purchase Agreement, the Company sold 795,651 shares of Common Stock, at $5.75 per share. The Company has agreed to file a registration statement on Form S-3 for a public resale offering on behalf of the institutional investor.
NOTE I: STOCK PLANS
The Company has stock option plans as described hereunder. Options are granted at fair market value at the date of grant being the average of the closing bid and asked prices of the Common Stock on the day preceding the date of grant.
STOCK OPTION PLANS FOR OUTSIDE DIRECTORS: The Company's stock option plans for outside directors provide for the granting of options to members of the Board of Directors who are neither employees nor officers of the Company in appreciation of their service. The timing, amounts, recipients and other terms of the option grants are determined by the provisions of or formulas in, the directors' option plans. The exercise price of the options is equal to the fair market value of Common Stock on the date of the grant. The options have a term of 10 years from the date of the grant and become exercisable per the terms of option plan. Total outstanding grants as of December 31, 1998 and 1997 are 572,542. Total options exercisable at December 31, 1998 and 1997 are 478,259 and 371,859, respectively. At December 31, 1998, options for 62,500 shares were available for grant.
STOCK OPTION PLANS FOR EMPLOYEES AND OFFICERS: The Company's stock option plans for employees, consultants and officers provide for the granting of options as inducement to obtain and retain the services of qualified persons. Incentive stock options may be granted to officers and employees, and non-qualified stock options may be granted to directors, officers, employees or consultants. The Compensation Committee of the Company determines the exercise price and vesting period of the options. Total outstanding grants as of December 31, 1998 and 1997 are 2,530,900 and 1,830,800. Total options exercisable at December 31, 1998 and 1997 are 639,168 and 622,900 respectively. At December 31, 1998, options for 932,315 shares were available for grant.
1990 EMPLOYEE STOCK PURCHASE PLAN: The 1990 Employee Stock Purchase Plan ("Stock Purchase Plan") is intended as an incentive to, and to encourage stock ownership by, all eligible employees of the Company and participating subsidiaries and to encourage them to remain in the employ of the Company. Substantially all employees of the Company and any participating subsidiary who have completed six months of employment with the Company or any subsidiary and whose customary employment is for more than 20 hours per week and more than five months per calendar year are eligible to participate in the Stock Purchase Plan.
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I: STOCK PLANS (CONTINUED) The Stock Purchase Plan presently authorizes the issuance of 100,000 shares of Common Stock (subject to adjustment for capital changes) pursuant to the exercise of nontransferable options granted to participating employees. During the years ended December 31, 1998 and 1997, 14,100 and 2,400, shares, respectively, of the Company's Common Stock were issued under the Stock Purchase Plan.
Information as to the Company's stock options is as follows:
In October, 1995, the FASB issued SFAS 123, "Accounting for Stock-Based Compensation." SFAS 123 is effective for periods beginning after December 15, 1995. SFAS 123 requires that companies either recognize compensation expense for grants of stock, stock options, and other equity instruments based on fair value, or provide pro-forma disclosure of net income and earnings per share in the notes to the financial statements.
Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates as calculated in accordance with SFAS 123, the Company's net income and earnings per share for the years ended December 31, 1998 and 1997 would have been reduced to the pro-forma amounts indicated below:
The effects of applying SFAS 123 in this pro-forma disclosure are not indicative of future amounts. SFAS 123 does not apply to awards prior to fiscal 1996 and additional awards in future years are anticipated.
The fair value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: an expected life of four years, expected volatility of 100%, no dividends, and risk-free interest rates of 5.1%.
Stock options outstanding at December 31, 1998:
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(a) Average contractual life remaining in years.
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I: STOCK PLANS (CONTINUED) A summary of the status of the Company's stock option plans as of December 31, 1998, 1997 and 1996 and changes during the years ending on those dates is presented below:
(1) Includes warrants outstanding at December 31, 1998 (see Note H).
