-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LYHYBTNQSpnYapPsx82hG8MvnjP+DEosSfPlc9n/IPNkGPdV5RusLTfH4AD1zk8a JrkELphHMP0VuB9G8wo2Ng== 0000950135-99-004443.txt : 19990916 0000950135-99-004443.hdr.sgml : 19990916 ACCESSION NUMBER: 0000950135-99-004443 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19990915 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NETEGRITY INC CENTRAL INDEX KEY: 0000840824 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045] IRS NUMBER: 042911320 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3 SEC ACT: SEC FILE NUMBER: 333-87171 FILM NUMBER: 99712261 BUSINESS ADDRESS: STREET 1: 245 WINTER ST CITY: WALTHAM STATE: MA ZIP: 02154 BUSINESS PHONE: 6178901700 MAIL ADDRESS: STREET 1: 245 WINTER STREET STREET 2: 0 CITY: WALTHAM STATE: MA ZIP: 02184 FORMER COMPANY: FORMER CONFORMED NAME: SOFTWARE DEVELOPERS CO INC/DE/ DATE OF NAME CHANGE: 19920703 S-3 1 NETEGRITY, INC. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 15, 1999 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------ FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ NETEGRITY, INC. (Exact name of registrant as specified in its charter) DELAWARE 04-2911320 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number)
245 WINTER STREET WALTHAM, MASSACHUSETTS 02451 (781) 890-1700 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------ JAMES E. HAYDEN CHIEF FINANCIAL OFFICER NETEGRITY, INC. 245 WINTER STREET WALTHAM, MASSACHUSETTS 02451 (781) 890-1700 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------ COPIES OF ALL COMMUNICATIONS, INCLUDING ALL COMMUNICATIONS SENT TO THE AGENT FOR SERVICE, SHOULD BE SENT TO: Anthony J. Medaglia, Jr., Esq. Mark L. Johnson, Esq. Hutchins, Wheeler & Dittmar Richard G. Costello, Esq. A Professional Corporation Foley, Hoag & Eliot LLP 101 Federal Street One Post Office Square Boston, Massachusetts 02110 Boston, Massachusetts 02109 (617) 951-6600 (617) 832-1000
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ CALCULATION OF REGISTRATION FEE ================================================================================
PROPOSED PROPOSED MAXIMUM MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE(3) - ---------------------------------------- --------------------- ------------------ ---------------------- ------------------- Common Stock, $.01 par value per share................................ 3,450,000 shares $25.59 $88,285,500 $24,545 ======================================== ===================== ================== ====================== ===================
(1) Includes 450,000 shares which the underwriters have the option to purchase from Netegrity, Inc. and certain selling stockholders to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457 under the Securities Act of 1933. (3) Pursuant to Rule 457(c) under the Securities Act of 1933, the registration fee has been calculated based upon the average of the high and low sale prices per share of the common stock of Netegrity, Inc. on the Nasdaq SmallCap Market on September 13, 1999. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 EXPLANATORY NOTE This registration statement contains two forms of prospectus: (1) one prospectus to be used in connection with an offering in the United States and Canada and (2) one prospectus to be used in connection with a concurrent offering outside of the United States and Canada. The U.S. prospectus and the international prospectus are identical in all respects except for the front cover page and the "Underwriting" section. The front cover page and the "Underwriting" section of the international prospectus are included immediately before Part II of this registration statement. 3 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED SEPTEMBER 15, 1999 [NETEGRITY CORPORATE LOGO] 3,000,000 SHARES COMMON STOCK Netegrity, Inc. is offering 2,450,000 shares of its common stock, and the selling stockholders identified in this prospectus are offering an additional 550,000 shares. Our common stock is listed on the Nasdaq SmallCap Market under the symbol "NETE." The last reported sale price of our common stock on the Nasdaq SmallCap Market on September 13, 1999 was $25.875 per share. ------------------------------ INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 6. ------------------------------
PER SHARE TOTAL ----------------- ----------------- Public offering price...................................... $ $ Underwriting discounts and commissions..................... $ $ Proceeds to Netegrity...................................... $ $ Proceeds to selling stockholders........................... $ $
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. We and the selling stockholders have granted the underwriters a 30-day option to purchase up to an additional 450,000 shares of our common stock to cover over-allotments. BancBoston Robertson Stephens expects to deliver the shares of common stock to purchasers on , 1999. ------------------------------ BANCBOSTON ROBERTSON STEPHENS DAIN RAUSCHER WESSELS A DIVISION OF DAIN RAUSCHER INCORPORATED THOMAS WEISEL PARTNERS LLC THE DATE OF THIS PROSPECTUS IS , 1999. 4 [THIS PAGE INTENTIONALLY LEFT BLANK.] 5 YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF COMMON STOCK. ------------------------------ TABLE OF CONTENTS
PAGE ---- Summary..................................................... 3 Risk Factors................................................ 6 Forward-Looking Statements and Industry Data................ 13 Use of Proceeds............................................. 13 Price Range of Common Stock................................. 14 Dividend Policy............................................. 14 Capitalization.............................................. 15 Selected Consolidated Financial Data........................ 16 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 18 Business.................................................... 28 Management.................................................. 38 Transactions with Related Parties........................... 40 Principal and Selling Stockholders.......................... 41 Underwriting................................................ 43 Legal Matters............................................... 45 Experts..................................................... 45 Where You Can Find More Information......................... 46 Index to Consolidated Financial Statements.................. F-1
------------------------------ We own or have rights to trademarks or trade names that we use in conjunction with the sale of our products and services. SiteMinder and Netegrity are registered trademarks owned by us. This prospectus also refers to trademarks and trade names of other companies. 2 6 - -------------------------------------------------------------------------------- SUMMARY You should read the following summary together with the more detailed information, including our consolidated financial statements and related notes, appearing elsewhere in this prospectus. Unless otherwise indicated, all information in this prospectus assumes the underwriters will not exercise their over-allotment option and reflects the conversion of all of our outstanding preferred stock into common stock, which will take effect before the closing of this offering. NETEGRITY Our Business.................. Netegrity is a leading provider of software and services that manage and control user access to electronic commerce, or e-commerce, applications. Our SiteMinder product is part of the software infrastructure that is used to build and manage an e-commerce web site. SiteMinder centrally manages the complex process of identifying users and assigning those users rights, or privileges, to access content and perform transactions over multiple applications on a company's web site. SiteMinder allows companies to effect security changes quickly and efficiently, while distributing administrative responsibilities to the most appropriate parties. SiteMinder improves the user experience by enabling the delivery of personalized content over multiple applications with a single sign-on. In addition to our SiteMinder software, we offer a wide range of support services to facilitate the successful implementation of SiteMinder into our customers' organizations. Our Market.................... We target our products and services to companies deploying e-commerce applications on their web sites. Forrester Research estimates that business-to-business e-commerce will grow from $43 billion in 1998 to $1.3 trillion in 2003 and that business-to-consumer e-commerce will grow from $8 billion in 1998 to $108 billion in 2003. The growth in e-commerce is driving companies to develop a new set of web-based applications accessed by a large and diverse range of users, including customers, business partners and employees. These applications include online retail, customer service, supply chain procurement, and delivery of operational and transactional data. International Data Corporation estimates that the global e-commerce application market will grow from $444 million in 1998 to over $13 billion in 2003. In many cases, these new applications are becoming companies' principal business processes. In order for e-commerce to be successful, companies require a secure and scalable user management infrastructure for conducting business. Our Products.................. SiteMinder provides centralized control of users and privileges that extend across multiple web-based applications on a company's web site. With SiteMinder, users sign on to a web site once and gain access, as defined by their user privileges, to content drawn from multiple applications. SiteMinder provides policy-based administration of security policies, so that administrative responsibilities can be easily delegated to individual business units, remote trading partners or other administrators without jeopardizing control. SiteMinder has been designed to support the existing systems used by our customers and to easily accommodate emerging Internet technologies. SiteMinder provides a scalable, reliable platform to meet the requirements of demanding web sites. - -------------------------------------------------------------------------------- 3 7 - -------------------------------------------------------------------------------- Our Customers................. As of June 30, 1999, we licensed SiteMinder software to 87 end-user customers. Our customers include Arthur Andersen, Delta Airlines, General Electric, GTE Internetworking, Ingram Micro, MCI WorldCom and Merrill Lynch. We sell our products through a direct sales force and through our distribution partners, which include Allaire, GTE Cybertrust, Network Associates and the Sun- Netscape Alliance. To date, most of our customers' deployments of SiteMinder have supported business-to-business e-commerce applications, but our customers are beginning to deploy SiteMinder for business-to-consumer e-commerce applications. Recent Developments........... On September 9, 1999, we completed a private placement of 534,242 shares of common stock to five investors at a purchase price of $20.59 per share. We received net proceeds of approximately $10.3 million from the private placement, after deducting the placement agent's fee and our estimated expenses. We are obligated to file with the SEC, by no later than September 20, 1999, a registration statement covering the 534,242 shares sold in the private placement. The purchasers of 242,836 of those shares have agreed that they will not, during the period ending 90 days after the date of this prospectus, sell or otherwise dispose of those shares without the consent of BancBoston Robertson Stephens. Our Address................... Our executive offices are located at 245 Winter Street, Waltham, Massachusetts, 02451 and our telephone number is (781) 890-1700. Our web site is located at www.netegrity.com. Information contained on our web site is not part of this prospectus. THE OFFERING Common stock offered by Netegrity.......... 2,450,000 shares Common stock offered by the selling stockholders............................... 550,000 shares Common stock to be outstanding after this offering................................... 16,754,153 shares Use of proceeds............................ General corporate purposes, including working capital and potential acquisitions. Nasdaq SmallCap Market symbol.............. NETE The number of shares of common stock to be outstanding after this offering is based on shares outstanding as of August 31, 1999. This number includes 3,333,333 shares of common stock to be issued upon the conversion of all of our outstanding preferred stock, which will take effect before the closing of this offering and also includes 534,242 shares of common stock issued in the September 9, 1999 private placement. It excludes: - 3,341,727 shares issuable upon exercise of outstanding options with a weighted average exercise price of $3.89 per share; - 1,600,787 shares issuable upon exercise of outstanding warrants with a weighted average exercise price of $1.97 per share; and - 685,734 shares reserved for future issuance under our stock-based compensation plans. - -------------------------------------------------------------------------------- 4 8 - -------------------------------------------------------------------------------- SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following tables summarize the financial data of our business. After our fiscal year ended March 31, 1996, we changed our fiscal year end from March 31 to December 31. The pro forma balance sheet data reflect our sale of 534,242 shares of common stock in a private placement completed on September 9, 1999 and the conversion of all of our outstanding preferred stock into common stock that will occur before the closing of this offering. The pro forma as adjusted data reflect the sale of 2,450,000 shares of common stock offered by us at an assumed public offering price of $25.875 per share and our application of our estimated net proceeds of this offering.
NINE MONTHS ENDED YEARS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, JUNE 30, ----------------- ------------------ ------------------ 1996 1997 1997 1998 1998 1999 ------ ------- ------- ------- ------- ------- STATEMENT OF OPERATIONS DATA: Revenues: SiteMinder software........... -- $ 237 $ 237 $ 1,483 $ 373 $ 2,468 SiteMinder services........... -- 12 12 468 126 805 Other......................... $3,637 3,497 4,484 2,840 1,365 1,426 Total revenues................ 3,637 3,746 4,733 4,791 1,864 4,699 Gross profit.................... 1,461 1,811 2,263 3,027 911 3,206 Loss from continuing operations.................... (1,406) (4,604) (5,252) (5,229) (2,813) (2,789) Gain on sale of assets of discontinued operations....... 6,000 -- -- -- -- -- Net income (loss)............... 4,000 (4,604) (5,252) (5,229) (2,813) (2,789) Basic and diluted earnings per share: From continuing operations.... $(0.16) $ (0.50) $ (0.57) $ (0.56) $(0.30) $ (0.27) Net income (loss)............. $ 0.45 $ (0.50) $ (0.57) $ (0.56) $(0.30) $ (0.27) Weighted average shares outstanding................... 8,944 9,209 9,279 9,362 9,323 10,158
JUNE 30, 1999 ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------ --------- ----------- BALANCE SHEET DATA: Cash and cash equivalents................................... $3,075 $13,375 $72,941 Working capital............................................. 2,115 12,415 71,981 Total assets................................................ 6,689 16,989 76,555 Total stockholders' equity.................................. 3,037 13,337 72,903
- -------------------------------------------------------------------------------- 5 9 RISK FACTORS This offering involves a high degree of risk. You should carefully consider the risks and uncertainties described below and the other information in this prospectus before deciding whether to invest in shares of our common stock. If any of the following risks actually occur, our business, financial condition or operating results could be materially adversely affected. This could cause the market price of our common stock to decline, and could cause you to lose part or all of your investment. 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 six months ended June 30, 1999, we had a net loss of $2.8 million. As a result of ongoing operating losses, at June 30, 1999, we had an accumulated deficit of $17.4 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. 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 70% of our total revenues in the six months ended June 30, 1999. 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 user management, including usage of 6 10 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. 7 11 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. 8 12 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, 1997 to August 31, 1999, the number of our employees increased from 40 to 105. 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 9 13 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. 10 14 THE MARKET PRICE OF OUR COMMON STOCK HAS BEEN AND MAY CONTINUE TO BE VOLATILE AND YOU MAY NOT BE ABLE TO SELL YOUR SHARES AT OR ABOVE THE PUBLIC OFFERING PRICE. 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. In addition, our common stock is listed on the Nasdaq SmallCap Market, which may increase investors' difficulty in buying and selling our common stock, which could have the effect of increasing the volatility of our stock price. We have filed or are filing two shelf registration statements on Form S-3 with the SEC in connection with two of our recent private financings. These registration statements cover an aggregate of 1,329,893 shares of our common stock, which may be sold into the public market at any time. Sales of these shares could increase the volatility of 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. OUR DIRECTORS AND MANAGEMENT WILL EXERCISE SIGNIFICANT CONTROL OVER OUR COMPANY. After this offering, our directors and executive officers and their affiliates will collectively control approximately 31.8% of our outstanding common stock. As a result, these stockholders, if they act together, will be able to influence our management and affairs and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control of our company and might affect the market price of our common stock. 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 11 15 existence of these provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. WE MAY BE ADVERSELY IMPACTED BY UNEXPECTED YEAR 2000 ISSUES. Computer systems and software must accept four digit entries to distinguish twenty-first century dates from twentieth century dates. As a result, many software and computer systems may need to be upgraded in order to be Year 2000 compliant. Significant uncertainties exist in the software industry concerning the potential effects associated with such compliance. We have assessed the impact of Year 2000 compliance on our products and systems. We cannot, however, be certain that we have identified all of the potential risks to our business that could result from matters related to the Year 2000. We have identified the following risks that you should be aware of: - Undetected Year 2000 problems that could affect our products. We believe that all of our versions of our SiteMinder software products were Year 2000 compliant at the time of installation. Although we have tested these products for Year 2000 compliance, we cannot be certain that these tests have detected all potential Year 2000 problems. The failure of our currently supported products to be fully Year 2000 compliant could result in claims by or liability to our customers, which could have a material adverse effect on our business and operating results. In addition, we have relied on representations of Check Point as to the Year 2000 readiness of FireWall-1. Any failure of FireWall-1 to be Year 2000 compliant may have a material adverse affect on our FireWall-1 reseller business, our customer relationships and our operating results. - Year 2000 problems that affect our internal systems. We believe that our internal software systems are Year 2000 compliant. Although we have tested these systems for Year 2000 compliance, we cannot be certain that these tests have detected all potential Year 2000 problems. It is possible that these systems could contain undetected problems that could cause serious and costly disruptions which would have a material adverse effect on our business and operating results. - Year 2000 problems that affect products and services provided to us by third parties. We have relied on certifications from our software vendors and suppliers regarding the Year 2000 readiness of products and services they provide to us. We have not conducted independent tests of these products and services. It is possible that these systems could contain undetected problems that could cause serious and costly delivery delays which would have a material adverse effect on our business and operating results. THE YEAR 2000 ISSUE MAY CAUSE OUR CURRENT AND POTENTIAL CUSTOMERS TO DELAY IMPLEMENTING OUR SOFTWARE. Some of our customers and potential customers have implemented policies that prohibit or discourage changing their internal computer systems until after January 1, 2000. Our revenues may suffer if potential customers delay the purchase of our products until after January 1, 2000. Purchasing decisions may be delayed as potential customers halt development of their internal computer systems or use their information technology budgets to address Year 2000 issues. If our potential customers delay purchasing or implementing our products in preparation for the Year 2000 problem, our business could be seriously harmed. WE MAY USE OUR PROCEEDS FROM THIS OFFERING IN WAYS WITH WHICH YOU MAY NOT AGREE. We have not identified specific uses for our proceeds from this offering, and we will have broad discretion in how we use them. You will not have the opportunity to evaluate the economic, financial or other information on which we base our decisions on how to use our proceeds. 12 16 FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA This prospectus 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" identify important factors that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. This prospectus contains 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. USE OF PROCEEDS We estimate that the net proceeds from our sale of 2,450,000 shares of common stock will be approximately $59.6 million, based upon an assumed public offering price of $25.875 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses that we will pay. We estimate that our net proceeds will be approximately $60.8 million if the underwriters exercise their over-allotment option in full. We will not receive any proceeds from the sale of shares by the selling stockholders. We intend to use our net proceeds for general corporate purposes, including working capital. We may also use a portion of the net proceeds to acquire or invest in complementary businesses or products or to obtain rights to use complementary technologies. We are not currently involved in negotiations regarding, and we have no specific understandings, commitments or agreements with respect to, any acquisition or investment. Pending these uses, we intend to invest our net proceeds in short-term, investment-grade, interest-bearing instruments, repurchase agreements or high grade corporate notes. 13 17 PRICE RANGE OF COMMON STOCK Our common stock is traded on the Nasdaq SmallCap Market under the symbol "NETE." The following table sets forth, for the periods indicated, the range of high and low sale prices per share of our common stock, as reported on the Nasdaq SmallCap Market.
PRICE RANGE OF COMMON STOCK ------------------ HIGH LOW ------- ------- 1997 FISCAL YEAR First Quarter............................................. $ 4.000 $ 1.813 Second Quarter............................................ $ 2.813 $ 1.250 Third Quarter............................................. $ 2.688 $ 1.125 Fourth Quarter............................................ $ 2.063 $ 1.156 1998 FISCAL YEAR First Quarter............................................. $ 2.344 $ 1.406 Second Quarter............................................ $ 3.000 $ 1.625 Third Quarter............................................. $ 4.125 $ 1.500 Fourth Quarter............................................ $ 4.531 $ 1.063 1999 FISCAL YEAR First Quarter............................................. $15.000 $ 4.125 Second Quarter............................................ $18.313 $10.000 Third Quarter (through September 13, 1999)................ $30.000 $15.875
On September 13, 1999, the last sale price of our common stock as reported on the Nasdaq SmallCap Market was $25.875 per share. As of September 13, 1999, there were 134 holders of record of common stock. DIVIDEND POLICY We have never declared or paid any cash dividends on our capital stock, and we do not anticipate paying cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to fund the expansion and growth of our business. Payment of future dividends, if any, will be at the discretion of the board of directors, after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, and plans for expansion. 14 18 CAPITALIZATION The following table sets forth our capitalization as of June 30, 1999: - on an actual basis, - on a pro forma basis to reflect our sale of 534,242 shares of common stock in a private placement completed on September 9, 1999 and the conversion of all of our outstanding preferred stock into common stock that will occur before the closing of this offering; and - on a pro forma as adjusted basis to reflect our sale of 2,450,000 shares of common stock at an assumed public offering price of $25.875 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses that we will pay. The data in the table contemplate that our authorized capital stock at June 30, 1999 consisted of 40,000,000 shares of common stock and 5,000,000 shares of preferred stock. A proposal to confirm the numbers of shares of authorized capital stock is to be considered at a meeting of our stockholders to be held on October 7, 1999. The data in the table do not give effect to a proposal of our board of directors to increase the number of authorized shares of common stock to 60,000,000. This proposal is to be considered by our stockholders at their meeting on October 7, 1999. This table should be read together with the consolidated financial statements and related notes appearing elsewhere in this prospectus.
JUNE 30, 1999 ------------------------------------- PRO PRO FORMA ACTUAL FORMA AS ADJUSTED --------- -------- ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Preferred stock, series D voting, $0.01 par value; 3,333,333 shares authorized, issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted.......................... $ 33 -- -- Preferred stock (undesignated), $0.01 par value; 1,666,667 shares authorized, actual; 5,000,000 shares authorized, pro forma and pro forma as adjusted; no shares issued or outstanding.............................................. -- -- -- Common stock, $0.01 par value; 40,000,000 shares authorized; 10,341,484 shares issued and 10,316,383 shares outstanding, actual; 14,209,059 shares issued and 14,183,958 shares outstanding, pro forma; 16,659,059 shares issued and 16,633,958 shares outstanding, pro forma as adjusted........................................ 104 $ 142 $ 166 Additional paid-in capital................................. 20,601 30,896 90,438 Cumulative deficit......................................... (17,417) (17,417) (17,417) Loan to officer............................................ (200) (200) (200) Less -- treasury stock, at cost; 25,101 shares actual, pro forma and pro forma as adjusted.......................... (84) (84) (84) -------- ------- ------- Total stockholders' equity............................ $ 3,037 $13,337 $72,903 ======== ======= =======
15 19 SELECTED CONSOLIDATED FINANCIAL DATA The selected financial data set forth below should be read in conjunction with our consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus. The statement of operations data for the nine months ended December 31, 1996 and the years ended December 31, 1997 and 1998, and the balance sheet data as of December 31, 1997 and 1998, are derived from, and are qualified by reference to, consolidated financial statements audited by PricewaterhouseCoopers LLP and included elsewhere in this prospectus. The statement of operations data for the years ended March 31, 1995 and 1996 and the balance sheet data as of March 31, 1995, March 31, 1996 and December 31, 1996, are derived from audited consolidated financial statements not included in this prospectus. The statement of operations data for the six months ended June 30, 1998 and 1999, and the balance sheet data as of June 30, 1999, are derived from unaudited consolidated financial statements appearing elsewhere in this prospectus. The statement of operations data for the pro forma twelve months ended December 31, 1996 and the nine months ended December 31, 1997, are unaudited. The unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of our management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information set forth therein. Historical results are not necessarily indicative of operating results to be expected in the future.
