10-Q/A 1 e10-qa.txt NETEGRITY, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-10139 NETEGRITY, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 04-2911320 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 245 WINTER STREET WALTHAM, MA 02451 (Address of principal executive offices) (Zip Code) (781) 890-1700 (Registrant's Telephone Number) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such other shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days [X] Yes No [ ] As of May 5, 2000 there were 19,327,655 shares of Common Stock outstanding, exclusive of Treasury stock. 1 2 FORM 10-Q/A QUARTERLY REPORT TABLE OF CONTENTS
Facing Sheet.................................................................................. 1 Table of Contents............................................................................. 2 PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999................................................... 3 Consolidated Statements of Operations for the three months ended March 31, 2000 and 1999................................ 4 Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 1999................................ 5 Notes to Consolidated Financial Statements............................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 7 Item 3. Quantitative and Qualitative Disclosures About Market Risk............................ 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings..................................................... 18 Item 2. Changes in Securities................................................. 18 Item 3. Defaults upon Senior Securities....................................... 18 Item 4. Submission of Matters to a Vote of Security Holders................... 18 Item 5. Other Information..................................................... 19 Item 6. Exhibits ............................................................. 19 SIGNATURES.................................................................................... 19 Exhibit 27.................................................................................... 20
2 3 PART I. - FINANCIAL INFORMATION NETEGRITY, INC. CONSOLIDATED BALANCE SHEETS
March 31, 2000 December 31, (unaudited) 1999 Restated Restated ------------------------------------- ASSETS Current Assets: Cash and cash equivalents ......................................... $103,215,704 $102,878,564 Accounts receivable-trade, net of allowance for doubtful accounts of $483,973 at March 31, 2000 and December 31, 1999 .... 6,278,656 4,730,626 Prepaid expenses and other current assets ......................... 2,236,274 1,361,568 ------------ ------------ Total current assets ........................................... 111,730,634 108,970,758 Property and equipment, net ......................................... 2,902,839 1,884,749 Other assets ........................................................ 149,445 114,118 ------------ ------------ Total Assets ................................................... $114,782,918 $110,969,625 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable-trade ............................................... 400,647 1,090,747 Accrued compensation and benefits .................................... 1,457,610 1,420,119 Other accrued expenses ............................................... 614,731 675,913 Deferred revenue ..................................................... 2,468,203 1,349,232 ------------- ------------- Total current liabilities ......................................... 4,941,191 4,536,011 ------------- ------------- Stockholders' Equity: Common stock, voting, $.01 par value; 55,000,000 shares authorized; 19,250,174 shares issued and 19,225,073 shares outstanding at March 31, 2000; 17,114,962 shares issued and 17,089,861 shares outstanding at December 31, 1999 ............................................................... 192,502 171,150 Additional paid-in capital ........................................... 135,607,584 131,285,569 Accumulated deficit .................................................. (25,744,702) (24,809,448) Loan to officer ...................................................... (130,000) (130,000) ------------- ------------- 109,925,384 106,517,271 Less -- Treasury Stock, at cost: 25,101 shares ......................... (83,657) (83,657) ------------- ------------- Total stockholders' equity ........................................ 109,841,727 106,433,614 ------------- ------------- Total liabilities and stockholders' equity ........................ $ 114,782,918 $ 110,969,625 ============= =============
The accompanying notes are an integral part of the consolidated financial statements. 3 4 NETEGRITY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the three months ended March 31, 2000 1999 Restated Restated ------------ ------------ Revenues: SiteMinder software ................................ $ 4,762,630 $ 994,935 SiteMinder services ................................ 1,253,817 358,310 Other .............................................. 729,645 706,789 ------------ ------------ Total revenues ..................................... 6,746,092 2,060,034 ------------ ------------ Cost of SiteMinder software .......................... 349,310 114,440 Cost of SiteMinder services .......................... 759,766 204,247 Cost of other ........................................ 379,144 396,284 ------------ ------------ Total cost of revenues ............................. 1,488,220 714,971 ------------ ------------ Gross profit ......................................... 5,257,872 1,345,063 ------------ ------------ Selling, general and administrative expenses.......... 5,569,488 2,101,119 Research and development costs ....................... 1,486,118 699,399 Non-cash stock compensation expense .................. 353,254 647,164 ------------ ------------ Loss from operations ................................. (2,150,988) (2,102,619) Interest income (expense), net ....................... 1,215,734 19,708 ------------ ------------ Net loss ............................................. $ (935,254) $ (2,082,911) Accretion of preferred stock ......................... -- (137,627) ------------ ------------ Net loss attributable to common stockholders ......... (935,254) (2,220,538) ============ ============ Basic and diluted earnings per share: Net loss attributable to common stockholders ......... $ (0.05) $ (0.22) ============ ============ Weighted average shares outstanding .................. 18,116,000 9,910,000