NOTE J: COMPARATIVE FINANCIAL INFORMATION
As reported on Form 8-K, dated August 21, 1996, the Company's Board of Directors approved on August 14, 1996 a change in the Company's fiscal year from March 31 to December 31. The following represents unaudited comparative financial information for the period January 1, 1996 to December 31,
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J: COMPARATIVE FINANCIAL INFORMATION (CONTINUED) 1996, which may be read in conjunction with the audited fiscal years ended December 31, 1998 and 1997, presented on the consolidated statements of operations.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item is incorporated by reference to the information under the caption "Election of Directors" contained in the Company's Definitive Proxy Statement filed on March 19, 1999 with the Securities and Exchange Commission in connection with the solicitation of proxies for the Company's Annual Meeting of Stockholders to be held on May 11, 1999 (the "Proxy Statement").
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the information under the caption "Executive Compensation and Other Information Concerning Directors and Officers" contained in the Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the information under the caption "Management and Principal Holders of Voting Securities" contained in the Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the information under the caption "Certain Relationships and Related Transactions" contained in the Proxy Statement.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
1. Financial Statements
The following financial statements are included in Item 8:
a. Report of Independent Auditors
b. Consolidated Balance Sheets--December 31, 1998 and 1997
c. Consolidated Statements of Operations for the fiscal years ended December 31, 1998 and 1997
d. Consolidated Statements of Stockholders' Equity (Deficit) for the fiscal years ended December 31, 1998 and 1997
e. Consolidated Statements of Cash Flows for the fiscal years ended December 31, 1998 and 1997
f. Notes to Consolidated Financial Statements
2. Financial Statement Schedules
The following financial statement schedules are included in Item 14(d):
a. Report of Independent Auditors
b. Schedule II: Valuation of Qualifying Accounts and Reserves
Schedules other than those listed above have been omitted since they are either not required or the information is otherwise included.
3. List of Exhibits
The following exhibits, required by Item 601 of Regulation S-K, are filed as a part of this Annual Report on Form 10-K. Exhibit numbers, where applicable, in the left column correspond to those of Item 601 of Regulation S-K.
B. REPORTS ON FORM 8-K:
The Company filed a Report on Form 8-K on January 15, 1998 in connection with the Preferred Stock and Warrant Purchase Agreement among Pequot Private Equity Fund, L.P., Pequot Offshore Private Equity Fund, Inc. and the Company dated January 6, 1998 (see Exhibit 10.30 above).
C. EXHIBITS:
The Company hereby files as part of this Form 10-K the exhibits listed in 14 (A)(3) above.
D. FINANCIAL STATEMENT SCHEDULES:
The Company hereby files as part of this Form 10-K in Item 14(d) attached hereto the financial statement schedules listed in Item 14 (A)(2) above.
NETEGRITY, INC. ANNUAL REPORT ON FORM 10-K
YEAR ENDED MARCH 31, 1996
ITEM 14(d) FINANCIAL STATEMENT SCHEDULES
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
NETEGRITY, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
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(1) Uncollectible accounts written off, net of recoveries.
S-1
EXHIBIT 3.03
AMENDED AND RESTATED BY-LAWS OF NETEGRITY, INC. A DELAWARE CORPORATION
Dated: Amended as of March 26, 1998
NETEGRITY, INC. BY-LAWS ARTICLE I MEETINGS OF STOCKHOLDERS
Section 1. PLACE OF MEETINGS. All meetings of the stockholders shall be held at such place within or without the State of Delaware as may be fixed from time to time by the Board of Directors or the chief executive officer, or if not so designated, at the registered office of the Corporation.
Section 2. ANNUAL MEETING. Annual meetings of stockholders shall be held on or before the third Friday in September of each year if not a legal holiday, and if a legal holiday, then on the next secular day following, at 10:00 a.m., or at such other date and time as shall be designated from time to time by the Board of Directors or the chief executive officer, at which meeting the stockholders shall elect by a plurality vote a Board of Directors and shall transact such other businesses as may properly be brought before the meeting. If no annual meeting is held in accordance with the foregoing provisions, the Board of Directors shall cause the meeting to be held as soon thereafter as convenient, which meeting shall be designated a special meeting in lieu of annual meeting.