NINE MONTHS PRO FORMA SIX MONTHS YEARS ENDED ENDED TWELVE MONTHS YEARS ENDED ENDED MARCH 31, DECEMBER 31, ENDED DECEMBER 31, JUNE 30, -------------- ----------------- DECEMBER 31, ----------------- ----------------- 1995 1996 1996 1997 1996 1997 1998 1998 1999 ----- ------ ------- ------- ------------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues: SiteMinder software............. -- -- -- $ 237 -- $ 237 $ 1,483 $ 373 $ 2,468 SiteMinder services............. -- -- -- 12 -- 12 468 126 805 Other........................... $ 959 $3,725 $ 3,637 3,497 $ 4,966 4,484 2,840 1,365 1,426 ----- ------ ------- ------- ------- ------- ------- ------- ------- Total revenues.................. 959 3,725 3,637 3,746 4,966 4,733 4,791 1,864 4,699 Cost of revenues.................. 488 2,173 2,176 1,935 2,931 2,470 1,764 953 1,493 ----- ------ ------- ------- ------- ------- ------- ------- ------- Gross profit...................... 471 1,552 1,461 1,811 2,035 2,263 3,027 911 3,206 Selling, general and administrative expenses......... 305 1,178 2,303 4,487 2,702 5,509 6,395 2,920 4,588 Research and development costs.... -- -- 705 927 705 1,028 1,991 873 1,474 ----- ------ ------- ------- ------- ------- ------- ------- ------- Income (loss) from operations..... 166 374 (1,547) (3,603) (1,372) (4,274) (5,359) (2,882) (2,856) Interest income (expense), net.... (1) 20 181 124 188 203 130 69 67 Share of loss from investment in Encotone, Inc. ................. -- -- (40) (76) (40) (132) -- -- -- Write off of investment in Encotone LTD.................... -- -- -- (1,049) -- (1,049) -- -- -- ----- ------ ------- ------- ------- ------- ------- ------- ------- Income (loss) from continuing operations...................... 165 394 (1,406) (4,604) (1,224) (5,252) (5,229) (2,813) (2,789) Income (loss) from discontinued operations...................... 31 (240) (520) -- (735) -- -- -- -- Gain on sale of assets of discontinued operations......... -- -- 6,000 -- 6,000 -- -- -- -- ----- ------ ------- ------- ------- ------- ------- ------- ------- Income (loss) before provision for income taxes.................... 196 154 4,074 (4,604) 4,041 (5,252) (5,229) (2,813) (2,789) Provision for income taxes........ -- 25 (74) -- (74) -- -- -- -- ----- ------ ------- ------- ------- ------- ------- ------- ------- Net income (loss)................. $ 196 $ 129 $ 4,000 $(4,604) $ 3,967 $(5,252) $(5,229) $(2,813) $(2,789) ===== ====== ======= ======= ======= ======= ======= ======= ======= Basic and diluted earnings per share: From continuing operations...... $0.02 $ 0.05 $ (0.16) $ (0.50) $ (0.12) $ (0.57) $ (0.56) $ (0.30) $ (0.27) From operation of discontinued operations.................... -- (0.03) (0.06) -- (0.07) -- -- -- -- Gain on sale of assets.......... -- -- 0.67 -- 0.61 -- -- -- -- ----- ------ ------- ------- ------- ------- ------- ------- ------- Net income (loss)............... $0.02 $ 0.02 $ 0.45 $ (0.50) $ 0.40 $ (0.57) $ (0.56) $ (0.30) $ (0.27) ===== ====== ======= ======= ======= ======= ======= ======= ======= Weighted average shares outstanding..................... 8,710 8,835 8,944 9,209 9,901 9,279 9,362 9,323 10,158
16 20
MARCH 31, DECEMBER 31, ----------------- --------------------------- JUNE 30, 1995 1996 1996 1997 1998 1999 ------ ------- ------- ------ ------ -------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents......................... $ 672 $ 1,410 $ 6,791 $2,134 $1,175 $3,075 Working capital................................... 651 401 4,629 9 47 2,115 Total assets...................................... 9,170 10,456 10,259 4,849 4,225 6,689 Total stockholders' equity........................ 1,950 1,903 6,149 1,016 996 3,037
17 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Selected Consolidated Financial Data" and our consolidated financial statements and related notes appearing elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements, as described under "Forward-Looking Statements and Industry Data." OVERVIEW We are a leading provider of software and services for managing and controlling user access to web-based e-commerce applications. We introduced our flagship product, SiteMinder, with the first commercial release of SiteMinder 2.0 in November 1997. In June 1998, we began shipment of SiteMinder 3.0, the first commercially available directory-enabled secure user management solution for web-based e-commerce applications. We changed our fiscal year end from March 31 to December 31, effective with the fiscal period ending December 31, 1996. The financial statements for the period ended December 31, 1996 reflect our operating results for the nine months then ended. We derive our revenues from the sale of SiteMinder software and services and from revenues related to the resale of Check Point Software Technologies' FireWall-1 software product. SiteMinder software revenues are derived from the sale of SiteMinder product licenses. SiteMinder service revenues are derived from fees related to the implementation and maintenance of SiteMinder and training on the SiteMinder product. Other revenues are derived from the resale, through a dedicated sales organization, of FireWall-1, complementary products from other vendors and related maintenance, consulting and training services. SiteMinder software revenues accounted for 53% of total revenues in the six months ended June 30, 1999, and 31% of total revenues in the year ended December 31, 1998. SiteMinder services revenues accounted for 17% of total revenues in the six months ended June 30, 1999 and 10% of total revenues in the year ended December 31, 1998. Other revenues accounted for 30% of total revenues in the six months ended June 30, 1999 and 59% of total revenues in the year ended December 31, 1998. We expect SiteMinder software and services revenues to increase as a percentage of total revenues. We recognize our SiteMinder and other software license revenues in accordance with Statement of Position 97-2, "Software Revenue Recognition." Statement of Position 97-2 generally requires revenues earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of the elements. We generally recognize revenues allocated to software licenses upon delivery of the software products, provided that we have no remaining significant obligations with regard to implementation, the license fee is fixed or determinable and collection of the fee is probable. Revenues derived from arrangements with resellers of our products are not recognized until the software is shipped to the end user. Generally, the price of a SiteMinder license is based upon a specified number of directory server users. The price per licensed user decreases as the number of licensed users increases. Our SiteMinder and other customers often contract for maintenance, which provides them with new releases of software and various technical support and services for a specified period which is typically one year. These agreements are generally separately negotiated and priced based on a percentage of software license revenues. We recognize maintenance revenues from these contracts ratably over the contractual period. We provide consulting and training services on either a daily rate or fixed-cost basis. We recognize revenues from the sale of consulting services provided at a daily rate ratably over the support term and revenues from the sale of consulting and training services provided on a fixed cost basis as the services are performed. We currently sell our SiteMinder products through a combination of our direct sales force, worldwide resellers and licensees. In the second half of 1999, we have begun to increase our presence in Europe and Asia. We anticipate that the percentage of our revenues derived outside of North America will increase. Revenues from North America represented 96% of our SiteMinder software and services revenues for the six months ended June 30, 1999. Increasing our international sales may subject us to risks, many of which are outside 18 22 our control, including economic uncertainties, currency fluctuations, political instability and uncertain cultural and regulatory environments. We record cash receipts from customers and billed amounts due from customers in excess of recognized revenues as deferred revenue. The timing and amount of cash receipts from customers can vary significantly depending on specific contract terms and therefore can have a significant impact on the amount of deferred revenues in any given period. Our gross profit is impacted by, among other things, royalties due to third parties for technology included in our products, product fulfillment costs, and salaries and related expenses for our consulting, education and technical support services organizations, and the associated cost of training facilities. In addition, our gross profit is impacted by the mix of software versus services revenues. We anticipate that, as SiteMinder software revenues increase as a percentage of total revenues, our gross profit will increase because our costs associated with SiteMinder software revenues are lower than the costs associated with our other products and services. Our operating expenses are classified into two general categories: sales, general and administrative and research and development. Sales, general and administrative expenses consist primarily of salaries and other related costs for sales, administrative and marketing personnel, sales commissions, travel, legal and accounting services, public relations, marketing materials, trade shows and certain facilities-related expenses. Research and development expenses consist primarily of personnel costs to support product development. We record software development costs in accordance with Financial Accounting Standards Board Statement No. 86. We did not have any software development costs that were capitalized during the six months ended June 30, 1999. Previously capitalized software development costs were fully amortized at June 30, 1999. Since 1996, we have incurred substantial costs to develop our technology and products, to recruit and train personnel for our research and development, sales, marketing and professional services departments, and to establish an administrative organization. We have incurred net losses in each fiscal quarter since 1996 and had an accumulated deficit of $17.4 million as of June 30, 1999. We anticipate that our operating expenses will increase substantially in future quarters as we increase sales and marketing operations, expand distribution channels, increase research and development, broaden professional services, expand facilities and support, and improve operational and financial systems. Accordingly, we expect to incur additional losses through at least 2000. Although we have experienced significant growth in revenues in recent periods, that growth has been from a relatively small base, and there can be no assurance that those growth rates are sustainable. Therefore, historical growth rates should not be considered indicative of future operating results. There can also be no assurance that we will be able to continue to increase our revenues or attain profitability or, if increases in revenue and profitability are achieved, that they can be sustained. We believe that the period-to-period comparisons of our historical operating results are not meaningful and should not be relied upon as an indication of future performance. As of December 31, 1998, we had net operating loss carryforwards of $12.9 million available for federal purposes to reduce future taxable income expiring on various dates through 2018. Provisions of the Internal Revenue Code may limit the net operating loss available for use in any given year, based upon significant past or future changes of our ownership. As of June 28, 1996, we completed the divestiture of our catalog-related business, consisting of The Programmer's SuperShop catalog and web site, the corporate sales group, SDC Germany and SDC Communications. We incurred $2.6 million in expenses and write-offs related to the divestiture and realized a gain of $6.0 million from the sale of assets. We utilized a portion of our available operating loss carryforwards at that time to decrease the amount of federal and state corporate income taxes. 19 23 RESULTS OF OPERATIONS The following table presents statement of operations data as percentages of total revenues for the periods indicated:
NINE MONTHS PRO FORMA ENDED TWELVE MONTHS YEARS ENDED SIX MONTHS DECEMBER 31, ENDED DECEMBER 31, ENDED JUNE 30, ------------- DECEMBER 31, ------------ --------------- 1996 1997 1996 1997 1998 1998 1999 ---- ----- ------------- ---- ---- ------ ----- STATEMENT OF OPERATIONS DATA: Revenues: SiteMinder software......................... -- 7% -- 5% 31% 20% 53% SiteMinder services......................... -- -- -- -- 10 7 17 Other....................................... 100% 93 100% 95 59 73 30 --- ---- --- ---- ---- ---- --- Total revenues.............................. 100 100 100 100 100 100 100 Cost of revenues.............................. 60 52 59 52 37 51 32 --- ---- --- ---- ---- ---- --- Gross profit.................................. 40 48 41 48 63 49 68 Selling, general and administrative expenses.................................... 63 120 54 116 133 157 98 Research and development costs................ 20 24 15 22 42 47 30 --- ---- --- ---- ---- ---- --- Loss from operations.......................... (43) (96) (28) (90) (112) (155) (60) Interest income (expense), net................ 5 3 4 4 3 4 1 Share of loss from investment in Encotone, Inc......................................... (1) (2) (1) (3) -- -- -- Write off of investment in Encotone LTD....... -- (28) -- (22) -- -- -- --- ---- --- ---- ---- ---- --- Loss from continuing operations............... (39) (123) (25) (111) (109) (151) (59) Loss from discontinued operations............. (14) -- (15) -- -- -- -- Gain on sale of assets of discontinued operations.................................. 165 -- 121 -- -- -- -- --- ---- --- ---- ---- ---- --- Income (loss) before provision for income taxes....................................... 112 (123) 81 (111) (109) (151) (59) Provision for income taxes.................... (2) -- (1) -- -- -- -- --- ---- --- ---- ---- ---- --- Net income (loss)............................. 110% (123)% 80% (111)% (109)% (151)% (59)% === ==== === ==== ==== ==== ===
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998 Revenues. Total revenues increased by $2.8 million, or 152%, to $4.7 million in the six months ended June 30, 1999, from $1.9 million in the six months ended June 30, 1998. SiteMinder software revenues increased by $2.1 million, or 562%, to $2.5 million in the six months ended June 30, 1999, from $373,000 in the six months ended June 30, 1998. This increase is due to the continued increase in market awareness and the acceptance of the SiteMinder product and expansion of our sales organization. There were no significant revenues from SiteMinder prior to the release of SiteMinder 3.0 in June 1998. SiteMinder services revenues increased by $679,000, or 539%, to $805,000 in the six months ended June 30, 1999, from $126,000 in the six months ended June 30, 1998. This increase reflects the continued growth in the installed base of SiteMinder software licenses and the increasing requirement to provide installation and integration services for customers. Other revenues increased by $61,000, or 4%, to $1.4 million in the six months ended June 30, 1999, from $1.4 million in the six months ended June 30, 1998. Gross profit. Gross profit increased by $2.3 million, or 252%, to $3.2 million in the six months ended June 30, 1999, from $911,000 in the six months ended June 30, 1998. 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 $1.7 million, or 57%, to $4.6 million in the six months ended June 30, 1999, from $2.9 million in the six 20 24 months ended June 30, 1998. This increase was primarily a result of the continued development of 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 $601,000, or 69%, to $1.5 million in the six months ended June 30, 1999, from $873,000 in the six months ended June 30, 1998. The increase was primarily due to our continued development of SiteMinder and our increase in research and development personnel. We expect to continue 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. Research and development costs may be incurred substantially in advance of the related revenues and in some cases may not generate revenues. In the six months ended June 30, 1998, we capitalized $282,000 of research and development costs, net of amortization, as a result of our realizing technological feasibility. We did not capitalize any research and development costs in the six months ended June 30, 1999. There was no capitalized software as of June 30, 1999. Interest income (expense), net. Net interest income decreased by $2,000, or 3%, to $67,000 in the six months ended June 30, 1999, from $69,000 in the six months ended June 30, 1998. This decrease was mainly attributable to lower interest rates in the six months ended June 30, 1999. There were no borrowings outstanding during the six months ended June 30, 1998 or the six months ended June 30, 1999. Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Revenues. Total revenues increased by $58,000, or 1%, to $4.8 million in the year ended December 31, 1998, from $4.7 million in the year ended December 31, 1997. SiteMinder software revenues increased by $1.2 million, or 526%, to $1.5 million in the year ended December 31, 1998, from $237,000 in the year ended December 31,1997. The first commercial release of SiteMinder was version 2.0 in November 1997. SiteMinder 3.0 was released in June 1998, after which revenues increased each quarter. SiteMinder services revenues increased by $456,000 to $468,000 in the year ended December 31, 1998, from $12,000 in the year ended December 31, 1997. As the number of SiteMinder software customers grew in 1998, support and consulting services grew accordingly. Other revenues decreased by $1.6 million, or 37%, to $2.8 million in the year ended December 31, 1998, from $4.5 million in the year ended December 31, 1997. This decrease is a result of our de-emphasis on the FireWall-1 related products and services as we shifted resources to SiteMinder products and services. Gross profit. Gross profit increased by $764,000, or 34%, to $3.0 million in the year ended December 31, 1998, from $2.3 million in the year ended December 31, 1997. The increase in SiteMinder software revenues resulted in higher gross profit due to lower costs of sales associated with SiteMinder software revenues. Selling, general and administrative expenses. Selling, general and administrative expenses increased by $886,000, or 16%, to $6.4 million in the year ended December 31, 1998, from $5.5 million in the year ended December 31, 1997. This increase was 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, net of capitalized software, increased by $963,000, or 94%, to $2.0 million in the year ended December 31, 1998, from $1.0 million in the year ended December 31, 1997. In the year ended December 31, 1997, we capitalized $310,000 of research and development costs, net of amortization, as a result of our realizing technological feasibility. Capitalized software costs, net of amortization, were $176,000 at December 31, 1998. Interest income (expense), net. Net interest income decreased $73,000, or 36%, to $130,000 in the year ended December 31, 1998, from $203,000 in the year ended December 31, 1997. This decrease was mainly attributable to a lower average cash balance in 1998. 21 25 Nine Months Ended December 31, 1997 Compared to Nine Months Ended December 31, 1996 Revenues. Total revenues increased by $109,000, or 3%, to $3.7 million in the nine months ended December 31, 1997, from $3.6 million in the nine months ended December 31, 1996. SiteMinder software revenues were $237,000 in the nine months ended December 31, 1997. There were no SiteMinder software revenues in the nine months ended December 31, 1996. SiteMinder services revenues were $12,000 in the nine months ended December 31, 1997. There were no SiteMinder services revenues in the nine months ended December 31, 1996. Other revenues decreased by $140,000, or 4%, to $3.5 million in the nine months ended December 31, 1997, from $3.6 million in the nine months ended December 31, 1996. This decrease resulted from our decision to eliminate hardware sales associated with the sale of FireWall-1 products during 1996, which was partially offset by an increase in network security consulting fees. Gross profit. Gross profit increased by $350,000, or 24%, to $1.8 million in the nine months ended December 31, 1997, from $1.5 million in the nine months ended December 31, 1996. Selling, general and administrative expenses. Selling, general and administrative expenses increased by $2.2 million, or 95%, to $4.5 million in the nine months ended December 31, 1997, from $2.3 million in the nine months ended December 31, 1996. This increase resulted from building our management and development staff infrastructure to bring our SiteMinder product to market. Research and development costs. Research and development costs, net of capitalized software, increased by $222,000, or 31%, to $927,000 in the nine months ended December 31, 1997, from $705,000 in the nine months ended December 31, 1996. In the nine months ended December 31, 1997, we capitalized $344,000 of research and development expenditures, net of amortization, as a result of our realizing technological feasibility. We did not capitalize any research and development expenditures in the nine months ended December 31, 1996. Capitalized software costs, net of amortization, were $310,000 at December 31, 1997. Interest income (expense), net. Net interest income decreased by $57,000, or 31%, to $124,000 in the nine months ended December 31, 1997, from $181,000 in the nine months ended December 31, 1996. This decrease is mainly attributable to a lower average cash balance in the nine months ended December 31, 1997. Year Ended December 31, 1997 Compared to Pro Forma Twelve Months Ended December 31, 1996 Revenues. Total revenues decreased by $233,000, or 5%, to $4.7 million in the year ended December 31, 1997, from $5.0 million in the pro forma twelve months ended December 31, 1996. SiteMinder software revenues were $237,000 in the twelve months ended December 31, 1997. There were no SiteMinder software revenues in the pro forma twelve months ended December 31, 1996. SiteMinder services revenues were $12,000 in the twelve months ended December 31, 1997. There were no SiteMinder services revenues in the pro forma twelve months ended December 31, 1996. Other revenues decreased by $482,000, or 10%, to $4.5 million in the twelve months ended December 31, 1997, from $5.0 million in the pro forma twelve months ended December 31, 1996. This decrease resulted from our decision to eliminate hardware sales associated with the sale of FireWall-1 products during 1996. Gross profit. Gross profit increased by $228,000, or 11%, to $2.3 million in the year ended December 31, 1997, from $2.0 million in the pro forma twelve months ended December 31, 1996. The increase in gross profit was attributable to our elimination of hardware sales, as described above, which produced lower gross profits. Selling, general and administrative expenses. Selling, general and administrative expenses increased by $2.8 million, or 104%, to $5.5 million in the year ended December 31, 1997, from $2.7 million in the pro 22 26 forma twelve months ended December 31, 1996. This increase was a result of the expansion of our sales and management to bring to market our SiteMinder product to market and to manage our growth. Research and development costs. Research and development costs, net of capitalized software, increased by $323,000, or 46%, to $1.0 million in the year ended December 31, 1997, from $705,000 in the pro forma twelve months ended December 31, 1996. In the year ended December 31, 1997, we capitalized $310,000 of research and development expenditures, net of amortization, as a result of our realizing technological feasibility. No costs were capitalized in the pro forma twelve months ended December 31, 1996. QUARTERLY RESULTS OF OPERATIONS The following tables set forth unaudited quarterly financial data for each of our last two fiscal years and each of the quarters in the six months ended June 30, 1999, and those data expressed as percentages of our total revenues for the respective quarters. This information has been derived from unaudited consolidated financial statements that, in the opinion of our management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the quarterly information. The operating results for any quarter are not necessarily indicative of results to be expected for any future period.
QUARTERS ENDED ----------------------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, 1997 1997 1997 1997 1998 1998 1998 1998 --------- -------- --------- -------- --------- -------- --------- -------- (IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenues: SiteMinder software..... -- -- -- $ 237 $ 131 $ 242 $ 411 $ 700 SiteMinder services..... -- -- -- 12 39 87 110 231 Other................... $ 987 $ 1,184 $ 1,120 1,193 640 725 736 739 ------ ------- ------- ------- ------- ------- ------- ------- Total revenues.......... 987 1,184 1,120 1,442 810 1,054 1,257 1,670 Cost of revenues.......... 535 700 571 664 509 444 431 579 ------ ------- ------- ------- ------- ------- ------- ------- Gross profit.............. 452 484 549 778 301 610 826 1,091 Selling, general and administrative expenses................ 1,022 1,273 1,502 1,527 1,385 1,535 1,504 1,772 Research and development costs................... 101 185 304 623 421 452 500 618 ------ ------- ------- ------- ------- ------- ------- ------- Loss from operations...... (671) (974) (1,257) (1,372) (1,505) (1,377) (1,178) (1,299) Interest income (expense), net..................... 79 63 43 18 32 37 31 30 Share of loss from investment in Encotone, Inc..................... (56) (48) (20) (8) -- -- -- -- Write off of investment in Encotone LTD. .......... -- (1,000) (49) -- -- -- -- -- ------ ------- ------- ------- ------- ------- ------- ------- Loss before provision for income taxes............ (648) (1,959) (1,283) (1,362) (1,473) (1,340) (1,147) (1,269) Provision for income taxes................... -- -- -- -- -- -- -- -- ------ ------- ------- ------- ------- ------- ------- ------- Net loss.............. $ (648) $(1,959) $(1,283) $(1,362) $(1,473) $(1,340) $(1,147) $(1,269) ====== ======= ======= ======= ======= ======= ======= ======= QUARTERS ENDED -------------------- MARCH 31, JUNE 30, 1999 1999 --------- -------- (IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenues: SiteMinder software..... $ 995 $ 1,473 SiteMinder services..... 358 447 Other................... 707 719 ------- ------- Total revenues.......... 2,060 2,639 Cost of revenues.......... 715 778 ------- ------- Gross profit.............. 1,345 1,861 Selling, general and administrative expenses................ 2,101 2,487 Research and development costs................... 699 775 ------- ------- Loss from operations...... (1,455) (1,401) Interest income (expense), net..................... 19 47 Share of loss from investment in Encotone, Inc..................... -- -- Write off of investment in Encotone LTD. .......... -- -- ------- ------- Loss before provision for income taxes............ (1,436) (1,354) Provision for income taxes................... -- -- ------- ------- Net loss.............. $(1,436) $(1,354) ======= =======
23 27
QUARTERS ENDED ----------------------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, 1997 1997 1997 1997 1998 1998 1998 1998 --------- -------- --------- -------- --------- -------- --------- -------- AS A PERCENTAGE OF TOTAL REVENUES: Revenues: SiteMinder software..... -- -- -- 16% 16% 23% 33% 42% SiteMinder services..... -- -- -- 1 5 8 9 14 Other................... 100% 100% 100% 83 79 69 58 44 ------ ------- ------- ------- ------- ------- ------- ------- Total revenues.......... 100 100 100 100 100 100 100 100 Cost of revenues.......... 54 59 51 46 63 42 34 35 ------ ------- ------- ------- ------- ------- ------- ------- Gross profit.............. 46 41 49 54 37 58 66 65 Selling, general and administrative expenses................ 104 108 134 106 171 146 120 106 Research and development costs................... 10 15 27 43 52 43 40 37 ------ ------- ------- ------- ------- ------- ------- ------- Loss from operations...... (68) (82) (112) (95) (186) (131) (94) (78) Interest income (expense), net..................... 8 5 4 1 4 4 3 2 Share of loss from investment in Encotone, Inc..................... (6) (4) (2) (1) -- -- -- -- Write off of investment in Encotone LTD. .......... -- (84) (4) -- -- -- -- -- ------ ------- ------- ------- ------- ------- ------- ------- Loss before provision for income taxes............ (66) (165) (115) (95) (182) (127) (91) (76) Provision for income taxes................... -- -- -- -- -- -- -- -- ------ ------- ------- ------- ------- ------- ------- ------- Net loss.................. (66)% (165)% (115)% (95)% (182)% (127)% (91)% (76)% ====== ======= ======= ======= ======= ======= ======= ======= QUARTERS ENDED -------------------- MARCH 31, JUNE 30, 1999 1999 --------- -------- AS A PERCENTAGE OF TOTAL REVENUES: Revenues: SiteMinder software..... 48% 56% SiteMinder services..... 17 17 Other................... 35 27 ------- ------- Total revenues.......... 100 100 Cost of revenues.......... 35 29 ------- ------- Gross profit.............. 65 71 Selling, general and administrative expenses................ 102 94 Research and development costs................... 34 29 ------- ------- Loss from operations...... (71) (53) Interest income (expense), net..................... 1 2 Share of loss from investment in Encotone, Inc..................... -- -- Write off of investment in Encotone LTD. .......... -- -- ------- ------- Loss before provision for income taxes............ (70) (51) Provision for income taxes................... -- -- ------- ------- Net loss.................. (70)% (51)% ======= =======
Our total SiteMinder-related revenues have increased in each quarter following the release of SiteMinder 3.0 in June 1998. The increase in each quarter has been due to the increase in the number of our customers. This resulted from increased market awareness and acceptance of our SiteMinder software, expansion of our sales organization and increased SiteMinder services revenues, which reflect the growth in the installed base of product licenses. Gross profit has increased in conjunction with our increases in SiteMinder software revenues. Our selling, general and administrative expenses have generally increased on a quarterly basis, primarily as a result of the timing and number of additions in personnel and compensation and the timing, number and significance of specific marketing and sales activities, such as trade shows and other promotional activities. Our research and development costs have varied from quarter to quarter primarily as a result of the timing and number of additions of personnel and related compensation costs. In addition, a variety of factors, many of which are outside of our control, may affect our quarterly operating results. These factors include: - 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. The limited history of deployment of our SiteMinder product and the undeveloped nature of the market for web-based e-commerce applications make predicting future revenues difficult. Our expense levels are based, in part, on our expectations regarding future revenue increases, and to a large extent such expenses are fixed, particularly in the short term. There can be no assurance that our expectations regarding future 24 28 revenues are accurate. Moreover, we may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall of revenues in relation to our expectations would likely cause a significant increase in our net loss, or a significant decrease in our net income, for that period. Due to the foregoing factors, our operating results are difficult to forecast. We believe that period-to-period comparisons of our historical operating results are not meaningful and should not be relied upon as an indication of future performance. Also, our operating results may fall below the expectations of securities analysts or investors in some future quarter and, as a result, the market price of our common stock could decrease significantly. LIQUIDITY AND CAPITAL RESOURCES In recent years, we have funded our operations primarily from sales of securities. Cash used for operating activities in the six months ended June 30, 1999 was $2.8 million, primarily due to a net loss of $2.8 million and an increase in accounts receivable, partially offset by increases in accounts payable, accrued expenses and deferred revenue. Cash used for operating activities in the year ended December 31, 1998 was $5.8 million, primarily due to a net loss of $5.2 million and an increase in accounts receivable, partially offset by increases in accounts payable, accrued expenses and deferred revenue. Cash used for investing activities was $122,000 in the six months ended June 30, 1999, and $301,000 in the year ended December 31, 1998. Investing activities for the periods consisted primarily of the purchases of equipment, consisting largely of computer servers, workstations and networking equipment. Cash provided by financing activities in the six months ended June 30, 1999 was $4.8 million, as a result of our sale of 795,651 shares of common stock to four investors in a private placement on February 8, 1999 at a price of $5.75 per share. Cash provided by financing activities in the year ended December 31, 1998 was $5.2 million, primarily due to our issuance of preferred stock and warrants for net proceeds totaling $5.0 million. As of June 30, 1999, our primary financial commitments consisted of obligations outstanding under operating leases. As of June 30, 1999, we had cash and cash equivalents totaling $3.1 million. On September 9, 1999, we sold 534,242 shares of common stock to five investors in a private placement at a price of $20.59 per share. We received net proceeds of approximately $10.3 million from the private placement, after deducting the placement agent's fee and our estimated expenses. 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 the net proceeds of this offering and our September 1999 sale of stock, together with our existing cash and cash equivalent balances, will be sufficient to meet our anticipated cash requirements for working capital and capital expenditures for at least the next twelve months. Thereafter, if cash generated from operations is insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities, or obtain additional credit facilities. The issuance of additional equity or convertible debt securities could result in additional dilution to our stockholders. IMPACT OF THE YEAR 2000 ISSUE The Year 2000 issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. This could result in a system failure or miscalculations if a computer program recognizes a date of "00" as the year 1900 instead of 2000. If not corrected, many computer systems could fail or create erroneous results in 2000. 25 29 State of Readiness We have completed our initial assessment and testing of products, systems and processes with respect to the "Year 2000" issue. We plan to continue our assessment and testing of products, systems and processes throughout the remainder of 1999. Products All dates used within our SiteMinder 3.0 product utilize a standard four-digit year format. SiteMinder 3.0 has been tested by configuring a test environment with the system dates on the test computers set to various dates in the twenty-first century. SiteMinder 3.0 was then put through a regression test and the output verified with previous test runs with no errors. We have verified that when used properly and in conformity with the product information we supply, SiteMinder 3.0 will accurately store, display, process, provide and receive data from, into and between 1999 and 2000, including leap year calculations, provided that all other technology used in combination with SiteMinder 3.0 properly exchanges date data with SiteMinder 3.0. The assessment of whether a complete system or device in which SiteMinder 3.0 is embedded will operate correctly for an end user depends in large part on the year 2000 readiness of the system's other components, most of which are supplied by parties other than our company. Users must test their unique combination of hardware, system software, and transaction and application software in order to assess the Year 2000 capability of a user's particular system. In addition, we have relied on representations of Check Point Software Technologies as to the Year 2000 readiness of FireWall-1. Any failure of FireWall-1 to be Year 2000 compliant may have a material adverse effect on our FireWall-1 reseller business, our customer relationships and our operating results. Internal Systems and Processes We have completed our assessment of our internal systems and processes, including computers and related systems, office and facilities equipment, including fax machines, photocopiers, telephone switches, security systems and other common devices that may be affected by the Year 2000 problem. In September 1999, we installed a necessary telephone system upgrade. Based on our assessment to date, we believe that all of our other internal systems and processes are Year 2000 capable. Third-Party Vendors and Suppliers We have reviewed Year 2000 statements provided by our significant vendors. We have not independently verified Year 2000 statements made by third parties, and we can express no assurances as to the Year 2000 compliance status of third parties. We may not be able to know with certainty whether vendors are compliant. Failure of critical vendors to achieve Year 2000 compliance could result in delayed deliveries of products and services to us. If those delays are extensive, they could have a material adverse effect on our business. Costs of Year 2000 Compliance All costs related to Year 2000 issues are being expensed as incurred. We do not expect the total costs of evaluation and testing to be material. Other potential costs may include updating of computer software and hardware, as well as other out-of-pocket costs. Costs associated with Year 2000 issues totaled approximately $100,000 through August 31, 1999. We anticipate that we may incur up to an additional $100,000 in future costs associated with our Year 2000 readiness. Risks of Year 2000 Issues Although we believe we are taking prudent action related to the identification and resolution of issues related to the Year 2000 problem, our assessment is still in progress. Our failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, normal business activities. An interruption or failure could materially and adversely affect our results of operations, liquidity and financial condition. Due to 26 30 the general uncertainty of the Year 2000 readiness of third parties, we are unable to determine at this time whether the consequences of Year 2000 failures will have a material adverse impact on our results of operations, liquidity or financial position. Our assessment, testing and contingency planning are expected to reduce, but not eliminate, our level of uncertainty about the Year 2000 issue and the readiness of third parties. We believe that the completion of our assessment, testing and contingency planning should reduce the possibility of significant interruptions to normal operations. Contingency Plan Based on our assessments to date, we believe our existing internal systems and procedures, including our standard redundant systems and servers, will enable us to continue to deliver our software in 2000 without significant interruption. As a result, we do not intend to formulate a detailed contingency plan for Year 2000 failures. We do not plan to assess the specific Year 2000 compliance of external forces such as utility and transportation systems or Year 2000 compliance failures that might generally affect industry and commerce. Any Year 2000 failure of this type, or any other significant unforeseen Year 2000 failure, could have a material adverse effect on our business and operating results. RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, or SOP 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 became effective for us beginning January 1, 1999. The adoption of this statement to have a material effect on our financial position or results of operations. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, or SFAS 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 statement initially was to be effective for all fiscal quarters of fiscal years beginning after June 15, 1999. In July 1999, the Financial Accounting Standards Board issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities Deferral of the Effective Date of FASB Statement No. 133 -- An amendment of FASB Statement No. 133." SFAS 137 defers the implementation of SFAS 133 by one year. SFAS 133, as amended by SFAS 137, is effective for our fiscal quarters beginning after January 1, 2000. We do not expect our adoption of SFAS 133 to have a material effect on our financial position or results of operations. 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. 