The accompanying notes are an integral part of the consolidated financial statements. 4 5 NETEGRITY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the three months ended March 31, 2000 1999 Restated Restated -------- -------- OPERATING ACTIVITIES: Net loss $ (935,254) $(2,082,911) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 170,891 157,755 Provision for doubtful accounts receivable -- (8,500) Compensation expense related to warrant 353,254 647,164 Changes in operating assets and liabilities: Accounts receivable (1,548,030) (32,473) Prepaid expenses and other current assets (874,706) 24,984 Other assets (35,327) (11,515) Accounts payable-trade (690,100) 329,355 Accrued compensation and benefits 37,491 73,460 Other accrued expenses (61,182) 60,473 Deferred revenue 1,118,971 67,790 ------------ -------------- Net cash used for operating activities (2,463,992) (774,418) INVESTING ACTIVITIES: Capital expenditures for equipment and leasehold improvements (1,188,981) (104,947) ------------ -------------- FINANCING ACTIVITITES: Net proceeds from issuance of common stock 3,990,113 4,647,254 ------------ -------------- Net increase in cash and cash equivalents 337,140 3,767,889 Cash and cash equivalents at beginning of period 102,878,564 1,174,625 ------------ -------------- Cash and cash equivalents at end of period $103,215,704 $ 4,942,514 ============ ==============
The accompanying notes are an integral part of the financial statements. 5 6 NETEGRITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - The unaudited financial information furnished herein reflects all adjustments which are of a normal recurring nature, which in the opinion of management are necessary to fairly state the Company's financial position, cash flows and results of operations for the periods presented. Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. This information should be read in conjunction with the Company's audited financial statements for the fiscal year ended December 31, 1999, included in Form 10-K filed on March 20, 2000. REVISION The Company has revised its consolidated financial statements for the years ended December 31, 1999 and 1998 and the three months ended March 31, 2000. The adjustments were to record non-cash compensation expenses for a warrant to purchase shares of common stock which was issued to a director in connection with the sale of the Series D Preferred Stock in January 1998. Due to certain terms of the warrant, the warrant is being accounted for as a variable award. The expense recorded reflects the increase in the fair market value of the Company's common stock since the date of issuance over the vesting period until exercised. The adjustments were also required to reclassify the presentation of the redeemable Series D Preferred Stock which was issued during 1998 and to record a related immediate beneficial conversion feature and subsequent accretion for cumulative dividends on the preferred stock until its conversion into common stock on September 30, 1999. The consolidated financial statements and related notes to the consolidated financial statements in this Form 10-Q/A reflect all such revisions through March 31, 2000. The adjustments to the financial statements had no impact on the Company's total assets, total revenues or cash flows. A summary of the impact of the adjustments for the three months ended March 31, 2000 and 1999 is as follows:
For the three months ended March 31, -------------------------------------------------------------- 2000 1999 ----------------------------- ---------------------------- As previously As As previously As reported restated reported restated ----------------------------- ---------------------------- Non-cash stock compensation expense ......... $ -- $ 353,254 $ -- $ 647,164 Loss from operations ......................... (1,797,734) (2,150,988) (1,455,455) (2,102,619) Net loss ..................................... (582,000) (953,254) (1,435,747) (2,082,911) Accretion of preferred stock ................. -- -- -- (137,627) Net loss attributable to common stockholders ................................ (582,000) (953,254) (1,435,747) (2,220,538) Basic and diluted earnings per share: Net loss attributable to common stockholders.. (0.03) (0.05) (0.14) (0.22)
NOTE 2 - Certain 1999 information has been reclassified to conform with the 2000 financial statement presentation. NOTE 3 - The results of operations for the three months ended March 31, 2000 are not necessarily indicative of the results to be expected for the remainder of the year ending December 31, 2000. NOTE 4 - Basic net loss per share is computed using the weighted average number of shares of common stock outstanding. Diluted EPS is based upon the weighted average number of common and common equivalent shares outstanding during the period. Diluted net loss per share does not differ from basic net loss per share since potential common shares from stock options and warrants and convertible preferred stock which are convertible into common stock are anti-dilutive for all periods presented. NOTE 5 - Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources, including foreign currency translation adjustments and unrealized gains and losses on marketable securities. For the three months ended March 31, 2000 and 1999, comprehensive income (loss) was not materially different from net income (loss). NOTE 6 - In December 1998, the Accounting Standards Executive Committee, or AcSEC, issued SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions." SOP 98-9 amends SOP 97-2 to require that an entity recognize revenue for multiple element arrangements by means of the "residual method" when (1) there is vendor-specific objective evidence of the fair values of all the undelivered elements that are not accounted for by means of long-term contract accounting and (2) vendor-specific objective evidence of fair value does not exist for one or more of the delivered elements. All revenue recognition criteria of SOP 97-2 and SOP 98-9 will be effective for our transactions entered into beginning in our year ending December 31, 2000. We do not expect SOP 98-9 to have a material effect on our financial position or results of operations. In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." This bulletin summarizes certain views of the staff on applying generally accepted accounting principles to revenue