-----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, JGANjxEjlWMt1N4SYktnwyHr3ehHlaHnGkgz5k7eeILS1TwqObDs/Wmvx6b0aYiP 5BCoesDeCx9q5Y2DOFzAmg== 0000950135-99-004458.txt : 19990920 0000950135-99-004458.hdr.sgml : 19990920 ACCESSION NUMBER: 0000950135-99-004458 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990917 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: 10-Q/A SEC ACT: SEC FILE NUMBER: 001-10139 FILM NUMBER: 99712887 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 10-Q/A 1 NETEGRITY, INC. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q/A [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999, OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-10139 NETEGRITY, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 04-2911320 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 245 WINTER STREET WALTHAM, MA 02451 (Address of principal executive offices) (Zip Code)
(781) 890-1700 (Registrant's Telephone Number) SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such other shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days [X] Yes No [ ] As of August 11, 1999 there were 10,420,288 shares of Common Stock outstanding. FORM 10-Q/A - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 FORM 10-Q/A QUARTERLY REPORT ---------------- TABLE OF CONTENTS Facing Sheet................................................................. 1 Table of Contents............................................................ 2 PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets ........................... 3 Consolidated Statements of Operations.................. 5 Consolidated Statements of Cash Flows.................. 7 Notes to Consolidated Financial Statements............. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 11 PART II. OTHER INFORMATION Item 6. Exhibits................................................. 24 SIGNATURES................................................................... 25 2 3 PART I. - FINANCIAL INFORMATION NETEGRITY, INC. CONSOLIDATED BALANCE SHEETS ASSETS June 30, 1999 December 31, (unaudited) 1998 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents $3,075,406 $1,174,625 Accounts receivable-trade, net of allowance for doubtful accounts of $238,563 and $247,063 June 30, 1999 and December 31, 1998, respectively 2,290,784 1,746,645 Deferred maintenance asset 328,993 308,926 Prepaid expenses 63,560 30,163 Other current assets 9,236 15,848 ---------- ---------- TOTAL CURRENT ASSETS 5,767,979 3,276,207 ---------- ---------- EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET 869,012 736,341 CAPITALIZED SOFTWARE COSTS -- 175,629 Other Assets 52,379 37,114 ---------- ---------- TOTAL ASSETS $6,689,370 $4,225,291 ========== ========== The accompanying notes are an integral part of the financial statements. 3 4 NETEGRITY, INC. CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY June 30, 1999 December 31, (unaudited) 1998 ----------- ----------- CURRENT LIABILITIES: Accounts payable-trade $ 993,444 $ 897,734 Deferred maintenance liability 1,168,406 938,004 Deferred revenue 173,540 285,857 Accrued employer expenses 151,739 180,328 Other accrued expenses 680,222 766,898 Accrued compensation 485,145 160,687 ----------- ----------- TOTAL CURRENT LIABILITIES 3,652,496 3,229,508 ----------- ----------- COMMITMENTS AND CONTINGENCIES -- -- TOTAL LIABILITIES 3,652,496 3,229,508 ----------- ----------- STOCKHOLDERS' EQUITY: Series D Preferred Stock, $.01 par value 3,333,333 shares authorized and outstanding as of June 30, 1999 33,333 33,333 Common stock, voting, $.01 par value, authorized 25,000,000 shares: 10,341,484 shares issued and 10,316,383 shares outstanding at June 30, 1999; 9,425,446 shares issued and 9,400,345 shares outstanding at December 31, 1998 103,852 94,254 Additional paid-in capital 20,600,887 15,780,049 Cumulative deficit (17,417,541) (14,628,196) Loan to officer (200,000) (200,000) ----------- ----------- 3,120,531 1,079,440 Less - Treasury Stock, at cost: 25,101 shares (83,657) (83,657) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 3,036,874 995,783 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,689,370 $ 4,225,291 =========== =========== The accompanying notes are an integral part of the financial statements. 4 5 NETEGRITY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For the three months ended June 30, 1999 1998 ---- ---- Revenues SiteMinder software $ 1,472,666 $ 241,957 SiteMinder services 446,717 87,342 Other 719,112 725,136 ----------- ----------- Total revenues 2,638,495 1,054,435 Cost of revenues 777,984 443,752 ----------- ----------- Gross profit 1,860,511 610,682 Selling, general and administrative expenses 2,486,525 1,534,649 Research and development costs 775,021 451,997 ----------- ----------- Loss from operations (1,401,035) (1,375,964) Interest income 47,437 36,686 ----------- ----------- Net loss $(1,353,598) $(1,339,278) =========== =========== Basic and diluted loss per share $ (0.13) $ (0.14) Weighted average shares outstanding (basic and diluted) 10,316,383 9,362,876 The accompanying notes are an integral part of the financial statements. 