Section 3. SPECIAL MEETINGS. Special meetings of the stockholders, for any purpose or purposes, may, unless otherwise prescribed by statute or by the Certificate of Incorporation, be called by the Board of Directors or the chief executive officer and shall be called by the chief executive officer or secretary at the request in writing of a majority of the Board of Directors, or at the request in writing of stockholders owning at least thirty percent (30%) amount of the entire capital stock of the Corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. Business transacted at any special meeting shall be limited to matters relating to the purpose or purposes stated in the notice of meeting.
Section 4. NOTICE OF MEETINGS. Except as otherwise provided by law, written notice of each meeting of stockholders, annual or special, stating the place, date and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given not less than ten or more than sixty days before the date of the meeting, to each stockholder entitled to vote at such meeting.
Section 5. VOTING LIST. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city or town where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present.
Section 6. QUORUM. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business, except as otherwise provided by statute, the Certificate of Incorporation or these by-laws. Both abstentions and broker non-votes are to be counted as present for the purpose of determining the existence of a quorum for the transaction of business at any meeting. However, for purposes of determining the number of shares voting on a particular proposal, abstentions and broker non-votes are not to be counted as votes cast or shares voting. Where a separate vote by a class or classes is expressly required by law or the Certificate of Incorporation of the Corporation, a majority of the
outstanding shares of such class or classes, present in person or represented by proxy, shall constitute a quorum entitled to take action with respect to that vote on that matter.
Section 7. ADJOURNMENTS. Any meeting of stockholders may be adjourned from time to time to any other time and to any other place at which a meeting of stockholders may be held under these by-laws, which time and place shall be announced at the meeting, by a majority of the stockholders present in person or represented by proxy at the meeting and entitled to vote, though less than a quorum, or, if no stockholder is present or represented by proxy, by any officer entitled to preside at or to act as secretary of such meeting, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.
Section 8. ACTION AT MEETINGS. When a quorum is present at any meeting, the vote of the holders of a majority of the shares voting in person or represented by proxy and entitled to vote on the matter (or where a separate vote by a class or classes is expressly required by law or the Certificate of Incorporation of the Corporation, the vote of the majority of shares of such class or classes present in person or represented by proxy at the meeting) shall decide any matter (other than the election of Directors) brought before such meeting, unless the matter is one upon which by express provision of law, the Certificate of Incorporation or these by-laws, a different vote is required, in which case such express provision shall govern and control the decision of such matter. For purposes of determining the number of shares voting on a particular proposal, abstentions and broker non-votes are not to be counted as votes cast or shares voting. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of Directors.
Section 9. VOTING AND PROXIES. Unless otherwise provided in the Certificate of Incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote for each share of capital stock having voting power held of record by such stockholder. Each stockholder entitled to vote at a meeting of stockholders, or to express consent or dissent to corporate action in writing without a meeting, may authorize another person or persons to act for him by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period.
ARTICLE II DIRECTORS
Section 1. NUMBER, ELECTION, TENURE AND QUALIFICATION. The number of Directors which shall constitute the whole board shall be not less than one. Within such limit, the number of Directors shall be determined by resolution of the Board of Directors or by the stockholders at the annual meeting or at any special meeting of stockholders. The Directors shall be elected at the annual meeting or at any special meeting of the stockholders, except as provided in Section 3 of this Article, and each Director elected shall hold office until his successor is elected and qualified, unless sooner displaced. Directors need not be stockholders.
Section 2. ENLARGEMENT. The number of the Board of Directors may be increased at any time by vote of a majority of the Directors then in office.
Section 3. VACANCIES. Vacancies and newly created directorships resulting from any increase in the authorized number of Directors may be filled by a majority of the Directors then in office, though less than a quorum, or by a sole remaining Director, and the Directors so chosen shall hold office until the next annual election and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no Directors in office, then an election of Directors may be held in the manner provided by
statute. In the event of a vacancy in the Board of Directors, the remaining Directors, except as otherwise provided by law or these by-laws, may exercise the powers of the full board until the vacancy is filled.