27 31 BUSINESS INTRODUCTION We are a leading provider of software and services that manage and control user access to web-based e-commerce applications. Our SiteMinder product is part of the software infrastructure that is used to build and manage an e-commerce web site. SiteMinder manages the complex process of identifying users and assigning those users privileges to multiple e-commerce applications on a company's web site. These assigned privileges determine what information a user can see and what transactions a user can perform on the web site. SiteMinder enables our customers to centrally control access to e-commerce web sites requiring secure log-in, while distributing the administrative responsibilities to the most appropriate parties. SiteMinder is designed to be scalable and reliable, to integrate with our customers' existing systems and to accommodate emerging Internet technology. We offer a wide range of support services that enable our customers to successfully implement SiteMinder into their organizations. As of June 30, 1999 we had 87 customers, including Arthur Andersen, Delta Airlines, General Electric, GTE Internetworking, Ingram Micro, MCI WorldCom and Merrill Lynch. We sell our products through a direct sales force and through our distribution partners who include Allaire, GTE Cybertrust, Network Associates and the Sun-Netscape Alliance. To date, most of our customers' deployments of SiteMinder have supported business-to-business e-commerce applications, but our customers are beginning to deploy SiteMinder for business-to-consumer applications. INDUSTRY BACKGROUND The growth in e-commerce is driving companies to develop a new set of web-based applications accessed by a large and diverse range of corporate users, including customers, business partners and employees. In many cases, these new applications are becoming the principal business processes of an organization. These include online retail, customer service, supply chain procurement, and delivery of operational and transactional data. This new generation of applications has created a demand for new Internet security and user management solutions to handle the size and scope of these applications. Before the advent of e-commerce and the transition to web-based computing, most large businesses deployed client/server architectures to support enterprise computing. In the client/server model, applications are generally limited to traditional enterprise resource planning functions such as accounting, human resources and material resource planning. Defined groups, limited to selected employees, access these applications through a company's internal computing resources or dedicated remote access solutions. As a result of this limited usage, controlling and securing access to these applications and administering the associated users and their rights of usage, or privileges, can be adequately handled by the organization's information technology, or IT, department. With only a limited number of applications and a small number of defined users, the assignment of privileges to these users is accomplished by embedding the security and privilege functions into each application. E-commerce, however, is fundamentally changing traditional business processes because companies now need to conduct business online with their customers and business partners. According to Forrester Research, business-to-business e-commerce is expected to grow from $43 billion in 1998 to $1.3 trillion in 2003. Forrester also estimates that business-to-consumer e-commerce will grow from $8 billion in 1998 to $108 billion in 2003. Companies are developing new web-based applications that support key revenue and relationship management aspects of the companies' business processes. International Data Corporation estimates that the global e-commerce application market will grow from $444 million in 1998 to over $13 billion in 2003. Companies are also attempting to leverage their existing investments in traditional enterprise applications by integrating them into their web sites. In this new e-commerce business model, applications accessed through the web site are not just supporting business operations, but, in many instances, become the focal point for companies' interactions with their constituencies, including remote and mobile employees, existing and potential customers, suppliers, vendors, distributors and other business partners. As larger and more diverse constituencies access wider ranges of applications, the management and security of users become increasingly important and complex. The software infrastructure required to support 28 32 these applications, developed in different languages, running on different web servers and operating on different hardware platforms, dramatically adds to this complexity. Traditional security and management software solutions, whether developed in house or provided by a third party, face significant difficulties in meeting these challenges effectively. Most e-commerce web sites have continued the practice of embedding security in each application. This requires users to provide a password to access each application, resulting in a cumbersome and time-consuming user experience. Lack of centralized user management also creates security issues. Companies cannot take corrective actions in a timely fashion because the security and privileges must be modified in each application. In addition, many companies find it difficult to accommodate relationships with business customers and partners because the companies' IT departments do not have the information necessary to manage the privileges of individual customer and partner users. Even organizations that have achieved early success with web-based e-commerce business models face challenges as their models evolve. For example, many e-commerce businesses initially focused on a direct sales relationship with their customers and therefore only needed to manage this single application. As their operations have matured, however, they have needed to deploy additional applications, such as customer service. These early e-commerce businesses had no alternative but to build their own security and user management infrastructure to manage the increased number of applications. Today, the software infrastructure that was built faces scalability and user-management issues, resulting in mounting development and support costs. In order for e-commerce to be successful, companies require a secure and scalable user management infrastructure for conducting business. E-commerce sites must be capable of managing the large numbers of users and multiple user transactions without jeopardizing the integrity of the site's security policies. As companies seek to attract customers and partners to their e-commerce sites, and to increase the efficiency of their employees, they require a solution providing a seamless and integrated view of the applications on their web sites. The solution must provide single sign-on to personalized information based on the profile of the particular user. As the number of applications proliferates and the complexity of data increases, the solution must reduce the burden of managing these applications. Companies require a solution that easily and seamlessly integrates with their existing investments in information technology infrastructure, including web servers, application servers, directory servers and various forms of user identification. Finally, companies require an open and extensible architecture in order to accommodate the introduction of new, evolving web technologies. THE NETEGRITY SOLUTION We are a leading provider of software and services for secure user management for e-commerce applications. Key benefits of our solution include: Centralized privilege management. SiteMinder provides centralized control of users and privileges that extends across multiple web-based applications on a company's web site. SiteMinder manages the privileges of customers, business partners and employees accessing applications on a company's web site. Our solution provides this centralized privilege management as a shared service that includes all of the e-commerce applications deployed by our customers. This approach provides many benefits. Security changes can be effected swiftly and efficiently across all of a company's e-commerce applications. Moreover, it makes application developers much more productive because they are free to focus on business processes and leave security, privilege management and personalization to SiteMinder. Superior user experience through single sign-on and personalized content. With SiteMinder, users sign-on to a web site once and gain access to all relevant information as defined by their user privileges. Single sign- on provides access to a personalized view of content drawn from multiple applications which run on multiple servers, multiple operating systems, and across multiple Internet domains. This benefits end users by providing them with a high-quality user experience, personalized to meet their individual needs. By providing a superior user experience on its web site, a company is able to protect its brand and build customer loyalty. Distributed and delegated administration. SiteMinder provides policy-based administration of security policies, so that administrative responsibilities can be easily delegated to individual business units, remote 29 33 trading partners or other administrators without jeopardizing control. Delegated administrators control only the users and policies for which they have been granted explicit responsibility. SiteMinder assigns administrative responsibility where the knowledge resides, while still maintaining the overall security of a site. As a result, a company's administrative burdens and associated costs are dramatically reduced. Leverages existing investments in technology infrastructure. SiteMinder has been designed to support the existing systems currently employed by companies and to easily accommodate emerging Internet technologies. SiteMinder integrates with leading user directories, web servers, application servers and authentication technologies. SiteMinder also provides support for multiple web servers and operating platforms involving Microsoft and Netscape Web servers, and Windows NT and UNIX platforms, which facilitates cross-platform development, deployment and migration. Scalability and high-availability. Our customers require a platform that scales as they deploy additional applications and as user traffic grows, while providing the highest level of reliability. SiteMinder provides a scalable high-availability platform to meet the requirements of demanding web sites. Based on independent third-party testing, published data from other vendors and feedback from customers, we believe that SiteMinder provides significantly higher transaction rates than other competing solutions. STRATEGY Our objective is to become the market leader in secure user management solutions that support business-to-business and business-to-consumer e-commerce applications. Key elements of our strategy include: Extend technology leadership in secure user management market. We believe that our technology enables us to offer a complete and cost-effective secure user management solution for web-based applications. By building upon our ability to use a company's existing directories rather than creating another database, a feature called native integration, single sign-on capabilities and our ability to scale to support millions of users, we believe we can extend our leadership in the secure user management market by adding new features and capabilities. Specifically, we plan to offer additional platform support for our SiteMinder solution and integration with non-web-based, legacy applications. In addition, we intend to continue to incorporate industry-leading technologies such as support for eXtensible Markup Language, or XML, and Simple Network Management Protocol, or SNMP, protocols, into SiteMinder. Expand applications of SiteMinder into new markets. While most of our customers' deployments have been in the business-to-business e-commerce market, our customers are beginning to deploy SiteMinder in the business-to-consumer e-commerce market. We believe that our capabilities will enable us to offer solutions that support portal and targeted community applications in the business-to-consumer market. We will continue to expand and tailor SiteMinder as necessary to meet the requirements of our customers for new e-commerce applications. Expand strategic partnerships and distribution channels. We have developed strategic relationships in order to significantly increase distribution of our products, provide validation of SiteMinder, and enhance market awareness. These relationships include our worldwide licensing agreements with Allaire, GTE Cybertrust, Network Associates and the Sun-Netscape Alliance and reseller agreements with Banyan Systems and Intraware. We are also focused on building our reseller channel and establishing relationships with leading systems integrators and technology consulting firms. We expect to continue to establish strategic and other third-party relationships with vendors of Internet-related systems and application software. Pursue international expansion. Although we principally focus our marketing efforts in the United States, we plan to expand our sales force and support organizations with the objective of gaining broad international market acceptance of SiteMinder through adoption into strategic accounts. In addition, we are developing products intended to address the specific needs of international markets, with an initial focus on Europe and Asia. These include developing localized versions of our products and local consulting services. Expand service resources. We believe that a customer's decision to purchase our products is based, in part, on our ability to provide a high level of customer service and technical support. The mission-critical nature of product implementations further heightens customer's need for our support. We believe that 30 34 demand for our services will grow as the size and scope of installation increases. We expect to expand our service resources and offer our customers a range of services that addresses the needs of larger scale deployments. PRODUCTS AND SERVICES SiteMinder Product SiteMinder 3.6 is the current version of the SiteMinder product. SiteMinder interacts with the four main components of an e-commerce web site: - Web Servers: SiteMinder is designed to support all major web servers and provide access control to content distributed through these servers. - Application Servers: SiteMinder is designed to support all major application servers and provide generalized privilege management to the content and transactions delivered through these servers. - Authentication Services: SiteMinder provides broad support for authentication methods that enable web sites to authenticate users through a variety of methods that meet the unique security requirements of each application. - Directory Servers: SiteMinder integrates with all industry leading directory servers and utilizes them as repositories for all user and privilege data. The SiteMinder product consists of three key components: Policy Servers, Agents and an Administration Console. Additionally, SiteMinder is delivered with a developer kit, which allows developers to construct web sites in both C++ and Java applications. The following briefly describes each of the primary components: - Policy Server: The Policy Server is a generalized security policy engine, which includes processes for authentication, authorization, session management, administration and auditing. The Policy Server, which handles all requests for managing, and enforcing user privileges, runs on Windows NT and UNIX platforms. - Agents: Agents are distributed components deployed on web servers, application servers, or as part of an application itself. Agents communicate policies to the application governing user privileges. SiteMinder ships with web Agents compatible with most popular web servers, including Microsoft IIS, Netscape Enterprise Server and Apache. SiteMinder also supports application server Agents compatible with most popular application servers, including those from Allaire, Bluestone, Microsoft, Oracle and the Sun-Netscape Alliance. - Administration Console: The Administration Console is a secure Java applet that allows administrators to create and manage user privilege policies from any Java-enabled web browser. SiteMinder 3.6 provides the following services: - Privilege management infrastructure: SiteMinder provides a single location for defining the policies that specify which users may access particular e-commerce applications and content. By providing a single location for these policies, SiteMinder enables web sites to apply consistent personalized content and application access for users throughout the site. - Single sign-on: SiteMinder provides robust single sign-on services across e-commerce sites spanning web servers and application environments running on multiple operating systems and spanning multiple Internet domains. Using encrypted cookies, SiteMinder is able to recognize a previously authenticated and authorized user and allow the user to access applications and content without being prompted repeatedly for new passwords. - Policy-based authentication services: SiteMinder manages the entire authentication process. It supports all leading authentication technologies including basic name-password, forms based authentication, digital certificates, two-factor authentication, and method chaining. SiteMinder's policy-based approach enables customers to apply different authentication technologies depending on the value 31 35 and risk of the application being accessed. For example, companies can easily use name-passwords for most applications while requiring a digital certificate for an on-line trading system. - Distributed administration: Using any Java-enabled browser, web administrators are able to access SiteMinder and modify user privilege policies from anywhere on the network. The user interface supports multiple levels of delegation among administrators. SiteMinder is the only secure user management system on the market that provides native integration with industry-standard Lightweight Directory Access Protocol, or LDAP, Windows NT directory services, and SQL databases. As a result, customers do not need to install and manage separate and redundant user directories, which are expensive to maintain, unnecessarily complex, and therefore prone to failure. SiteMinder's native directory support works with multiple directory services from multiple vendors to provide our customers with the freedom to deploy on their preferred platforms. SiteMinder has been developed with a scalable, highly available architecture. Key features of this robust architecture include: - Load balancing: SiteMinder Agents can easily be configured to balance loads across multiple policy servers, as well as across multiple user directories. The result is nearly linear scaling as additional servers are deployed. - Automatic fail-over: SiteMinder Agents can easily be configured to automatically communicate with a new Policy Server should their primary Policy Server be taken off line or fail. Likewise, SiteMinder Policy Servers can easily be configured to automatically utilize a new user directory should their primary user directory be taken off line or fail. The result is a fully redundant architecture that provides high availability. - Local caching: Both Policy Servers and Agents can be configured to cache appropriate data thereby minimizing unnecessary traffic and processing requirements. SiteMinder's session management will automatically update cached information should policies or user profiles change. We typically license SiteMinder based on the following categories: - Intranets, in which all the users are employees or contractors working for our customer. Prices start at approximately $40 per user for small sites and are discounted as volumes grow. - Extranets, in which our customers conduct transactions with their corporate customers, suppliers and partners. Prices start at approximately $30 per user for small sites and are discounted as volumes grow. - Internet sites, in which users are consumers seeking products or information from our customers. Prices start at less than $2 per user for volumes greater than 250,000 users. Standard SiteMinder licenses include a web Agent site license and unlimited Policy Server licenses. Essentially, our customers pay us for the size of the web site they are building, as measured by the number of users of that site. Our standard product license gives the customer the right to replicate and install our SiteMinder software components throughout its web site infrastructure as needed to meet scalability and redundancy requirements. SiteMinder Services Our professional services organization provides consulting and integration services that aid our customers in successfully implementing SiteMinder within their organizations. Our professional services include application infrastructure planning, application prototyping and integration, SiteMinder deployment, SiteMinder extensions and custom agents, and training for developers and solutions architects. In addition to our professional services offerings, we offer annual support maintenance contracts to each SiteMinder customer. These maintenance contracts are usually purchased at the time of the initial software purchase, and are renewed annually. We provide our customers with a variety of specialized maintenance 32 36 programs ranging from standard business hours support, to more robust support plans providing 24-hour, 7 day per week coverage. SiteMinder Products in Development Two additional versions of SiteMinder are currently under development for scheduled release in the next twelve months: SiteMinder Portal Edition and SiteMinder 4.0. The SiteMinder Portal Edition is being developed to provide additional support for corporate e-commerce portals. SiteMinder 4.0 is being designed to integrate with additional legacy applications, extend the current product support to additional platforms and provide integrated support for additional web and application servers. Other Products and Services In addition to the sales and marketing of SiteMinder, we are a non-exclusive distributor of Check Point Software Technologies' FireWall-1 product, complementary products from other vendors and related maintenance, consulting and training services. We sell these products and services directly to end users through a small, dedicated sales organization throughout the United States. SALES, MARKETING AND DISTRIBUTION We directly market our SiteMinder software and services domestically through a field sales organization supported by inside sales representatives. We also indirectly market 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. As of August 31, 1999, our sales and marketing organization consisted of 50 individuals. Direct Sales Force. As of August 31, 1999, our direct sales force consisted of 31 individuals, 10 of whom were field sales representatives covering seven domestic regions. Our sales organization identifies prospects that have e-commerce plans and requirements, and deploys a solution-selling approach once customers are qualified. Our inside sales representatives qualify, develop and pursue leads generated through a variety of sources. Our field sales group conducts on-site meetings with accounts that have substantial product and service requirements. We target SiteMinder software and services to large, corporate customers and smaller firms that need to protect access to mission-critical information while providing the users of their applications with a personalized, seamless experience. We generally sell to e-commerce business managers, product managers, web application development managers, Internet architects, security administrators, network/systems administrators and other people responsible for analyzing and selecting e-commerce solutions. We plan to continue to focus on building our direct sales force, especially our field sales representatives, both domestically and internationally. Indirect Distribution. We have signed partnership agreements with several leading technology providers and systems integrators. We classify our partner companies as follows: - Alliance partners. Through our alliance partners, we license restricted use of our versions of our SiteMinder product to sell with their platforms or applications. Key alliance partners include Allaire, GTE Cybertrust, Network Associates and the Sun-Netscape Alliance. - Systems integrators. We continue to develop partnerships with leading systems integrators to aid in the integration and systems design of our software at customer sites. We plan to utilize systems integrators as well as our internal service and support personnel to provide superior customer installation and support. Systems integrators with which we have relationships include Navidec, Omicron and SDG. - Resellers. We enter into agreements with selected resellers of our product, including Banyan Systems and Intraware. - ISV/Co-marketing partners. We also actively seek partnerships with companies that provide products to our customers which are complementary to SiteMinder. We work together with these vendors 33 37 to provide technical integration of our product. In many cases we also work together on sales and marketing initiatives. Key partners in this arena include Baltimore, IBM, Microsoft, Novell, Verisign and Vignette. Product Marketing Programs. We engage in a broad range of product marketing activities, including sponsoring seminars for prospective customers, exhibiting at targeted conferences for both the technology and financial communities, as well as providing paper and e-mail based direct mailings. We also maintain an active public relations program. This program issues press releases highlighting major customer additions, strategic partnerships and new product releases, manages relations with industry analysts and promotes coverage of the firm in the trade and business press. We devote significant resources to our web site to provide product and company information as well as customer profiles. We continue to enhance our web site with features, including interactive tours, streaming demos, presentations and seminar content online, customer and developer chat rooms and more customer application stories. In addition, we plan to launch a series of test banner campaigns on leading Internet portal sites. Our product marketing programs are aimed at informing customers of the capabilities and benefits of the SiteMinder solution and increasing demand across all industry segments. We plan to continue to devote significant resources to marketing our product and brand. In addition to the sales and marketing of SiteMinder, we are also a non-exclusive distributor of Check Point Software Technologies' FireWall-1 product, complementary products from other vendors and related maintenance, consulting and training services. We sell these products and services directly to end-users through a small, dedicated sales organization in the United States. We also benefit from marketing programs conducted by Check Point Software Technologies. CUSTOMERS As of June 30, 1999, we licensed SiteMinder software to 87 end-user customers. Our customer base spans multiple industry segments, focusing primarily on financial services, high tech, government, insurance, retail and telephone companies and internet service providers. The following is a representative list of our customers who have purchased SiteMinder: Aetna Arthur Andersen The Associates Autodesk Carrier Citibank Corio Country Wide Delta Airlines General Electric GTE Internetworking Ingram Micro Inova Health Systems Lucent MCI WorldCom Merrill Lynch Mitsubishi Nextel Communications Paychex PG&E SAIC-FBI/LEO State of Utah Tandy Tektronix Thomson US Steel Virginia Power No single customer, including direct end users or resellers, accounted for more than 10% of our total revenues during any of the years ended December 31, 1998, 1997 and 1996. We also sold Check Point Software Technologies' FireWall-1 to over 300 customers and continue to provide support to most of them. COMPETITION The market for secure user management products and sources is new, rapidly evolving and highly competitive. We expect competition to continue to increase both from existing competitors and new market 34 38 entrants. We believe that our ability to compete depends on many factors both within and beyond our control, including: - the performance, reliability, features, price and ease of use of our SiteMinder product line as compared to those of our competitors; - our ability to secure and maintain key strategic relationships with distributors, resellers and other partners; - our ability to expand both our domestic and international sales operations; and - the timing and market acceptance of new solutions and enhancements to existing solutions developed by us and our competitors. Until recently, our primary source of competition was from custom-built 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 competitive with ours. Our primary competitors now include enCommerce and a partnership between IBM and DASCOM. We also have faced competition from web development professional services organizations. In addition, a number of other security and software companies have indicated that they offer products which may compete with ours. Additional competition may develop as the market matures and other companies begin to offer similar products, and as our product offerings expand to other segments of the marketplace. Current and potential competitors have established, or may in the future establish, cooperative selling relationships with third parties to increase the distribution of their products to the marketplace. Accordingly, it is possible that new competitors may emerge and rapidly acquire significant market share. Some of our competitors have longer operating histories and significantly greater financial, technical, marketing and other resources than we do. Many of these companies have broader customer relationships that can be leveraged, including relationships with many of our customers. These companies also have more established customer support and implementation services than we do. In addition, these companies may adopt aggressive pricing policies. As a result, we may not be able to maintain a competitive position against current or future competitors. As new participants enter the secure user management market, we will face increased competition. Potential competitors may bundle their products in a manner that discourages users from purchasing our products. It is also possible that current and potential competitors may be able to respond more quickly to new or emerging technologies or customer requirements, resulting in the acquisition of market share. Our FireWall-1 reseller business experiences competition from companies that offer products competing with Check Point Software Technologies' FireWall-1 product, including Axent Technologies, Cisco Systems and Trusted Information Systems. We also compete with other resellers of FireWall-1. 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. We devote significant time and resources to analyzing and responding to changes in the industry, such as changes in operating systems, application software, security standards and networking software and evolving customer requirements. E-commerce applications have significant requirements for scalability, reliability, sophisticated security and ease of administration. These increased demands drive the need for a centralized access control model for administrators and a single point of access for end-users. With the growing implementation of standards-based user directories, such as LDAP, and the proliferation of flexible and easy-to-use security products, businesses are able to take advantage of best-of-breed solutions as they deploy e-commerce applications across heterogeneous networks. We have made, and expect to continue to make, a substantial investment in research and development. In the year ended December 31, 1998, we spent approximately $2.0 million, or 42% of 35 39 total revenues, on research and development of our SiteMinder product. In the six months ended June 30, 1999, we spent approximately $1.5 million, or 31% of total revenues, on research and development of our SiteMinder product. We will continue our product development efforts for our current product, as well as developing next generation versions of our product line. As of August 31, 1999, we had 36 employees engaged in research and development activities. We believe our future success depends largely on our ability to enhance and broaden our existing product line to meet the evolving needs of the market. There can be no assurance that we will be able to respond effectively to technological changes or new industry standards or developments. Our operating results and business could be adversely affected if we were to incur significant delays or be unsuccessful in developing new products or enhancing our existing products, or if any such enhancements or new products do not gain market acceptance. In addition, a number of factors may cause variations in our future operating results. These include the timing of product introductions and enhancements by us or our competitors, market acceptance of new products, or customer order deferrals in anticipation of new products. PROPRIETARY RIGHTS Our success and ability to compete are dependent to a significant degree on our ability to develop and maintain the proprietary aspects of our technology and operate without infringing on the proprietary rights of others. We rely on a combination of trademark, licenses, trade secret and copyright laws and contractual restrictions to protect the proprietary aspects of our technology. These legal protections afford only limited protection for our technology. We seek to protect our source code for our software, documentation and other written materials under trade secret and copyright laws. We license our software pursuant to signed license agreements, which impose restrictions on the licensee's ability to utilize the software. Finally, we seek to limit disclosure of our intellectual property by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements with us and by restricting access to our source code. Due to rapid technological change, we believe that factors such as the technological and creative skills of our personnel, new product developments and enhancements to existing products are more important than the various legal protections of our technology to establishing and maintaining a technology leadership position. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult and while we are unable to determine the extent to which piracy of our software exists, software piracy can be expected to be a persistent problem. In addition, the laws of many countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Any such resulting litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our business, operating results and financial condition. There can be no assurance that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology. Any failure by us to meaningfully protect our property could have a material adverse effect on our business, operating results and financial condition. There can be no assurance that third parties will not claim infringement with respect to our current or future products. We expect that developers of web-based application software products will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and as the functionality of products in different segments of the software industry increasingly overlaps. Any such claims, with or without merit, could be time consuming to defend, result in costly litigation, divert management's attention and resources, cause product shipment delays or require us to enter into terms acceptable to us or at all. A successful infringement claim against us and our failure or inability to license the infringed rights or develop or license technology with comparable functionality could have a material adverse effect on our business, financial condition and operating results. We integrate third-party software into our products. This third-party software may not continue to be available on commercially reasonable terms. We believe, however, there are alternative sources for such 36 40 technology. If we could not maintain licenses to the third-party software included in our products, however, distribution of our products could be delayed until equivalent software could be developed or licensed and integrated into our products, which could materially adversely affect our business, operating results and financial condition. EMPLOYEES As of August 31, 1999, we had a total of 105 full-time employees, of which 36 were involved in research and development, 57 in sales, marketing and customer support, and 12 in administration and finance. None of our employees are represented by a labor union. We have not experienced any work stoppages and believe that our relationships with employees are good. Our future success will depend in part on our ability to attract, retain and motivate highly qualified technical and management personnel, for whom competition is intense. PROPERTIES Our headquarters consist of two separate leased office suites located at 245 Winter Street in Waltham, Massachusetts. We occupy 5,760 square feet of space for current monthly payments of $8,880 under a lease expiring in May 2001. Additionally, we occupy 8,015 square feet of office space in the same building for current monthly payments of $11,552 under a sub-lease expiring in December 1999. We are currently seeking larger quarters and believe that suitable space will be available on acceptable terms to meet our needs. In order to support our field sales and consulting staff, we lease office space in Los Angeles and San Francisco, California; New York, New York; Chicago, Illinois; Reston, Virginia; Atlanta, Georgia and Paris, France. LEGAL PROCEEDINGS On June 4, 1999, a suit was brought in the Delaware Court of Chancery, purportedly on behalf of our common stockholders, alleging that certain amendments to our certificate of incorporation previously adopted by our stockholders increasing the authorized shares of various classes of stock were invalid because we did not obtain the required statutory votes. On August 5, 1999, the parties entered into a settlement agreement, subject to court approval and approval from the holders of our preferred stock and common stock, in separate class votes, of the previously adopted amendments. A hearing on the settlement is scheduled for September 24, 1999. We believe that the costs associated with this settlement will not have a material effect on our results of operations, assets or financial condition. 37 41 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS Our executive officers and directors as of August 31, 1999 were:
NAME AGE POSITION - ---- --- -------- Barry N. Bycoff.................... 50 President, Chief Executive Officer and Director James E. Hayden.................... 44 Vice President of Finance and Administration, Chief Financial Officer and Treasurer Thomas Palka....................... 57 Vice President of Sales Deepak Taneja...................... 38 Vice President of Development James Rosen........................ 45 Vice President of Marketing and Business Development Stephen L. Watson(1)............... 57 Director Ralph B. Wagner(2)................. 65 Director Michael L. Mark(1)(2).............. 53 Director Eric R. Giler(2)................... 43 Director James P. McNiel(1)................. 36 Director
- --------------- (1) Member of audit committee. (2) Member of compensation committee. Barry N. Bycoff became our President and Chief Executive Officer and one of our directors in April 1993. From December 1991 to December 1992, during his tenure at MapInfo Corporation, a provider of desktop mapping software, he held positions as Chief Operating Officer, Senior Vice President of Sales and Marketing, and Director. From January 1984 to October 1991, he ran a number of business units for Prime Computer, a manufacturer of mainframe and minicomputer systems; his positions included Vice President-Marketing in the Computer Systems Business Unit, Vice President-General Purpose Product Line, Vice President-Prime Information Business Group, Director-Finance and Administration/Worldwide Sales, and Director-Corporate Planning and Analysis. Prior to that, Mr. Bycoff held various management positions at Gillette Company from November 1973 to December 1983. Mr. Bycoff is also a director of Encotone, Ltd. James E. Hayden was named our Vice President of Finance and Administration, Chief Financial Officer and Treasurer in April 1998. Prior to joining us, he was with Computervision Corporation, a manufacturer of mainframe and minicomputer systems, serving as Principal Accounting Officer from June 1994 to January 1998, and as Director of Finance for Worldwide Field Operations from July 1993 to May 1994. From 1989 to 1993, Mr. Hayden served as Finance Director for Prime Computer/Computervision's Northern European Region. From 1986 to 1989, he served in various finance management positions for Prime Computer/ Computervision. Thomas Palka was named our Vice President of Sales and Services in September 1998. From March 1997 to August 1998, he was Vice President of Worldwide Sales & Consulting Services for VenturCom Software, a developer of software tools for the embedded and real-time market. From 1991 to December 1997, Mr. Palka was with Ardent Software, a database, data warehouse, and development tools company, where he served as Vice President of Worldwide Sales from February 1991 to December 1995 and Vice President of Marketing from January 1996 to December 1997. From 1990 to 1991, he was Vice President of North American Sales at Data General Corporation, and from 1981 to 1990, he was Vice President of North American Sales at Prime Computer, a manufacturer of mainframe and minicomputer systems. Deepak Taneja joined us in January 1998 as Vice President of Development. From July 1996 to December 1997, he was Director of Development for Switchboard, an Internet directory services firm. From 1987 to 1996, Mr. Taneja held various positions at Banyan Systems, a developer of network software products, including Director of Development for Messaging Products from July 1995 to June 1996 and Director of Development for Network and Systems Management products from August 1994 to June 1995. From June 1983 to November 1987, he was a Senior Software Engineer with Intel Corporation. 38 42 James Rosen joined us in April 1997 as Vice President of Marketing & Business Development. From October 1995 to March 1997 Mr. Rosen was Director of Business Alliances at BBN Planet Corporation, an internet services provider, now known as GTE Internetworking. From 1991 to 1995, he held various positions at Lotus Development Corporation, including Director of Strategic Alliances from October 1992 to July 1995, Senior Manager of Lotus Notes Alliance Partner Program Alliances from November 1991 to October 1992, and Senior Manager of Notes Product Management from April 1991 to November 1991. From 1985 to 1991, Mr. Rosen was a co-founder and held senior management positions, including Executive Vice President and Vice President for LanSystems, a systems integration and software firm. Stephen L. Watson has been our Chairman of the Board since December 1991 and has served as one of our directors since March 1986. Mr. Watson previously served as our President and Chief Operating Officer from March 1991 to April 1993 and our Chief Executive Officer from May 1991 until April 1993. Since 1984 he has been a private investor. He was a co-founder and from December 1994 to July 1997 was Chairman and Chief Executive Officer of ScanCenters of America, a document imaging and conversion services company. From July 1988 to June 1989, he was President of California Micro Solutions, a franchise of Computerland Corporation, a retailer of personal computer systems. From April 1987 to July 1988, he was Senior Vice President of Computerland Corporation, a retailer of personal computer software and hardware systems. Mr. Watson is a director of several privately-held companies. Ralph B. Wagner became one of our directors in September 1992. He is a director and co-founder of Keyfile Corporation, a manufacturer and marketer of document image software products for use on personal computers. Mr. Wagner is a member of Walnut Venture Associates, an early stage angel investment group. Since 1983, Mr. Wagner has served as a director of several private companies including Alpha Software, a developer, manufacturer and marketer of software for the software industry, and DYS Analytics, a software developer specializing in information flow analysis. Michael L. Mark became one of our directors in October 1994. Mr. Mark is a private investor. From October 1985 until March 1990 he served as Vice President, System Integration at Interleaf, an electronic publishing software developer, and was Vice President and co-founder of Cadmus Computer Corporation, a workstation manufacturer. Mr. Mark also serves as a director of Progress Software Corporation, a manufacturer of software development tools, and several private companies. Eric R. Giler became one of our directors in December 1996. Mr. Giler is founder and since 1984 has been President and a director of Brooktrout Technology, a supplier of advanced software and hardware products in the electronic messaging market. Prior to founding Brooktrout Technology, he worked primarily in the area of technical marketing and sales as a product manager with Teradyne and as an applications engineer manager for Intec Corporation. Mr. Giler serves on the boards of the MIT Enterprise Forum, the Massachusetts Telecommunications Council and the New England-Israel Chamber of Commerce. Mr. Giler is also a member of the American Electronics Association and the Massachusetts Computer Software Council. James P. McNiel became one of our directors in January 1998. He was selected by the holders of our series D preferred stock pursuant to provisions of our charter. Since July 1, 1999, Mr. McNiel has been a Vice President and general partner of Pequot Capital Management. From February 1998 to January 1999, Mr. McNiel was a director and Executive Vice President of Spike Technologies, a developer of wireless local loop communications equipment. Since May 1996, he has been the President of McNiel Group Ltd. a professional consulting firm. From 1990 to April 1996, Mr. McNiel was Executive Vice President of Corporate Development for Cheyenne Software Corporation, now known as Computer Associates International. From 1989 to 1990, Mr. McNiel was Director of Marketing for Archive Corporation, now Seagate Technology, and from 1986 to 1989, he was Senior Manager of Advanced Products for AST Computer, a manufacturer of desktop computers and network file servers. From 1981 to 1986, Mr. McNiel was Lead Software Engineer and Team Leader for Lucas Film/Convergence Corporation, developers of post-production video editing equipment and film production tools. 39 43 TRANSACTIONS WITH RELATED PARTIES In May 1996, Barry N. Bycoff, our President and Chief Executive Officer, exercised an option to purchase 200,000 shares of common stock at a price of $1.00 per share. The board of directors approved our acceptance of a full recourse note from Mr. Bycoff in payment of the exercise price. The note is secured by the 200,000 shares of common stock, has an interest rate of 7% per annum and is due and payable on demand by us, in the discretion of the board of directors. At September 14, 1999, the note had an outstanding balance of $251,440. On January 6, 1998, we entered into a preferred stock and warrant purchase agreement with Pequot Private Equity Fund, a Delaware limited partnership, and Pequot Offshore Private Equity Fund, a British Virgin Islands corporation. In accordance with this agreement: - on January 7, 1998, we sold to the two funds a total of 1,666,667 shares of series D preferred stock and 750,393 common stock warrants with a per share exercise price of $2.00 for an aggregate purchase price of $2,500,000; - on June 5, 1998, we sold to the two funds a total of 833,334 shares of series D preferred stock and 375,197 common stock warrants with a per share exercise price of $2.00 for an aggregate purchase price of $1,250,000; and - on June 30, 1998, we sold to the two funds a total of 833,333 shares of series D preferred stock and 375,196 common stock warrants with a per share exercise price of $2.00 for an aggregate purchase price of $1,250,000. Each share of series D preferred stock will convert into one share of common stock before the closing of this offering. The two Pequot funds beneficially own, in the aggregate, more than five percent of our outstanding common stock. In connection with these investments, James McNiel joined the board of directors as the designee of the two Pequot funds and agreed to provide consulting services to us. As partial compensation for those services, we issued to Mr. McNiel warrants for the purchase of 100,000 shares of common stock at a price of $1.50 per share. On February 8, 1999, we entered into a stock purchase agreement with the two Pequot funds, Fidelity Securities Fund: Fidelity OTC Portfolio and another party named therein under which we sold 795,651 shares of common stock at a price of $5.75 per share for an aggregate purchase price of $4,574,993. Fidelity beneficially owns more than five percent of our outstanding common stock. The board of directors has adopted a policy that all transactions between us and our officers, directors and principal stockholders, or any affiliates of those parties, must be on terms no less favorable to us than could be obtained from unaffiliated third parties. Those transactions, including any loans to officers, also must be approved by a majority of the disinterested outside directors. 40 44 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth information about the beneficial ownership of our outstanding common stock on August 31, 1999, by (1) each person who is known by us to own beneficially more than five percent of our common stock, (2) each of our directors, (3) our chief executive officer and next four most highly compensated executive officers, (4) all of our executive officers and directors as a group and (5) each of the other selling stockholders. Except as noted below, we believe that the persons named in the table have sole voting and investment power with respect to the shares of common stock set forth opposite their names. The address of each of our executive officers and directors is in care of Netegrity, Inc., 245 Winter Street, Waltham, Massachusetts 02451. In accordance with SEC rules, beneficial ownership includes any shares as to which a person or entity has sole or shared voting power or investment power and any shares as to which the person or entity has the right to acquire beneficial ownership within 60 days after August 31, 1999 through the exercise of any stock option or warrant. Percentage of beneficial ownership is based on 13,769,911 shares of common stock outstanding as of August 31, 1999, including shares of series D preferred stock which will convert into 3,333,333 shares of common stock before the closing of this offering, and 16,219,911 shares of common stock outstanding after completion of this offering.