5 6 NETEGRITY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For the six months ended June 30, 1999 1998 ---- ---- Revenues SiteMinder software $ 2,467,601 $ 372,801 SiteMinder services 805,027 126,621 Other 1,425,901 1,364,833 ----------- ----------- Total revenues 4,698,529 1,864,255 Cost of revenues 1,492,955 953,171 ----------- ----------- Gross profit 3,205,574 911,084 Selling, general and administrative expenses 4,587,644 2,919,696 Research and development costs 1,474,420 872,853 ----------- ----------- Loss from operations (2,856,490) (2,881,465) Interest income 67,145 68,657 ----------- ----------- Net loss $(2,789,345) $(2,812,808) =========== =========== Basic and diluted loss per share $ (0.27) $ (0.30) Weighted average shares outstanding (basic and diluted) 10,158,342 9,322,896 The accompanying notes are an integral part of the financial statements. 6 7 NETEGRITY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the six months ended June 30, 1999 1998 ---- ---- OPERATING ACTIVITIES Net(loss) income from continuing operations $(2,789,345) $(2,812,808) ----------- ----------- Adjustments to reconcile (loss) income to net cash (used for) provided by operating activities: Depreciation and amortization 165,188 97,976 Provision for doubtful accounts receivable (8,500) (5,990) Change in operating assets and liabilities: Accounts receivable (535,639) (57,264) Other current assets (46,852) 5,214 Other assets (15,265) 69,081 Accounts payable 95,710 (552,298) Other accrued expenses 327,278 137,232 ----------- ----------- Total adjustments (18,080) (306,049) ----------- ----------- Net cash provided by continuing operating activities (2,807,425) (3,118,857) Net cash provided by operating activities $(2,807,425) $(3,118,857) ----------- ----------- The accompanying notes are an integral part of the financial statements. 7 8 NETEGRITY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.) (Unaudited) For the six months ended June 30, 1999 1998 ---- ---- INVESTING ACTIVITIES: Capitalized software costs $ 175,629 $ 27,658 Capital expenditures for equipment and leasehold improvements (297,859) (177,673) Proceeds from sale of certain assets -- 25,863 ---------- ---------- Net cash provided by investing activities (122,230) (124,152) ---------- ---------- FINANCING ACTIVITIES: Net proceeds from issuance of preferred stock -- 4,950,001 Net proceeds from issuance of stock 4,830,436 194,205 Principal payments under capital leases -- (22,721) ---------- ---------- Net cash provided by financing activities 4,830,436 5,121,485 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 1,900,781 1,878,476 Cash and cash equivalents at beginning of period 1,174,625 2,133,586 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $3,075,406 $4,012,062 ========== ========== The accompanying notes are an integral part of the financial statements. 8 9 NETEGRITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - The unaudited financial information furnished herein reflects all adjustments which are of a normal recurring nature, which in the opinion of management are necessary to fairly state the Company's financial position, cash flows and the results of its operations for the periods presented. Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. This information should be read in conjunction with the Company's audited financial statements for the fiscal year ended December 31, 1998, included in Form 10-K/A filed on September 16, 1999. NOTE 2 - The results of operations for the three-month and six month periods ended June 30, 1999 are not necessarily indicative of the results to be expected for the entire year ending December 31, 1999. NOTE 3 - On July 7, 1999, the Financial Accounting Standards Board issued Statement of Accounting Standards No. 137 ("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 fiscal quarters beginning after January 1, 2000 for the Company, and its adoption is not expected to have a material effect on the Company's financial position or results of operations. NOTE 4 -The Company has adopted AICPA Statement of Position 97-2 "Software Revenue Recognition." Adoption of this pronouncement did not have a material effect on the revenue recognition practices of the Company. Effective December 15, 1998, SOP 98-9 amended SOP 98-4, Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition, to extend the deferral of the application of certain passages of SOP 97-2 provided by SOP 98-4 to fiscal quarters beginning after January 1, 2000 for the Company. NOTE 5 - 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 and subsequently filed a registration statement on Form S-3. NOTE 6 - Certain 1998 information has been reclassified to conform with 1999 financial statement presentation. Such reclassifications have no impact on the results of operations in 1998. NOTE 7 - 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. 9 10 NOTE 8 -On June 4, 1999, a suit was brought in the Court of Chancery of the State of Delaware styled Applebaum et. al. v. Netegrity, Inc. et al., purportedly on behalf of the common stockholders of the Company, alleging that certain amendments to the Company's Certificate of Incorporation previously adopted by the stockholders 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 at a hearing scheduled for September 24, 1999. If approved by the Court, the settlement agreement requires that the Company obtain the approval from the holders of its preferred stock and common stock, in separate class votes, of the previously adopted amendments which increased the authorized shares of their respective classes of stock. 