-----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, ReQNaZqyytxlUhxQr/RXbpQ/BmFTHb2KtqqEKeu1xJ52Kf/0GWNeqEVluk1/SvEI rdn4r6L2WEe429gxstKQdg== 0000950135-99-004829.txt : 19991025 0000950135-99-004829.hdr.sgml : 19991025 ACCESSION NUMBER: 0000950135-99-004829 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991022 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 SEC ACT: SEC FILE NUMBER: 001-10139 FILM NUMBER: 99732394 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 1 NETEGRITY, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-10139 NETEGRITY, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 04-2911320 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 245 WINTER STREET WALTHAM, MA 02451 (Address of principal executive offices) (Zip Code) (781) 890-1700 (Registrant's Telephone Number) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such other shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days [X] Yes No [ ] As of October 15, 1999 there were 14,416,279 shares of Common Stock outstanding, exclusive of Treasury stock. 1 2 FORM 10-Q QUARTERLY REPORT TABLE OF CONTENTS Facing Sheet................................................................. 1 Table of Contents............................................................ 2 PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance 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....................... 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 21 PART II. OTHER INFORMATION Item 1. Legal Proceedings......................................... 22 Item 2. Changes in Securities and Use of Proceeds................. 22 Item 3. Submission of Matters to a Vote of Securityholders........ 22 Item 4. Other Information......................................... 24 Item 5. Exhibits and Reports on Form 8-K.......................... 24 SIGNATURES .......................................................... 24 Exhibit 3.0............................................................ 25 Exhibit 11............................................................. 37 Exhibit 27............................................................. 38 2 3 PART I. - FINANCIAL INFORMATION NETEGRITY, INC. CONSOLIDATED BALANCE SHEETS ASSETS September 30, 1999 December 31, (unaudited) 1998 ----------- ---------- CURRENT ASSETS: Cash and cash equivalents $11,211,960 $1,174,625 Accounts receivable-trade, net of allowance for doubtful accounts of $529,905 and $247,063 September 30, 1999 and December 31, 1998, respectively 2,875,408 1,746,645 Deferred maintenance asset 302,472 308,926 Prepaid expenses 88,560 30,163 Other current assets 61,789 15,848 ----------- ---------- TOTAL CURRENT ASSETS 14,540,189 3,276,207 ----------- ---------- EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET 1,000,029 736,341 CAPITALIZED SOFTWARE COSTS -- 175,629 Other Assets 53,219 37,114 ----------- ---------- TOTAL ASSETS $15,593,437 $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 September 30, 1999 December 31, (unaudited) 1998 ----------- ----------- CURRENT LIABILITIES: Accounts payable-trade $ 910,774 $ 897,734 Deferred maintenance liability 885,049 938,004 Deferred revenue 150,104 285,857 Accrued employer expenses 172,563 180,328 Other accrued expenses 980,049 766,898 Accrued compensation 455,292 160,687 ----------- ----------- TOTAL CURRENT LIABILITIES 3,553,831 3,229,508 ----------- ----------- TOTAL LIABILITIES 3,553,831 3,229,508 ----------- ----------- STOCKHOLDERS' EQUITY: Preferred Stock, $.01 par value 5,000,000 shares authorized and none outstanding as of September 30, 1999; 3,333,333 Series D Preferred shares authorized and outstanding as of December 31, 1998 -- 33,333 Common stock, voting, $.01 par value, authorized 40,000,000 as of September 30, 1999; 14,441,379 shares issued and 14,416,279 shares outstanding as of September 30, 1999; 9,425,446 shares issued and 9,400,345 shares outstanding at December 31, 1998 144,163 94,254 Additional paid-in capital 31,285,741 15,780,049 Cumulative deficit (19,106,641) (14,628,196) Loan to officer (200,000) (200,000) ----------- ----------- 12,123,263 1,079,440 Less - Treasury Stock, at cost: 25,101 shares (83,657) (83,657) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 12,039,606 995,783 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $15,593,437 $ 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 September 30, 1999 1998 ---- ---- Revenues: SiteMinder software $ 2,008,493 $ 410,873 SiteMinder services 600,582 109,761 Other 719,070 736,427 ----------- ----------- Total revenues 3,328,145 1,257,061 Cost of revenues 838,487 431,464 ----------- ----------- Gross profit 2,489,658 825,597 Selling, general and administrative expenses 3,218,816 1,503,794 Research and development costs 1,011,707 500,290 ----------- ----------- Loss from operations (1,740,865) (1,178,487) Interest income (expense), net 51,767 31,246 ----------- ----------- Net loss $(1,689,098) $(1,147,241) =========== =========== Basic and diluted loss per share $ (0.16) $ (0.12) Weighted average shares outstanding (basic and diluted) 10,575,516 9,397,526 The accompanying notes are an integral part of the financial statements. 5 6 NETEGRITY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For the nine months ended September 30, 1999 1998 ---- ---- Revenues SiteMinder software $ 4,476,094 $ 783,673 SiteMinder services 1,405,609 236,381 Other 2,144,970 2,101,262 ----------- ----------- Total revenues 8,026,673 3,121,316 Cost of revenues 2,331,442 1,348,426 ----------- ----------- Gross profit 5,695,231 1,736,890 Selling, general and administrative expenses 7,806,460 4,423,700 Research and development costs 2,486,126 1,373,143 ----------- ----------- Loss from operations (4,597,355) (4,059,953) Interest income (expense), net 118,912 99,903 ----------- ----------- Net loss $(4,478,443) $(3,960,050) =========== =========== Basic and diluted loss per share $ (0.44) $ (0.42) Weighted average shares outstanding (basic and diluted) 10,272,682 9,348,455 The accompanying notes are an integral part of the financial statements. 