SHARES SHARES BENEFICIALLY OWNED BENEFICIALLY OWNED BEFORE OFFERING NUMBER OF AFTER OFFERING ----------------------- SHARES ------------------------ NAME NUMBER PERCENTAGE TO BE OFFERED NUMBER PERCENTAGE - ---- --------- ---------- ------------- ---------- ---------- Pequot Private Equity Fund L.P.(1) Pequot Offshore Private Equity Fund Inc. ..................... 4,921,076 32.2% 410,000 4,511,076 24.7% 354 Pequot Avenue Southport, Connecticut 06490 Fidelity Securities Fund: Fidelity OTC Portfolio......... 700,000 5.1 -- 700,000 4.2 c/o Fidelity Management & Research Company 82 Devonshire Street E 20E Boston, Massachusetts 02109 Barry N. Bycoff(2)............... 683,000 4.8 70,000 613,000 3.6 Stephen L. Watson(3)............. 363,000 2.6 40,000 323,000 1.9 Michael L. Mark(4)............... 104,303 * 10,000 94,303 * Ralph B. Wagner(5)............... 87,962 * -- 87,962 * James Rosen(6)................... 68,200 * 5,000 63,200 * James E. Hayden(7)............... 45,500 * 5,000 40,500 * Deepak Taneja(8)................. 66,100 * 5,000 61,100 * James P. McNiel(9)............... 69,447 * -- 69,447 * Thomas M. Palka(10).............. 15,500 * 5,000 10,500 * Eric R. Giler(11)................ 12,000 * -- 12,000 * All executive officers and directors as a group (10 persons)(12)................... 1,515,012 10.2 140,000 1,375,012 7.7
- ------------ * Less than 1%. (1) Includes 3,333,333 shares of series D preferred stock and warrants to purchase 1,500,787 shares of common stock. (2) Includes 10,000 shares of common stock held in trust for the benefit of Mr. Bycoff's children and options to purchase 468,000 shares of common stock. Excludes options to purchase 397,000 shares of common stock that will not vest prior to October 30, 1999. 41 45 (3) Includes options to purchase 255,000 shares of common stock. Excludes options to purchase 7,500 shares of common stock that will not vest prior to October 30, 1999. (4) Includes options to purchase 26,000 shares of common stock. Excludes options to purchase 12,750 shares of common stock that will not vest prior to October 30, 1999. (5) Includes options to purchase 50,250 shares of common stock. Excludes options to purchase 19,000 shares of common stock that will not vest prior to October 30, 1999. (6) Includes options to purchase 46,200 shares of common stock. Excludes options to purchase 122,000 shares of common stock that will not vest prior to October 30, 1999. (7) Includes options to purchase 45,000 shares of common stock. Excludes options to purchase 165,000 shares of common stock that will not vest prior to October 30, 1999. (8) Consists of options to purchase 66,100 shares of common stock. Excludes options to purchase 163,900 shares of common stock that will not vest prior to October 30, 1999. (9) Consists of warrants to purchase 69,447 shares of common stock. Excludes options to purchase 53,468 shares of common stock that will not vest prior to October 30, 1999. (10) Includes options to purchase 15,000 shares of common stock. Excludes options to purchase 185,000 that will not vest prior to October 30, 1999. (11) Consists of options to purchase 12,000 shares of common stock. Excludes options to purchase 18,000 that will not vest prior to October 30, 1999. (12) Includes the following shares of common stock which the specified individual has the right to acquire on or before October 30, 1999 upon the exercise of outstanding options: Mr. Watson, 255,000 shares; Mr. Wagner, 50,250 shares; Mr. Mark, 26,000 shares; Mr. Giler, 12,000 shares; Mr. Bycoff, 468,000 shares; Mr. Rosen, 46,200 shares; Mr. Hayden, 45,000 shares; Mr. Taneja, 66,100 shares; Mr. McNiel, 69,447 shares and Mr. Palka, 15,000 shares. 42 46 UNDERWRITING The underwriters named below have entered into an underwriting agreement to purchase from us and the selling stockholders the number of shares of common stock listed next to their names below. BancBoston Robertson Stephens Inc., Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, and Thomas Weisel Partners LLC are the representatives of the underwriters. The underwriters have committed to purchase and pay for all of the shares listed below if any shares are purchased.
NUMBER UNDERWRITERS OF SHARES - ------------ --------- BancBoston Robertson Stephens Inc........................... Dain Rauscher Wessels....................................... Thomas Weisel Partners LLC.................................. -------- Total.................................................. ========
Shares sold by the underwriters to the public will initially be offered at the public offering price listed on the cover page of this prospectus. Any shares sold by underwriters to securities dealers will be sold at a discount of up to $ per share from the public offering price. Those securities dealers may resell any shares purchased from the underwriters to other brokers or dealers at a discount of up to $ per share from the public offering price. If all the shares are not sold at the initial offering price, the representatives may change the offering price and other selling terms. The underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. Option to Purchase Additional Shares. We and the selling stockholders have granted to the underwriters an option, exercisable during the 30-day period after the date of this prospectus, to purchase up to 450,000 additional shares of common stock at the same price per share as we and the selling stockholders will receive for the 3,000,000 shares that the underwriters have agreed to purchase. To the extent that the underwriters exercise this option, each of the underwriters will have a firm commitment to purchase approximately the same percentage of additional shares that the number of shares of common stock to be purchased by it shown in the above table represents as a percentage of the 3,000,000 shares offered in this prospectus. If purchased, additional shares will be sold by the underwriters on the same terms as those on which the 3,000,000 shares are being sold. We will be obligated to sell these shares if the underwriters exercise their option to purchase additional shares. If the option is exercised in full, the total price to the public, underwriting discounts and commissions, proceeds to Netegrity and proceeds to the selling stockholders will be $89,268,750, $4,686,609, $60,791,406 and $23,290,734, respectively, assuming a public offering price of $25.875 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses. Indemnity. The underwriting agreement contains covenants of indemnity among the underwriters, the selling stockholders and us against civil liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the underwriting agreement. Agreements Not to Sell Shares. Each of our officers and directors, each of the selling stockholders, and three additional stockholders have agreed, during the period ending 90 days after the date of this prospectus, subject to limited exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose of loan, pledge or grant any rights with respect to any shares of common stock or any options or warrants to purchase any shares of common stock, or any securities convertible into or exchangeable for shares of common stock owned as of the date of this prospectus or later acquired directly by those holders or with respect to which they have 43 47 the power of disposition, without the prior written consent of BancBoston Robertson Stephens. However, BancBoston Robertson Stephens may, in its sole discretion and at any time without notice, release all or any portion of securities subject to the agreements not to sell shares. There are no existing agreements between the representatives of the underwriters and any of our stockholders providing consent to the sale of shares prior to the expiration of the 90-day period. Future Sales by Us. In addition, we have agreed that during the 90 days after the date of this prospectus we will not, without the prior written consent of BancBoston Robertson Stephens, subject to specified exceptions, (1) consent to the disposition of any shares held by stockholders subject to agreements not to sell shares prior to the expiration of the 90-day period or (2) issue, sell, contract to sell, or otherwise dispose of, any shares of common stock, any options to purchase any shares of common stock or any securities convertible into, exercisable for or exchangeable for shares of common stock other than our sale of shares in this offering, the issuance of common stock upon the exercise of outstanding options, and the issuance of options under existing stock option and incentive plans, provided those options do not vest prior to the expiration of the 90-day period. Listing. Our common stock currently is traded on the Nasdaq SmallCap Market under the symbol "NETE." Stabilization. The representatives of the underwriters have advised us that, pursuant to Regulation M under the Securities Act, some of the persons participating in this offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, that may have the effect of stabilizing or maintaining the market price of the common stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of common stock on behalf of the underwriters for the purpose of fixing or maintaining the price of the common stock. A "syndicate covering transaction" is the bid for or the purchase of common stock on behalf of the underwriters to reduce a short position incurred by the underwriters in connection with this offering. A "penalty bid" is an arrangement permitting the representatives to reclaim the selling concession otherwise accruing to an underwriter or syndicate member in connection with this offering if the common stock originally sold by the underwriter or syndicate member is purchased by the representatives in a syndicate covering transaction and has therefore not been effectively placed by the underwriter or syndicate member. The representatives have advised us that these types of transactions may be effected on the Nasdaq SmallCap Market, the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. Passive Market Making. In connection with this offering, underwriters and selling group members, if any, that are qualified market makers on the Nasdaq SmallCap Market may engage in passive market making transactions in our common stock on the Nasdaq SmallCap Market in accordance with Rule 103 of Regulation M under the Securities Exchange Act during the business day prior to the pricing of this offering before the commencement of offers or sales of our common stock. Passive market makers must comply with applicable volume and price limitations and must be identified as such. In general, a passive market maker must display its bid at a price not in excess of the highest independent bid of a security; if all independent bids are lowered below the passive market maker's bid, however, the passive market maker's bid must be lowered when applicable purchase limits are exceeded. Expenses of this Offering. We estimate our total expenses of this offering, excluding underwriting discounts and commissions, to be $500,000. Prior Relationship. On September 9, 1999, we completed a private placement of 534,242 shares of common stock at a purchase price of $20.59 per share. BancBoston Robertson Stephens acted as placement agent in this transaction and received a placement fee of $632,500. We received net proceeds of approximately $10.3 million from the private placement, after deducting the placement agent's fee and our estimated expenses. New Underwriter. Thomas Weisel Partners, one of the representatives of the underwriters, was organized and registered as a broker-dealer in December 1998. Since December 1998, Thomas Weisel Partners has been named as a lead or co-manager on 65 filed public offerings of equity securities, of which 44 48 33 have been completed, and has acted as a syndicate member in an additional 32 public offerings of equity securities. Thomas Weisel Partners does not have any material relationship with us or any of our officers, directors or other controlling persons, except with respect to its contractual relationship with us and the selling stockholders pursuant to the underwriting agreement entered into in connection with this offering. LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Hutchins, Wheeler & Dittmar, A Professional Corporation, Boston, Massachusetts. Anthony J. Medaglia, Jr., a stockholder of the firm, beneficially owns 15,195 shares of common stock. Legal matters will be passed upon for the underwriters by Foley, Hoag & Eliot LLP, Boston, Massachusetts. EXPERTS The consolidated financial statements and schedules as of December 31, 1997 and 1998, and for the years ended December 31, 1998 and 1997, and the nine-month transition period ended December 31, 1996, have been included and incorporated by reference in this prospectus and in the registration statement of which this prospectus is a part in reliance on the report of PricewaterhouseCoopers LLP, independent certified public accountants, given on the authority of said firm as experts in accounting and auditing. 45 49 WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any document we file at the SEC's public reference rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public from commercial document retrieval services and the SEC's website at http://www.sec.gov. We have filed a registration statement to register with the SEC the shares of our common stock that are being offered. This prospectus is a part of the registration statement and, as the SEC rules permit, does not contain all the information that stockholders can find in the registration statement or the exhibits to the registration statement. The SEC allows us to "incorporate by reference" the information we file with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be part of this prospectus, and information that we file later with the SEC will automatically update and supersede this information. This prospectus incorporates by reference the documents listed below: - Annual Report on Form 10-K for the year ended December 31, 1998; as amended by a Form 10-K/A filed on July 6, 1999; - Proxy Statement filed on March 19, 1999 for the 1999 Annual Meeting of Stockholders, and Proxy Statement filed on September 7, 1999 for the Special Meeting of Stockholders to be held on October 7, 1999; - Quarterly Reports on Form 10-Q for the quarters ended March 31, 1999 and June 30, 1999; and - Form 8-A, filed on December 6, 1988, as amended by Amendment No. 1 to Form 8-A, filed on December 13, 1988, setting forth a discussion of our capital stock. We incorporate by reference in this prospectus additional documents that we may file with the SEC between the date the registration statement was initially filed and the consummation of this offering. These include periodic reports, such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as proxy statements. You may request a copy of these filings, at no cost, by writing or telephoning our Chief Financial Officer as follows: NETEGRITY, INC. 245 Winter Street Waltham, Massachusetts 02451 (781) 890-1700 46 50 NETEGRITY, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Auditors.............................. F-2 Consolidated Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999......................................... F-3 Consolidated Statements of Operations for the Nine Months Ended December 31, 1996, the Years Ended December 31, 1997 and 1998 and the Six Months Ended June 30, 1998 and 1999...................................................... F-4 Consolidated Statements of Stockholders' Equity for the Nine Months Ended December 31, 1996, the Years Ended December 31, 1997 and 1998 and the Six Months Ended June 30, 1999...................................................... F-5 Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 1996, the Years Ended December 31, 1997 and 1998 and the Six Months Ended June 30, 1998 and 1999...................................................... F-6 Notes to Consolidated Financial Statements.................. F-7
F-1 51 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 stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Netegrity, Inc. (the "Company") at December 31, 1997 and 1998, and the results of its operations and its cash flows for the nine months ended December 31, 1996, and for the years ended December 31, 1997 and 1998, 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, Massachusetts February 8, 1999 F-2 52 NETEGRITY, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------------- JUNE 30, 1997 1998 1999 ----------- ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 2,133,586 $ 1,174,625 $ 3,075,406 Escrow receivable (Note F)................................ 600,000 -- -- Accounts receivable-trade, net of allowance for doubtful accounts of $64,460 at December 31, 1997; $247,063 at December 31, 1998; $238,563 at June 30, 1999............ 791,369 1,746,645 2,290,784 Deferred maintenance asset................................ 304,721 308,926 328,993 Prepaid rent.............................................. -- 30,163 63,560 Other current assets...................................... 8,252 15,848 9,236 ----------- ------------ ------------ TOTAL CURRENT ASSETS.................................... 3,837,928 3,276,207 5,767,979 EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET (Note B).......... 585,055 736,341 869,012 CAPITALIZED SOFTWARE COSTS, NET............................. 309,891 175,629 -- OTHER ASSETS: Investment in Encotone, Inc. (Note C)..................... 78,199 -- -- Other..................................................... 37,438 37,114 52,379 ----------- ------------ ------------ TOTAL OTHER ASSETS...................................... 115,637 37,114 52,379 ----------- ------------ ------------ TOTAL ASSETS................................................ $ 4,848,511 $ 4,225,291 $ 6,689,370 =========== ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable-trade.................................... $ 1,507,071 $ 897,734 $ 993,444 Deferred revenue.......................................... -- 285,857 173,540 Accrued bonus............................................. 215,000 160,687 485,145 Accrued commissions....................................... 64,722 180,328 151,739 Other accrued expenses.................................... 1,355,533 766,898 680,222 Deferred maintenance liability............................ 667,416 938,004 1,168,406 Current portion of capital lease obligations.............. 19,068 -- -- ----------- ------------ ------------ TOTAL CURRENT LIABILITIES............................... 3,828,810 3,229,508 3,652,496 LONG-TERM CAPITAL LEASE OBLIGATIONS......................... 3,653 -- -- ----------- ------------ ------------ TOTAL LIABILITIES........................................... 3,832,463 3,229,508 3,652,496 COMMITMENTS AND CONTINGENCIES (Note D)...................... -- -- -- STOCKHOLDERS' EQUITY: Preferred stock, Series D voting; $.01 par value; 3,333,333 shares issued and outstanding at December 31, 1998 and June 30, 1999 (aggregate liquidation value, $4,999,999.50).......................................... -- 33,333 33,333 Common stock, voting, $.01 par value; 25,000,000 shares authorized; 9,279,346 shares issued and 9,254,245 shares outstanding at December 31, 1997; 9,425,446 shares issued and 9,400,345 shares outstanding at December 31, 1998; 10,341,484 shares issued and 10,316,383 shares outstanding at June 30, 1999............................ 92,793 94,254 103,852 Additional paid-in capital................................ 10,578,330 15,780,049 20,600,887 Cumulative translation adjustment......................... 28,028 -- -- Cumulative deficit........................................ (9,399,446) (14,628,196) (17,417,541) Loan to officer (Note E).................................. (200,000) (200,000) (200,000) ----------- ------------ ------------ 1,099,705 1,079,440 3,120,531 Less -- Treasury Stock, at cost: 25,101 shares.............. (83,657) (83,657) (83,657) ----------- ------------ ------------ TOTAL STOCKHOLDERS' EQUITY.................................. 1,016,048 995,783 3,036,874 ----------- ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $ 4,848,511 $ 4,225,291 $ 6,689,370 =========== ============ ============
The accompanying notes are an integral part of the consolidated financial statements. F-3 53 NETEGRITY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, DECEMBER 31, ------------------------- ------------------------- 1996 1997 1998 1998 1999 ----------------- ----------- ----------- ----------- ----------- Revenues: SiteMinder software............... -- $ 237,217 $ 1,483,296 $ 372,801 $ 2,467,601 SiteMinder services............... -- 12,012 467,568 126,621 805,027 Other............................. $ 3,637,037 4,483,420 2,840,253 1,364,833 1,425,901 ----------- ----------- ----------- ----------- ----------- Total revenues.................... 3,637,037 4,732,649 4,791,117 1,864,255 4,698,529 Cost of revenues.................... 2,175,626 2,469,891 1,763,825 953,171 1,492,955 ----------- ----------- ----------- ----------- ----------- Gross profit........................ 1,461,411 2,262,758 3,027,292 911,084 3,205,574 Selling, general and administrative expenses.......................... 2,303,478 5,508,813 6,394,918 2,919,696 4,587,644 Research and development costs...... 705,298 1,028,094 1,991,239 872,853 1,474,420 ----------- ----------- ----------- ----------- ----------- Loss from operations................ (1,547,365) (4,274,149) (5,358,865) (2,881,465) (2,856,490) Interest income (expense), net...... 181,881 203,205 130,115 68,657 67,145 Share of loss from investment in Encotone, Inc..................... (40,000) (131,801) -- -- -- Write off of investment in Encotone LTD............................... -- (1,049,151) -- -- -- ----------- ----------- ----------- ----------- ----------- Loss from continuing operations..... (1,405,484) (5,251,896) (5,228,750) (2,812,808) (2,789,345) Loss from discontinued operations... (520,245) -- -- -- -- Gain on sale of assets of discontinued operations........... 6,000,000 -- -- -- -- ----------- ----------- ----------- ----------- ----------- Income (loss) before provision for income taxes...................... 4,074,271 (5,251,896) (5,228,750) (2,812,808) (2,789,345) Provision for income taxes.......... 74,300 -- -- -- -- ----------- ----------- ----------- ----------- ----------- Net income (loss)................... $ 3,999,971 $(5,251,896) $(5,228,750) $(2,812,808) $(2,789,345) =========== =========== =========== =========== =========== Basic and diluted earnings per share: From continuing operations........ $ (0.16) $ (0.57) $ (0.56) $ (0.30) $ (0.27) From operation of discontinued operations...................... (0.06) -- -- -- -- Gain on sale of assets............ 0.67 -- -- -- -- ----------- ----------- ----------- ----------- ----------- Net income (loss)................. $ 0.45 $ (0.57) $ (0.56) $ (0.30) $ (0.27) =========== =========== =========== =========== =========== Weighted average shares outstanding....................... 8,944,000 9,279,000 9,362,000 9,323,000 10,158,000
The accompanying notes are an integral part of the consolidated financial statements. F-4 54 NETEGRITY, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL CUMULATIVE PREFERRED COMMON PAID-IN TRANSLATION CUMULATIVE LOAN TO TREASURY STOCK STOCK CAPITAL ADJUSTMENT DEFICIT OFFICER STOCK --------- -------- ----------- ----------- ------------ --------- -------- BALANCE AT MARCH 31, 1996............ $ 6,283 $ 81,979 $10,024,710 $21,569 $ (8,147,521) -- $(83,657) Net income(loss)............ -- -- -- -- 3,999,971 -- -- Conversion of Preferred Stock (628,330 shares) -- Series C....... (6,283) 6,283 -- -- -- -- -- Issuance of Common Stock (378,729 shares).......... -- 3,787 435,844 -- -- -- -- Translation adjustment...... -- -- -- 6,459 -- -- -- Loan to officer (Note E).... -- -- -- -- -- $(200,000) -- ------- -------- ----------- ------- ------------ --------- -------- BALANCE AT DECEMBER 31, 1996...................... -- 92,049 10,460,554 28,028 (4,147,550) (200,000) (83,657) ------- -------- ----------- ------- ------------ --------- -------- Net income(loss)............ -- -- -- -- (5,251,896) -- -- Issuance of Common Stock (74,400 shares)........... -- 744 117,776 -- -- -- -- ------- -------- ----------- ------- ------------ --------- -------- BALANCE AT DECEMBER 31, 1997...................... -- 92,793 10,578,330 28,028 (9,399,446) (200,000) (83,657) ------- -------- ----------- ------- ------------ --------- -------- Net income(loss)............ -- -- -- -- (5,228,750) -- -- Issuance of Preferred Stock (3,333,333 shares) -- Series D.................. 33,333 -- 4,916,668 -- -- -- -- Issuance of Common Stock (146,100 shares).......... -- 1,461 257,023 -- -- -- -- Translation adjustment...... -- -- 28,028 (28,028) -- -- -- ------- -------- ----------- ------- ------------ --------- -------- BALANCE AT DECEMBER 31, 1998...................... 33,333 94,254 15,780,049 -- (14,628,196) (200,000) (83,657) ------- -------- ----------- ------- ------------ --------- -------- Net income(loss)............ -- -- -- -- (2,789,345) -- -- Issuance of Common Stock (959,800 shares).......... -- 9,598 4,820,838 -- -- -- -- ------- -------- ----------- ------- ------------ --------- -------- BALANCE AT JUNE 30, 1999.... $33,333 $103,852 $20,600,887 $ -- $(17,417,541) $(200,000) $(83,657) ======= ======== =========== ======= ============ ========= ======== TOTAL STOCKHOLDERS' EQUITY ------------- BALANCE AT MARCH 31, 1996............ $ 1,903,363 Net income(loss)............ 3,999,971 Conversion of Preferred Stock (628,330 shares) -- Series C....... -- Issuance of Common Stock (378,729 shares).......... 439,631 Translation adjustment...... 6,459 Loan to officer (Note E).... (200,000) ----------- BALANCE AT DECEMBER 31, 1996...................... 6,149,424 ----------- Net income(loss)............ (5,251,896) Issuance of Common Stock (74,400 shares)........... 118,520 ----------- BALANCE AT DECEMBER 31, 1997...................... 1,016,048 ----------- Net income(loss)............ (5,228,750) Issuance of Preferred Stock (3,333,333 shares) -- Series D.................. 4,950,001 Issuance of Common Stock (146,100 shares).......... 258,484 Translation adjustment...... -- ----------- BALANCE AT DECEMBER 31, 1998...................... 995,783 ----------- Net income(loss)............ (2,789,345) Issuance of Common Stock (959,800 shares).......... 4,830,436 ----------- BALANCE AT JUNE 30, 1999.... $ 3,036,874 ===========
