SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
---------------
FORM 10-Q
---------------
XX Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, for the quarterly period
ended March 31, 1998, or
Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, For the transition
period from ---------- to ---------
Commission File Number 1-10139
--------------------------
NETEGRITY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2911320
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
245 WINTER STREET
WALTHAM, MASSACHUSETTS 02154
(Address of principal (Zip Code)
executive offices)
(781) 890-1700
(Registrant's Telephone Number)
Securities registered pursuant to Section 12(g) of the Act: NONE
-----------------
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such other shorter period that the Registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days XX YES No
As of May 7, 1998 there were 9,397,526 shares of Common Stock
outstanding.
<PAGE>
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. . . . . . 6
Notes to Consolidated Financial Statements . . . 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . .10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . .13
Item 2. Changes in Securities. . . . . . . . . . . . . . .13
Item 3. Defaults Upon Senior Securities. . . . . . . . . .13
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . 13
Item 5. Other Information . . . . . . . . . . . . . . . .13
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . .13
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . .14
Exhibit 11 - Computation of earnings per share . . . . . .15
<PAGE>
PART I. - FINANCIAL INFORMATION
NETEGRITY, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
1998 December 31,
(unaudited) 1997
CURRENT ASSETS:
Cash and cash equivalents $3,019,570 $2,133,586
Escrow receivable 600,000 600,000
Accounts receivable-trade, net of
allowance for doubtful accounts
of $58,470 and $64,460 at March 31,
1998 and December 31, 1997,
respectively 611,353 791,369
Other current assets 309,501 312,971
TOTAL CURRENT ASSETS 4,540,424 3,837,926
EQUIPMENT AND LEASEHOLD
IMPROVEMENTS, NET 612,741 585,055
CAPITALIZED SOFTWARE COSTS 293,374 309,891
OTHER ASSETS:
Investment in Encotone, Inc. --- 78,199
Other 50,797 37,438
TOTAL OTHER ASSETS 50,797 115,637
TOTAL ASSETS $5,497,336 $4,848,509
The accompanying notes are an integral part of the financial
statements.
<PAGE>
NETEGRITY, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31,
1998 December 31,
(unaudited) 1997
CURRENT LIABILITIES:
Accounts payable-trade $ 1,077,771 $ 1,507,071
Other accrued expenses 2,099,685 2,022,949
Accrued compensation 297,633 279,722
Current portion of capitalized
lease obligations 20,141 19,068
TOTAL CURRENT LIABILITIES 3,495,230 3,828,810
Long-term capital lease obligations --- 3,653
COMMITMENTS AND CONTINGENCIES --- ---
TOTAL LIABILITIES 3,495,230 3,832,463
STOCKHOLDERS' EQUITY:
Series D Preferred Stock, $.01
par value 1,666,667 shares
authorized and outstanding
as of March 31, 1998 16,667 ---
Common stock, voting, $.01 par
value, authorized 25,000,000
shares: 9,286,346 shares
issued and 9,261,245 shares
outstanding at March 31, 1998;
9,279,346 shares issued and
9,254,245 shares outstanding
at December 31, 1997 92,886 92,793
Additional paid-in capital 13,021,161 10,578,330
Cumulative translation adjustment 28,028 28,028
Cumulative deficit (10,872,979) (9,399,448)
Loan to officer (200,000) (200,000)
2,085,763 1,099,703
Less - Treasury Stock, at cost:
25,101 shares (83,657) (83,657)
TOTAL STOCKHOLDERS' EQUITY 2,002,106 1,016,046
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 5,497,336 $ 4,848,509
The accompanying notes are an integral part of the financial
statements.<PAGE>
NETEGRITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended
March 31,
1998 1997
Net revenues $ 809,821 $ 986,594
Cost of revenues 346,556 535,251
Gross profit 463,265 451,343
Selling, general and administrative
expenses 1,547,910 1,021,522
Research and development costs 420,856 101,148
Loss from operations (1,505,501) (671,327)
Interest income (expense) 31,970 79,062
Share of loss from investment
in Encotone, Inc. --- (56,044)
Net loss $(1,473,531) $ (648,309)
Basic loss per share $(0.16) $(0.07)
Weighted average shares
outstanding (basic) 9,284,036 9,261,616
Diluted loss per share $(0.16) $(0.07)
Weighted average shares
outstanding (diluted) 9,284,036 9,261,616
The accompanying notes are an integral part of the financial
statements.