6 7 NETEGRITY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the nine months ended September 30, 1999 1998 ---- ---- OPERATING ACTIVITIES: Net(loss) income from continuing operations $(4,478,443) $(3,960,050) ----------- ----------- Adjustments to reconcile (loss) income to net cash (used for) provided by operating activities: Depreciation and amortization 245,913 160,519 Provision for doubtful accounts receivable 282,842 (5,990) Change in operating assets and liabilities: Accounts receivable (1,411,605) (225,392) Other current assets (97,884) 652,576 Other assets (16,105) 63,095 Accounts payable 13,040 (563,949) Other accrued expenses 311,283 (548,442) ----------- ----------- Total adjustments (672,516) (467,583) ----------- ----------- Net cash used for continuing operating activities (5,150,959) (4,427,632) Net cash used for operating activities $(5,150,959) $(4,427,632) ----------- ----------- The accompanying notes are an integral part of the financial statements. 7 8 NETEGRITY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.) (Unaudited) For the nine months ended September 30, 1999 1998 ---- ---- INVESTING ACTIVITIES: Capitalized software costs $ 175,629 $ 61,220 Capital expenditures for equipment and leasehold improvements (509,603) (282,993) Proceeds from sale of certain assets -- 25,863 ----------- ---------- Net cash used for investing activities (333,974) (195,910) ----------- ---------- FINANCING ACTIVITIES: Net proceeds from issuance of preferred stock -- 4,950,001 Net proceeds from issuance of stock 15,522,268 194,205 Principal payments under capital leases -- (22,721) ----------- ---------- Net cash provided by financing activities 15,522,268 5,121,485 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 10,037,335 497,942 Cash and cash equivalents at beginning of period 1,174,625 2,133,586 ----------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $11,211,960 $2,631,528 =========== ========== 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 results of operations for the periods presented. Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. This information should be read in conjunction with the Company's audited financial statements for the fiscal year ended December 31, 1998, included in Form 10-K/A filed on September 16, 1999. NOTE 2 - The results of operations for the three months and nine months ended September 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, the Company sold 534,242 shares of common stock to certain investors in a private placement at a price of $20.59 per share. The Company received net proceeds of approximately $10.3 million from the private placement, after deducting the placement agent's fee and the Company's estimated expenses. NOTE 8 - In September 1999 the holders of all of the Company's outstanding preferred stock surrendered their shares for conversion into common stock. On October 7, 1999, the stockholders of the Company approved and the Company filed an amendment to the Company's certificate of incorporation increasing the number of authorized shares of the Company's common stock to 55,000,000. NOTE 9 - 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. The settlement was approved by the Court of Chancery at a hearing held on September 24, 1999. The appeal period for this approval will expire on October 25, 1999. The holders of the Company's preferred and common stock approved the previously adopted amendments at a meeting of the Company's stockholders held on October 7, 1999. The Company believes that the costs associated with this settlement will not have a material effect on the Company's results of operations, assets or financial condition. 9 10 2. Management's Discussion & Analysis of Financial Condition and Results of Operations FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA This report and the documents incorporated in it by reference contain forward-looking statements about our plans, objectives, expectations and intentions. You can identify these statements by words such as "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate," "may," "will" and "continue" or similar words. You should read statements that contain these words carefully. They discuss our future expectations, contain projections of our future results of operations or our financial condition or state other forward-looking information, and may involve known and unknown risks over which we have no control. You should not place undue reliance on forward-looking statements. We cannot guarantee any future results, levels of activity, performance or achievements. Moreover, we assume no obligation to update forward-looking statements or update the reasons actual results could differ materially from those anticipated in forward-looking statements. The factors discussed in the sections captioned "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "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. Risk factors which may impact on our results include the following: 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 nine months ended September 30, 1999, we had a net loss of $4.5 million. As a result of ongoing operating losses, at September 30, 1999, we had an accumulated deficit of $19.1 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. 