The accompanying notes are an integral part of the consolidated financial statements. F-5 55 NETEGRITY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, DECEMBER 31, ------------------------- ------------------------- 1996 1997 1998 1998 1999 ------------ ----------- ----------- ----------- ----------- OPERATING ACTIVITIES: Net loss from continuing operations...................... $(1,405,484) $(5,251,896) $(5,228,750) $(2,812,808) $(2,789,345) Adjustments to reconcile loss to net cash used for operating activities: Share of loss from investment.......................... 40,000 131,801 -- -- -- Write off of investment in Encotone, LTD............... -- 1,049,151 -- -- -- Depreciation and amortization.......................... 26,487 116,187 231,713 97,976 165,188 Provision for doubtful accounts receivable, net........ 56,771 (3,337) 182,603 (5,990) (8,500) Change in operating assets and liabilities: Escrow receivable...................................... (600,000) -- 600,000 -- -- Accounts receivable.................................... 137,935 (252) (1,137,879) (57,264) (535,639) Other current assets................................... 389,156 246,259 (41,966) 5,214 (46,852) Inventory.............................................. 21,400 -- -- -- -- Other assets........................................... 52,053 (14,078) 324 69,081 (15,265) Accounts payable....................................... 622,784 (592,364) (609,337) (552,298) 95,710 Other accrued expenses................................. (1,548,083) 292,781 25,646 137,232 327,278 ----------- ----------- ----------- ----------- ----------- Total adjustments.................................... (801,497) 1,226,148 (748,896) (306,049) (18,080) ----------- ----------- ----------- ----------- ----------- Net cash used for continuing operating activities.... (2,206,981) (4,025,748) (5,843,384) (3,118,857) (2,807,425) Net cash (used for) provided by discontinuing operating activities............................... 436,859 (46,241) -- -- -- ----------- ----------- ----------- ----------- ----------- Net cash used for operating activities................. (1,770,122) (4,071,989) (5,977,646) (3,118,857) (2,807,425) ----------- ----------- ----------- ----------- ----------- INVESTING ACTIVITIES: Proceeds from sale of certain assets................... 9,435,000 -- 25,863 25,863 -- Capitalized software costs............................. -- (309,891) 134,262 27,658 175,629 Capital expenditures for equipment and leasehold improvements......................................... (256,886) (384,458) (408,860) (177,673) (297,859) Investment in Encotone, LTD............................ (1,000,000) -- -- -- -- Investment in Encotone, Inc. .......................... (250,000) -- 81,656 -- -- ----------- ----------- ----------- ----------- ----------- Net cash (used for) provided by investing activities... 7,928,114 (694,349) (167,079) (124,152) (122,230) ----------- ----------- ----------- ----------- ----------- FINANCING ACTIVITIES: Net proceeds from issuance of preferred stock.......... -- -- 4,950,001 4,950,001 -- Net proceeds from issuance of stock.................... 239,631 118,520 258,484 194,205 4,830,436 Payment on notes payable-related party................. (300,000) -- -- -- -- Net payments on line of credit......................... (723,470) -- -- -- -- Principal payments under capital leases................ -- (9,653) (22,721) (22,721) -- ----------- ----------- ----------- ----------- ----------- Net cash (used for) provided by financing activities... (783,839) 108,867 5,185,764 5,121,485 4,830,436 ----------- ----------- ----------- ----------- ----------- Effect of exchange rate changes on cash.................. 6,459 -- -- -- -- ----------- ----------- ----------- ----------- ----------- NET CHANGE IN CASH AND CASH EQUIVALENTS.................. 5,380,612 (4,657,471) (958,961) 1,878,476 1,900,781 Cash and cash equivalents at beginning of period......... 1,410,445 6,791,057 2,133,586 2,133,586 1,174,625 ----------- ----------- ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD............... $ 6,791,057 $ 2,133,586 $ 1,174,625 $ 4,012,062 $ 3,075,406 =========== =========== =========== =========== =========== Supplemental Disclosures of Cash Flow Information: Interest paid.......................................... $ 17,778 $ 3,143 $ 872 $ 872 -- Income taxes paid...................................... -- 63,557 -- -- -- Supplemental Disclosure of Non-Cash Activities: Loan to officer in exchange for common stock........... 200,000 -- -- -- -- Write off of investment in Encotone LTD................ -- 1,049,151 -- -- -- Property purchased under capital leases................ -- 32,374 -- -- --
The accompanying notes are an integral part of the consolidated financial statements. F-6 56 NETEGRITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A: NATURE OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES The Company currently operates in the secure user management 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 are 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 months 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 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 F-7 57 NETEGRITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 the Company's transactions entered into beginning in its year ending December 31, 2000. The Company does not expect SOP 98-9 to have a material effect on our financial position or results of operations. 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 exceed the expected future net realizable value, the excess amount is written off. At December 31, 1998 and June 30, 1999, the Company amortized $134,262 and $175,629, respectively 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 selling, general and administrative expenses as incurred. F-8 58 NETEGRITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 and 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 1995, 1996, 1997 and for the quarter ended September 30, 1997. 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 and June 30, 1999 include stock options outstanding to purchase 3,103,442 and 3,204,782 common shares, respectively, warrants to purchase 1,600,787 and 1,600,787 common shares, respectively, and 3,333,333 and 3,333,333, respectively shares of convertible preferred stock (see Note H); 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 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 nine months 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. 401(k) 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. F-9 59 NETEGRITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts 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. Unaudited Interim Financial Information The interim financial information at June 30, 1999 and for the six months ended June 30, 1998 and 1999, all of which is unaudited, was prepared by the Company on a basis consistent with the audited financial statements. In management's opinion, such information reflects all adjustments, which are only of a normal recurring nature, necessary to present fairly the results of the periods presented. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, or SFAS 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 statement initially was to be effective for all fiscal quarters of fiscal years beginning after June 15, 1999. In July 1999, the Financial Accounting Standards Board issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities Deferral of the Effective Date of FASB Statement No. 133 -- An amendment of FASB Statement No. 133." SFAS 137 defers the implementation of SFAS 133 by one year. SFAS 133, as amended by SFAS 137, is effective for the Company's fiscal quarters beginning after January 1, 2000. The Company does not expect the adoption of SFAS 133 to have a material effect on its financial position or results of operations. 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. F-10 60 NETEGRITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE B: EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements are stated at cost and consist of the following:
DECEMBER 31, ---------------------- JUNE 30, 1997 1998 1999 --------- --------- ---------- Computer equipment and software................. $ 582,464 $ 944,555 $1,232,678 Leasehold improvements.......................... 30,248 73,557 83,293 Furniture and fixtures.......................... 124,987 97,577 97,577 Less accumulated depreciation and amortization.................................. (152,644) (379,348) (544,536) --------- --------- ---------- $ 585,055 $ 736,341 $ 869,012 ========= ========= ==========
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, 1997 and 1998, and the six-month period ended June 30, 1999, was $116,187, $231,713 and $165,188, 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. NOTE D: COMMITMENTS AND CONTINGENCIES On June 4, 1999, a suit was brought in the Delaware Court of Chancery, purportedly on behalf of the Company's common stockholders, alleging that certain amendments to the Company's certificate of incorporation previously adopted by the Company's stockholders increasing the authorized shares of various classes of stock were invalid because the Company did not obtain the required statutory votes. On August 5, 1999, the parties entered into a settlement agreement, subject to court approval and approval from the holders of the Company's preferred stock and common stock, in separate class votes, of the previously adopted amendments. A hearing on the settlement is scheduled for September 24, 1999. The Company believes that the costs associated with this settlement will not have a material effect on its results of operations, assets or financial condition. The Company leases certain facilities under noncancellable operating leases. For the years ended December 31, 1997, 1998 and the six months ended June 30, 1999, the Company incurred total operating F-11 61 NETEGRITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) lease expense of $173,600, $299,825, and $163,589, respectively. Future minimum lease payments under these leases are as follows:
YEARS ENDING DECEMBER 31, - ------------------------- 1999.................................................. $171,400 2000.................................................. 100,800 2001.................................................. 42,000 -------- $314,200 ========
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 months 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. F-12 62 NETEGRITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE G: INCOME TAXES Significant components of the deferred tax assets are as follows:
FOR THE YEARS ENDED DECEMBER 31, ------------------------- 1997 1998 ----------- ----------- Net operating loss carryforward................... $ 2,842,447 $ 5,188,919 Loss on investment................................ 1,324,650 971,562 Accruals and reserves............................. 138,517 232,625 Deferred revenue.................................. -- 115,115 Software development costs........................ -- (70,726) Research and development tax credits.............. 254,739 318,450 Depreciation...................................... (17,890) (25,346) Alternative minimum tax credit.................... 74,773 74,773 Valuation allowance............................... (4,617,236) (6,805,372) ----------- ----------- $ -- $ -- =========== ===========
The provision for income taxes differs from the federal statutory rate of 34% as follows:
FOR THE YEARS ENDED DECEMBER 31, ------------------------- 1997 1998 ----------- ----------- Federal provision at 34%.......................... $(1,785,645) $(1,777,775) Meals and entertainment........................... 9,962 13,829 Current year Federal loss, not benefited.......... 1,775,683 1,763,946 ----------- ----------- $ -- $ -- =========== ===========
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, 1997 and 1998 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. F-13 63 NETEGRITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. Warrants: In conjunction with the Pequot Agreement as described above, warrants to purchase 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, the Pequot Entities and the parties named therein. Pursuant to the terms of the Stock Purchase Agreement, the Company sold 795,651 shares of Common Stock, at $5.75 per share for total gross proceeds of $4,574,993. 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, 1997 and 1998 are 572,542. Total outstanding grants as of June 30, 1999 are 514,042. Total options exercisable at December 31, 1997 and 1998 and June 30, 1999 are 371,859, 478,259 and 446,167, 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, 1997 and 1998 and June 30, 1999 are 1,830,800, 2,530,900 and 2,690,740, respectively. Total options exercisable at December 31, 1997 and 1998 and June 30, 1999 are 622,900, 639,168 and 922,041, 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. F-14 64 NETEGRITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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, 1997 and 1998 and the six months ended June 30, 1999, 2,400, 14,100 and 10,781, 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, 1997 and 1998 would have been reduced to the pro- forma amounts indicated below:
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1998 ---------------------------- ---------------------------- EARNINGS LOSS EARNINGS LOSS NET LOSS PER SHARE NET LOSS PER SHARE ------------- ----------- ------------- ----------- As reported.............................. $(5,251,898) $(0.57) $(5,228,750) $(0.56) Pro-Forma................................ (5,500,386) (0.59) (5,661,325) (0.60)
The effects of applying SFAS 123 in this proforma 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:
OPTIONS OUTSTANDING -------------------------- WEIGHTED WEIGHTED SHARES AVERAGE AVERAGE SHARES RANGE OF EXERCISE PRICES OUTSTANDING LIFE(A) EXERCISE PRICE EXERCISABLE - ------------------------ ----------- -------- -------------- ----------- $0.63-$1.00.................................. 677,592 4.3 $0.95 652,684 $1.25-$1.63.................................. 1,100,560 8.0 1.40 363,588 $1.94-$2.19.................................. 2,442,077 9.2 2.02 1,619,552 $2.38-$3.50.................................. 177,250 7.0 3.04 75,640 $3.56-$4.13.................................. 306,750 9.9 3.84 6,750 --------- --------- $0.63-$4.13.................................. 4,704,229 8.2 1.88 2,718,214 ========= =========
- ------------ (a) Average contractual life remaining in years. F-15 65 NETEGRITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of the status of the Company's stock option plans as of December 31, 1996, 1997 and 1998 and June 30, 1999 and changes during the periods ending on those dates is presented below:
FOR THE NINE MONTHS FOR THE YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, ---------------------------- 1996 1997 1998 JUNE 30, 1999 ------------ ------------ ------------ ------------- Options outstanding at beginning of ............................ 1,523,845 2,196,095 2,403,342 4,704,229 Option activity during the period: Granted............................... 1,125,250 640,750 2,826,487(1) 300,500 Exercised............................. (374,360) (72,000) (132,000) (170,800) Canceled.............................. (78,640) (361,503) (393,600) (28,360) ---------- ---------- ---------- ----------- Options outstanding at end of ..... 2,196,095 2,403,342 4,704,229(1) 4,805,569(1) ========== ========== ========== =========== Price range of outstanding options...... $0.78-4.50 $0.63-4.00 $0.63-4.13 $0.63-13.38 Price range of options exercised........ $0.50-1.72 $0.50-1.71 $1.37-2.63 $ 0.63-2.88 Options exercisable..................... 1,179,937 994,759 2,718,214 2,915,527
- ------------ (1) Includes warrants outstanding at December 31, 1998 and June 30, 1999 (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, 1996, which may be read in conjunction with the audited fiscal years ended December 31, 1997 and 1998, presented on the consolidated statements of operations.
PRO FORMA TWELVE MONTHS ENDED DECEMBER 31, 1996 ------------------- Net revenue............................................... $ 4,965,948 Cost of revenues.......................................... 2,930,674 ----------- Gross profit.............................................. 2,035,274 Selling, general and administrative expenses.............. 2,702,264 Research and development costs............................ 705,298 ----------- Income (loss) from operations............................. (1,372,288) Interest income........................................... 188,215 Share of loss from investment............................. (40,000) ----------- Income (loss) from continuing operations.................. (1,224,073) Income (loss) from discontinued operations................ (734,698) Gain on sale of assets of discontinued operations......... 6,000,000 ----------- Income before provision for income taxes.................. 4,041,229 Provision for income taxes................................ 74,300 ----------- Net income................................................ $ 3,966,929 ===========
F-16 66 [NETEGRITY CORPORATE LOGO] 67 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED SEPTEMBER 15, 1999 [NETEGRITY CORPORATE LOGO] 3,000,000 SHARES COMMON STOCK Netegrity, Inc. is offering 2,450,000 shares of its common stock, and the selling stockholders identified in this prospectus are offering an additional 550,000 shares. Our common stock is listed on the Nasdaq SmallCap Market under the symbol "NETE." The last reported sale price of our common stock on the Nasdaq SmallCap Market on September 13, 1999 was $25.875 per share. ------------------------------ INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 6. ------------------------------
PER SHARE TOTAL ----------------- ----------------- Public offering price...................................... $ $ Underwriting discounts and commissions..................... $ $ Proceeds to Netegrity...................................... $ $ Proceeds to selling stockholders........................... $ $
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. We and the selling stockholders have granted the underwriters a 30-day option to purchase up to an additional 450,000 shares of our common stock to cover over-allotments. BancBoston Robertson Stephens International Limited expects to deliver the shares of common stock to purchasers on , 1999. ------------------------------ BANCBOSTON ROBERTSON STEPHENS INTERNATIONAL LIMITED DAIN RAUSCHER WESSELS A DIVISION OF DAIN RAUSCHER INCORPORATED THOMAS WEISEL PARTNERS LLC THE DATE OF THIS PROSPECTUS IS , 1999 68 UNDERWRITING The underwriters named below, have entered into an underwriting agreement to purchase from us and the selling stockholders the number of shares of common stock listed next to their names below. BancBoston Robertson Stephens Inc., Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, and Thomas Weisel Partners LLC are the representatives of the underwriters. The underwriters have committed to purchase and pay for all of the shares listed below if any shares are purchased.
NUMBER OF SHARES ---------------- U.S. UNDERWRITERS BancBoston Robertson Stephens Inc........................... Dain Rauscher Wessels....................................... Thomas Weisel Partners LLC.................................. INTERNATIONAL UNDERWRITERS BancBoston Robertson Stephens International Limited......... Dain Rauscher Wessels....................................... Thomas Weisel Partners LLC.................................. -------- Total............................................. ========
Shares sold by the underwriters to the public will initially be offered at the public offering price listed on the cover page of this prospectus. Any shares sold by underwriters to securities dealers will be sold at a discount of up to $ per share from the public offering price. Those securities dealers may resell any shares purchased from the underwriters to other brokers or dealers at a discount of up to $ per share from the public offering price. If all the shares are not sold at the initial offering price, the representatives may change the offering price and other selling terms. The underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. Option to Purchase Additional Shares. We and the selling stockholders have granted to the underwriters an option, exercisable during the 30-day period after the date of this prospectus, to purchase up to 450,000 additional shares of common stock at the same price per share as we and the selling stockholders will receive for the 3,000,000 shares that the underwriters have agreed to purchase. To the extent that the underwriters exercise this option, each of the underwriters will have a firm commitment to purchase approximately the same percentage of additional shares that the number of shares of common stock to be purchased by it shown in the above table represents as a percentage of the 3,000,000 shares offered in this prospectus. If purchased, additional shares will and the selling stockholders be sold by the underwriters on the same terms as those on which the 3,000,000 shares are being sold. We will be obligated to sell these shares if the underwriters exercise their option to purchase additional shares. If the option is exercised in full, the total price to the public, underwriting discounts and commissions, proceeds to Netegrity and proceeds to the selling stockholders will be $89,268,750, $4,686,609, $60,791,406 and $23,290,734, respectively, assuming a public offering price of 44 69 $25.875 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses. Indemnity. The underwriting agreement contains covenants of indemnity among the underwriters, the selling stockholders and us against civil liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the underwriting agreement. Agreements Not to Sell Shares. Each of our officers and directors, each of the selling stockholders, and three additional stockholders have agreed, during the period ending 90 days after the date of this prospectus, subject to limited exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose of loan, pledge or grant any rights with respect to any shares of common stock or any options or warrants to purchase any shares of common stock, or any securities convertible into or exchangeable for shares of common stock owned as of the date of this prospectus or later acquired directly by those holders or with respect to which they have the power of disposition, without the prior written consent of BancBoston Robertson Stephens Inc. However, BancBoston Robertson Stephens Inc. may, in its sole discretion and at any time without notice, release all or any portion of securities subject to the agreements not to sell shares. There are no existing agreements between the representatives of the underwriters and any of our stockholders providing consent to the sale of shares prior to the expiration of the 90-day period. Future Sales by Us. In addition, we have agreed that during the 90 days after the date of this prospectus we will not, without the prior written consent of BancBoston Robertson Stephens Inc., subject to specified exceptions, (1) consent to the disposition of any shares held by stockholders subject to agreements not to sell shares prior to the expiration of the 90-day period or (2) issue, sell, contract to sell, or otherwise dispose of, any shares of common stock, any options to purchase any shares of common stock or any securities convertible into, exercisable for or exchangeable for shares of common stock other than our sale of shares in this offering, the issuance of common stock upon the exercise of outstanding options, and the issuance of options under existing stock option and incentive plans, provided those options do not vest prior to the expiration of the 90-day period. Listing. Our common stock currently is traded on the Nasdaq SmallCap Market under the symbol "NETE." Stabilization. The representatives of the underwriters have advised us that, pursuant to Regulation M under the Securities Act, some of the persons participating in this offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, that may have the effect of stabilizing or maintaining the market price of the common stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of common stock on behalf of the underwriters for the purpose of fixing or maintaining the price of the common stock. A "syndicate covering transaction" is the bid for or the purchase of common stock on behalf of the underwriters to reduce a short position incurred by the underwriters in connection with this offering. A "penalty bid" is an arrangement permitting the representatives to reclaim the selling concession otherwise accruing to an underwriter or syndicate member in connection with this offering if the common stock originally sold by the underwriter or syndicate member is purchased by the representatives in a syndicate covering transaction and has therefore not been effectively placed by the underwriter or syndicate member. The representatives have advised us that these types of transactions may be effected on the Nasdaq SmallCap Market, the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. Passive Market Making. In connection with this offering, underwriters and selling group members, if any, that are qualified market makers on the Nasdaq SmallCap Market may engage in passive market making transactions in our common stock on the Nasdaq SmallCap Market in accordance with Rule 103 of Regulation M under the Securities Exchange Act during the business day prior to the pricing of this offering before the commencement of offers or sales of our common stock. Passive market makers must comply with applicable volume and price limitations and must be identified as such. In general, a passive market maker must display its bid at a price not in excess of the highest independent bid of a security; if all independent bids are lowered below the passive market maker's bid, however, the passive market maker's bid must be lowered when applicable purchase limits are exceeded. 45 70 Expenses of this Offering. We estimate our total expenses of this offering, excluding underwriting discounts and commissions, to be $500,000. Prior Relationship. On September 9, 1999, we completed a private placement of 534,242 shares of common stock at a purchase price of $20.59 per share. BancBoston Robertson Stephen acted as placement agent in this transaction and received a placement fee of $632,500. We received net proceeds of approximately $10.3 million from the private placement, after deducting the placement agent's fee and our estimated expenses. New Underwriter. Thomas Weisel Partners, one of the representatives of the underwriters, was organized and registered as a broker-dealer in December 1998. Since December 1998, Thomas Weisel Partners has been named as a lead or co-manager on 65 filed public offerings of equity securities, of which 33 have been completed, and has acted as a syndicate member in an additional 32 public offerings of equity securities. Thomas Weisel Partners does not have any material relationship with us or any of our officers, directors or other controlling persons, except with respect to its contractual relationship with us and the selling stockholders pursuant to the underwriting agreement entered into in connection with this offering. 46 71 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth an estimate of the expenses expected to be incurred by Netegrity in connection with the issuance and distribution of the securities being registered, other than underwriting discounts and commissions: Registration Fee -- Securities and Exchange Commission...... $ 24,545 National Association of Securities Dealers, Inc. filing fee....................................................... 9,329 Nasdaq SmallCap Market listing fee.......................... 7,500 Blue Sky fees and expenses.................................. 5,000 Printing and engraving expenses............................. 95,000 Legal and accounting fees and expenses...................... 250,000 Miscellaneous............................................... 108,626 -------- TOTAL.................................................. 500,000 ========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Delaware General Corporation Law and Netegrity's Certificate of Incorporation and By-Laws allow for indemnification of Netegrity's directors and officers for liabilities and expenses that they may incur in such capacities. In general, directors and officers are indemnified with respect to actions taken in good faith in a manner reasonably believed to be in, or not opposed to, the best interests of Netegrity, and with respect to any criminal action or proceeding, actions that the indemnitee has no reasonable cause to believe were unlawful. Article V of the Amended and Restated By-Laws of Netegrity provides as follows: ARTICLE V INDEMNIFICATION Section 5.1 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 5.2 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 5.3 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 5.1 and 5.2, 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. II-1 72 Section 5.4 Authorization and Request for Indemnification. (a) Any indemnification requested by the Indemnitee under Section 5.1 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 5.2 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 5.5 Advance Payment of Expenses. Subject to Section 5.4 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 5.6 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 5.7 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 5.8 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 5.9 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 5.4 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. II-2 73 ITEM 16. EXHIBITS. The following exhibits, required by Item 601 of Regulation S-K, are filed as a part of this Registration Statement. Exhibit numbers, where applicable, in the left column correspond to those of Item 601 of Regulation S-K.