recognition in financial statements. The Company is currently determining the impact that SAB 101 will have on our financial position or results of operations. In March 2000, the Financial Accounting Standard Board issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation -- an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44 clarifies the application of APB Opinion No. 25 to certain issues including: the definition of an employee for purposes of applying APB Opinion No. 25; the criteria for determining whether a plan qualifies as a noncompensatory plan; the accounting consequences of various modification to the terms of previously fixed stock options or awards; and the accounting for the exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN 44 are applicable retroactively to specific events occurring after either December 15, 1998 or January 12, 2000. The Company does not expect the application of FIN 44 to have a material impact on the Company's financial position or results of operations. NOTE 7 - 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. 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 833,334 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. The Series D Preferred Stock converted one for one to common stock in September 1999. In conjunction with the Pequot Agreement as described above, warrants to purchase a total of 1,500,786 shares of common stock exercisable at $2.00 were issued to Pequot expiring on January 7, 2003. The warrants were exercised in February 2000. NOTE 8 - Common Stock: On February 8, 1999 the Company sold 795,651 shares of common stock at $5.75 per share. On September 9, 1999, the Company sold 534,242 shares of common stock to certain investors in a private placement at a price of $20.59 per share. On November 10, 1999, the Company sold 2,500,000 shares of common stock at a price of $40.00 per share in a follow on public offering. On December 9, 1999 the Company sold an additional 12,500 shares of common stock at a price of $40.00 per share pursuant to the exercise of the underwriter overallotment option. NOTE 9 - In September 1999 the holders of all of the Company's outstanding preferred stock surrendered their shares for conversion into common stock. On October 7, 1999, the stockholders of the Company approved and the Company filed an amendment to the Company's certificate of incorporation increasing the number of authorized shares of the Company's common stock to 55,000,000. NOTE 10 - The Company considers that it has the following five reportable operating segments based on differences in products and services. Operating segments are defined as components of the enterprise about which separate financial information is available that is reviewed regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing their performance.
For the three months ended March 31, ------------------------------------------ 2000 1999 ------------------- ------------------ Gross Gross Revenue Margin Revenue Margin ------- ------ ------- ------ Operating Segments: SiteMinder software .......... $4,762,630 $4,413,320 $ 994,935 $ 880,495 ---------- ---------- ---------- ---------- SiteMinder services: Maintenance.................. 325,617 325,617 95,710 95,710 Training and consulting...... 928,200 168,434 262,600 58,353 ---------- ---------- ---------- ---------- 1,253,817 494,051 358,310 154,063 ---------- ---------- ---------- ---------- Other Software and related products..................... 304,834 112,120 382,327 131,254 Services...................... 424,811 238,381 324,462 179,251 ---------- ---------- ---------- ---------- 729,645 350,501 706,789 310,505 ---------- ---------- ---------- ---------- Totals........................ $6,746,092 $5,257,872 $2,060,034 $1,345,063 ========== ========== ========== ==========
Certain expenses related to maintenance are included in operating expenses based upon the Company's management reporting practice and it has not been practical to allocate these expenses to cost of maintenance. 6 7 2. Management's Discussion & Analysis of Financial Condition and Results of Operations FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA This report and the documents incorporated in it by reference contain forward-looking statements about our plans, objectives, expectations and intentions. You can identify these statements by words such as "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate," "may," "will" and "continue" or similar words. You should read statements that contain these words carefully. They discuss our future expectations, contain projections of our future results of operations or our financial condition or state other forward-looking information, and may involve known and unknown risks over which we have no control. You should not place undue reliance on forward-looking statements. We cannot guarantee any future results, levels of activity, performance or achievements. Moreover, we assume no obligation to update forward-looking statements or update the reasons actual results could differ materially from those anticipated in forward-looking statements. The factors discussed in the sections captioned "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" in this report and the documents incorporated in it by reference identify important factors that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. This report and the documents incorporated in it by reference contain data related to the e-commerce market. These market data have been included in studies published by the market research firms of Forrester Research and International Data Corporation. These data include projections that are based on a number of assumptions, including increasing worldwide business use of the Internet, the growth in the number of web access devices per user, the absence of any failure of the Internet, and the continued improvement of security on the Internet. If any of these assumptions is incorrect, actual results may differ from the projections based on those assumptions. RISK FACTORS The Private Securities Litigation Reform Act of 1995 contains certain safe harbors regarding forward-looking statements. In that context, the discussion in this Item contains forward-looking statements which involve certain degrees of risk and uncertainties, including statements relating to liquidity and capital resources. Except for the historical information contained herein, the matters discussed in this