10 11 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 73% of our total revenues in the nine months ended September 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 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 e-Commerce 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. 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. 11 12 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. 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 September 30, 1999, the number of our employees increased from 40 to 109. 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. 12 13 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 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. 13 14 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. 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. The stock market in general, and the market prices for Internet-related companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of these companies. These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our operating performance. Recently, when the market price of a stock has been volatile, holders of that stock have often instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. The lawsuit could also divert the time and attention of our management. WE MAY LOSE MONEY ON FIXED-PRICE CONSULTING CONTRACTS. In the future, an increased portion of our SiteMinder services revenues may be derived from fixed-price contracts. We work with complex technologies in compressed time frames and it can be difficult to judge the time and resources necessary to complete a project. If we miscalculate the resources or time we need to complete work under fixed-price contracts, our operating results could be materially harmed. LOSS OF OUR FIREWALL-1 RESELLER BUSINESS WOULD ADVERSELY AFFECT OUR OPERATING RESULTS. While we recently have focused our resources on developing and marketing our SiteMinder software and services, we continue to generate a significant portion of our revenues from our sales of Check Point Software Technologies' FireWall-1 product. Our FireWall-1 reseller business experiences competition from companies that compete with FireWall-1, including Axent Technologies, Cisco Systems and Trusted Information Systems, as well as from other resellers of FireWall-1. As a result, we may not be able to maintain the current revenue levels generated by our FireWall-1 reseller business. CERTAIN PROVISIONS OF OUR CHARTER AND OF DELAWARE LAW MAKE A TAKEOVER OF OUR COMPANY MORE DIFFICULT. Our corporate documents and Delaware law contain provisions that might enable our management to resist a takeover of our company. These provisions might discourage, delay or prevent a change in the control of Netegrity or a change in our management. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. The existence of these provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. 14 15 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. 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 September 30, 1999 we had 109 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. 15 16 RESULTS OF OPERATIONS The following information should be read in conjunction with the consolidated financial statements and notes thereto: Period to Period % Increase/(Decrease) % of Total Revenues Three Months Ended For the three months September 30, ended September 30, 1998 1999 1998 vs. 1999 - ------------------- ---- ---- ------------- Revenues: SiteMinder software 33% 60% 389% SiteMinder services 9 18 447 Other 58 22 (2) --- --- --- Total revenues 100 100 165 Gross profit 66 75 202 Selling, general and administrative expenses 120 97 114 Research and development costs 40 30 102 --- --- --- Loss from operations (94%) (52%) 48% Three Months Ended September 30, 1999 Compared to Three Months Ended September 30, 1998 Revenues. Total revenues increased by $2.0 million, or 165%, to $3.3 million in the three months ended September 30, 1999, from $1.3 million in the three months ended September 30, 1998. SiteMinder software revenues increased by $1.6 million, or 389%, to $2.0 million in the three months ended September 30, 1999, from $411,000 in the three months ended September 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 $491,000, or 447%, to $601,000 in the three months ended September 30, 1999, from $110,000 in the three months ended September 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 $17,000, or 2%, to $719,000 in the three months ended September 30, 1999, from $736,000 in the three months ended September 30, 1998. Gross profit. Gross profit increased by $1.7 million, or 202%, to $2.5 million in the three months ended September 30, 1999, from $826,000 in the three months ended September 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 114%, to $3.2 million in the three months ended September 30, 1999, from $1.5 million in the three months ended September 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 $511,000, or 102%, to $1.0 million in the three months ended September 30, 1999, from $500,000 in the three months ended September 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 September 30, 1998 or the three months ended September 30, 1999. There was no capitalized software as of September 30, 1999. 