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. 10 11 2. Management's Discussion & Analysis of Financial Condition and Results of Operation FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA This report and the documents incorporated in it by reference contain forward-looking statements about our plans, objectives, expectations and intentions. You can identify these statements by words such as "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate," "may," "will" and "continue" or similar words. You should read statements that contain these words carefully. They discuss our future expectations, contain projections of our future results of operations or our financial condition or state other forward-looking information, and may involve known and unknown risks over which we have no control. You should not place undue reliance on forward-looking statements. We cannot guarantee any future results, levels of activity, performance or achievements. Moreover, we assume no obligation to update forward-looking statements or update the reasons actual results could differ materially from those anticipated in forward-looking statements. The factors discussed in the sections captioned "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Company Description" in this report and the documents incorporated in it by reference identify important factors that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Our forward-looking statements are based on a number of assumptions, including increasing worldwide business use of the Internet, the growth in the number of web access devices per user, the absence of any failure of the Internet, and the continued improvement of security on the Internet. If any of these assumptions is incorrect, actual results may differ from the projections based on those assumptions. RISK FACTORS The Private Securities Litigation Reform Act of 1995 contains certain safe harbors regarding forward-looking statements. In that context, the discussion in this Item contains forward-looking statements which involve certain degrees of risk and uncertainties, including statements relating to liquidity and capital resources. Except for the historical information contained herein, the matters discussed in this section are such forward-looking statements that involve risks and uncertainties, including: WE HAVE INCURRED SUBSTANTIAL LOSSES AND MAY NOT BE PROFITABLE IN THE FUTURE. In recent years, we have incurred substantial operating losses in every fiscal period. We cannot predict when we will become profitable, if at all, and if we do, that we will remain profitable for any substantial period of time. Failure to achieve profitability within the time frame expected by investors may adversely affect the market price of our common stock. In the 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 11 12 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. 12 13 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. 13 14 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 14 15 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. 15 16 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. The stock market in general, and the market prices for Internet-related companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of these companies. These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our operating performance. Recently, when the market price of a stock has been volatile, holders of that stock have often instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. The lawsuit could also divert the time and attention of our management. WE MAY LOSE MONEY ON FIXED-PRICE CONSULTING CONTRACTS. In the future, an increased portion of our SiteMinder services revenues may be derived from fixed-price contracts. We work with complex technologies in compressed time frames and it can be difficult to judge the time and resources necessary to complete a project. If we miscalculate the resources or time we need to complete work under fixed-price contracts, our operating results could be materially harmed. LOSS OF OUR FIREWALL-1 RESELLER BUSINESS WOULD ADVERSELY AFFECT OUR OPERATING RESULTS. While we recently have focused our resources on developing and marketing our SiteMinder software and services, we continue to generate a significant portion of our revenues from our sales of Check Point Software Technologies' FireWall-1 product. Our FireWall-1 reseller business experiences competition from companies that compete with FireWall-1, including Axent Technologies, Cisco Systems and Trusted Information Systems, as well as from other resellers of FireWall-1. As a result, we may not be able to maintain the current revenue levels generated by our FireWall-1 reseller business. CERTAIN PROVISIONS OF OUR CHARTER AND OF DELAWARE LAW MAKE A TAKEOVER OF OUR COMPANY MORE DIFFICULT. Our corporate documents and Delaware law contain provisions that might enable our management to resist a takeover of our company. These provisions might discourage, delay or prevent a change in the control of Netegrity or a change in our management. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. The 16 17 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. 