section are such forward-looking statements that involve risks and uncertainties, including: WE HAVE INCURRED SUBSTANTIAL LOSSES AND MAY NOT BE PROFITABLE IN THE FUTURE. In recent years, we have incurred substantial operating losses in every fiscal period. We cannot predict when we will become profitable, if at all, and if we do, that we will remain profitable for any substantial period of time. Failure to achieve profitability within the time frame expected by investors may adversely affect the market price of our common stock. In the three months ended March 31, 2000, we had a net loss of $935,254. As a result of ongoing operating losses, at March 31, 2000, we had an accumulated deficit of $25.7 million. We have generated relatively small amounts of SiteMinder revenues until recent fiscal quarters, while increasing expenditures in all areas, particularly in research and development and sales and marketing, in order to execute our business plan. Although we have experienced revenue growth in connection with SiteMinder in recent periods, the growth has been off of a small base, and it is unlikely that the recent growth rates are sustainable. DISAPPOINTING QUARTERLY RESULTS COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO FALL SUBSTANTIALLY. Our quarterly revenues and operating results are difficult to predict and may fluctuate significantly from quarter to quarter. If our quarterly revenues or operating results fall below the expectations of investors, the price of our common stock could fall substantially. Our quarterly revenues may fluctuate for several reasons, including the following: - market acceptance of our SiteMinder products; - our success in obtaining follow-on sales to existing customers; - the long sales and deployment cycle for sales of SiteMinder licenses; - our ability to hire and retain personnel, particularly in services and sales and marketing; - the release of new versions of SiteMinder or other products; and - the development of our direct and indirect sales channels. In addition, because our revenues from services are largely correlated with our SiteMinder software revenues, a decline in SiteMinder software revenues could also cause a decline in our SiteMinder services revenues in the same quarter or in subsequent quarters. Other factors, many of which are outside our control, could also cause variations in our quarterly revenues and operating results. 7 8 Most of our expenses, such as employee compensation and rent, are relatively fixed. Moreover, our expense levels are based, in part, on our expectations regarding future revenue increases. As a result, any shortfall in revenues in relation to our expectations could cause significant changes in our operating results from quarter to quarter and could result in increased quarterly losses. OUR FUTURE SUCCESS WILL DEPEND ON OUR ABILITY TO MARKET SITEMINDER AND RELATED SERVICES SUCCESSFULLY. The sale of SiteMinder licenses and related services provides a substantial majority of our total revenues. These sales accounted for 89% of our total revenues for the three months ended March 31, 2000. We expect that our future financial performance will depend on SiteMinder sales. Prior to the release of SiteMinder 3.0 in June 1998, there had been very few commercial installations of SiteMinder. Since June 1998, all commercial deployments of SiteMinder have supported business-to-business web applications. Broad market acceptance of SiteMinder will depend on the development of the market for secure portal management, including usage of 8 9 SiteMinder for business-to-consumer applications, and customer demand for the specific functionality of SiteMinder. We cannot be sure that either will occur. Like most technology products at an early stage of development, SiteMinder may require extensive reengineering or upgrading if it fails to meet the performance needs or expectations of our customers when shipped or contains significant software defects or bugs. If we fail in marketing SiteMinder products and services, for whatever reason, our business would be harmed. OUR SUCCESS IS DEPENDENT ON OUR ABILITY TO ENHANCE OUR SITEMINDER PRODUCT LINE AND DEVELOP NEW PRODUCTS. We believe our success is dependent, in large part, on our ability to enhance and broaden our SiteMinder product line to meet the evolving needs of both the business-to-business and business-to-consumer market. We cannot be sure that we will be able to respond effectively to technological changes or new industry standards or developments. In the past, we have been forced to delay introduction of several new product versions. In the future, we could be adversely affected if we incur significant delays or are unsuccessful in enhancing our SiteMinder product line or developing new products, or if any of our enhancements or new products do not gain market acceptance. OUR PERFORMANCE DEPENDS ON OUR ABILITY TO OBTAIN FOLLOW-ON SALES. Customers typically place small initial orders for SiteMinder installations to allow them to evaluate its performance. Our strategy is to pursue more significant follow-on sales after these initial installations. Our financial performance depends on successful initial deployments of SiteMinder that, in turn, lead to follow-on sales. We cannot be sure that initial deployments of SiteMinder by our customers will be successful, or that we will be able to obtain follow-on sales. WE FACE SIGNIFICANT COMPETITION FROM THE INTERNAL EFFORTS OF POTENTIAL CUSTOMERS AND FROM OTHER TECHNOLOGY COMPANIES AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY. The market for secure user management products and services is relatively immature and highly competitive. We expect the level of competition to increase as a result of the anticipated growth of e-commerce. Until recently, our primary source of competition was from secure user management software developed in-house. Many of our potential customers have the resources to establish in-house software development capabilities, and some of them, from time to time, may choose to develop their own secure user management technology that is competitive with ours. In addition, we have faced competition from web development professional services organizations. Today our primary competitors include enCommerce and the partnership between IBM and DASCOM. In addition, a number of other security and software companies have indicated that they offer products which may compete with ours. We expect