16 17 Interest income (expense), net. Net interest income increased by $21,000, or 66%, to $52,000 in the three months ended September 30, 1999, from $31,000 in the three months ended September 30, 1998. This increase is mainly attributable to a higher average cash balance in the three months ended September 30, 1999. There were no borrowings outstanding during the three months ended September 30, 1998 or the three months ended September 30, 1999. Period to Period % Increase/(Decrease) % of Total Revenues Nine Months Ended For the nine months September 30, ended September 30, 1998 1999 1998 vs. 1999 ---- ---- ------------- Revenues: SiteMinder software 25% 56% 471% SiteMinder services 8 17 495 Other 67 27 2 --- --- --- Total revenues 100 100 157 Gross profit 56 71 228 Selling, general and administrative expenses 142 97 76 Research and development costs 44 31 81 --- --- --- Loss from operations (130%) (57%) (13%) Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30, 1998 Revenues. Total revenues increased by $4.9 million, or 157%, to $8.0 million in the nine months ended September 30, 1999, from $3.1 million in the nine months ended September 30, 1998. SiteMinder software revenues increased by $3.7 million, or 471%, to $4.5 million in the nine months ended September 30, 1999, from $784,000 in the nine months ended September 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 $1.2 million, or 495%, to $1.4 million in the nine months ended September 30, 1999, from $236,000 in the nine months ended September 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 $44,000, or 2%, to $2.1 million in the nine months ended September 30, 1999, from $2.1 million in the nine months ended September 30, 1998. Gross profit. Gross profit increased by $4.0 million, or 228%, to $5.7 million in the nine months ended September 30, 1999, from $1.7 million in the nine months ended September 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 $3.4 million, or 76%, to $7.8 million in the nine months ended September 30, 1999, from $4.4 million in the nine months ended September 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 $1.1 million, or 81%, to $2.5 million in the nine months ended September 30, 1999, from $1.4 million in the nine months ended September 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 nine months ended September 30, 1998, we capitalized $249,000 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 nine months ended September 30, 1999. There was no capitalized software as of September 30, 1999. 17 18 Interest income (expense), net. Net interest income increased by $19,000, or 19%, to $119,000 in the nine months ended September 30, 1999, from $100,000 in the nine months ended September 30, 1998. This increase was mainly attributable to a higher cash balance in the nine months ended September 30, 1999. There were no borrowings outstanding during the nine months ended September 30, 1998 or the nine months ended September 30, 1999. 18 19 LIQUIDITY AND CAPITAL RESOURCES (in thousands, except ratios) September 30, December 31, Financial Condition as of 1999 1998 ---- ---- Cash and cash equivalents $11,212 $1,175 Working capital 10,986 47 Current ratio 4.09 1.01 Cash Flow Activity Summary for September 30, September 30, the Nine Months Ended 1999 1998 ---- ---- Net cash used for operating activities $(5,151) $(4,428) Net cash used for investing activities (334) (196) Net cash provided by financing activities 15,522 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 nine months ended September 30, 1999 was $5.2 million, primarily due to a net loss of $4.5 million and an increase in accounts receivable, partially offset by increases in accounts payable and accrued expenses. 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 $334,000 in the nine months ended September 30, 1999, and $167,000 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 nine months ended September 30, 1999 was $15.5 million, primarily as a result of our sale of 795,651 shares of common stock to certain investors in a private placement on February 8, 1999 at a price of $5.75 per share and 534,242 shares of common stock to certain investors in a private placement on September 9, 1999 at a price of $20.59 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 September 30, 1999, our primary financial commitments consisted of obligations outstanding under operating leases. 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 from our proposed secondary offering and the existing cash and cash equivalents will be sufficient to meet our anticipated cash requirements for working capital and capital expenditures for at least the next twelve months. 19 20 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 September 30, 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 20 21 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. 3. Quantitative and Qualitative Disclosures About Market Risk The Company does not believe that it has any material market risk exposure with respect to derivatives or other financial instruments that would require disclosure under this item. 21 22 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On June 4, 1999 a suit was brought in the Delaware Court of Chancery, 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 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. The settlement was approved by the Court of Chancery at a hearing held on September 24, 1999. The appeal period for this approval will expire on October 25, 1999. The holders of the Company's preferred and common stock approved the previously adopted amendments at a meeting of the Company's stockholders held on October 7, 1999. The Company believes that the costs associated with the settlement will not have a materially adverse affect on the Company's results of operations, assets or financial condition. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On September 9, 1999 the Company completed a private placement of 534,242 shares of common stock to the following investors at a purchase price of $20.59 per share: Pogue Capital International Fund, Kingdon Associates, L.P., Kingdon Partners L.P., M. Kingdon Offshore N.V., Chilton Q.P. Investment Partners L.P., Chilton Investment Partners L.P., Chilton Opportunity International L.P., Chilton International L.P., Permal Media & Communication Fund, L.P., Essex High Technology (Bermuda) Fund, L.P., Essex High Technology (USA) Fund, L.P., Essex High Technology Offshore II Fund, L.P., Dimensional Partners L.P. and Dimensional Partners Ltd. The Company recorded net proceeds of approximately $10.3 million from the private placement, after deducting the placement agent's fee and the Company's estimated expenses. The Company has filed with the SEC a registration statement, which was declared effective on October 8, 1999, covering the 534,242 shares sold in the private placement. The Commission file number assigned to the registration statement is 333-87247. The placement did not involve a public offering and was, accordingly, exempt under ss.4(2) of the Securities Act of 1933. ITEM 3. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS On September 7, 1999 the Board of Directors caused to be distributed to stockholders of record as of August 31, 1999 a Notice of Special Meeting of Stockholders to be held October 7, 1999, together with a Proxy and Proxy Statement. On the record date, the Company had outstanding 10,436,578 shares of Common Stock (excluding treasury shares) and 3,333,333 shares of Series D Preferred Stock, convertible into Common Stock on a one-for-one basis. At the meeting the stockholders acted upon the following proposals: 1. To consider and act upon a proposal to approve the Amendment to the Company's Restated Certificate of Incorporation, as amended, to increase the number of authorized shares of capital stock from 30,000,000 to 45,000,000, which amendment was approved by the stockholders at their meeting on May 11, 1999. The voting results on this proposal were as follows: Common Stock (voting as a single class) For: 8,686,965 Against: 538,138 Abstain: 16,452 Preferred Stock (voting as a single class) For: 3,333,333 Against: 0 Abstain: 0 Common Stock and Preferred Stock (voting together as a single class) For: 12,020,298 Against: 538,138 Abstain: 16,452 22 23 2. To consider and act upon a proposal to approve the Amendment to the Company's Restated Certificate of Incorporation, as amended, to increase the number of authorized shares of capital stock to 60,000,000. The voting results on this proposal were as follows: Common Stock (voting as a single class) For: 8,505,810 Against: 717,382 Abstain: 18,363 Preferred Stock (voting as a single class) For: 3,333,333 Against: 0 Abstain: 0 Common Stock and Preferred Stock (voting together as a single class) For: 11,839,143 Against: 717,382 Abstain: 18,363 23 24 ITEM 4. OTHER INFORMATION In accordance with the provisions of Rule 14a-4(c) promulgated under the Securities Exchange Act of 1934, if the Company does not receive notice of a shareholder proposal to be raised at its 2000 annual meeting on or before February 24, 2000, then in such event, the management proxies shall be allowed to use their discretionary voting authority when the proposal is raised at the 2000 Annual Meeting of Stockholders. ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3. Restated Certificate of Incorporation of the Company, as amended October 7, 1999 11. Computation of earnings per share 27. Financial Data Schedule (b) Reports on Form 8-K The Company filed a Report on Form 8-K on September 17, 1999 announcing the completion of the private placement described in Item 2 above. 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: October 22, 1999 By: /s/ Barry N. Bycoff ----------------------- Barry N. Bycoff President and Chief Executive Officer (Principal Executive Officer) Date: October 22, 1999 By: /s/ James E. Hayden ----------------------- James E. Hayden Vice President, Finance and Administration, and Chief Financial Officer (Principal Financial and Chief Accounting Officer) 24 EX-3 2 RESTATED CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.00 RESTATED CERTIFICATE OF INCORPORATION OF THE SOFTWARE DEVELOPER'S COMPANY, INC. The Software Developer's Company, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), filed its Certificate of Incorporation with the Secretary of State of the State of Delaware on September 11, 1986. Said Certificate of Incorporation was further amended by the filing of a Certificate of Agreement of Merger on October 3,1986. Desiring to further amend its Certificate of Incorporation, as heretofore amended, and to restate the same, as amended, The Software Developer's Company, Inc. does hereby certify: FIRST: That the Board of Directors of the Corporation, by unanimous written consent, duly adopted resolutions proposing and declaring advisable the amendment and restatement of the Certificate of Incorporation of the Corporation as hereinafter set forth. SECOND: That, thereafter, the stockholders of the Corporation, at a meeting duly called and held at which a quorum was present and acting throughout, voted the necessary number of shares as required by statute in favor of the amendment and restatement. THIRD: That upon the effectiveness of the filing of this Restated Certificate of Incorporation with the Secretary of State of Delaware (i) each currently outstanding share of the Corporation's Series A Common Stock, $.01 par value per share shall be converted into one share of Common Stock, $.01 par