EXHIBIT NO. ITEM - ----------- ---- 1 Form of Underwriting Agreement 4 Specimen certificate for shares of Common Stock of the Registrant (filed as Exhibit 4.01 to the Registrant's Registration Statement on Form S-18, No. 33-24446-B, and incorporated by reference. 5 Legal Opinion of Hutchins, Wheeler & Dittmar, A Professional Corporation* 23.1 Consent of PricewaterhouseCoopers LLP 23.2 Consent of Hutchins, Wheeler & Dittmar, A Professional Corporation (included in Exhibit 5)* 24 Power of Attorney (contained on Signature Page) 27.1 Financial Data Schedule for the Nine Months Ended December 31, 1996 (incorporated by reference from the Annual Report on Form 10-K for the nine months ended December 31, 1996) 27.2 Financial Data Schedule for the Twelve Months Ended December 31, 1997* 27.3 Financial Data Schedule for the Twelve Months Ended December 31, 1998* 27.4 Financial Data Schedule for the Six Months Ended June 30, 1999*
- ------------ * To be filed by amendment. ITEM 17. UNDERTAKINGS. (a) The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in this Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereto. (b) Insofar as indemnification for liabilities under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (c) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as a part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) II-3 74 under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereto. II-4 75 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement on Form S-3 to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Waltham, Massachusetts on September 15, 1999. NETEGRITY, INC. By: /s/ JAMES E. HAYDEN ------------------------------------ James E. Hayden Vice President of Finance and Administration, Chief Financial Officer and Treasurer POWER OF ATTORNEY Each person whose signature appears below on this Registration Statement hereby constitutes and appoints James E. Hayden, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities (until revoked in writing) to sign any and all amendments (including post-effective amendments and amendments thereto) to this Registration Statement on Form S-3 of Netegrity, Inc. (or any other registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary fully to all intents and purposes as he might or could do in person thereby ratifying and confirming all that said attorney-in-fact and agent or his substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement on Form S-3 has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
NAME CAPACITY DATE ---- -------- ---- /s/ BARRY N. BYCOFF President, Chief Executive Officer September 15, 1999 - ------------------------------------ and Director (Principal Executive Barry N. Bycoff Officer) /s/ JAMES E. HAYDEN Vice President of Finance and September 15, 1999 - ------------------------------------ Administration, Chief Financial James E. Hayden Officer and Treasurer (Principal Accounting and Financial Officer) /s/ ERIC R. GILER Director September 15, 1999 - ------------------------------------ Eric R. Giler /s/ MICHAEL L. MARK Director September 15, 1999 - ------------------------------------ Michael L. Mark /s/ JAMES P. MCNIEL Director September 15, 1999 - ------------------------------------ James P. McNiel /s/ RALPH B. WAGNER Director September 15, 1999 - ------------------------------------ Ralph B. Wagner /s/ STEPHEN L. WATSON Director September 15, 1999 - ------------------------------------ Stephen L. Watson
II-5 76 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ------- ----------- 1 Form of Underwriting Agreement 4 Specimen certificate for shares of Common Stock of the Registrant (filed as Exhibit 4.01 to the Registrant's Registration Statement on Form S-18, No. 33-24446-B, and incorporated by reference. 5 Legal Opinion of Hutchins, Wheeler & Dittmar, A Professional Corporation* 23.1 Consent of PricewaterhouseCoopers LLP 23.2 Consent of Hutchins, Wheeler & Dittmar, A Professional Corporation (included in Exhibit 5)* 24 Power of Attorney (contained on Signature Page) 27.1 Financial Data Schedule for the Nine Months Ended December 31, 1996 (incorporated by reference to the Annual Report on Form 10-K for the nine months ended December 31, 1996) 27.2 Financial Data Schedule for the Twelve Months Ended December 31, 1997* 27.3 Financial Data Schedule for the Twelve Months Ended December 31, 1998* 27.4 Financial Data Schedule for the Six Months Ended June 30, 1999*
- ------------ * To be filed by amendment. EX-1 2 FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1 UNDERWRITING AGREEMENT ___________ , 1999 BANCBOSTON ROBERTSON STEPHENS INC. DAIN RAUSCHER WESSELS A DIVISION OF DAIN RAUSCHER INCORPORATED THOMAS WEISEL PARTNERS LLC As Representatives of the several Underwriters c/o BancBoston Robertson Stephens Inc. 555 California Street, Suite 2600 San Francisco, California 94104 Ladies and Gentlemen: INTRODUCTORY. Netegrity, Inc., a Delaware corporation (the "Company"), proposes to issue and sell to the several underwriters named in Schedule A (the "Underwriters") an aggregate of 2,450,000 shares of its common stock, $.01 par value per share ("Common Shares"); and the stockholders of the Company named in Schedule B (collectively, the "Selling Stockholders") severally propose to sell to the Underwriters an aggregate of 550,000 Common Shares. The 2,450,000 Common Shares to be sold by the Company and the 550,000 Common Shares to be sold by the Selling Stockholders are collectively called the "Firm Shares." In addition, the Company has granted to the Underwriters an option to purchase up to an additional 50,000 Common Shares and the Selling Stockholders have severally granted to the Underwriters an option to purchase up to an additional 400,000 Common Shares, each Selling Stockholder selling up to the amount set forth opposite such Selling Stockholder's name in Schedule B, all as provided in Section 2. The additional 50,000 Common Shares to be sold by the Company and the additional 400,000 Common Shares to be sold by the Selling Stockholders pursuant to such option are collectively called the "Option Shares". The Firm Shares and, if and to the extent such option is exercised, the Option Shares are collectively called the "Shares." BancBoston Robertson Stephens Inc., Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, and Thomas Weisel Partners LLC have agreed to act as representatives of the several Underwriters (in such capacity, the "Representatives") in connection with the offering and sale of the Common Shares. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-3 (File No. 333- ), which contains a form of prospectus to be used in connection with the public offering and sale of the Shares. Such registration statement, as amended, in the form in which it was declared effective by the Commission under the Securities Act of 1933 and the rules and regulations promulgated thereunder (collectively, the "Securities Act"), including (a) the financial statements, financial schedules and exhibits thereto, (b) any information deemed to be a part thereof at the time of effectiveness pursuant to Rule 430A under the Securities Act, and (c) all documents filed under the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder (collectively, the "Exchange Act") and incorporated or deemed to be incorporated by reference in such registration statement, as amended, is called the "Registration Statement." Any registration statement filed by the Company pursuant to Rule 462(b) under the Securities Act is called the "Rule 462(b) Registration Statement," and from and after the date and time of filing of the 2 Rule 462(b) Registration Statement the term "Registration Statement" shall include the Rule 462(b) Registration Statement. Such prospectus, in the form first used by the Underwriters to confirm sales of the Shares, is called the "Prospectus." All references in this Agreement to the Registration Statement, the Rule 462(b) Registration Statement, any prospectus subject to completion (each a "preliminary prospectus") or the Prospectus, or any amendments or supplements to any of the foregoing, shall include any copy thereof filed pursuant to the Commission's Electronic Data Gathering, Analysis and Retrieval system. All references in this Agreement to financial statements, financial schedules and other information that is "contained," included" or "stated" in the Registration Statement or the Prospectus (and all other references of like import) shall be deemed to mean and include all such financial statements, financial schedules and other information that is or is deemed to be incorporated by reference in the Registration Statement or the Prospectus, as the case may be; and all references in this Agreement to amendments or supplements to the Registration Statement or the Prospectus shall be deemed to mean and include the filing of any document under the Exchange Act that is or is deemed to be incorporated by reference in the Registration Statement or the Prospectus, as the case may be. The Company and the Selling Stockholders hereby confirm their respective agreements with the Underwriters as follows: SECTION 1. REPRESENTATIONS AND WARRANTIES. A. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents, warrants and covenants to each Underwriter as follows: (a) Compliance with Registration Requirements. The Registration Statement and any Rule 462(b) Registration Statement have been declared effective by the Commission under the Securities Act. The Company has complied to the Commission's satisfaction with all requests of the Commission for additional or supplemental information. No stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement is in effect, and no proceedings for such purpose have been instituted, are pending or, to the knowledge of the Company, are contemplated or threatened by the Commission. Each preliminary prospectus and the Prospectus when filed complied in all material respects with the Securities Act and, if filed by electronic transmission pursuant to the Commission's Electronic Data Gathering, Analysis and Retrieval system, was identical to the copy thereof delivered to the Underwriters for use in connection with the offer and sale of the Shares. Each of the Registration Statement, any Rule 462(b) Registration Statement, and any post-effective amendment to the Registration Statement or any Rule 462(b) Registration Statement, at the time it became effective and at all subsequent times, complied and will comply in all material respects with the Securities Act and did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus, as amended or supplemented, as of its date and at all subsequent times, did not and will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties set forth in the two immediately preceding sentences do not apply to statements in or omissions from the Registration Statement, any Rule 462(b) Registration Statement, any post-effective amendment to the Registration Statement or any Rule 462(b) Registration Statement, the Prospectus, or any amendment or supplement to the Prospectus made in reliance upon and in conformity with information relating to any 2 3 Underwriter furnished to the Company in writing by the Representatives expressly for use therein. There are no contracts or other documents required to be described in the Prospectus or to be filed as exhibits to the Registration Statement that have not been described or filed as required. (b) Exchange Act Compliance. The documents incorporated or deemed to be incorporated by reference in the Prospectus, at the time they were or hereafter are filed with the Commission, complied and will comply in all material respects with the requirements of the Exchange Act. (c) Exchange Act Reports Filed. The Company has filed all reports required to be filed by it pursuant to the Exchange Act. (d) Conditions for Use of Form S-3. The Company has satisfied the conditions for the use of Form S-3, as set forth in the general instructions thereto, with respect to the Registration Statement. (e) Offering Materials Furnished to Underwriters. The Company has delivered to the Representatives (i) three complete conformed copies of the Registration Statement, including each consent of experts filed as a part thereof, and (ii) conformed copies of the Registration Statement (without exhibits), each preliminary prospectus and the Prospectus, as amended or supplemented, in such quantities and at such places as the Representatives have reasonably requested for each of the Underwriters. (f) Distribution of Offering Material by the Company. The Company has not distributed and will not distribute, prior to the later of the Second Closing Date (as defined below) and the completion of the Underwriters' distribution of the Shares, any offering material in connection with the offering and sale of the Shares other than any preliminary prospectus, the Prospectus or the Registration Statement. (g) The Underwriting Agreement. This Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of, the Company, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting the rights and remedies of creditors or by general equitable principles. (h) Authorization of the Shares to be Sold by the Company. The Shares to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale pursuant to this Agreement and, when issued and delivered by the Company pursuant to this Agreement, will be validly issued, fully paid and nonassessable. (i) Authorization of the Firm Shares to be Sold by the Selling Stockholders. The Firm Shares to be purchased by the Underwriters from the Selling Stockholders were duly authorized when issued and are validly issued, fully paid and nonassessable. (j) No Applicable Registration or Other Similar Rights. There are no persons with registration or other similar rights to have any equity or debt securities registered for sale under the Registration Statement or included in the offering contemplated by this Agreement, 3 4 except for (i) such rights of the Selling Stockholders with respect to Shares included in the Registration Statement and (ii) such rights as have been duly waived. (k) No Material Adverse Change. Subsequent to the respective dates as of which information is given in the Prospectus: (i) there has been no material adverse change, or any development that reasonably could be expected to result in a material adverse change, in the condition, financial or otherwise, or in the earnings, business, operations or prospects, whether or not arising from transactions in the ordinary course of business, of the Company and the Subsidiaries (as defined below), considered as one entity (any such change or effect is called a "Material Adverse Change" or "Material Adverse Effect"); (ii) neither the Company nor any of the Subsidiaries has incurred any liability or obligation, indirect, direct or contingent, not in the ordinary course of business or has entered into any transaction or agreement not in the ordinary course of business, other than any such liabilities, obligations, transactions and agreements that are not, in the aggregate, material to the Company and the Subsidiaries, considered as one entity; and (iii)there has not been any dividend or distribution of any kind declared, paid or made by the Company or any of the Subsidiaries on any class of capital stock or any repurchase or redemption by the Company or any of the Subsidiaries of any class of capital stock. (l) Independent Certified Public Accountants. PricewaterhouseCoopers LLP, who have expressed their opinion with respect to the consolidated financial statements (which term as used in this Agreement includes the related notes thereto) and any supporting schedules filed with the Commission as a part of the Registration Statement and included in the Prospectus, are independent certified public accountants with respect to the Company and the Subsidiaries within the meaning of the Securities Act. (m) Preparation of the Financial Statements. The consolidated financial statements filed with the Commission as a part of the Registration Statement and included in the Prospectus present fairly in all material respects the consolidated financial position of the Company and the Subsidiaries as of and at the dates indicated and the results of operations and cash flows of the Company and the Subsidiaries for the periods specified. Any supporting schedules included in the Registration Statement present fairly in all material respects the information required to be stated therein. Such consolidated financial statements and supporting schedules have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved, except as may be expressly stated in the related notes thereto. No other financial statements or supporting schedules are required to be included in the Registration Statement. The financial data set forth in the Prospectus under the captions "Summary -- Summary Consolidated Financial Data," "Selected Consolidated Financial Data" and "Capitalization" fairly present in all material respects the information set forth therein on a basis consistent with that of the audited consolidated financial statements contained in the Registration Statement. 4 5 (n) Accounting Systems. Each of the Company and the Subsidiaries maintains a system of accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of consolidated financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (o) Subsidiaries of the Company. The Company does not own or control, directly or indirectly, any corporation, association or other entity other than Internet Security Corporation, Netegrity Europe Ltd. and Personal Computing Tools Supershop, Inc. (collectively, the "Subsidiaries"). (p) Incorporation and Good Standing of the Company and the Subsidiaries. Each of the Company and the Subsidiaries (i) has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction in which it is organized, with full corporate power and authority to own its properties and conduct its business as described in the Prospectus, and (ii) is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction that requires such qualification. (q) Capitalization of the Subsidiaries. All the outstanding shares of capital stock of each of the Subsidiaries (i) have been duly authorized and are validly issued, fully paid and nonassessable and (ii) are owned by the Company, free and clear of any security interests, claims, liens or encumbrances. (r) No Prohibition on Subsidiaries Paying Dividends or Making Other Distributions. None of the Subsidiaries is prohibited, directly or indirectly, from (i) paying any dividends to the Company, (ii) making any other distribution on its capital stock, (iii) repaying to the Company or the other Subsidiary any loans or advances from the Company or such other Subsidiary or (iv) transferring any of its properties or assets to the Company, (s) Capitalization and Other Capital Stock Matters. The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" (other than for subsequent issuances, if any, pursuant to employee benefit plans described in the Prospectus or upon exercise of outstanding options or warrants described in the Prospectus). The Common Shares, including the Shares, conform in all material respects to the description thereof contained in the Prospectus. All of the issued and outstanding Common Shares (i) have been duly authorized and are validly issued, fully paid and nonassessable and (ii) have been issued in compliance with federal and state securities laws. None of the outstanding Common Shares were issued in violation of any preemptive rights, rights of first refusal, or other similar rights to subscribe for or purchase securities of the Company. There are no authorized or outstanding options, warrants, preemptive rights, rights of first refusal or other rights to purchase, or equity or debt securities convertible into or exchangeable or exercisable for, any capital stock of the Company or any of the Subsidiaries other than those accurately described in the Prospectus. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted thereunder, set forth in the Prospectus accurately and fairly presents 5 6 in all material respects the information required to be shown with respect to such plans, arrangements, options and rights. (t) Listing. The Shares have been approved for inclusion on the Nasdaq SmallCap Market, subject only to official notice of issuance. (u) No Consents, Approvals or Authorizations Required. No consent, approval, authorization or order of, or filing with, any court or governmental agency or regulatory body is required in connection with the transactions contemplated herein, except such as have been obtained or made under the Securities Act and such as may be required by the blue sky laws of any state or other jurisdiction of the United States, the by-laws, rules and regulations of the National Association of Securities Dealers, Inc. (the "NASD"), or federal or provincial securities laws of Canada. (v) Non-Contravention of Existing Instruments and Agreements. Neither the issue and sale of the Shares, the consummation of any of the other transactions contemplated herein nor the fulfillment of the terms hereof will conflict with, result in a breach or violation of, or result in the imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of the Subsidiaries pursuant to (i) the charter or by-laws of the Company or any of the Subsidiaries, (ii) the terms of any indenture, contract, lease, mortgage, deed of trust, note agreement, loan agreement or other agreement, obligation, condition, covenant or instrument to which the Company or any of the Subsidiaries is a party or bound or to which its properties are subject or (iii) any statute, law, rule, regulation, judgment, order or decree applicable to the Company or any of the Subsidiaries of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Company, any of the Subsidiaries or any of their properties. (w) No Defaults or Violations. Neither the Company nor any of the Subsidiaries is in violation or default of (i) any provision of its charter or by-laws, (ii) the terms of any indenture, contract, lease, mortgage, deed of trust, note agreement, loan agreement or other agreement, obligation, condition, covenant or instrument to which it is a party or bound or to which its properties are subject or (iii) any statute, law, rule, regulation, judgment, order or decree of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Company or such Subsidiary or any of its properties, as applicable, except for any such violations or defaults that do not and will not, in the aggregate, have a Material Adverse Effect. (x) No Actions, Suits or Proceedings. No action, suit or proceeding by or before any court, any governmental agency, authority or body, or any arbitrator involving the Company, any of the Subsidiaries, or its or their properties is pending or, to the knowledge of the Company, threatened that reasonably could be expected (i) to have a material adverse effect on the performance of this Agreement or the consummation of any of the transactions contemplated hereby or (ii) to result in a Material Adverse Effect. (y) All Necessary Permits, etc. Each of the Company and the Subsidiaries possesses all valid and current certificates, authorizations and permits issued by the appropriate state, federal or foreign regulatory agencies or bodies necessary to conduct its business. Neither the Company nor any of the Subsidiaries has received any notice of proceedings relating to the revocation or modification of, or non-compliance with, any such certificate, authorization 6 7 or permit that, in the aggregate, if the subject of unfavorable decisions, rulings or findings, reasonably could be expected to result in a Material Adverse Change. (z) Title to Properties. The Company and the Subsidiaries have good and marketable title to all the properties and assets reflected as owned in the consolidated financial statements referred to in Section 1(A)(l) or elsewhere in the Prospectus, in each case free and clear of any security interests, mortgages, liens, encumbrances, equities, claims and other defects, except such as, in the aggregate, do not materially and adversely affect the value of such properties and do not materially interfere with the use made or proposed to be made of such properties by the Company and the Subsidiaries. The real property, improvements, equipment and personal property held under lease by the Company or any of the Subsidiaries are held under valid and enforceable leases, with such exceptions as, in the aggregate, are not material and do not materially interfere with the use made or proposed to be made of such real property, improvements, equipment or personal property by the Company or such Subsidiary. (aa) Tax Law Compliance. The Company and the Subsidiaries have (i) filed all necessary federal, state and foreign income and franchise tax returns or have properly requested extensions thereof and (ii) paid all taxes required to be paid by any of them and, if due and payable, any related or similar assessment, fine or penalty levied against any of them except as is being contested in good faith and by appropriate proceedings. The Company has made adequate charges, accruals and reserves in the applicable consolidated financial statements referred to in Section 1(A)(l) in respect of all federal, state and foreign income and franchise taxes for all periods as to which the tax liability of the Company or any of the Subsidiaries has not been finally determined. The Company is not aware of any tax deficiency that has been or might be asserted or threatened against the Company or any of the Subsidiaries and that reasonably could be expected to result in a Material Adverse Change. (bb) Intellectual Property Rights. Each of the Company and the Subsidiaries owns or possesses adequate rights to use all patents, patent rights or licenses, inventions, collaborative research agreements, trade secrets, know-how, trademarks, service marks, trade names and copyrights that are necessary to conduct its businesses as described in the Registration Statement and the Prospectus. The expiration of any patents, patent rights, trade secrets, trademarks, service marks, trade names or copyrights of the Company and the Subsidiaries would not result in a Material Adverse Effect that is not otherwise disclosed in the Prospectus. Neither the Company nor any of the Subsidiaries has received any notice of, or has any knowledge of, any infringement of or conflict with asserted rights of the Company by others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights. Neither the Company nor any of the Subsidiaries has received any notice of, or otherwise has any knowledge of, any infringement of or conflict with asserted rights of others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights that, in the aggregate, if the subject of an unfavorable decisions, rulings or findings, reasonably could be expected to have a Material Adverse Effect. There is no claim being made against the Company or any of the Subsidiaries regarding patents, patent rights or licenses, inventions, collaborative research, trade secrets, know-how, trademarks, service marks, trade names or copyrights. The Company and the Subsidiaries do not in the conduct of their business as now or proposed to be conducted (as described in the Prospectus) infringe or conflict with any right 7 8 or patent of any third party, or any discovery, invention, product or process that is the subject of a patent application filed by any third party, known to the Company or any of the Subsidiaries, which infringement or conflict reasonably could be expected to result in a Material Adverse Change. (cc) Year 2000 Preparedness. There are no issues related to the preparedness of the Company or any of the Subsidiaries for the Year 2000 that (i) are of a character required to be described or referred to in the Registration Statement or Prospectus by the Securities Act that have not been accurately described in the Registration Statement and the Prospectus or (ii) reasonably could be expected to result in a Material Adverse Change or to materially affect their properties, assets or rights. All internal computer systems and each Constituent Component of those systems, and all computer-related products and each Constituent Component of those products, of the Company and the Subsidiaries (i) have been reviewed to confirm that they store, process (including sorting and performing mathematical operations, calculations and computations), input and output data containing date and information correctly regardless of whether the date contains dates and times before, on or after January 1, 2000, (ii) have been designated to ensure date and time entry recognition and calculations and date data interface values that reflect the century, (iii) accurately manage and manipulate data involving dates and times, including single century formulas and multi-century formulas, and will not cause an abnormal ending scenario within the application or generate incorrect values or invalid results involving such dates, (iv) accurately process any date rollover, and (v) accept and respond to two-digit year date input in a manner that resolves any ambiguities as to the century. "Constituent Component" means all software (including operating systems, programs, packages and utilities), firmware, hardware, networking components and peripherals provided as part of the configuration. The Company has inquired of material vendors as to their preparedness for the Year 2000 and has disclosed in the Registration Statement and the Prospectus any issues that reasonably could be expected to result in a Material Adverse Change. (dd) No Transfer Taxes or Other Fees. There are no transfer taxes or other similar fees or charges under federal law or the laws of any state, or any political subdivision thereof, required to be paid in connection with the execution and delivery of this Agreement or the issuance and sale of Shares by the Company. (ee) Company Not an "Investment Company." The Company has been advised of the rules and requirements under the Investment Company Act of 1940, as amended. The Company is not, and after receipt of payment for the Shares will not be, an "investment company" or an entity "controlled" by an "investment company" within the meaning of such Act. The Company will conduct its business in a manner so that it will not become subject to such Act. (ff) Insurance. The Company and the Subsidiaries are insured by recognized, financially sound and reputable institutions with policies in such amounts, with such deductibles and covering such risks as are adequate and customary for their businesses, including policies covering (i) real and personal property owned or leased by the Company and the Subsidiaries against theft, damage, destruction, acts of vandalism and earthquakes, (ii) general liability, and (iii) directors' and officers' liability. The Company has no reason to believe that it or any of the Subsidiaries will not be able (i) to renew its existing insurance coverage as and when such policies expire or (ii) to obtain comparable coverage from similar 8 9 institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not result in a Material Adverse Change. Neither the Company nor any of the Subsidiaries has been denied any insurance coverage that it has sought or for which it has applied. (gg) Labor Matters. To the Company's knowledge, no labor disturbance by employees of the Company or any of the Subsidiaries exists or is imminent. The Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers, resellers, dealers, international distributors or licensors or its significant customers that reasonably could be expected to result in a Material Adverse Change. (hh) No Price Stabilization or Manipulation. The Company has not taken and will not take, directly or indirectly, any action designed to, or that reasonably could be expected to, cause or result in stabilization or manipulation of the price of the Common Shares to facilitate the sale or resale of the Shares. (ii) Lock-Up Agreements. Each officer and director of the Company, each Selling Stockholder and each person or entity known by the Company to own one percent or more of the outstanding issued share capital of the Company has signed an agreement substantially in the form attached hereto as Exhibit A (the "Lock-up Agreements"). The Company has provided to Foley, Hoag & Eliot LLP, counsel for the Underwriters ("Underwriters' Counsel"), a complete and accurate list of all securityholders of the Company and the number and type of securities held by each securityholder. The Company has provided to Underwriters' Counsel executed copies of all of the Lock-up Agreements. (jj) Related Party Transactions. There are no business relationships or related-party transactions involving the Company, any of the Subsidiaries or any other person that are required to be described in the Prospectus and have not been described as required. (kk) No Unlawful Contributions or Other Payments. Neither the Company, any of the Subsidiaries nor, to the knowledge of the Company, any employee or agent of the Company or any of the Subsidiaries has made any contribution or other payment to any official of, or candidate for, any federal, state or foreign office in violation of any law or of a character required to be disclosed in the Prospectus. (ll) Environmental Laws. The Company and the Subsidiaries are in compliance with all existing rules, laws and regulations relating to the use, treatment, storage and disposal of toxic substances and protection of health or the environment ("Environmental Laws") that are applicable to their businesses, except where the failure to comply would not result in a Material Adverse Change. Neither the Company nor any of the Subsidiaries has received any notice from any governmental authority or third party of an asserted claim under Environmental Laws, which claim is required to be disclosed in the Registration Statement and the Prospectus. Neither the Company nor any of the Subsidiaries will be required to make future material capital expenditures to comply with Environmental Laws. No property owned, leased or occupied by the Company or any of the Subsidiaries has been designated as a Superfund site pursuant to the Comprehensive Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C. Section 9601, et seq.), or otherwise designated as a contaminated site under applicable state or local law. 9 10 (mm) ERISA Compliance. The Company, the Subsidiaries and any "employee benefit plan" (as defined under the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder (collectively, "ERISA")) established or maintained by the Company, any of the Subsidiaries or their "ERISA Affiliates" (as defined below) are in compliance in all material respects with ERISA. "ERISA Affiliate" means any member of any group of organizations described in Section 414(b),(c),(m) or (o) of the Internal Revenue Code of 1986, as amended (the "Code"), of which the Company or such Subsidiary is a member. No "reportable event" (as defined under ERISA) has occurred or is reasonably expected to occur with respect to any "employee benefit plan" established or maintained by the Company, the Subsidiaries or any ERISA Affiliate. No "employee benefit plan" established or maintained by the Company, any of the Subsidiaries or any ERISA Affiliate, if such "employee benefit plan" were terminated, would have any "amount of unfounded benefit liabilities" (as defined under ERISA). Neither the Company, any of the Subsidiaries nor any ERISA Affiliate has incurred or reasonably expects to incur any liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "employee benefit plan" or (ii) Section 412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan" established or maintained by the Company, any of the Subsidiaries or any ERISA Affiliate that is intended to be qualified under Section 401(a) of the Code is so qualified, and nothing has occurred, whether by action or failure to act, that would cause the loss of such qualification. (nn) Certificates. Any certificate signed by an officer of the Company and delivered to the Representatives or Underwriters' Counsel in connection with this Agreement shall be deemed to be a representation and warranty hereunder by the Company to each Underwriter as to the matters set forth therein. B. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS. Each Selling Stockholder represents, warrants and covenants to each Underwriter as follows: (a) The Underwriting Agreement. This Agreement (i) has been duly authorized, executed and delivered by or on behalf of such Selling Stockholder and (ii) is a valid and binding agreement of such Selling Stockholder, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting the rights and remedies of creditors or by general equitable principles. (b) The Custody Agreement and Power of Attorney. Each of (i) the Custody Agreement signed by or on behalf of such Selling Stockholder and , as custodian (the "Custodian"), relating to the deposit of the Shares to be sold by such Selling Stockholder (the "Custody Agreement") and (ii) the Irrevocable Power of Attorney of such Selling Stockholder appointing Barry N. Bycoff and James A. Hayden as such Selling Stockholder's attorneys-in-fact (each an "Attorney-in-Fact") to the extent set forth therein relating to the transactions contemplated hereby and by the Prospectus (with respect to such Selling Stockholder, the "Power of Attorney") has been duly authorized, executed and delivered by or on behalf of such Selling Stockholder and is a valid and binding agreement of such Selling Stockholder, enforceable in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting the rights and remedies of creditors or by general equitable principles. 10 11 Such Selling Stockholder agrees that the Firm Shares to be sold by such Selling Stockholder on deposit with the Custodian are subject to the interests of the Underwriters, that the arrangements made for such custody are to that extent irrevocable, and that the obligations of such Selling Stockholder hereunder shall not be terminated, except as provided in this Agreement or in the Custody Agreement, by any act of such Selling Stockholder, by operation of law, by death or incapacity of such Selling Stockholder, or by the occurrence of any other event. If such Selling Stockholder should die or become incapacitated, or if any other event should occur, before the delivery of the Shares to be sold by such Selling Stockholder hereunder, the documents evidencing the Firm Shares to be sold by such Selling Stockholder then on deposit with the Custodian shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such death, incapacity or other event had not occurred, regardless of whether or not the Custodian shall have received notice thereof. (c) Title to Shares to be Sold. Such Selling Stockholder is the lawful owner of the Firm Shares to be sold by such Selling Stockholder hereunder. Upon sale and delivery of, and payment for, such Firm Shares as provided herein, such Selling Stockholder will convey good and marketable title to such Firm Shares, free and clear of all security interests, claims, liens or encumbrances. (d) All Authorizations Obtained. Such Selling Stockholder has, and on the First Closing Date will have, (i) good and marketable title to all of the Firm Shares being sold by such Selling Stockholder pursuant to this Agreement and (ii) the legal right and power, and all authorizations and approvals required by law and its organizational documents (if any) to enter into this Agreement, the Custody Agreement and the Power of Attorney, to sell, transfer and deliver all of the Firm Shares being sold by such Selling Stockholder pursuant to this Agreement, and to comply with its other obligations hereunder and thereunder. (e) No Further Consents, Authorization or Approvals. No consent, approval, authorization or order of any court or governmental agency or body is required for the consummation by such Selling Stockholder of the transactions contemplated herein, except such as may have been obtained under the Securities Act or otherwise and such as may be required by the blue sky laws of any state or other jurisdiction of the United States, the by-laws, rules and regulations of the NASD, or federal or provincial securities laws of Canada. (f) Non-Contravention. Neither the sale of the Firm Shares being sold by such Selling Stockholder, the consummation of any of the other transactions herein contemplated by such Selling Stockholder, nor the fulfillment of the terms hereof by such Selling Stockholder will conflict with, result in a breach or violation of, or constitute a default under any law, any indenture or other agreement or instrument to which such Selling Stockholder is party or bound or any judgment, order or decree applicable to such Selling Stockholder of any court or regulatory body, administrative agency, governmental body or arbitrator having jurisdiction over such Selling Stockholder. (g) No Registration or Other Similar Rights. Such Selling Stockholder does not have, or has waived prior to the date hereof, any registration or other similar rights to have any equity or debt securities, other than the Firm Shares to be sold hereunder by such Selling Stockholder, registered for sale by the Company under the Registration Statement or included in the offering contemplated by this Agreement. 