Section 4. RESIGNATION AND REMOVAL. Any Director may resign at any time upon written notice to the Corporation at its principal place of business or to the chief executive officer or secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. Any Director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of Directors, unless otherwise specified by law or the Certificate of Incorporation.
Section 5. GENERAL POWERS. The business and affairs of the Corporation shall be managed by its Board of Directors, which may exercise all powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these by-laws directed or required to be exercised or done by the stockholders.
Section 6. CHAIRMAN OF THE BOARD. If the Board of Directors appoints a chairman of the board, he shall, when present, preside at all meetings of the stockholders and the Board of Directors. He shall perform such duties and possess such powers as are customarily vested in the office of the chairman of the board or as may be vested in him by the Board of Directors.
Section 7. PLACE OF MEETINGS. The Board of Directors may hold meetings, both regular and special, either within or without the State of Delaware.
Section 8. REGULAR MEETINGS. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the board; provided that any Director who is absent when such a determination is made shall be given prompt notice of such determination. A regular meeting of the Board of Directors may be held without notice immediately after and at the same place as the annual meeting of stockholders.
Section 9. SPECIAL MEETINGS. Special meetings of the board may be called by the chief executive officer, secretary, or on the written request of two or more Directors, or by one Director in the event that there is only one Director in office. Two days' notice to each Director, either personally or by telegram, cable, telecopy, commercial delivery service, telex or similar means sent to his business or home address, or three days' notice by written notice deposited in the mail, shall be given to each Director by the secretary or by the officer or one of the Directors calling the meeting. A notice or waiver of notice of a meeting of the Board of Directors need not specify the purposes of the meeting.
Section 10. QUORUM, ACTION AT MEETING, ADJOURNMENTS. At all meetings of the board a majority of Directors then in-office, but in no event less than one third of the entire board, shall constitute a quorum for the transaction of business and the act of a majority of the Directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by law or by the Certificate of Incorporation. For purposes of this section, the term "entire board" shall mean the number of Directors last fixed by the stockholders or Directors, as the case may be, in accordance with law and these by-laws; provided, however, that if less than all the number so fixed of Directors were elected, the "entire board" shall mean the greatest number of Directors so elected to hold office at any one time pursuant to such authorization. If a quorum shall not be present at any meeting of the Board of Directors, a majority of the Directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present.
Section 11. ACTION BY CONSENT. Unless otherwise restricted by the Certificate of Incorporation or these by-laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board or committee.
Section 12. TELEPHONIC MEETINGS. Unless otherwise restricted by the Certificate of Incorporation or these by-laws, members of the Board of Directors or of any committee thereof may participate in a meeting of the Board of Directors or of any committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting.
Section 13. COMMITTEES. The Board of Directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of one or more of the Directors of the Corporation. The board may designate one or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amending the by-laws of the Corporation; and, unless the resolution designating such committee or the Certificate of Incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Each committee shall keep regular minutes of its meetings and make such reports to the Board of Directors as the Board of Directors may request. Except as the Board of Directors may otherwise determine, any committee may make rules for the conduct of its business, but unless otherwise provided by the Directors or in such rules, its business shall be conducted as nearly as possible in the same manner as is provided in these by-laws for the conduct of its business by the Board of Directors.
Section 14. COMPENSATION. Unless otherwise restricted by the Certificate of Incorporation or these by-laws, the Board of Directors shall have the authority to fix from time to time the compensation of Directors. The Directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and the performance of their responsibilities as Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors and/or a stated salary as Director. No such payment shall preclude any Director from serving the Corporation or its parent or subsidiary corporations in any other capacity and receiving compensation therefore. The Board of Directors may also allow compensation for members of special or standing committees for service on such committees.