<PAGE>
NETEGRITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the three months ended
March 31,
1998 1997
OPERATING ACTIVITIES
Net income (loss) from
continuing operations $(1,473,531) $ (648,309)
Adjustments to reconcile
income (loss) tonet cash
provided by (used for)
operating activities:
Share of loss from investment --- 56,044
Depreciation and amortization 40,663 16,500
Provision for doubtful accounts
receivable (5,990) 7,000
Change in operating assets and
liabilities:
Accounts receivable 186,006 107,923
Other current assets 3,470 (13,701)
Accounts payable (429,300) (234,628)
Other accrued expenses 94,647 (43,123)
Other assets 64,840 ---
Total adjustments (45,664) (103,985)
Net cash (used for) provided
by continuing operating
activities (1,519,195) (752,294)
Net cash (used for) provided
by discontinued operating
activities --- (31,766)
Net cash (used for) provided
by operating activities $(1,519,195) $ (784,060)
The accompanying notes are an integral part of the financial
statements.
<PAGE>
NETEGRITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.)
(Unaudited)
For the three months ended
March 31,
1998 1997
INVESTING ACTIVITIES:
Capitalized software costs $ 16,517 $ (158,839)
Capital expenditures for equipment
and leasehold improvements (68,349) (74,448)
Net cash used for investing
activities (51,832) (233,287)
FINANCING ACTIVITIES:
Net proceeds from issuance of
preferred stock 2,450,001 ---
Net proceeds from issuance of
common stock 9,590 103,201
Principal payments under
capital leases (2,580) ---
Net cash provided by (used for)
financing activities 2,457,011 103,201
Effect of exchange rate changes
on cash --- ---
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS 885,984 (914,146)
Cash and cash equivalents at
beginning of period 2,133,586 6,791,057
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $3,019,570 $5,876,911
Supplemental Disclosures of Cash
Flow Information:
Interest paid $ 599 ---
Income taxes paid --- $ 63,557
The accompanying notes are an integral part of the financial
statements.
<PAGE>
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - The unaudited financial information furnished
herein reflects all adjustments which are of a normal recurring
nature, which in the opinion of management are necessary to
fairly state the Company's financial position, cash flows and the
results of its operations for the periods presented. Certain
information and footnote disclosure normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
This information should be read in conjunction with the Company's
audited financial statements for the fiscal year ended December
31, 1997, included in Form 10-K filed on March 31, 1998.
Note 2 - The results of operations for the three-month
period ended March 31, 1998 are not necessarily indicative of the
results to be expected for the entire year ending December 31,
1998.
Note 3 - The Company has adopted Statement of Financial
Accounting Standards (SFAS) No. 128 "Earnings Per Share" and has
retroactively restated the earnings per share (EPS) for Q1 1997.
SFAS 128 requires presentation of basic and diluted EPS. Basic
EPS is computed by dividing net income by the number of weighted
average common shares outstanding. Diluted EPS reflects potential
dilution from outstanding stock options and warrants, using the
treasury stock method. For the periods that options are
anti-dilutive, they are not included in the calculation of
earnings per share.
Note 4 - The Company follows Statement of Financial
Accounting Standards ("SFAS") No. 109 "Accounting for Income
Taxes." Under SFAS No. 109, deferred tax assets and liabilities
are recognized for the unexpected future tax consequences of
events that have been included in the financial statements or
tax returns. The amount of deferred tax asset or liability is
based on the difference between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to reverse.