value per share, and (ii) each currently outstanding share of the Corporation's Series B Common Stock, $.01 par value per share shall be converted into one share of Common Stock, $.01 par value per share. FOURTH: That this Restated Certificate of Incorporation has been duly adopted in accordance with Sections 242 and 245 of the General Corporation Law of the State of Delaware. FIFTH: That the text of the Certificate of Incorporation of The Software Developer's Company, 25 2 Inc. is hereby further amended and restated in full to read as follows: ARTICLE FIRST: The name of the Corporation is The Software Developer's Company, Inc. ARTICLE SECOND: The address of its registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE THIRD: The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. ARTICLE FOURTH: The total number of shares of stock which the Corporation shall have authority to issue is Four Million (4,000,000) shares, with Three Million Five Hundred Thousand (3,500,000) shares of Common Stock with a par value of one cent ($.01) per share (the "Common Stock"), and Five Hundred Thousand (500,000) shares of Preferred Stock with a par value of one ($.01) per share (the "Preferred Stock"). A description of the respective classes of stock and a statement of the designations, preferences, voting powers (or no voting powers), relative, participating, optional or other special rights and privileges and the qualifications, limitations and restrictions of the Preferred Stock and Common Stock are as follows: A. PREFERRED STOCK The Preferred Stock may be issued in one or more series at such time or times and for such consideration or considerations as at least two-thirds of the members of the Board of Directors of the Corporation may determine. Each series shall be so designated as to distinguish the shares thereof from the shares of all other series and classes. Except as otherwise provided in this Restated Certificate of Incorporation, different series of Preferred Stock shall not be construed to constitute different classes of shares for the purpose of voting by classes. The Board of Directors of the Corporation is expressly authorized, by a vote or written consent of at least two-thirds of the directors then if office, to provide for the issuance of all or any shares of the Preferred Stock in one or more series, each with such designations, preferences, voting powers (or no voting powers), 26 3 relative, participating, optional or other special rights and privileges and such qualifications, limitations or restrictions thereof as shall be stated in the resolution or resolutions adopted by the Board of Directors of the Corporation to create such series, and a Certificate of Designation of said resolution or resolutions shall be filed in accordance with the General Corporation Law of the State of Delaware. The authority of the Board of Directors of the Corporation with respect to each such series shall include, without limitation of the foregoing, the right to provide that the shares of each such series may be: (i) subject to redemption at such time or times and at such price or prices; (ii) entitled to receive dividends (which may be cumulative or non-cumulative) at such rates, on such conditions, and at such times, and payable in preference to, or in such relation to, the dividends payable on any other class or classes or any other series; (iii) entitled to such rights upon the dissolution of, or upon any distribution of the assets of, the Corporation; (iv) convertible into, or exchangeable for, shares of any other class or classes of capital stock, or of any other series of the same or any other class or classes of stock of the Corporation at such price or prices or at such rates of exchange and with such adjustments, if any; (v) entitled to the benefit of such limitations, if any, on the issuance of additional shares of such series or shares of any other series of Preferred Stock; or (vi) entitled to such other preferences, powers, qualifications, rights and privileges, all as the Board of Directors of the Corporation may deem advisable and as are not inconsistent with law and the provisions of this Restated Certificate of Incorporation. B. COMMON STOCK 1. RELATIVE RIGHTS OF PREFERRED STOCK AND COMMON STOCK. All preferences, voting powers, relative, participating, optional or other special rights and privileges, and qualifications, limitations, or restrictions of the Common Stock are expressly made subject and subordinate to those that may be fixed from time to time with respect to any shares of the Preferred Stock. 2. VOTING RIGHTS. Except as otherwise required by law or this Restated Certificate of Incorporation, each holder of Common Stock shall have one vote in respect of each share of stock held by him of record on the books of the Corporation for the election of directors and on all matters submitted to a vote of 27 4 stockholders of the Corporation. Except as otherwise required by law or as set forth in this Restated Certificate of Incorporation, any further amendment or restatement thereof, or in any Certificate of Designation filed in accordance with the General Corporation Law of the State of Delaware with respect to the Preferred Stock, the holders of Common Stock and Preferred Stock shall vote together as a single class on all matters submitted to the stockholders for a vote. 3. DIVIDENDS. Subject to the preferential rights of the Preferred Stock, if any, the holders of shares of Common Stock shall be entitled to receive, when, as and if declared by the Board of Directors of the Corporation, out of the assets of the Corporation which are by law available therefor, dividends payable either in cash, in property or in shares of capital stock. 