ARTICLE III OFFICERS
Section 1. ENUMERATION. The officers of the Corporation shall be chosen by the Board of Directors and shall be a president, a secretary and a treasurer and such other officers with such titles, terms of office and duties as the Board of Directors may from time to time determine, including a chairman of the board, one or more vice-presidents, and one or more assistant secretaries and assistant treasurers. If authorized by resolution of the Board of Directors, the chief executive officer may be empowered to appoint from time to time assistant secretaries and assistant treasurers. Any number of offices may be held by the same person, unless the Certificate of Incorporation or these by-laws otherwise provide.
Section 2. ELECTION. The Board of Directors at its first meeting after each annual meeting of stockholders shall choose a president, a secretary and a treasurer. Other officers may be appointed by the Board of Directors at such meeting, at any other meeting, or by written consent.
Section 3. TENURE. The officers of the Corporation shall hold office until their successors are chosen and qualify, unless a different term is specified in the vote choosing or appointing him, or until his earlier death, resignation or removal. Any officer elected or appointed by the Board of Directors or by the chief executive officer may be removed at any time by the affirmative vote of a majority of the Board of Directors or a committee duly authorized to do so, except that any officer appointed by the chief executive officer may also be removed at any time by the chief executive officer. Any vacancy occurring in any office of the Corporation may be filled by the Board of Directors, at its discretion. Any officer may resign by delivering his written resignation to the Corporation at its principal place of business or to the chief executive officer or the secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event.
Section 4. PRESIDENT. The president shall be the chief operating officer of the Corporation. He shall also be the chief executive officer unless the Board of Directors otherwise provides. The president shall, unless the Board of Directors provides otherwise in a specific instance or generally, preside at all meetings of the stockholders and the Board of Directors, have general and active management of the business of the Corporation and see that all orders and resolutions of the Board of Directors are carried into effect. The president shall execute bonds, mortgages, and other contracts requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation.
Section 5. VICE-PRESIDENTS. In the absence of the president or in the event of his inability or refusal to act, the vice-president, or if there be more than one vice-president, the vice-presidents in the order designated by the Board of Directors or the chief executive officer (or in the absence of any designation, then in the order determined by their tenure in office) shall perform the duties of the president, and when so acting, shall have all the powers of and be subject to all the restrictions upon the president. The vice-presidents shall perform such other duties and have such other powers as the Board of Directors or the chief executive officer may from time to time prescribe.
Section 6. SECRETARY. The secretary shall have such powers and perform such duties as are incident to the office of secretary. He shall maintain a stock ledger and prepare lists of stockholders and their addresses as required and shall be the custodian of corporate records. The secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all the proceedings of the meetings of the Corporation and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be from time to time prescribed by the Board of Directors or chief executive officer, under whose supervision he shall be. He shall have custody of the corporate seal of the Corporation and he, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his signature or by the signature of such assistant secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his signature.
Section 7. ASSISTANT SECRETARIES. The assistant secretary, or if there be more than one, the assistant secretaries in the order determined by the Board of Directors, the chief executive officer or the secretary (or if there be no such determination, then in the order determined by their tenure in office), shall, in the absence of the secretary or in the event of his inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the Board of Directors, the chief executive officer or the secretary may from time to time prescribe. In the absence of the secretary or any assistant secretary at any meeting of stockholders or Directors, the person presiding at the-meeting shall designate a temporary or acting secretary to keep a record of the meeting.
Section 8. TREASURER. The treasurer shall perform such duties and shall have such powers as may be assigned to him by the Board of Directors or the chief executive officer. In addition, the treasurer shall perform such duties and have such powers as are incident to the office of treasurer. The treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the chief executive officer and the Board of Directors, when the chief executive officer or Board of Directors so requires, an account of all his transactions as treasurer and of the financial condition of the Corporation.
Section 9. ASSISTANT TREASURERS. The assistant treasurer, or if there shall be more than one, the assistant treasurers in the order determined by the Board of Directors, the chief executive officer or the treasurer (or if there be no such determination, then in the order determined by their tenure in office), shall, in the absence of the treasurer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the Board of Directors, the chief executive officer or the treasurer may from time to time prescribe.