Note 5 - The Company capitalizes certain internally
generated software development costs after technological
feasibility of the product has been established. Such costs are
amortized over the estimated life of the product. The Company
continually compares the unamortized costs of capitalized
software to the expected future revenues for the products. If the
unamortized costs exceed the expected future net realizable
value, the excess amount is written off.
Note 6 - On January 6, 1998, the Company, entered into a
Preferred Stock and Warrant Purchase Agreement (the "Agreement")
with Pequot Private Equity Fund, L.P., a Delaware limited
partnership ("PPEF") and Pequot Offshore Private Equity Fund,
Inc., a British Virgin Islands corporation (together with PPEF,
the "Pequot Entities"). Pursuant to the terms of the Agreement,
on January 7, 1998, the Company sold 1,666,667 shares of Series D
Preferred Stock, at $1.50 per share, and 750,393 Warrants to the
Pequot Entities for an aggregate purchase price of $2,500,000.50.
The Series D Preferred Stock is automatically convertible into
Common Stock on a one-for-one basis, subject to adjustment. In
addition, the Series D Preferred Stock is subject to mandatory
conversion into Common Stock upon certain circumstances. Pursuant
to the Agreement, the Pequot Entities intend to make a second
$2.5 million investment subject to certain terms and
contingencies in the Agreement, including the Company's release
of its SiteMinder 3.0 product and having the product attain an
acceptable level of quality and satisfaction as determined by the
Pequot Entities. As part of the transaction, James McNiel joined
the Board of Directors of the Company, as designee of the Pequot
Entities, and has agreed to provide certain consulting services
to the Company. In addition to consulting fees in connection with
such service, the Company granted Mr. McNiel warrants for the
purchase of 100,000 shares of Common Stock.
Note 7 - The Company has adopted American Institute of
Certified Public Accountants Statement of Position 97-2,
"Software Revenue Recognition." Adoption of this pronouncement
did not have a material affect on the revenue recognition
practices of the Company.
The Company has adopted SFAS No. 130, Reporting
Comprehensive Income, in the quarter ended March 31, 1998. SFAS
130 requires that all items that are required to be recognized
under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the
same prominence as other financial statements. The statement
requires that an enterprise classify items of other comprehensive
income by their nature in a financial statement and to display
the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the
equity section of a statement of financial position. The Company
believes that the adoption of SFAS 130 will have no material
impact on its financial statements as there are no material
differences between net income and comprehensive income.
Note 8 - The Company is currently a defendant in two legal
proceedings. The first case involves a suit and countersuit
between the Company and Programmer's Paradise, Inc. ("PPI") of
Shrewsbury, New Jersey. The proceedings are intended to resolve a
valuation dispute of approximately $1,100,000 related to the Net
Assets Transferred to PPI during the 1996 divestiture of The
Software Developer's Company, Inc.
The Company is also a defendant in a suit brought by Lemma, Inc.
a consulting firm doing business in Massachusetts. The suit was
filed over a dispute on amounts due to Lemma, Inc. under a 1996
consulting contract of approximately $33,000. Lemma is also
claiming trebled damages.
The Company's management believes that neither of these cases
will have a material adverse effect on the Company's results of
operations. At this time, the Company cannot predict the outcome
of these cases.
<PAGE>
NETEGRITY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Private Securities Litigation Reform Act of 1995
contains certain safe harbors regarding forward-looking
statements. In that context, the discussion in this Item
contains forward-looking statements which involve certain degrees
of risk and uncertainties, including statements relating to
liquidity and capital resources. Except for the historical
information contained herein, the matters discussed in this
section are such forward-looking statements that involve risks
and uncertainties, including the impact of competitive pricing
within the software industry, the effect any reaction to such
competitive pressures has on the need for and effect of any
business restructuring, the presence of competitors with greater
financial resources, capacity and supply constraints or
difficulties, and the Company's continuing need for improved
profitability and liquidity.