4. DISSOLUTION, LIQUIDATION OR WINDING UP. In the event of any dissolution, liquidation or winding up of the affairs of the Corporation, after distribution in full of the preferential amounts, if any, to be distributed to the holders of shares of the Preferred Stock, the holders of Common Stock shall be entitled to receive all of the remaining assets of the Corporation of whatever kind available for distribution to stockholders ratably in proportion to the number of shares of Common Stock held by them respectively, unless otherwise provided by law or this Amended and Restated Certificate of Incorporation, any further amendment or restatement thereof, or in any Certificate of Designation filed in accordance with the General Corporation Law of the State of Delaware with respect to the Preferred Stock. ARTICLE FIFTH: The Corporation is to have perpetual existence. ARTICLE SIXTH: In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware: A. The Board of Directors of the Corporation is expressly authorized to adopt, amend or repeal the By-laws of the Corporation. B. Elections of directors need not be by written ballot unless the By-laws of the Corporation shall so provide. 28 5 C. The books of the Corporation may be kept at such place within or without the State of Delaware as the By-laws of the Corporation may provide or as may be designated from time to time by the Board of Directors of the Corporation. D. Any vote or votes authorizing liquidation of the Corporation or proceedings for its dissolution may provide, subject to the rights of creditors and the rights expressly provided for particular classes or series of capital stock, for the distribution among the stockholders of the Corporation of the assets of the Corporation as provided herein, wholly or in part or in kind, whether such assets be in cash or other property, and may authorize the Board of Directors of the Corporation to determine the valuation of the different assets of the Corporation for the purpose of such liquidation and may divide or authorize the Board of Directors to divide such assets or any part thereof among the stockholders of the Corporation, in such manner that every stockholder will receive a proportionate amount in value (determined as provided herein) of cash or property of the Corporation upon such liquidation or dissolution even though each stockholder may not receive a strictly proportionate part of each such asset. ARTICLE SEVENTH: Whenever a compromise or arrangement is proposed between the Corporation and its creditors or any class of them and/or between the Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of the Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for the Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for the Corporation under the provisions of Section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of the Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if 29 6 sanctioned by the court to which the said application has been made, be binding on all of the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of the Corporation, as the case may be, and also on the Corporation. ARTICLE EIGHTH: SECTION 1. (a) ELIMINATION OF PERSONAL LIABILITY. The Corporation eliminates the personal liability of each member of its Board of Directors to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that the foregoing shall not eliminate the liability of a director (i) for any breach of such director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of Title 8 of the Delaware Code, or (iv) for any transaction from which such director derived an improper personal benefit. If the General Corporation Law of the State of Delaware is amended in the future to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law of the State of Delaware, as so amended from time to time. Any repeal or modification of this Article Eighth shall not increase the personal liability of any director of this Corporation for any act or occurrence taking place prior to such repeal or modification, or otherwise adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. SECTION 2. (a) RIGHT TO INDEMNIFICATION. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director, officer or employee of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the General Corporation Law of the State of 30 7 Delaware, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith and such indemnification shall continue as to an indemnitee who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the indemnitee's heirs, executors and administrators; PROVIDED, HOWEVER, that except as provided in paragraph (b) hereof with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. The right to indemnification conferred in this Section shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); PROVIDED, HOWEVER, that, if the General Corporation Law so of the State of Delaware requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including without limitation, service to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that such indemnitee is not entitled to be indemnified for such expenses under this Section or otherwise (hereinafter an "undertaking"). (b) RIGHT OF INDEMNITEE TO BRING SUIT. If a claim under paragraph (a) of this Section is not paid in full by the Corporation within sixty days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit or in a suit brought by the Corporation to recover an 31 8 advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee be a defense to such suit. In any suit brought by the indemnitee to enforce a right hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified or to such advancement of expenses under this Section or otherwise shall be on the Corporation. (c) NON-EXCLUSIVITY OF RIGHTS. The rights to indemnification and to the advancement of expenses conferred in this Section shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, this Restated Certificate of Incorporation, by-law, agreement, vote of stockholders or disinterested directors or otherwise. (d) INSURANCE. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law of the State of 32 9 Delaware. (e) INDEMNIFICATION OF AGENTS OF THE CORPORATION. The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification and to the advancement of expenses, to any agent of the Corporation to the fullest extent of the Provisions of this Section with respect to the indemnification and advancement of expenses of directors, officers and employees of the Corporation. ARTICLE NINTH: The Corporation reserves the right to amend or repeal any provision contained in this Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon a stockholder herein are granted subject to this reservation. IN WITNESS WHEREOF, The Software Developers Company, Inc. has caused this certificate to be signed by Bruce W. Lynch, its duly authorized President, and attested by John M. Hession, its duly authorized Secretary, this 20th day of October, 1987. THE SOFTWARE DEVELOPER'S COMPANY, INC. By: /s/ Bruce W. Lynch --------------------------------- Bruce W. Lynch, President ATTEST: /s/ John M. Hession - -------------------------- Secretary 33 10 CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF THE SOFTWARE DEVELOPER'S COMPANY, INC. -------------------------------------- The Software Developer's Company, Inc. (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Delaware Law"), DOES HEREBY CERTIFY: FIRST. The Board of Directors of the Corporation duly adopted a resolution setting forth and declaring advisable the amendment of Article First of the Restated Certificate of Incorporation of the Corporation, so that, as amended, said Article shall read as follows: First. The name of the corporation is Netegrity, Inc. SECOND. The foregoing Amendment of the Restated Certificate of Incorporation has been duly adopted by the written consent of stockholders in accordance with the provisions of Sections 228 and 242 of the Delaware Law. In addition, written notice of the adoption of the foregoing Amendment of the Restated Certificate of Incorporation has been given to those stockholders who did not consent in writing in accordance with Section 228 of the Delaware Law. Signed and attested to on June 28, 1996. THE SOFTWARE DEVELOPER'S COMPANY, INC. By: /s/ Barry N. Bycoff --------------------------------- Barry N. Bycoff, President Attest: /s/ John Hession - ------------------------------------- John Hession, Assistant Secretary 34 11 CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF NETEGRITY, INC. Pursuant to Section 242 of the General Corporation Law of the State of Delaware Netegrity, Inc. (the "Corporation"), organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify as follows: By vote of the Board of Directors of the Corporation, a resolution was adopted, pursuant to Sections 242 and 141 of the General Corporation Law of the State of Delaware, setting forth an amendment to the Certificate of Incorporation of the Corporation and declaring said amendment to be advisable. The stockholders of the Corporation duly approved said proposed amendment in accordance with Sections 212, 216 and 242 of the General Corporation Law of the State of Delaware. The resolution setting forth the amendment is as follows: RESOLVED: That the first paragraph of Article Fourth of the Restated Certificate of Incorporation of the Corporation be and it hereby is deleted in its entirety and a new paragraph be inserted in lieu thereof to read as follows: "ARTICLE FOURTH. The total number of shares of all classes of capital stock which the Corporation shall have authority to issue is 60,000,000 shares, consisting of 55,000,000 shares of Common Stock with a par value of $0.01 per share (herein called the "Common Stock") and 5,000,000 shares of Preferred Stock with a par value of $0.01 per share (herein called the "Preferred Stock")." [Intentionally Left Blank] 35 12 IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be signed by its President, Barry N. Bycoff, and attested to by Anthony J. Medaglia, Jr., its Secretary, as of this 7th day of October, 1999. NETEGRITY, INC. By: /s/ Barry N. Bycoff -------------------------- Barry N. Bycoff, President Attest: /s/ Anthony J. Medaglia, Jr. - ----------------------------------- Anthony J. Medaglia, Jr., Secretary 36 EX-11 3 COMPUTATION OF EARNINGS PER SHARE (UNAUDITED) 1 EXHIBIT 11.00 NETEGRITY, INC. COMPUTATION OF EARNINGS PER SHARE (UNAUDITED) (In thousands, except per share data) Three months ended September 30, 1999 1998 ---- ---- BASIC AND DILUTED: Average Common shares outstanding 10,576 9,398 Net loss $(1,689) $(1,147) Per share amount $ (0.16) $ (0.12) Nine months ended September 30, 1999 1998 ---- ---- BASIC AND DILUTED: Average Common shares outstanding 10,273 9,348 Net loss $(4,478) $(3,960) Per share amount $ (0.44) $ (0.42) 37 EX-27 4 FINANCIAL DATA SCHEDULE
5 1 U.S. DOLLARS 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 1 11,211,960 0 3,405,313 529,905 0 14,540,189 1,625,291 625,262 15,593,437 3,553,831 0 0 0 144,163 11,895,443 15,593,437 8,026,673 8,026,673 2,331,442 2,331,442 10,292,586 0 118,912 (4,478,443) 0 (4,597,355) 0 0 0 (4,478,443) (0.44) (0.44)
-----END PRIVACY-ENHANCED MESSAGE-----