Section 10. BOND. If required by the Board of Directors, any officer shall give the Corporation a bond in such sum and with such surety or sureties and upon such terms and conditions as shall be satisfactory to the Board of Directors, including without limitation a bond for the faithful performance of the duties of his office and for the restoration to the Corporation of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control and belonging to the Corporation.
ARTICLE IV NOTICES
Section 1. DELIVERY. Whenever, under the provisions of law, or of the Certificate of Incorporation or these by-laws, written notice is required to be given to any Director or stockholder, such notice may be given by mail, addressed to such Director or stockholder, at his address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Unless written notice by mail is required by law, written notice may also be given by telegram, cable, telecopy, commercial delivery service, telex or similar means, addressed to such Director or stockholder at his address as it appears on the records of the Corporation, in which case such notice shall be deemed to be given when delivered into the control of the persons charged with effecting such transmission, the transmission charge to be paid by the Corporation or the person sending such notice and not by the addressee. Oral notice or other in-hand delivery (in person or by telephone) shall be deemed given at the time it is actually given.
Section 2. WAIVER OF NOTICE. Whenever any notice is required to be given under the provisions of law or of the Certificate of Incorporation or of these by-laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto.
ARTICLE V INDEMNIFICATION
Section 1. THIRD PARTY ACTIONS. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a Director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise (each an "Indemnitee"), against expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding.
Section 2. DERIVATIVE ACTIONS. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a Director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit.
Section 3. EXPENSES. To the extent that a Director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 1 and 2, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith.
Section 4. AUTHORIZATION AND REQUEST FOR INDEMNIFICATION.
(a) Any indemnification requested by the Indemnitee under Section 1 hereof shall be made no later than ten (10) days after receipt of the written request of the Indemnitee, unless it shall have been adjudicated by a court of final determination that the Indemnitee did not act in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful.
(b) Any indemnification requested by the Indemnitee under Section 2 hereof shall be made no later than ten (10) days after receipt of the written request of the Indemnitee, unless it shall have been adjudicated by a court of final determination that the Indemnitee did not act in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation, the Indemnitee shall have been finally adjudged to be liable to the Company by a court of competent jurisdiction due to willful misconduct of a culpable nature in the performance of the Indemnitee's duty to the Corporation unless and only to the extent that any court in which such proceeding was brought shall determine upon application that despite the adjudication of liability, but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as such court shall deem proper.
Section 5. ADVANCE PAYMENT OF EXPENSES. Subject to Section 4 above, the Corporation shall advance all expenses incurred by the Indemnitee in connection with the investigation, defense, settlement or appeal of any proceeding to which the Indemnitee is a party or is threatened to be made a party by reason of the fact that the Indemnitee is or was an agent of the Corporation. The Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined that the Indemnitee is not entitled to be indemnified by the Corporation. The advances to be made hereunder shall be paid by the Corporation to or on behalf of the Indemnitee within 30 days following delivery of a written request therefor by the Indemnitee to the Corporation.
Section 6. NON-EXCLUSIVENESS. The indemnification provided by this Article V shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any by-law, agreement, vote of stockholders or disinterested Directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a Director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.
Section 7. INSURANCE. The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a Director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article V.
Section 8. CONSTITUENT CORPORATIONS. The Corporation shall have power to indemnify any person who is or was a director, officer, employee or agent of a constituent corporation absorbed in a consolidation or merger with this Corporation or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, in the same manner as hereinabove provided for any person who is or was a Director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise.
Section 9. ADDITIONAL INDEMNIFICATION. In addition to the foregoing provisions of this Article V, the Corporation shall have the power, to the full extent provided by law, to indemnify any person for any act or omission of such person against all loss, cost, damage and expense (including attorney's fees) if such person is determined (in the manner prescribed in Section 4 hereof) to have acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interest of the Corporation.