that additional competitors will emerge in the future. Current and potential competitors have established, or may in the future establish, cooperative relationships with third parties to increase the availability of their products to the marketplace. It is possible that new competitors or alliances may emerge and rapidly acquire significant market share. Potential competitors may have significantly greater financial, marketing, technical and other competitive resources than we have. If, in the future, a competitor chooses to bundle a competing secure user management product with other e-commerce applications, the demand for our products might be substantially reduced. Many of these factors are out of our control, and there can be no assurance that we can maintain or enhance our competitive position against current and future competitors. THE DEVELOPMENT OF A MARKET FOR SITEMINDER IS UNCERTAIN. We provide secure user management solutions for web-based e-commerce applications. Our market is new and rapidly evolving. If the market for secure user management solutions does not grow at a significant rate, this will have a material adverse effect on our business, operating results and financial condition. As is typical for new and rapidly evolving industries, customer demand for recently introduced secure user management products is highly uncertain. 9 10 OUR BUSINESS WILL BE ADVERSELY AFFECTED IF THE INTERNET DOES NOT BECOME A VIABLE AND SUBSTANTIAL COMMERCIAL MEDIUM. Our future success depends heavily on the acceptance and wide use of the Internet for e-commerce. If e-commerce does not continue to grow or grows more slowly than expected, significant demand for SiteMinder and related services may fail to develop. Consumers and businesses may reject the Internet as a viable commercial medium for a number of reasons, including potentially inadequate network infrastructure, slow development of enabling technologies, insufficient commercial support or privacy concerns. In addition, delays in the development or adoption of new standards and protocols required to handle increased levels of e-commerce, or increased government regulation or taxation, could cause the Internet to lose its viability as a commercial medium. REGULATIONS OR CONSUMER CONCERNS REGARDING THE USE OF "COOKIES" ON THE INTERNET COULD REDUCE THE FUNCTIONALITY OF SITEMINDER. SiteMinder uses cookies to support its single sign-on functionality. A cookie is information keyed to a specific user that is stored on the hard drive of the user's computer, typically without the user's knowledge. Cookies are generally removable by the user, and can be refused by the user at the point at which the information would be stored on the user's hard drive. A number of governmental bodies and commentators in the United States and abroad have urged passage of laws limiting or abolishing the use of cookies. The passage of laws limiting or abolishing the use of cookies, or the widespread deletion or refusal of cookies by web site users, could reduce or eliminate the effectiveness of single sign-on and could reduce market demand for SiteMinder. WE MUST HIRE AND RETAIN SKILLED PERSONNEL IN A TIGHT LABOR MARKET. Qualified personnel are in great demand throughout the software industry. Our success depends, in large part, upon our ability to attract, train, motivate and retain highly skilled employees, particularly software engineers, professional services personnel, sales and marketing personnel, and other senior personnel. Our failure to attract and retain the highly trained technical personnel that are integral to our product development, professional services and direct sales teams may limit the rate at which we can generate sales and develop new products or product enhancements. This could have a material adverse effect on our business, operating results and financial condition. OUR SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP OUR DIRECT SALES AND INDIRECT DISTRIBUTION CHANNELS. To increase our revenues, we must develop our direct sales channel and increase the number of our indirect channel partners. A failure to do so could have a material adverse effect on our business, operating results and financial condition. There is intense competition for sales personnel in our business, and we cannot be sure that we will be successful in attracting, integrating, motivating and retaining sales personnel. In addition, we must increase the number of strategic partnerships and other third-party relationships with vendors of Internet-related systems and application software, resellers and systems integrators. Our existing or future channel partners may choose to devote greater resources to marketing and supporting the products of other companies. In addition, we will need to resolve potential conflicts among our sales force and channel partners. OUR FAILURE TO EXPAND OUR PROFESSIONAL SERVICES RESOURCES COULD LIMIT THE SUCCESS OF SITEMINDER. Our professional services organization provides critical support to our customers' installation and deployment of SiteMinder. If we fail to expand our professional services resources, our ability to increase sales of SiteMinder may be limited. In addition, if we cannot adequately support SiteMinder installations, our customers' use of our products may fail, which could harm our reputation and hurt our business. 10 11 OUR LENGTHY SALES CYCLE MAKES IT DIFFICULT TO PREDICT OUR QUARTERLY OPERATING RESULTS. We have a long sales cycle because we generally need to educate potential customers regarding the use and benefits of SiteMinder. Our sales cycle varies depending on the size and type of customer contemplating a purchase and whether we have conducted business with a potential customer in the past. These potential customers frequently need to obtain approvals from multiple decision makers prior to making purchase decisions. Our long sales cycle, which can range from several weeks to several months or more, makes it difficult to predict the quarter in which sales will occur. Delays in sales could cause significant variability in our revenues and operating results for any particular period. OUR FAILURE TO MANAGE OUR RAPID GROWTH EFFECTIVELY COULD HURT OUR BUSINESS. Our failure to manage our rapid growth effectively could have a material adverse effect on the quality of our products, our ability to retain key personnel and our business, operating results and financial condition. We have been experiencing