17 18 Company Description 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. We sell our products through a direct sales force and through our distribution partners. 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. 18 19 RESULTS OF OPERATIONS The following information should be read in conjunction with the consolidated financial statements and notes thereto: Period to Period % Increase/(Decrease) % to Total Revenues Three Months Ended For the three months June 30, ended June 30, 1998 1999 1999 vs. 1998 - -------------- ---- ---- ------------- Revenues: SiteMinder software 23% 56% 509% SiteMinder services 8 17 411 Other 69 27 (1) --- --- --- Total revenues 100 100 150% Gross profits 58% 71% 205% Selling, general and administrative expenses 146% 94% 62% Research and development costs 43% 29% 71% --- --- --- (Loss) from operations (130%) (53%) 2% REVENUES: Total revenues increased by $1.6 million, or 150%, to $2.6 million in the three months ended June 30, 1999, from $1 million in the three months ended June 30, 1999. SiteMinder software revenues increased by $1.2 million, or 509%, to $1.5 million in the three months ended June 30, 1999, from $242,000 in the three 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 $359,000, or 411%, to $447,000 in the three months ended June 30, 1999, from $87,000 in the three 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 decreased by $6,000, or 1%, to $719,000 in the three months ended June 30, 1999 from $725,000 in the three months ended June 30, 1998. GROSS PROFIT: Gross profit increased by $1.2 million, or 205%, to $1.9 million in the three months ended June 30, 1999, from $610,682 in the three 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 $951,876, or 62%, to $2.5 million in the three months ended June 30, 1999, from $1.5 million in the three months ended June 30, 1998. This increase is primarily a result of our continuing to build our sales and marketing infrastructure to support planned growth in sales of our SiteMinder product and services. RESEARCH AND DEVELOPMENT COSTS: Research and development costs increased by $323,024, or 71%, to $775,021 in the three months ended June 30, 1999, from $451,997 in the three 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 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-commence applications. Research and development costs may be incurred substantially in advance of the related revenues and in some cases may not generate revenues. We did not capitalize any research and development costs in the three months ended June 30, 1999, or the three months ended June 30, 1998. There was no capitalized software as of June 30, 1999. 19 20 INTEREST INCOME (EXPENSE), NET: Net interest income increased by $10,751, or 29%, to $47,437 in the three months ended June 30, 1999, from $36,686 in the three months ended June 30, 1998. This increase is mainly attributable to a higher average cash balance in the three months ended June 30, 1999. There were no borrowings outstanding during the three months ended June 30, 1998, or the three months ended June 30, 1999. Period to Period % Increase/(Decrease) % to Total Revenues Six Months Ended For the six months June 30, ended June 30, 1998 1999 1999 vs. 1998 - -------------- ---- ---- ------------- Revenues: SiteMinder 20% 53% 562% SiteMinder services 7 17 539 Other 73 30 4 --- --- --- Total revenues 100% 100% 152% Gross profits 49% 68% 252% Selling, general and administrative expenses 157% 98% 57% Research and development costs 47% 31% 69% --- --- --- (Loss) from operations (155%) (61%) (1%) 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 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. 20 21 LIQUIDITY AND CAPITAL RESOURCES (in thousands, except ratios) June 30, December 31, Financial Condition as of 1999 1998 - ------------------------- ------ ------ Cash and cash equivalents $3,075 $1,175 Working capital 2,115 47 Current ratio 1.58 1.01 Cash Flow Activity Summary for June 30, June 30, the Six Months Ended 1999 1998 - -------------------- ------- ------- Net cash used for operating activities $(2,807) $(3,119) Net cash used for investing activities (122) (124) Net cash provided by (used for) financing activities 4,830 5,121 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. 21 22 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. 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 22 23 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. 23 24 PART II -- OTHER INFORMATION Item 6 EXHIBITS - -------- 23.1 Consent of Independent Accountants 24 25 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NETEGRITY, INC. Date: September 16, 1999 By: /s/ Barry N. Bycoff ---------------------------------------- Barry N. Bycoff President and Chief Executive Officer (Principal Executive Officer) Date: September 16, 1999 By: /s/ James E. Hayden ---------------------------------------- James E. Hayden Vice President, Finance and Administration, and Chief Financial Officer (Principal Financial and Chief Accounting Officer) 25 EX-23.1 2 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the registration statement on Form 10-QA 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. /s/ PricewaterhouseCoopers LLP September 15, 1999 Boston, Massachusetts -----END PRIVACY-ENHANCED MESSAGE-----