ARTICLE VI CAPITAL STOCK
Section 1. CERTIFICATES OF STOCK. Every holder of stock in the Corporation shall be entitled to have a certificate, signed by, or in the name of the Corporation by, the chairman or vice-chairman of the Board of Directors, or the president or a vice-president and the treasurer or an assistant treasurer, or the secretary or an assistant secretary of the Corporation, certifying the number of shares owned by him in the Corporation. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. Certificates may be issued for partly paid shares and in such case upon the face or back of the certificates issued to represent any such partly paid shares, the total amount of the consideration to be paid therefor, and the amount paid thereon shall be specified.
Section 2. LOST CERTIFICATES. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to give reasonable evidence of such loss, theft or destruction, to advertise the same in such manner as it shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed or the issuance of such new certificate.
Section 3. TRANSFER OF STOCK. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares, duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, and proper evidence of compliance with other conditions to rightful transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books.
Section 4. RECORD DATE. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which shall not be more than sixty days nor less then ten days
before the date of such meeting. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. If no record date is fixed, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day before the day on which notice is given, or, if notice is waived, at the close of business on the day before the day on which the meeting is held. In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which shall not precede the date upon which the resolution fixing the record date is adopted, and which shall be not more than sixty days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating to such purpose.
Section 5. REGISTERED STOCKHOLDERS. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VII CERTAIN TRANSACTIONS
Section 1. TRANSACTIONS WITH INTERESTED PARTIES. No contract or transaction between the Corporation and one or more of its Directors or officers, or between the Corporation and any other Corporation, partnership, association, or other organization in which one or more of its Directors or officers are Directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the Director or officer is present at or participates in the meeting of the board or committee thereof which authorizes the contract or transaction or solely because his or their votes are counted for such purpose, if:
(a) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested Directors, even though the disinterested Directors be less than a quorum; or
(b) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or
(c) The contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof, or the stockholders.
Section 2. QUORUM. Common or interested Directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction.
ARTICLE VIII GENERAL PROVISIONS
Section 1. DIVIDENDS. Dividends upon the capital stock of the Corporation, if any, may be declared by the Board of Directors at any regular or special meeting or by written consent, pursuant to law.
Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation.
Section 2. RESERVES. The Directors may set apart out of any funds of the Corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve.
Section 3. CHECKS. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate.
Section 4. FISCAL YEAR. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors.
Section 5. SEAL. The Board of Directors may, by resolution, adopt a corporate seal. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the word "Delaware". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. The seal may be altered from time to time by the Board of Directors.
ARTICLE IX AMENDMENTS
These by-laws may be altered, amended or repealed or new by-laws may be adopted by the stockholders or by the Board of Directors, when such power is conferred upon the Board of Directors by the Certificate of Incorporation, at any regular meeting of the stockholders or of the Board of Directors or at any special meeting of the stockholders or of the Board of Directors provided, however, that in the case of a regular or special meeting of stockholders, notice of such alteration, amendment, repeal or adoption of new by-laws be contained in the notice of such meeting.
In the event of any conflict of any provision of these by-laws and the Corporation's Certificate of Incorporation, as amended from time to time, and including any certificate of designation filed with respect to the Corporation's preferred stock, the provisions of such instruments shall in all events supersede, govern and control the provisions of these by-laws.
EXHIBIT 11.01
NETEGRITY, INC.
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
EXHIBIT 22.01
NETEGRITY, INC.
SUBSIDIARIES OF THE REGISTRANT
The Company does not own any subsidiaries in whole or in part.
Exhibit 24.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of Netegrity, Inc. on Form S-8 (File Nos. 333-44893, 333-44895, 333-58759) of our report dated February 8, 1999, on our audits of the consolidated financial statements and financial statement schedules of Netegrity, Inc. as of December 31, 1998 and 1997, and for the years ended December 31, 1998 and 1997 and the nine-month transition period ended December 31, 1996, which report is included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Boston, Massachusetts February 8, 1999