a period of rapid growth that has been placing a significant strain on all of our resources. From December 31, 1999 to March 31, 2000, the number of our employees increased from 138 to 159. To manage future growth effectively we must maintain and enhance our financial and accounting systems and controls, integrate new personnel and manage expanded operations. IF WE LOSE THE SERVICES OF BARRY BYCOFF OR ANY OTHER MEMBER OF OUR MANAGEMENT TEAM, OUR BUSINESS COULD SUFFER. Our future success depends, to a significant degree, on the skill, experience and efforts of Barry Bycoff, our chief executive officer, and the rest of our management team. The loss of any member of our management team could have a material adverse effect on our business, operating results and financial condition. We also depend on the ability of our officers and key employees to work effectively as a team. AS WE EXPAND OUR INTERNATIONAL OPERATIONS, WE WILL FACE NEW RISKS TO OUR SUCCESS. Historically, we have not derived a significant portion of our total revenues from sales to customers outside the United States. However, we intend to expand our international operations in the future. This expansion will require additional resources and management attention, and will subject us to new regulatory, economic and political risks. We have very little experience in international markets. As a result, we cannot be sure that our expansion into global markets will be successful. In addition, we will face new risks in doing business internationally. These risks could reduce demand for our products and services, increase the prices at which we can sell our products and services, or otherwise have an adverse effect on our operating results. Among the risks we believe are most likely to affect us are: - longer payment cycles and problems in collecting accounts receivable; - adverse changes in trade and tax regulations, including restrictions on the import and export of sensitive technologies, such as encryption technologies, that we use or may wish to use in our software products; - the absence or significant lack of legal protection for intellectual property rights; - difficulties in managing an organization spread over several countries, including complications arising from cultural, language and time differences that may lengthen sales and implementation cycles; - currency risks, including fluctuations in exchange rates; and - political and economic instability. OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR PROPRIETARY RIGHTS. Our success depends to a significant degree upon the protection of our software and other proprietary technology. The unauthorized reproduction or other misappropriation of our proprietary technology could enable third parties to benefit from our technology without paying us for it. This could have a material adverse effect on our business, operating results and financial condition. We depend upon a combination of 11 12 trademark, trade secret and copyright laws, license agreements and non-disclosure and other contractual provisions to protect proprietary and distribution rights in our products. In addition, we attempt to protect our proprietary information and the proprietary information of our vendors and partners through confidentiality and/or license agreements with our employees and others. Although we have taken steps to protect our proprietary technology, they may be inadequate. Existing trade secret, copyright and trademark laws offer only limited protection. Moreover, the laws of other countries in which we market our products may afford little or no effective protection of our intellectual property. If we resort to legal proceedings to enforce our intellectual property rights, the proceedings could be burdensome and expensive, even if we were to prevail. CLAIMS BY OTHER COMPANIES THAT WE INFRINGE THEIR PROPRIETARY TECHNOLOGY COULD HURT OUR FINANCIAL CONDITION. If we discover that any of our products violated third party proprietary rights, there can be no assurance that we would be able to reengineer our product or to obtain a license on commercially reasonable terms to continue offering the product without substantial reengineering. We do not conduct comprehensive patent searches to determine whether the technology used in our products infringes patents held by third parties. In addition, product development is inherently uncertain in a rapidly evolving technology environment in which there may be numerous patent applications pending, many of which are confidential when filed, with regard to similar technologies. Any claim of infringement could cause us to incur substantial costs defending against the claim, even if the claim is invalid, and could distract our management from our business. Furthermore, a party making such a claim could secure a judgment that requires us to pay substantial damages. A judgment could also include an injunction or other court order that could prevent us from selling our products. Any of these events could have a material adverse effect on our business, operating results and financial condition. OUR BUSINESS COULD BE ADVERSELY AFFECTED IF OUR PRODUCTS CONTAIN ERRORS. Software products as complex as ours may contain undetected errors or "bugs" that result in product failures. The occurrence of errors could result in loss of or delay in revenues, loss of market share, failure to achieve market acceptance, diversion of development resources, injury to our reputation, or damage to our efforts to build brand awareness, any of which could have a material adverse effect on our business, operating results and financial condition. WE COULD INCUR SUBSTANTIAL COSTS RESULTING FROM PRODUCT LIABILITY CLAIMS RELATING TO OUR CUSTOMERS' USE OF OUR PRODUCTS. Many of the e-commerce applications supported by our products are critical to the operations of our customers' businesses. Any failure in a customer's web site or application caused or allegedly caused by our products could result in a claim for substantial damages against us, regardless of our responsibility for the failure. Although we maintain general liability insurance, including coverage for errors and omissions, there can be no assurance that our existing coverage will continue to be available on reasonable terms or will be available in amounts sufficient to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claim. IF WE ACQUIRE OTHER COMPANIES OR BUSINESSES, WE WILL BE SUBJECT TO RISKS THAT COULD HURT OUR COMPANY. In the future, we may pursue acquisitions to obtain complementary products, services and technologies. An acquisition may not produce the revenues, earnings or business synergies that we anticipated, and an acquired product, service or technology might not perform as we expected. If we pursue any acquisition, our management could spend a significant amount of time and effort in identifying and completing the acquisition. If we complete an acquisition, we would probably have to devote a significant amount of management resources to integrate the acquired business with our existing business. To pay for an acquisition, we might use our stock or cash. Alternatively, we might borrow money from a bank or other lender. If we use our stock, our stockholders would experience dilution of their ownership interests. If we use cash or debt financing, our financial liquidity will be reduced. 