11 12 (h) No Preemptive, Co-sale or Other Similar Rights. Such Selling Stockholder does not have, or has waived prior to the date hereof, any preemptive right, co-sale right, right of first refusal or other similar right to purchase any of the Shares that are to be sold by the Company or any of the other Selling Stockholders to the Underwriters pursuant to this Agreement. Such Selling Stockholder does not own any warrants, options or similar rights to acquire, and does not have any right or arrangement to acquire, any capital stock, right, warrants, options or other securities from the Company, other than those described in the Registration Statement and the Prospectus. (i) Disclosure Made by Such Selling Stockholder in the Prospectus. All information furnished by or on behalf of such Selling Stockholder in writing expressly for use in the Registration Statement and the Prospectus (i) is, and on the First Closing Date and the Second Closing Date will be, accurate and complete in all material respects and (ii) does not, and on the First Closing Date and the Second Closing Date will not, contain any untrue statement of a material fact or omit to state any material fact necessary to make such information not misleading. Such Selling Stockholder confirms as accurate the numbers of shares of Common Shares set forth opposite such Selling Stockholder's name in the Prospectus under the caption "Principal and Selling Stockholders" (both prior to and after giving effect to the sale of the Shares). (j) No Price Stabilization or Manipulation. Such Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to or that reasonably could be expected to cause or result in stabilization or manipulation of the price of the Common Shares to facilitate the sale or resale of the Shares. (k) No Transfer Taxes or Other Fees. There are no transfer taxes or other similar fees or charges under federal law or the laws of any state, or any political subdivision thereof, required to be paid in connection with the execution and delivery of this Agreement or the sale of Firm Shares by such Selling Stockholder. (l) Distribution of Offering Materials by Such Selling Stockholder. Such Selling Stockholder has not distributed and will not distribute, prior to the later of the Second Closing Date and the completion of the Underwriters' distribution of the Shares, any offering material in connection with the offering and sale of the Shares other than any preliminary prospectus, the Prospectus or the Registration Statement. (m) Confirmation of Company Representations and Warranties. Such Selling Stockholder (i) has no reason to believe that the representations and warranties of the Company contained in Section 1(A) are not true and correct, (ii) is familiar with the Registration Statement and the Prospectus and has no knowledge of any material fact, condition or information not disclosed in the Registration Statement or the Prospectus that has had or may result in a Material Adverse Effect and (iii) is not prompted to sell the Firm Shares to be sold by such Selling Stockholder by any information concerning the Company that is not set forth in the Registration Statement and the Prospectus. (n) Certificates. Any certificate signed by or on behalf of any Selling Stockholder and delivered to the Representatives or Underwriters' Counsel in connection with this Agreement shall be deemed to be a representation and warranty hereunder by such Selling Stockholder to each Underwriter as to the matters covered thereby. 12 13 SECTION 2. PURCHASE, SALE AND DELIVERY OF THE SHARES. (a) The Firm Shares. Upon the terms herein set forth, (i) the Company agrees to issue and sell to the several Underwriters an aggregate of 2,450,000 Firm Shares and (ii) the Selling Stockholders agree to sell to the several Underwriters an aggregate of 550,000 Firm Shares, each Selling Stockholder selling the number of Firm Shares set forth opposite such Selling Stockholder's name on Schedule B. On the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Underwriters agree, severally and not jointly, to purchase from the Company and the Selling Stockholders the respective numbers of Firm Shares set forth opposite their names on Schedule A. The purchase price per Firm Share to be paid by the several Underwriters to the Company and the Selling Stockholders shall be $___. (b) The First Closing Date. Delivery of the Firm Shares to be purchased by the Underwriters and payment therefor shall be made by the Company and the Representatives at 9 A.M., Boston time, at the offices of Hutchins, Wheeler & Dittmar, A Professional Corporation (or at such other place as may be agreed upon between the Representatives and the Company), (i) on the third full business day following the first day that Shares are traded, (ii) if this Agreement is executed and delivered after 4:30 P.M., Boston time, the fourth full business day following the day that this Agreement is executed and delivered or (iii) at such other time and date not later that seven full business days following the first day that Shares are traded as the Representatives and the Company may determine (or at such time and date to which payment and delivery shall have been postponed pursuant to Section 8), such time and date of payment and delivery being herein called the "Closing Date." Notwithstanding the foregoing, if the Company has not made available to the Representatives copies of the Prospectus within the time provided in Section 4(d), the Representatives may, in their sole discretion, postpone the Closing Date until no later that two full business days following delivery of copies of the Prospectus to the Representatives. (c) The Option Shares; the Second Closing Date. In addition, on the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Company and the Selling Stockholders indicated on Schedule B hereby grant an option to the several Underwriters to purchase, severally and not jointly, up to an aggregate of 450,000 Option Shares from the Company and such Selling Stockholders at the purchase price per share to be paid by the Underwriters for the Firm Shares. The option granted hereunder is for use by the Underwriters solely in covering any over-allotments in connection with the sale and distribution of the Firm Shares. The option granted hereunder may be exercised at any time upon notice by the Representative to the Company and such Selling Stockholders, which notice may be given at any time within 30 days from the date of this Agreement. The time and date of delivery of the Option Shares, if subsequent to the First Closing Date, is called the "Second Closing Date" and shall be determined by the Representatives and shall not be earlier than three nor later than five full business days after delivery of such notice of exercise. If any Option Shares are to be purchased, (i) each Underwriter agrees, severally and not jointly, to purchase the number of Option Shares (subject to such adjustments to eliminate fractional shares as the Representatives may determine) that bears the same proportion to the total number of Option Shares to be purchased as the number of Firm Shares set forth on Schedule A opposite the name of such Underwriter bears to the total number of Firm Shares and (ii) the Company and each such Selling Stockholder agree, severally and not jointly, to sell the number of Option Shares (subject to such adjustments to eliminate fractional shares as the Representatives may determine) that bears the same proportion to the total number of Option Shares to be sold as the number of Option Shares 13 14 set forth in Schedule B opposite the name of such Selling Stockholder (or, in the case of the Company, as 50,000 bears to the total number of Option Shares to be sold. The Representative may cancel the option at any time prior to its expiration by giving written notice of such cancellation to the Company and such Selling Stockholders. (d) Public Offering of the Shares. The Representatives hereby advise the Company and the Selling Stockholders that the Underwriters intend to offer for sale to the public, as described in the Prospectus, their respective portions of the Shares as soon after this Agreement has been executed and the Registration Statement has been declared effective as the Representatives, in their sole judgment, have determined is advisable and practicable. (e) Payment for the Shares. Payment for the Shares to be sold by the Company shall be made at the First Closing Date (and, if applicable, at the Second Closing Date) by wire transfer of immediately available funds to the order of the Company. Payment for the Shares to be sold by the Selling Stockholders shall be made at the First Closing Date by wire transfer of immediately available funds to the order of the Custodian. It is understood that the Representatives have been authorized, for their own accounts and the accounts of the several Underwriters, to accept delivery of and receipt for, and make payment of the purchase price for, the Firm Shares and any Option Shares the Underwriters have agreed to purchase. BancBoston Robertson Stephens Inc., individually and not as one of the Representatives, may (but shall not be obligated to) make payment for any Shares to be purchased by any Underwriter whose funds shall not have been received by the Representatives by the First Closing Date or the Second Closing Date, as the case may be, for the account of such Underwriter, but any such payment shall not relieve such Underwriter from any of its obligations under this Agreement. Each Selling Stockholder hereby agrees that (i) it will pay all stock transfer taxes, stamp duties and other similar taxes, if any, payable upon the sale or delivery of the Firm Shares to be sold by such Selling Stockholder to the several Underwriters or otherwise in connection with the performance of such Selling Stockholder's obligations hereunder and (ii) the Custodian is authorized to deduct for such payment any such amounts from the proceeds to such Selling Stockholder hereunder and to hold such amounts for the account of such Selling Stockholder with the Custodian under the Custody Agreement. (f) Delivery of the Shares. The Company and the Selling Stockholders shall deliver, or cause to be delivered, a credit representing the Firm Shares to an account or accounts at The Depository Trust Company as designated by the Representatives for the accounts of the Representatives and the several Underwriters at the First Closing Date, against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefor. The Company and the Selling Stockholders that granted the option provided in Section 2 shall also deliver, or cause to be delivered, a credit representing the Option Shares to an account or accounts at The Depository Trust Company as designated by the Representatives for the accounts of the Representatives and the several Underwriters at the Second Closing Date, against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefor. Time shall be of the essence, and delivery at the time and place specified in this Agreement is a further condition to the obligations of the Underwriters. 14 15 (g) Delivery of Prospectus to the Underwriters. Not later than 3 P.M., Boston time, on the second business day following the date the Shares are released by the Underwriters for sale to the public, the Company shall deliver or cause to be delivered copies of the Prospectus in such quantities and at such places as the Representatives shall request. SECTION 3. COVENANTS OF THE COMPANY AND THE SELLING STOCKHOLDERS. A. COVENANTS OF THE COMPANY. The Company further covenants and agrees with each Underwriter as follows: (a) Registration Statement Matters. The Company will use its best efforts to cause a registration statement on Form 8-A (the "Form 8-A Registration Statement") as required by the Securities Exchange Act of 1934, as amended (the "Exchange Act"), to become effective simultaneously with the Registration Statement. The Company will use its best efforts to cause the Registration Statement to become effective or, if the procedure in Rule 430A of the Securities Act is followed, will prepare and timely file with the Commission pursuant to Rule 424(b) under the Securities Act a prospectus in a form approved by the Representatives containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Securities Act. The Company will not file any amendment to the Registration Statement or any amendment or supplement to the Prospectus of which the Representatives have not previously been advised and furnished with a copy, to which the Representatives have reasonably objected in writing or which is not in compliance with the Securities Act. If the Company elects to rely on Rule 462(b) under the Securities Act, the Company will file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) under the Securities Act prior to the time confirmations are sent or given, as specified by Rule 462(b)(2) under the Securities Act, and will pay the applicable fees in accordance with Rule 111 under the Securities Act. (b) Securities Act Compliance. The Company will advise the Representatives promptly when (i) the Registration Statement or any post-effective amendment thereto becomes effective, (ii) the Company receives any comments from the Commission, (iii) the Commission requests any amendment of the Registration Statement, any amendment or supplement to the Prospectus, or any additional information and (iv) the Commission institutes any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or institutes proceedings for that purpose. The Company will use its best efforts to prevent the Commission from issuing any such stop order and, if such a stop order is issued, to cause the Commission to lift such stop order as soon as possible. (c) Blue Sky Compliance. The Company will cooperate with the Representatives and Underwriters' Counsel in endeavoring to qualify the Shares for sale under the securities laws of such jurisdictions (both national and foreign) as the Representatives may reasonably have designated in writing and will make such applications, file such documents and furnish such information as may be reasonably required for that purpose, provided the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent. The Company will, from time to time, prepare and file such statements, reports and other documents as are or may be required to continue such qualifications in effect for so long a period as the Representatives may reasonably request for distribution of the Shares. 15 16 (d) Amendments and Supplements to the Prospectus and Other Securities Act Matters. The Company will comply with the Securities Act, the Exchange Act and the rules and regulations of the Commission under the Exchange Act so as to permit the completion of the distribution of the Shares as contemplated by this Agreement and the Prospectus. If during the period in which a prospectus is required by law to be delivered by an underwriter or dealer, any event shall occur as a result of which, in the judgment of the Company or in the reasonable opinion of the Representatives or Underwriters' Counsel, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly will prepare and file with the Commission, and furnish at its own expense to the Underwriters and to dealers, an appropriate amendment to the Registration Statement or supplement to the Prospectus so that the Prospectus as so amended or supplemented will not, in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with the law. (e) Copies of any Amendments and Supplements to the Prospectus. The Company will furnish to the Representatives, without charge, during the period beginning on the date hereof and ending on the later of the Second Closing Date or such date as in the opinion of Underwriters' Counsel the Prospectus is no longer required by law to be delivered in connection with sales by an underwriter or dealer (the "Prospectus Delivery Period"), as many copies of the Prospectus and any amendments and supplements thereto as the Representatives may request. (f) Insurance.The Company will (i) obtain directors' and officers' liability insurance in the minimum amount of $10,000,000 that shall apply to the offering contemplated hereby and (ii) cause BancBoston Robertson Stephens Inc. to be added as an additional insured to such policy in respect of the offering contemplated hereby. (g) Notice of Subsequent Events. If at any time during the ninety-day period after the Registration Statement becomes effective, any rumor, publication or event relating to or affecting the Company shall occur as a result of which in opinion of the Representatives the market price of the Common Shares has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, after written notice from the Representatives advising the Company to the effect set forth above, forthwith prepare, consult with the Representatives concerning the substance of, and disseminate a press release or other public statement, reasonably satisfactory to Representatives, responding to or commenting on such rumor, publication or event. (h) Use of Proceeds. The Company will apply the net proceeds from the sale of the Shares sold by it in the manner described under the caption "Use of Proceeds" in the Prospectus. (i) Transfer Agent. The Company will engage and maintain, at its expense, a registrar and transfer agent for the Common Shares. (j) Earnings Statement. As soon as practicable, the Company will make generally available to its security holders and to the Representatives an earnings statement (which need 16 17 not be audited) covering the twelve-month period ending , 2000 that satisfies the provisions of Section 11(a) of the Securities Act. (k) Periodic Reporting Obligations. During the Prospectus Delivery Period, the Company will file with the Commission, on a timely basis, all reports and documents required to be filed under the Exchange Act. (l) Agreement Not to Offer or Sell Additional Securities. The Company will not, for a period of 90 days after the date of the Prospectus, offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any Common Shares, any options or warrants to purchase any Common Shares, or any securities convertible into or exchangeable for Common Shares without the prior written consent of BancBoston Robertson Stephens Inc., other than the sale of the Shares to be sold by the Company hereunder and the Company's issuance of options or Common Shares under the Company's stock option plan, as presently authorized.. (m) Future Reports to the Representatives. During the five-year period commencing on the date hereof, the Company will furnish to the Representatives (i) as soon as practicable after the end of each fiscal year, copies of its annual report containing the consolidated balance sheet of the Company and its subsidiaries as of the close of such fiscal year, consolidated statements of income, stockholders' equity and cash flows for the year then ended, and the opinion thereon of the Company's independent certified public accountants; (ii) as soon as practicable after the filing thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K or other report filed by the Company with the Commission, the Nasdaq Stock Market, Inc. or any securities exchange; and (iii) as soon as practicable after mailing, copies of any report or communication of the Company mailed generally to holders of its capital stock. B. COVENANTS OF THE SELLING STOCKHOLDERS. Each Selling Stockholder further covenants and agrees with each Underwriter as follows: (a) Delivery of Form W-8 or W-9. Such Selling Stockholder will deliver to the Representatives prior to the First Closing Date a properly completed and executed United States Treasury Department Form W-8 (if such Selling Stockholder is a non-United States person) or Form W-9 (if such Selling Stockholder is a United States person). (b) Notification of Untrue Statements, etc. If, at any time prior to the date on which the distribution of the Shares as contemplated by this Agreement and the Prospectus has been completed, as determined by the Representatives, such Selling Stockholder has knowledge of the occurrence of any event as a result of which the Prospectus or the Registration Statement, in each case as then amended or supplemented, would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, such Selling Stockholder will promptly notify the Company and the Representatives. 17 18 SECTION 4. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The obligations of the several Underwriters to purchase and pay for the Shares as provided herein on the First Closing Date and, with respect to the Option Shares, the Second Closing Date shall be subject to the accuracy of the respective representations and warranties on the part of the Company and the Selling Stockholders set forth in Section 1 as of the date hereof and as of the First Closing Date as though then made and, with respect to the Option Shares, as of the Second Closing Date as though then made, to the timely performance by the Company and the Selling Stockholders of their respective covenants and other obligations hereunder, and to each of the following additional conditions: (a) Compliance with Registration Requirements; No Stop Order; No Objection from the NASD. The Registration Statement shall have become effective prior to the execution of this Agreement, or at such later date as shall be consented to in writing by the Representatives. No stop order suspending the effectiveness thereof shall have been issued and no proceedings for that purpose shall have been initiated or, to the knowledge of the Company, any Selling Shareholder or any Underwriter, threatened by the Commission. Any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the reasonable satisfaction of Underwriters' Counsel. The NASD shall have raised no objection to the fairness and reasonableness of the underwriting terms and arrangements. (b) Corporate Proceedings. All corporate proceedings and other legal matters in connection with this Agreement, the form of the Registration Statement and the Prospectus, and the registration, authorization, issue, sale and delivery of the Shares shall have been reasonably satisfactory to Underwriters' Counsel. Such counsel shall have been furnished with such papers and information as they may reasonably have requested to enable them to pass upon the matters referred to in this Section 4. (c) No Material Adverse Change. Subsequent to the execution and delivery of this Agreement and prior to the First Closing Date or the Second Closing Date, as the case may be, there shall not have been any Material Adverse Change from that set forth in the Registration Statement or Prospectus that in the sole judgment of the Representatives, is material and adverse and that makes it, in the sole judgment of the Representatives, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. (d) Opinion of Counsel for the Company. You shall have received on the First Closing Date or the Second Closing Date, as the case may be, an opinion of Hutchins, Wheeler & Dittmar, A Professional Corporation, counsel for the Company, substantially in the form of Exhibit B attached hereto, dated the First Closing Date or the Second Closing Date, as the case may be, addressed to the Underwriters and with reproduced copies or signed counterparts thereof for each of the Underwriters. Counsel rendering the opinion contained in Exhibit B may rely as to questions of law not involving the law of the United States or Massachusetts or the General Corporation Law of the State of Delaware upon opinions of local counsel, and as to questions of fact upon representations or certificates of officers of the Company and of government officials, in which case their opinion is to state that they are so relying and that they have no knowledge of any material misstatement or inaccuracy in any 18 19 such opinion, representation or certificate. Copies of any opinion, representation or certificate so relied upon shall be delivered to the Representatives and to Underwriters' Counsel. (e) Opinion of Counsel for the Underwriters. You shall have received on the First Closing Date or the Second Closing Date, as the case may be, an opinion of Underwriters' Counsel, substantially in the form of Exhibit C hereto. The Company shall have furnished to such counsel such documents as they may have requested for the purpose of enabling them to pass upon such matters. (f) Accountants' Comfort Letter. You shall have received on the First Closing Date and on the Second Closing Date, as the case may be, a letter from PricewaterhouseCoopers LLP addressed to the Underwriters, dated the First Closing Date or the Second Closing Date, as the case may be, confirming that they are independent certified public accountants with respect to the Company and the Subsidiaries within the meaning of the Securities Act and based upon the procedures described in such letter delivered to you concurrently with the execution of this Agreement (herein called the "Original Letter"), but carried out to a date not more than four business days prior to the First Closing Date or the Second Closing Date, as the case may be, (i) confirming, to the extent true, that the statements and conclusions set forth in the Original Letter are accurate as of the First Closing Date or the Second Closing Date, as the case may be, and (ii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letter that are necessary to reflect any changes in the facts described in the Original Letter since the date of such letter or to reflect the availability of more recent financial statements, data or information. The letter shall not disclose any change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiaries considered as one enterprise from that set forth in the Registration Statement or the Prospectus that, in the sole judgment of the Representatives, is material and adverse and that makes it, in the sole judgment of the Representatives, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. The Original Letter from PricewaterhouseCoopers LLP (i) shall be addressed to the Underwriters, (ii) shall be satisfactory in form and substance to the Representatives, (iii) shall represent that they are independent accountants with respect to the Company within the meaning of the Securities Act, (iv) shall set forth their opinion with respect to their examination of the consolidated balance sheets of the Company as of December 31, 1997 and 1998 and related consolidated statements of operations, shareholders' equity, and cash flows for the nine months ended December 31, 1996 and the fiscal years ended December 31, 1997 and 1998 and (v) shall address other matters agreed upon by PricewaterhouseCoopers LLP and the Representatives. (g) Officers' Certificate. You shall have received on the First Closing Date or the Second Closing Date, as the case may be, a certificate of the Company, dated the First Closing Date or the Second Closing Date, as the case may be, signed by the President and Chief Executive Officer and the Vice President of Finance, Chief Financial Officer and Treasurer of the Company, to the effect that, and you shall be satisfied that: (i) the representations and warranties of the Company in this Agreement are true and correct, as if made on and as of the First Closing Date or the Second Closing Date, as the case may be, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or 19 20 satisfied at or prior to the First Closing Date or the Second Closing Date, as the case may be; (ii) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Securities Act; (iii)when the Registration Statement became effective and at all times subsequent thereto up to the time of delivery of such certificate, (A) the Registration Statement and the Prospectus, and any amendments or supplements thereto, contained all material information required to be included therein by the Securities Act and conformed in all material respects to the requirements of the Securities Act and (B) the Registration Statement and the Prospectus, and any amendments or supplements thereto, did not and do not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (iv) since the effective date of the Registration Statement, there has occurred no event required to be set forth in an amendment or supplement to the Prospectus that has not been so set forth; and (v) subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been (A) any Material Adverse Change, (B) any transaction that is material to the Company and the Subsidiaries considered as one enterprise, except transactions entered into in the ordinary course of business, (C) any obligation, direct or contingent, that is material to the Company and the Subsidiaries considered as one enterprise, incurred by the Company or the Subsidiaries, except obligations incurred in the ordinary course of business, (D) any change in the capital stock or outstanding indebtedness of the Company or any of the Subsidiaries that is material to the Company and the Subsidiaries considered as one enterprise, (E) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company or any of the Subsidiaries, or (F) any loss or damage (whether or not insured) to the properties of the Company or any of the Subsidiaries that has been sustained or will have been sustained that has or will have a Material Adverse Effect. (h) Opinion of Counsel for the Selling Stockholders. You shall have received, with respect to each of the Selling Stockholders, on the First Closing Date and the Second Closing Date, if applicable, an opinion of counsel for such Selling Stockholder (which counsel shall be Hutchins, Wheeler & Dittmar, A Professional Corporation, or another firm reasonably acceptable to the Representatives and Underwriters' Counsel), substantially in the form of Exhibit D hereto, dated as of such Closing Date, addressed to the Underwriters and with reproduced copies or signed counterparts thereof for each of the Underwriters. In rendering such opinion, such counsel may rely as to questions of law not involving the law of the United States or Massachusetts or the General Corporation Law of the State of Delaware upon opinions of local counsel and as to questions of fact upon representations or certificates of such Selling Stockholder, officers of such Selling Stockholder (when the Selling Stockholder 20 21 is not a natural person) and governmental officials, in which case their opinion is to state that they are so relying and that they have no knowledge of any material misstatement or inaccuracy of any material misstatement or inaccuracy in any such opinion, representation or certificate so relied upon shall be delivered to the Representatives and Underwriters' Counsel. (i) Selling Stockholders' Certificate. You shall have received on the First Closing Date and the Second Closing Date, as the case may be, a written certificate executed by the Attorneys-in-Fact, dated as of such Closing Date, to the effect that: (i) the representations, warranties and covenants of each of the Selling Stockholders set forth in Section 1(B) are true and correct with the same force and effect as though expressly made by the Selling Stockholders on and as of such Closing Date; and (ii) each of the Selling Stockholders has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to such Closing Date. (j) Stock Listing. The Shares shall have been approved for inclusion on the Nasdaq SmallCap Market, subject only to official notice of issuance. (k) Compliance with Prospectus Delivery Requirements. The Company shall have complied with the provisions of Sections 2(g) and 3(e) with respect to the furnishing of Prospectuses. (l) Additional Documents. On or before the First Closing Date or the Second Closing Date, as the case may be, the Representatives and Underwriters' Counsel shall have received such information, documents and opinions as they may reasonably require (i) for the purpose of enabling them to pass upon the issuance and sale of the Shares as contemplated herein or (ii) in order to evidence the accuracy of any of the representations and warranties, or the satisfaction of any of the conditions or agreements, of the Company or the Selling Stockholders herein contained. If any condition specified in this Section 4 is not satisfied when and as required to be satisfied, this Agreement may be terminated by the Representatives by notice to the Company and the Selling Stockholders at any time on or prior to the First Closing Date and, with respect to the Option Shares, at any time prior to the Second Closing Date, which termination shall be without liability on the part of any party to any other party, except that Sections 5, 6, 7 and 10 shall at all times be effective and shall survive such termination. SECTION 5. PAYMENT OF EXPENSES. The Company agrees to pay all costs, fees and expenses incurred in connection with the performance of the obligations of the Company and the Selling Stockholders hereunder and in connection with the transactions contemplated hereby, including (i) all expenses incident to the issuance and delivery of the Shares (including all printing and engraving costs), (ii) all fees and expenses of the registrar and transfer agent of the Common Shares, (iii) all issue, transfer and other stamp taxes in connection with the issuance and sale of the Shares to the Underwriters, (iv) all fees and expenses of the Company's counsel, independent accountants and other advisors, 21 22 (v) all costs and expenses incurred in connection with the preparation, printing, filing, shipping and distribution of the Registration Statement (including financial statements, exhibits, consents and certificates of experts), each preliminary prospectus and the Prospectus, and all amendments and supplements thereto, and this Agreement, (vi) all filing fees, attorneys' fees and expenses incurred by the Company or the Underwriters in connection with qualifying or registering (or obtaining exemptions from the qualification or registration of) all or any part of the Shares for offer and sale under the state securities or blue sky laws or the provincial securities laws of Canada or any other country, and, if requested by the Representatives, preparing and printing a "Blue Sky Memorandum," an "International Blue Sky Memorandum" or any other memoranda, and any supplements thereto, advising the Underwriters of such qualifications, registrations and exemptions, (vii) the filing fees incident to, and the reasonable fees and expenses of Underwriters' Counsel in connection with, the NASD review and approval of the Underwriters' participation in the offering and distribution of the Shares, (viii) the fees and expenses associated with listing the Common Shares on the Nasdaq National Market, (ix) all costs and expenses incident to the preparation and undertaking of "road show" preparations to be made to prospective investors, and (x) all other fees, costs and expenses referred to in Item 13 of Part II of the Registration Statement. Except as provided in this Section 5 or in Section 6 or 7, the Underwriters shall pay their own expenses, including the fees and disbursements of their counsel. This Section 5 shall not affect or modify any separate, valid agreement relating to the allocation of payment of expenses between the Company, on the one hand, and the Selling Stockholders, on the other hand. SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement is terminated by the Representatives pursuant to Section 4, 7, 8, 9 or 15, or if the sale to the Underwriters of the Firm Shares on the First Closing Date is not consummated because of any refusal, inability or failure on the part of the Company or the Selling Stockholders to perform any agreement herein or to comply with any provision hereof, the Company agrees to reimburse the Representatives and the other Underwriters (or such Underwriters as have terminated this Agreement with respect to themselves), severally upon demand for all out-of-pocket expenses that shall have been reasonably incurred by the Representatives and the other Underwriters in connection with the proposed purchase and the offering and sale of the Shares, including fees and disbursements of counsel, printing expenses, travel expenses, postage, facsimile and telephone charges. SECTION 7. INDEMNIFICATION AND CONTRIBUTION. (a) Indemnification of the Underwriters. (1) The Company and each of the Selling Stockholders identified as a "Principal Selling Stockholder" in Schedule B (each a "Principal Selling Stockholder") agree to indemnify and hold harmless each Underwriter, its officers and employees, and each person, if any, who controls any Underwriter within the meaning of the Securities Act and the Exchange Act against any loss, claim, damage, liability or expense, as incurred, to which such Underwriter or such controlling person may become subject, under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company, which consent shall not be unreasonably withheld), insofar as such loss, claim, 22 23 damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based: (i) upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, or any amendment thereto, including any information deemed to be a part thereof pursuant to Rule 430A under the Securities Act, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) upon any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (iii) in whole or in part upon any inaccuracy in the representations and warranties of the Company or such Principal Selling Stockholder contained herein; (iv) in whole or in part upon any failure of the Company or such Principal Selling Stockholder to perform its or his obligations hereunder or under law; or (v) any act or failure to act or any alleged act or failure to act by any Underwriter in connection with, or relating in any manner to, the Shares or the offering contemplated hereby, which is included as part of or referred to in any loss, claim, damage, liability or action arising out of or based upon any matter covered by clause (i), (ii), (iii) or (iv) above, provided that the Company and the Principal Selling Stockholders shall not be liable under this clause (v) to the extent that a court of competent jurisdiction shall have determined by a final judgment that such loss, claim, damage, liability or action resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Underwriter through its bad faith or willful misconduct; and to reimburse each Underwriter and each such controlling person for any and all expenses (including the fees and disbursements of counsel chosen by BancBoston Robertson Stephens Inc.) as such expenses are reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action; provided, however, that the foregoing indemnity agreement shall not apply to any loss, claim, damage, liability or expense to the extent, but only to the extent, arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Company by the Representatives expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto); and provided, further, that with respect to any preliminary prospectus, the foregoing indemnity agreement shall not inure to the benefit of any Underwriter from whom the person asserting any loss, claim, damage, liability or expense purchased Shares, or any person controlling such Underwriter, if copies of the Prospectus were timely delivered to the Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or 23 24 supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage, liability or expense. The indemnity agreement set forth in this Section 7(a)(i) shall be in addition to any liabilities that the Company and the Principal Selling Stockholders may otherwise have. (2) Each of the Selling Stockholders other than the Principal Selling Stockholders (each an "Other Selling Stockholder"), jointly and severally, agrees to indemnify and hold harmless each Underwriter, its officers and employees, and each person, if any, who controls any Underwriter within the meaning of the Securities Act and the Exchange Act against any loss, claim, damage, liability or expense, as incurred, to which such Underwriter or such controlling person may become subject, under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company, which consent shall not be unreasonably withheld), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based: (i) upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, or any amendment thereto, including any information deemed to be a part thereof pursuant to Rule 430A under the Securities Act, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company or such Underwriter by such Other Selling Stockholder, directly or through such Other Selling Stockholder's representatives, specifically for use in the preparation thereof; (ii) upon any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; or (iii) in whole or in part upon any inaccuracy in the representations and warranties of such Other Selling Stockholder contained herein; (iv) in whole or in part upon any failure of such Other Selling Stockholder to perform its obligations hereunder or under law; or (v) any act or failure to act or any alleged act or failure to act by any Underwriter in connection with, or relating in any manner to, the Shares or the offering contemplated hereby, which is included as part of or referred to in any loss, claim, damage, liability or action arising out of or based upon any matter covered by clause (i), (ii), (iii) or (iv) above, provided that the Selling Stockholders shall not be liable under this clause (v) to the extent that a court 24 25 of competent jurisdiction shall have determined by a final judgment that such loss, claim, damage, liability or action resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Underwriter through its bad faith or willful misconduct; and to reimburse each Underwriter and each such controlling person for any and all expenses (including the fees and disbursements of counsel chosen by BancBoston Robertson Stephens Inc.) as such expenses are reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action; provided, however, that the foregoing indemnity agreement shall not apply to any loss, claim, damage, liability or expense to the extent, but only to the extent, arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Selling Stockholders by the Representatives expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto); and provided, further, that with respect to any preliminary prospectus, the foregoing indemnity agreement shall not inure to the benefit of any Underwriter from whom the person asserting any loss, claim, damage, liability or expense purchased Shares, or any person controlling such Underwriter, if copies of the Prospectus were timely delivered to the Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage, liability or expense. The indemnity agreement set forth in this Section 7(a)(2) shall be in addition to any liabilities that the Selling Stockholders may otherwise have. (b) Indemnification of the Company, Its Directors and Officers, and the Selling Stockholders. Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement, the Selling Stockholders and each person, if any, who controls the Company or any Selling Stockholder within the meaning of the Securities Act or the Exchange Act, against any loss, claim, damage, liability or expense, as incurred, to which the Company, or any such director, officer, Selling Stockholder or controlling person may become subject under the Securities Act, the Exchange Act, or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Underwriter), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based upon any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or arises out of or is based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any preliminary prospectus, the Prospectus (or any amendment or supplement thereto), in reliance upon and in conformity with written information furnished to the Company and the Selling Stockholders by the Representatives expressly for use therein; and to reimburse the Company, or any such director, officer, Selling Stockholder or controlling person for any legal and other expense reasonably incurred by the Company, or any such director, officer, 25 26 Selling Stockholder or controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action. The indemnity agreement set forth in this Section 7(b) shall be in addition to any liabilities that the Underwriters may otherwise have. (c) Information Provided by the Underwriters. The Company and each of the Selling Stockholders hereby acknowledge that the only information that the Underwriters have furnished to the Company and the Selling Stockholders expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) are the information set forth in the table in the first paragraph and the statements in the second paragraph under the caption "Underwriting" in the Prospectus. The Underwriters confirm that such statements are correct. (d) Notifications and Other Indemnification Procedures. Promptly after receipt by an indemnified party under this Section 7 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section 7, notify the indemnifying party in writing of the commencement thereof, but the omission so to notify the indemnifying party will not relieve it from any liability that it may have to any indemnified party for contribution or otherwise than under the indemnity agreement contained in this Section 7 or to the extent it is not prejudiced as a proximate result of such failure. In case any such action is brought against any indemnified party and such indemnified party seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it shall elect, jointly with all other indemnifying parties similarly notified, by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; provided, however, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that a conflict may arise between the positions of the indemnifying party and the indemnified party in conducting the defense of any such action or that there may be legal defenses available to it and/or other indemnified parties that are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of such indemnifying party's election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 7 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with local counsel), approved by the indemnifying party (BancBoston Robertson Stephens Inc. in the case of Sections 7(b) and 8), representing the indemnified parties who are parties to such action), (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action, or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party, in each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying party. 26 27 (e) Settlements. The indemnifying party under this Section 7 shall not be liable for any settlement of any proceeding effected without its written consent, which consent shall not be unreasonably withheld, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party against any loss, claim, damage, liability or expense by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by Section 7(d), the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement, compromise or consent to the entry of judgment in any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity was or could have been sought hereunder by such indemnified party, unless such settlement, compromise or consent includes (i) an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (f) Contribution. If the indemnification provided for in this Section 7 is unavailable to or insufficient to hold harmless an indemnified party under Section 7(a) or (b) in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof), then each indemnifying party shall contribute to the aggregate amount paid or payable by such indemnified party in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and the Selling Stockholders on the one hand and the Underwriters on the other in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriter on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Selling Stockholders bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company and the Selling Stockholders on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Selling Stockholders and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 7(f) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to above in this Section 7(f). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this 27 28 Section 7(f) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (f), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such Underwriter and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this Section 7(f) to contribute are several in proportion to their respective underwriting obligations and not joint. (g) Timing of Any Payments of Indemnification. Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 7 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred, but in all cases, no later than thirty days of invoice to the indemnifying party. (h) Survival. The indemnity and contribution agreements contained in this Section 7 and the representation and warranties of the Company set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its directors or officers or any persons controlling the Company, (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter, or to the Company, its directors or officers, or any person controlling the Company, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 7. (i) Acknowledgments of Parties. The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions hereof, including the provisions of this Section 7, and are fully informed regarding said provisions. They further acknowledge that the provisions of this Section 7 fairly allocate the risks in light of the ability of the parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement and the Prospectus as required by the Securities Act. SECTION 8. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the several Underwriters shall fail or refuse to purchase Shares that it or they have agreed to purchase hereunder on such date, and the aggregate number of Common Shares that such defaulting Underwriter or Underwriters agreed but failed or refused to purchase does not exceed 10% of the aggregate number of the Shares to be purchased on such date, the other Underwriters shall be obligated, severally, in the proportions that the number of Firm Common Shares set forth opposite their respective names on Schedule A bears to the aggregate number of Firm Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as may be specified by the Representatives with the consent of the non-defaulting Underwriters, to purchase the Shares that such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Shares and the aggregate number of Shares with respect to which such default occurs exceeds 10% of the aggregate number of Shares to be purchased on such date, and arrangements satisfactory to the 28 29 Representatives and the Company for the purchase of such Shares are not made within 48 hours after such default, this Agreement shall terminate without liability of any party to any other party except that the provisions of Sections 4 and 7 shall at all times be effective and shall survive such termination. In any such case either the Representatives or the Company shall have the right to postpone the First Closing Date or the Second Closing Date, as the case may be, but in no event for longer than seven days in order that the required changes, if any, to the Registration Statement and the Prospectus or any other documents or arrangements may be effected. As used in this Agreement, the term "Underwriter" shall be deemed to include any person substituted for a defaulting Underwriter under this Section 8. Any action taken under this Section 8 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. SECTION 9. TERMINATION OF THIS AGREEMENT. Prior to the First Closing Date, this Agreement may be terminated by the Representatives by notice given to the Company and the Selling Stockholders if at any time (a) trading or quotation in any of the Company's securities shall have been suspended or limited by the Commission or by the Nasdaq Stock Market, or trading in securities generally on either the Nasdaq Stock Market or the New York Stock Exchange shall have been suspended or limited, or minimum or maximum prices shall have been generally established on any of such stock exchanges by the Commission or the NASD; (b) a general banking moratorium shall have been declared by any of federal, New York, Delaware or California authorities; (c) there shall have occurred any outbreak or escalation of national or international hostilities or any crisis or calamity, or any change in the United States or international financial markets, or any substantial change or development involving a prospective change in United States' or international political, financial or economic conditions, as in the judgment of the Representatives is material and adverse and makes it impracticable or inadvisable to market the Common Shares in the manner and on the terms described in the Prospectus or to enforce contracts for the sale of securities; (d) in the judgment of the Representatives there shall have occurred any Material Adverse Change; or (e) the Company shall have sustained a loss by strike, fire, flood, earthquake, accident or other calamity of such character as in the judgment of the Representatives may interfere materially with the conduct of the business and operations of the Company regardless of whether or not such loss shall have been insured. Any termination pursuant to this Section 9 shall be without liability on the part of (i) the Company or the Selling Stockholders to any Underwriter, except that the Company and the Selling Stockholders shall be obligated to reimburse the expenses of the Representatives and the Underwriters pursuant to Sections 5 and 6, (ii) any Underwriter to the Company or the Selling Stockholders, or (iii) of any party hereto to any other party except that the provisions of Section 7 shall at all times be effective and shall survive such termination. SECTION 10. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The respective indemnities, agreements, representations, warranties and other statements of the Company, of its officers, of the Selling Stockholders and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or any of its or their partners, officers or directors or any controlling person, or the Selling Stockholders, as the case may be, and will survive delivery of and payment for the Shares sold hereunder and any termination of this Agreement. 29 30 SECTION 11. NOTICES. All communications hereunder shall be in writing and shall be mailed, hand delivered or telecopied and confirmed to the parties hereto as follows: If to the Representatives: BANCBOSTON ROBERTSON STEPHENS INC. 555 California Street San Francisco, California 94104 Facsimile: (415) 676-2696 Attention: General Counsel If to the Company: NETEGRITY, INC. 245 Winter Street Waltham, Massachusetts 02154 Facsimile: (781) 487-7791 Attention: President and Chief Executive Officer If to the Selling Stockholders: BARRY N. BYCOFF AND JAMES E. HAYDEN As Attorneys-in-Fact c/o Netegrity, Inc. 245 Winter Street Waltham, Massachusetts 02154 Facsimile: (781) 487-7791 Any party hereto may change the address for receipt of communications by giving written notice to the others. SECTION 12. SUCCESSORS. This Agreement will inure to the benefit of and be binding upon the parties hereto, including any substitute Underwriters pursuant to Section 9, and to the benefit of the employees, officers and directors and controlling persons referred to in Section 7, and to their respective successors, and no other person will have any right or obligation hereunder. The term "successors" shall not include any purchaser of the Shares as such from any of the Underwriters merely by reason of such purchase. SECTION 13. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable. SECTION 14. GOVERNING LAW PROVISIONS. (a) Governing Law. This agreement shall be governed by and construed in accordance with the internal laws of the State of New York applicable to agreements made and to be performed in such state. 30 31 (b) Consent to Jurisdiction. Any legal suit, action or proceeding arising out of or based upon this Agreement or the transactions contemplated hereby ("Related Proceedings") may be instituted in the federal courts of the United States of America located in the City and County of San Francisco or the courts of the State of California in each case located in the City and County of San Francisco (collectively, the "Specified Courts"), and each party irrevocably submits to the exclusive jurisdiction (except for proceedings instituted in regard to the enforcement of a judgment of any such court (a "Related Judgment"), as to which such jurisdiction is non-exclusive) of such courts in any such suit, action or proceeding. Service of any process, summons, notice or document by mail to such party's address set forth above shall be effective service of process for any suit, action or other proceeding brought in any such court. The parties irrevocably and unconditionally waive any objection to the laying of venue of any suit, action or other proceeding in the Specified Courts and irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such suit, action or other proceeding brought in any such court has been brought in an inconvenient forum. Each party not located in the United States irrevocably appoints CT Corporation System, which currently maintains a San Francisco office at 49 Stevenson Street, San Francisco, California 94105, United States of America, as its agent to receive service of process or other legal summons for purposes of any such suit, action or proceeding that may be instituted in any state or federal court in the City and County of San Francisco. SECTION 15. FAILURE OF ONE OR MORE SELLING STOCKHOLDERS TO SELL AND DELIVER SHARES. If one or more of the Selling Stockholders shall fail to sell and deliver to the Underwriters the Shares to be sold and delivered by such Selling Stockholders at the First Closing Date pursuant to this Agreement, then the Underwriters may at their option, by written notice from the Representatives to the Company and the Selling Stockholders, either (i) terminate this Agreement without any liability on the part of any Underwriter or, except as provided in Sections 5, 6, and 7 hereof, the Company or the Selling Stockholders, or (ii) purchase the shares that the Company and other Selling Stockholders have agreed to sell and deliver in accordance with the terms hereof. If one or more of the Selling Stockholders shall fail to sell and deliver to the Underwriters the Shares to be sold and delivered by such Selling Stockholders pursuant to this Agreement at the First Closing Date or the Second Closing Date, then the Underwriters shall have the right, by written notice from the Representative to the Company and the Selling Stockholders, to postpone the First Closing Date or the Second Closing Date, as the case may be, but in no event for longer than seven days in order that the required changes, if any, to the Registration Statement and the Prospectus or any other documents or arrangements may be effected. SECTION 16. GENERAL PROVISIONS. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may be executed in two or more counterparts, each one of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement may not be amended or modified unless in writing by all of the parties hereto, and no condition herein (express or implied) may be waived unless waived in writing by each party whom the condition is meant to benefit. All references to Sections, Schedules and Exhibits shall be deemed references to such parts of this Agreement, except as otherwise provided. The Table of Contents and the Section headings herein are for the convenience of the parties only and shall not affect the construction or 31 32 interpretation of this Agreement. The word "including" as used herein shall not be construed so as to exclude any other thing not referred to or described. * * * If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company and the Attorneys-in-Fact the enclosed copies hereof, whereupon this instrument, along with all counterparts hereof, shall become a binding agreement in accordance with its terms. Very truly yours, NETEGRITY, INC. By___________________________________________ President and Chief Executive Officer SELLING STOCKHOLDERS By___________________________________________ As Attorney-in-Fact for the Selling Stockholders named in Schedule B hereto The foregoing Underwriting Agreement is hereby confirmed and accepted by the Representatives as of the date first above written: BANCBOSTON ROBERTSON STEPHENS INC. DAIN RAUSCHER WESSELS A DIVISION OF DAIN RAUSCHER INCORPORATED THOMAS WEISEL PARTNERS LLC On their behalf and on behalf of each of the several Underwriters named in Schedule A hereto By BancBoston Robertson Stephens Inc. By_____________________________________________ Authorized Signatory 32 33 SCHEDULE A
NUMBER OF FIRM SHARES TO BE UNDERWRITERS PURCHASED - ------------ ----------- BancBoston Robertson Stephens Inc. ...................................... Dain Rauscher Wessels, a division of Dain Rauscher Incorporated.......... Thomas Weisel Partners LLC............................................... --------- Total .............................................................. 3,000,000 =========
34 SCHEDULE B
NUMBER OF FIRM SHARES SELLING STOCKHOLDER TO BE SOLD - ------------------- ----------- ------- Total ............................................................................................. 550,000 =======
35 EXHIBIT A LOCK-UP AGREEMENT BANCBOSTON ROBERTSON STEPHENS INC. As Lead Representative of the several Underwriters 555 California Street, Suite 2600 San Francisco, California 94104 Ladies and Gentlemen: The undersigned understands that you, as lead representative of the several underwriters (the "Underwriters"), propose to enter into an Underwriting Agreement (the "Underwriting Agreement") with Netegrity, Inc. (the "Company") and certain selling stockholders providing for the public offering (the "Public Offering") by the Underwriters, including yourselves, of the Company's common stock, $.01 par value (the "Common Stock"), pursuant to a registration statement on Form S-3 to be filed with the Securities and Exchange Commission. This letter agreement shall terminate and be of no further force and effect upon a decision by BancBoston Robertson Stephens Inc. or the Company not to proceed with the Public Offering. In consideration of the Underwriters' agreement to purchase and make the Public Offering of the Common Stock, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the undersigned hereby agrees that the undersigned will not, for a period commencing on the date hereof and continuing thereafter until 90 days after the date of the final prospectus for the Public Offering (the "Lock-Up Period"), offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to (each a "Disposition") any shares of Common Stock, any options or warrants to purchase any shares of Common Stock, or any securities convertible into or exchangeable for shares of Common Stock (collectively, "Securities") now owned or hereafter acquired directly by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition, otherwise than (a) as a distribution to limited partners, members or shareholders of the undersigned, (b) by gift, will or intestacy, (c) in the event the undersigned is an individual, to his or her immediate family or to a trust the beneficiaries of which are exclusively the undersigned, his or her parent or parents and/or a member or members of his or her immediate family, (d) to the undersigned's affiliates, as such term is defined in Rule 405 under the Securities Act of 1933, provided that the transferees, donees or distributees thereof under clauses (a), (b), (c) and (d) (as the case may be) agree in writing to be bound by the terms of this Lock-Up Agreement, or (e) with the prior written consent of BancBoston Robertson Stephens Inc. The foregoing restriction is expressly agreed to preclude the holder of the Securities from engaging in any hedging or other transaction that is designed to or reasonably expected to lead to or result in a Disposition of Securities during the Lock-Up Period, even if such Securities would be disposed of by someone other than the undersigned. Such prohibited hedging or other transactions include, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from the Securities. Notwithstanding the foregoing, this Lock-Up Agreement does not prohibit the sale of shares of Common Stock by the undersigned to the Underwriters in the Public Offering. The undersigned A-1 36 hereby agrees and consents to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the Securities held by the undersigned except in compliance with this Lock-Up Agreement. Date:____________________________, 1999 Very truly yours, ____________________________________ Name (please print or type) ____________________________________ Signature A-2 37 EXHIBIT B MATTERS TO BE COVERED IN THE OPINION OF COUNSEL FOR THE COMPANY (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the General Corporation Law of the State of Delaware. (ii) The Company has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus. (iii) The Company is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction, if any, in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not have a Material Adverse Effect. To such counsel's knowledge, the Company does not own or control, directly or indirectly, any corporation, association or other entity other than the Subsidiaries. (iv) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" as of the dates stated therein, the issued and outstanding shares of capital stock of the Company (including the Selling Stockholder Shares) have been duly and validly issued and are fully paid and nonassessable, and, to such counsel's knowledge, will not have been issued in violation of or subject to any preemptive right, co-sale right, registration right, right of first refusal or other similar right. (v) The Firm Shares or the Option Shares, as the case may be, to be issued by the Company pursuant to the terms of this Agreement have been duly authorized and, upon issuance and delivery against payment therefor in accordance with the terms hereof, will be duly and validly issued and fully paid and nonassessable, and will not have been issued in violation of or subject to any preemptive right, co-sale right, registration right, right of first refusal or other similar right. (vi) The Company has the corporate power and authority to enter into this Agreement and to issue, sell and deliver to the Underwriters the Shares to be issued and sold by it hereunder. (vii) This Agreement has been duly authorized by all necessary corporate action on the part of the Company and has been duly executed and delivered by the Company. (viii) To such counsel's knowledge, the Registration Statement has become effective under the Act, no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for that purpose have been instituted or are pending or threatened under the Securities Act. (ix) The 8-A Registration Statement complied as to form in all material respects with the requirements of the Exchange Act; the 8-A Registration Statement has become effective under the Exchange Act; and the Firm Shares or the Option Shares have been validly registered under the Securities Act and the Rules and Regulations of the Exchange Act and the applicable rules and regulations of the Commission thereunder. (x) The Registration Statement and the Prospectus, and each amendment or supplement thereto (other than the financial statements (including supporting schedules) and financial data derived therefrom as to which such counsel need express no opinion), as of the effective date of the Registration Statement, complied as to form in all material respects with the requirements of B-1 38 the Act and the applicable Rules and Regulations; and each of the Incorporated Documents (other than the financial statements (including supporting schedules) and the financial data derived therefrom as to which such counsel need express no opinion) complied when filed pursuant to the Exchange Act as to form in all material respects with the requirements of the Act and the Rules and Regulations of the Exchange Act and the applicable rules and regulations of the Commission thereunder. (xi) The information in the Prospectus under the caption "Description of Capital Stock," to the extent that it constitutes matters of law or legal conclusions, has been reviewed by such counsel and is a fair summary of such matters and conclusions; and the forms of certificates evidencing the Common Stock and filed as exhibits to the Registration Statement comply with Delaware law. (xii) The description in the Registration Statement and the Prospectus of the charter and bylaws of the Company and of statutes are accurate and fairly present the information required to be presented by the Securities Act. (xiii) To such counsel's knowledge, there are no agreements, contracts, leases or documents to which the Company is a party of a character required to be described or referred to in the Registration Statement or Prospectus or any Incorporated Document or to be filed as an exhibit to the Registration Statement or any Incorporated Document which are not described or referred to therein or filed as required. (xiv) The performance of this Agreement and the consummation of the transactions herein contemplated (other than performance of the Company's indemnification obligations hereunder, concerning which no opinion need be expressed) will not (a) result in any violation of the Company's charter or bylaws or (b) to such counsel's knowledge, result in a material breach or violation of any of the terms and provisions of, or constitute a default under, any bond, debenture, note or other evidence of indebtedness, or any lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument known to such counsel to which the Company is a party or by which its properties are bound, or any applicable statute, rule or regulation known to such counsel or, to such counsel's knowledge, any order, writ or decree of any court, government or governmental agency or body having jurisdiction over the Company or any of its properties or operations. (xv) No consent, approval, authorization or order of or qualification with any court, government or governmental agency or body having jurisdiction over the Company or any of its properties or operations is necessary in connection with the consummation by the Company of the transactions herein contemplated, except (i) such as have been obtained under the Securities Act, (ii) such as may be required under state or other securities or Blue Sky laws in connection with the purchase and the distribution of the Shares by the Underwriters, (iii) such as may be required by the National Association of Securities Dealers, LLC and (iv) such as may be required under the federal or provincial laws of Canada. (xvi) To such counsel's knowledge, there are no legal or governmental proceedings pending or threatened against the Company or any of the Subsidiaries of a character required to be disclosed in the Registration Statement or the Prospectus or any Incorporated Document by the Securities Act or by the Exchange Act or the applicable rules and regulations of the Commission thereunder, other than those described therein. B-2 39 (xvii) To such counsel's knowledge, the Company is not presently (a) in material violation of its respective charter or bylaws or (b) in material breach of any applicable statute, rule or regulation known to such counsel or, to such counsel's knowledge, any order, writ or decree of any court or governmental agency or body having jurisdiction over the Company or any of its properties or operations. (xviii) To such counsel's knowledge, except as set forth in the Registration Statement and Prospectus and any Incorporated Document, no holders of Company Shares or other securities of the Company have registration rights with respect to securities of the Company and, except as set forth in the Registration Statement and Prospectus, all holders of securities of the Company having rights known to such counsel to registration of such shares of Company Shares or other securities, because of the filing of the Registration Statement by the Company have, with respect to the offering contemplated thereby, waived such rights or such rights have expired by reason of lapse of time following notification of the Company's intent to file the Registration Statement or have included securities in the Registration Statement pursuant to the exercise of and in full satisfaction of such rights. (xix) The Company is not and, after giving effect to the offering and the sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be, an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. (xx) To such counsel's knowledge, the Company owns or possesses sufficient trademarks, trade names, patent rights, copyrights, licenses, approvals, trade secrets and other similar rights (collectively, "Intellectual Property Rights") reasonably necessary to conduct their business as now conducted; and the expected expiration of any such Intellectual Property Rights would not result in a Material Adverse Effect. The Company has not received any notice of infringement or conflict with asserted Intellectual Property Rights of others, which infringement or conflict, if the subject of an unfavorable decision, would result in a Material Adverse Effect. To such counsel's knowledge, the Company's discoveries, inventions, products, or processes referred to in the Registration Statement or Prospectus do not infringe or conflict with any right or patent which is the subject of a patent application known to the Company. (xxi) Each document filed pursuant to the Exchange Act (other than the financial statements and supporting schedules included therein, as to which no opinion need be rendered) and incorporated or deemed to be incorporated by reference in the Prospectus complied when so filed as to form in all material respects with the Exchange Act. In addition, such counsel shall state that such counsel has participated in conferences with officials and other representatives of the Company, the Representatives, Underwriters' Counsel and the independent certified public accountants of the Company, at which such conferences the contents of the Registration Statement and Prospectus and related matters were discussed, and although they have not verified the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel which leads them to believe that, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the First Closing Date or Second Closing Date, as the case may be, the Registration Statement and any amendment or supplement thereto and any Incorporated Document, when such documents became effective or were filed with the Commission (other than the financial statements including supporting schedules and other financial and statistical B-3 40 information derived therefrom, as to which such counsel need express no comment) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or at the First Closing Date or the Second Closing Date, as the case may be, the Registration Statement, the Prospectus and any amendment or supplement thereto and any Incorporated Document (except as aforesaid) contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Such counsel shall also state that the conditions for the use of Form S-3 set forth in the General Instructions thereto have been satisfied. B-4 41 EXHIBIT C MATTERS TO BE COVERED IN THE OPINION OF UNDERWRITERS' COUNSEL (i) The Company is validly existing as a corporation in good standing under the General Corporation Law of the State of Delaware. (ii) The execution and delivery of the Underwriting Agreement have been duly authorized by all necessary corporate action of the Company, and the Underwriting Agreement has been duly executed and delivered by the Company. (iii) The Shares to be issued be the Company have been duly authorized by all necessary corporate action of the Company. When those Shares are issued and delivered in accordance with the terms of the Underwriting Agreement, they will be validly issued, fully paid and non-assessable. (iv) To such counsel's knowledge, the Registration Statement has become effective under the Securities Act, no order suspending the effectiveness of the Registration Statement has been issued by the Commission and no proceeding for that purpose has been instituted or threatened by the Commission. (v) To such counsel's knowledge, the Form 8-A Registration Statement has become effective under the Exchange Act, no order suspending the effectiveness of the Form 8-A Registration Statement has been issued by the Commission and no proceeding for that purpose has been instituted or threatened by the Commission. Such counsel shall state that such counsel has reviewed the opinions addressed to the Representatives from Hutchins, Wheeler & Dittmar, A Professional Corporation and any other firm serving as counsel to the Selling Stockholders, each dated the date hereof, and furnished to you in accordance with the provisions of the Underwriting Agreement. Such opinions appear on their face to be appropriately responsive to the requirements of the Underwriting Agreement. In addition, such counsel shall state that such counsel has participated in conferences with officials and other representatives of the Company, the Company's counsel, the Representatives and the independent certified public accountants of the Company, at which such conferences the contents of the Registration Statement and Prospectus and related matters were discussed, and although they have not verified the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus: (a) The Registration Statement (except the financial statements and other financial and statistical data included therein, as to which such counsel need express no view), at the time it became effective, and the Prospectus (except as aforesaid), as of its date, appeared on their face to be appropriately responsive in all material respects to the requirements of the Securities Act. (b) No information has come to the attention of such counsel that causes such counsel to believe that the Registration Statement (except the financial statements and other financial and statistical data included therein, as to which such counsel need express no view), at the time it became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading. C-1 42 (c) No information has come to the attention of such counsel that causes such counsel to believe that the Prospectus (except the financial statements and other financial and statistical data included therein, as to which such counsel need express no view), as of its date or the date of such opinion, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (d) The Form 8-A Registration Statement, at the time it became effective, appeared on its face to be appropriately responsive in all material respects to the requirements of the Exchange Act. C-2 43 EXHIBIT D MATTERS TO BE COVERED IN THE OPINION OF COUNSEL FOR EACH OF THE SELLING STOCKHOLDERS (i) The Underwriting Agreement has been duly authorized, executed and delivered by or on behalf of, and is a valid and binding agreement of, such Selling Stockholder, enforceable in accordance with its terms, except as rights to indemnification thereunder may be limited by applicable law and except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting creditors' rights generally or by general equitable principles. (ii) The execution and delivery by such Selling Stockholder of, and the performance by such Selling Stockholder of its obligations under, the Underwriting Agreement and its Custody Agreement and its Power of Attorney will not contravene or conflict with, result in a breach of, or constitute a default under, the charter or by-laws, partnership agreement, trust agreement or other organization documents, as the case may be, of such Selling Stockholder, or, to the knowledge of such counsel, violate, result in a breach of or constitute a default under the terms of any other agreement or instrument to which such Selling Stockholder is a party or by which it is bound, or any judgement, order or decree applicable to such Selling Stockholder of any court, regulatory body, administrative agency, governmental body or arbitrator having jurisdiction over such Selling Stockholder. (iii) Such Selling Stockholder has good and valid title to all of the Common Shares that may be sold by such Selling Stockholder under the Underwriting Agreement and has the legal right and power, and all authorization and approvals required under the charter or by-laws, partnership agreement, trust agreement or other organizational documents, as the case may be, to enter into the Underwriting Agreement and its Custody Agreement and its Power of Attorney, to sell, transfer and deliver all of the Common Shares that may be sold by such Selling Stockholder under the Underwriting Agreement and to comply with its other obligations under the Underwriting Agreement, its Custody Agreement and its Power of Attorney. (iv) Each of the Custody Agreement and Power of Attorney of such Selling Stockholder has been duly authorized, executed and delivered by such Selling Stockholder and is a valid and binding agreement of such Selling Stockholder, enforceable in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting creditors' rights generally or by general equitable principles. (v) Assuming that the Underwriters purchase the Shares that are sold by such Selling Stockholder pursuant to the Underwriting Agreement for value, in good faith and without notice of any adverse claims, the delivery of such Shares pursuant to the Underwriting Agreement will pass good and valid title to such Shares, free and clear of any security interest, mortgage, pledge, lieu encumbrance or other claim. (vi) To the knowledge of such counsel, no consent, approval, authorization or other order of, or registration or filing with, any court or governmental authority or agency, is required for the consummation by such Selling Stockholder of the transactions contemplated in the Underwriting Agreement, except as required under the Securities Act, applicable state securities or blue sky laws, and from the NASD. D-1 EX-23.1 3 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-3 of our report dated February 8, 1999, on our audits of the consolidated financial statements of Netegrity, Inc. as of December 31, 1998 and December 31, 1997 and for each of the three years in the period ended December 31, 1998 and 1997, and the nine months ended December 31, 1996, which appear in such Registration Statement. We also consent to the reference to us under the headings "Experts" and "Selected Financial Data" in such Registration Statement. /s/ PricewaterhouseCoopers LLP September 15, 1999 Boston, Massachusetts -----END PRIVACY-ENHANCED MESSAGE-----