The Company's revenues were generated by the sale of network
security products, integration and support services to companies
doing business on the Internet and internal networks. The
Company plans to develop and introduce new products to address
the changing needs of the evolving network security market.
There can be no assurance that the Company will be able to
develop new products or that such products will achieve market
acceptance, or, if market acceptance is achieved, that the
Company will be able to maintain such acceptance for a
significant period of time.
<PAGE>
RESULTS OF OPERATIONS
The following information should be read in conjunction with
the consolidated financial statements and notes thereto:
Period to Period %
Increase/(Decrease)
Three Months Ended
For the three months % to Net Revenue March 31,
ended March 31, 1998 1997 1998 vs. 1997
Net Revenues:
Product sales 100% 100% (18%)
Gross Margins:
Product sales 57% 46% 3%
Selling, general and
administrative expenses 191% 104% 52%
Research and development
costs 52% 10% 316%
Loss from operations (182%) (66%) 127%
REVENUES: Net revenues for the first quarter ended March 31, 1998
decreased by $176,773, or 18%, to $809,821 from $986,594 for the
quarter ended March 31, 1997. This decrease is due to a decline
in the Company's firewall reseller business as a result of the
Company's planned de-emphasis on this portion of its business.
This was partially offset by revenue achieved from the Company's
new SiteMinder product and related services in the first quarter
ended March 31, 1998.
GROSS PROFIT: Total Gross Profit dollars for the first quarter
ended March 31, 1998 increased by $11,922, or 3%, to $463,265
from $451,343 for the quarter ended March 31, 1997. This increase
is attributed to the Company's decline in its lower margin
firewall reseller business as described above, and the sale
of its proprietary SiteMinder product and services which yield
higher margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general
and administrative expenses for the first quarter ended March 31,
1998 increased by $526,388 or 52%, to $ 1,547,910 from $1,021,522
for the quarter ended March 31, 1997. This increase was a result
of the Company continuing to build its sales and marketing
infrastructure for its SiteMinder product business.
RESEARCH AND DEVELOPMENT COSTS: Research and Development costs
(net of capitalized software) for the first quarter ended March
31, 1998 increased $319,708, or 316% to $420,856 as compared to
$101,148 for the quarter ended March 31, 1997. The Company
continues to develop and enhance its product line to address the
changing needs of the evolving web access control market.
Certain research and development expenditures are incurred
substantially in advance of the related revenue, and in some
cases, do not generate revenue.
INTEREST INCOME: Net interest income (expense) for the first
quarter ended March 31, 1998 decreased $47,092, or 60%, to
$31,970 from $79,062 for the same period last year. This
decrease is mainly attributable to a lower average cash and
investment portfolio balance.
LIQUIDITY AND CAPITAL RESOURCES
(in thousands, except ratios)
March 31, December 31,
Financial Condition as of 1998 1997
Cash and cash equivalents $3,020 $2,134
Working capital 1,045 9
Current ratio 1.30 1.00
Cash Flow Activity Summary for March 31, March 31,
the Three Months Ended 1998 1997
Net cash (used for) provided by
continuing operating activities (1,519) (784)
Net cash used for investing
activities (52) (233)
Net cash provided by (used for)
financing activities 2,457 103
The Company's net cash balance increased by $886,000 to
$3,020,000 at March 31, 1998 from $2,134,000 at December 31,
1997. This increase was attributable to proceeds from a preferred
stock offering entered into with the Pequot Entities on January
6, 1998 (see Note 6), offset by expenditures related to building
its sales, marketing, and development infrastructure for its
SiteMinder product business.
Accounts receivable-trade (net of allowance for doubtful
accounts) decreased 23% to $611,000 at March 31, 1998 from
$791,000 at December 31, 1997. This decrease resulted from the
corresponding decrease in net revenues discussed above.