12 13 THE MARKET PRICE OF OUR COMMON STOCK HAS BEEN AND MAY CONTINUE TO BE VOLATILE. Our stock price, like that of other technology companies, has been extremely volatile. The announcement of new products, services, technological innovations or distribution partners by us or our competitors, quarterly variations in our operating results, changes in revenues or earnings estimates by securities analysts and speculation in the press or investment community are among the factors affecting our stock price. The stock market in general, and the market prices for Internet-related companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of these companies. These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our operating performance. Recently, when the market price of a stock has been volatile, holders of that stock have often instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. The lawsuit could also divert the time and attention of our management. WE MAY LOSE MONEY ON FIXED-PRICE CONSULTING CONTRACTS. In the future, an increased portion of our SiteMinder services revenues may be derived from fixed-price contracts. We work with complex technologies in compressed time frames and it can be difficult to judge the time and resources necessary to complete a project. If we miscalculate the resources or time we need to complete work under fixed-price contracts, our operating results could be materially harmed. LOSS OF OUR FIREWALL-1 RESELLER BUSINESS WOULD ADVERSELY AFFECT OUR OPERATING RESULTS. While we recently have focused our resources on developing and marketing our SiteMinder software and services, we continue to generate a significant portion of our revenues from our sales of Check Point Software Technologies' FireWall-1 product. Our FireWall-1 reseller business experiences competition from companies that compete with FireWall-1, including Axent Technologies, Cisco Systems and Trusted Information Systems, as well as from other resellers of FireWall-1. As a result, we may not be able to maintain the current revenue levels generated by our FireWall-1 reseller business. CERTAIN PROVISIONS OF OUR CHARTER AND OF DELAWARE LAW MAKE A TAKEOVER OF OUR COMPANY MORE DIFFICULT. Our corporate documents and Delaware law contain provisions that might enable our management to resist a takeover of our company. These provisions might discourage, delay or prevent a change in the control of Netegrity or a change in our management. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. The existence of these provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. 13 14 RESULTS OF OPERATIONS The following information should be read in conjunction with the consolidated financial statements and notes thereto:
Period to Period % Increase (Decrease) % of Total Revenues Three Months Ended For the three months March 30, Ended March 31, 2000 1999 2000 vs. 1999 Restated Restated Restated -------- -------- ------------------ Revenues: SiteMinder software 71% 48% 379% SiteMinder services 18 18 250 Other 11 34 3 ---- ---- ---- Total revenues 100 100 227 ---- ---- ---- Cost of SiteMinder software 5 6 205 Cost of SiteMinder services 11 10 272 Cost of other 6 19 (4) ---- ---- ---- Total cost of revenues 22 35 108 ---- ---- ---- Gross profit 78 65 291 Selling, general and administrative expenses 83 102 165 Research and development costs 22 34 112 Non-cash stock compensation expense 5 31 (45) ---- ---- ---- Loss from operations (32) (102) 2 Interest income (expense), net 18 1 N/A ---- ---- ---- Net loss (14)% (101)% (55)% ==== ==== ====
Revenues. Total revenues increased by $4.7 million, or 227%, to $6.7 million in the three months ended March 31, 2000, from $2.1 million in the three months ended March 31, 1999. SiteMinder software revenues increased by $3.8 million, or 379%, to $4.8 million in the three months ended March 31, 2000, from $995,000 in the three months ended March 31, 1999. This increase is due to the continued increase in market awareness and the acceptance of the SiteMinder product and expansion of our sales organization. SiteMinder services revenues increased by $896,000, or 250%, to $1.3 million in the three months ended March 31, 2000, from $358,000 in the three months ended March 31, 1999. This increase reflects the continued growth in the installed base of SiteMinder software licenses and the increasing demand to provide installation and integration services for customers. Other revenues increased by $23,000, or 3%, to $730,000 in the three months ended March 31, 2000, from $707,000 in the three months ended March 31, 1999. Cost of revenues. Total cost of revenue increased by $773,000 or 108%, to $1.5 million in three months ended March 31, 2000, from $715,000 in the three months ended March 31, 1999. Cost of SiteMinder software increased by $235,000, or 205%, to $349,000 in the three months ended March 31, 2000 from $144,000 in the three months ended March 31, 1999. The increase is primarily due to increases in royalties due to third parties for technology included in our product as SiteMinder software revenues continue to increase. Cost of SiteMinder services increased by $556,000 or 272%, to $760,000 in the three months ended March 31, 2000 from $204,000 in the three months ended March 31, 1999. The increase is due to increases in salaries and related expenses for our consulting and education organizations as a result of increased SiteMinder service revenues. Cost of other decreased by $17,000 or 4%, to $379,000 in the three months ended March 31, 2000 from $396,000 in the three months ended March 31, 1999. Gross profit. Gross profit increased by $3.9 million, or 291%, to $5.3 million in the three months ended March 31, 2000, from $1.3 million in the three months ended March 31, 1999. The increase in SiteMinder software revenues resulted in higher gross profit due to lower costs associated with SiteMinder software revenues. Selling, general and administrative expenses. Selling, general and administrative expenses increased by $3.5 million, or 165%, to $5.6 million in the three months ended March 31, 2000, from $2.1 million in the three months ended March 31, 1999. This increase is primarily a result of our continuing to build our sales and marketing infrastructure to support planned growth in sales of our SiteMinder product and services. Research and development costs. Research and development costs increased by $787,000, or 112%, to $1.5 million in the three months ended March 31, 2000, from $699,000 in the three months ended March 31, 1999. The increase was primarily due to our continued development of SiteMinder and our increase in research and development personnel. We expect to increase the amount spent on research and development in the foreseeable future as we continue to develop and enhance our product line to address the evolving needs of customers deploying large-scale and transaction-based e-commerce applications. Non-cash stock compensation expense. The non-cash stock compensation expense decreased by $294,000 to $353,000 in the three months ended March 31, 2000 from $647,000 in the three months ended March 31, 1999. This expense represents the compensation charge for a common stock warrant for 100,000 shares issued to a director in connection with the January 1998 preferred stock financing. The warrant is being accounted for as a variable award, and as a result, the expense primarily relates to the increase in the fair value of the Company's common stock during the respective periods. The expense is recognized over the vesting period until the warrant is exercised. Approximately 70,000 shares of common stock were exercised under this warrant during the fourth quarter of 1999. 14 15 Interest income (expense), net. Net interest income increased by $1.2 million, to $1.2 million in the three months ended March 31, 2000, from $20,000 in the three months ended March 31, 1999. This increase is mainly attributable to a higher average cash balance in the three months ended March 31, 2000. Provision for income taxes. For the three months ended March 31, 2000 and 1999 we had no provision for income taxes due to the net losses incurred. 15 16 LIQUIDITY AND CAPITAL RESOURCES (in thousands, except ratios)
March 31, December 31, Financial Condition as of 2000 1999 --------- ------------ Cash and cash equivalents $103,216 $102,879 Working capital 106,789 104,435 Current ratio 22.61 24.02
LIQUIDITY AND CAPITAL RESOURCES In recent years, we have funded our operations primarily from sales of securities. Cash used for operating activities in the three months ended March 31, 2000 was $2.5 million, primarily due to a net loss of $582,000 and an increase in accounts receivable and prepaid expenses, partially offset by increases in deferred revenue. Cash used for investing activities was $1.2 million in the three months ended March 31, 2000. Investing activities for the period consisted primarily of the purchases of equipment, consisting largely of computer servers, workstations and networking equipment. Cash provided by financing activities in the three months ended March 31, 2000 was $4.0 million, primarily as a result of the warrant exercise by the Pequot Entities in February 2000. In recent years, we have significantly increased our operating expenses. We anticipate that we will continue to experience significant growth in our operating expenses for the foreseeable future and that our operating expenses and capital expenditures will constitute a material use of our cash resources. In addition, we may utilize cash resources to fund acquisitions or investments in businesses, technologies, products or services that are complementary to our business. We believe that our existing cash and cash equivalents will be sufficient to meet our anticipated cash requirements for working capital and capital expenditures for at least the next twelve months. 16 17 YEAR 2000 UPDATE We have not experienced any disruptions related to the "Year 2000" issue. Nevertheless, we are continuing to evaluate risks associated with a potential delayed impact of Year 2000 related failures. Any such failure could result in an interruption in, or a failure of, normal business activities which could materially and adversely affect our results of operations, liquidity and financial condition. Due to the general uncertainty inherent in the Year 2000 issue, resulting in part from the uncertainty of the Year 2000 readiness of third party vendors, we are unable to predict whether any future failure related to the Year 2000 issue will have a material adverse impact on our results of operations, liquidity or financial position. We believe that our efforts to identify and resolve issues related to the Year 2000 problem have reduced, but not eliminated, the possibility that we will in the future encounter any significant interruptions to normal operations related to the Year 2000 issue. 3. Quantitative and Qualitative Disclosures About Market Risk Not Applicable 17 18 PART II -- OTHER INFORMATION ITEM 1. 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 2. CHANGES IN SECURITIES On February 17, 2000, the Company issued 1,500,786 shares of its common stock to Pequot Entities upon the exercise of warrants at an exercise price of $2.00 per share. The proceeds to the Company were $3,001,572. The issuance of the shares was exempt from registration pursuant to section 4(2) of the Securities Act of 1933. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable 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 March 31, 2000. 19 ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS 27. Financial Data Schedule Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NETEGRITY, INC. Date: July 25, 2000 By: /s/ Barry N. Bycoff ----------------------- Barry N. Bycoff President, Chief Executive Officer, Director and Chairman of the Board Date: July 25, 2000 By: /s/ James E. Hayden ----------------------- James E. Hayden Vice President, Finance and Administration, and Chief Financial Officer