Working capital increased by $1,036,000 to $1,045,000 at
March 31, 1997 from $9,000 at December 31, 1997. This increase
was primarily attributable to proceeds from a preferred stock
offering entered into with the Pequot Entities on January 6, 1998
(see Note 6), offset by expenditures related to building its
sales, marketing, and development infrastructure for its
SiteMinder product business.
On January 6, 1998, the Company, entered into a Preferred
Stock and Warrant Purchase Agreement (the "Agreement") with
Pequot Private Equity Fund, L.P., a Delaware limited partnership
("PPEF") and Pequot Offshore Private Equity Fund, Inc., a British
Virgin Islands corporation (together with PPEF, the "Pequot
Entities"). Pursuant to the terms of the Agreement, on January 7,
1998, the Company sold 1,666,667 shares of Series D Preferred
Stock, at $1.50 per share, and 750,393 Warrants to the Pequot
Entities for an aggregate purchase price of $2,500,000.50. The
Series D Preferred Stock is automatically convertible into Common
Stock on a one-for-one basis, subject to adjustment. In addition,
the Series D Preferred Stock is subject to mandatory conversion
into Common Stock upon certain circumstances. Pursuant to the
Agreement, the Pequot Entities intend to make a second $2.5
million investment subject to certain terms and contingencies in
the Agreement, including the Company's release of its SiteMinder
3.0 product and having the product attain an acceptable level of
quality and satisfaction as determined by the Pequot Entities.
The Company anticipates that its existing cash resources,
anticipated cash flow from operations, and the proposed
additional financing described above will be sufficient to fund
its operations through the Company's current fiscal year ending
December 31, 1998. <PAGE>
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no significant changes to the Company's
outstanding litigation since the filing of the Company's Form
10-K for the twelve months ended December 31, 1997.
ITEM 2. CHANGES IN SECURITIES
During the quarter ended March 31, 1998, the Company issued
1,666,667 shares of Series D Preferred Stock, par value $.01 as
described in Note 6.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders,
whether through the solicitation of proxies or otherwise, during
the quarter ended March 31, 1998.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11.00 - Computation of Earnings Per Share.
(b) Exhibit 27.00 - Financial Data Schedule (Edgar only).
(c) The Company filed a report on Form 8-K dated January
15, 1998 announcing a Preferred Stock and Warrant Purchase
agreement with the Pequot Entities as described in Note 6.
<PAGE>
SIGNATURES
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: May 14, 1998 By: /s/Barry N. Bycoff
Barry N. Bycoff
President and Chief
Executive Officer
(Principal Executive
Officer)
Date: May 14, 1998 By: /s/ James E. Hayden
James E. Hayden
Vice President, Finance
and Administration, and
Chief Financial Officer
(Principal Financial and
Chief Accounting Officer)
<PAGE>
EXHIBIT 11.00
NETEGRITY, INC.
COMPUTATION OF EARNINGS PER SHARE
(UNAUDITED)
(In thousands, except per share data)
Three months ended
March 31,
1998 1997
BASIC:
Average Common shares outstanding 9,284 9,262
Net loss $(1,474) $(648)
Per share amount $(0.16) $(0.07)
DILUTED:
Average Common shares outstanding 9,284 9,262
Net effect of dilutive stock
options and warrants based on
treasury stock method --- ---
Total 9,284 9,262
Net loss $(1,474) $(648)
Per share amount $(0.16) $(0.07)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Attached is the financial data schedule for Netegrity, Inc. for the period ended
March 31, 1998. It should be read in conjunction with the Company's Form 10-Q
and Form 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,019,570
<SECURITIES> 0
<RECEIVABLES> 669,823
<ALLOWANCES> 58,470
<INVENTORY> 0
<CURRENT-ASSETS> 4,540,424
<PP&E> 612,741
<DEPRECIATION> (193,308)
<TOTAL-ASSETS> 5,497,336
<CURRENT-LIABILITIES> 3,495,230
<BONDS> 0
0
16,667
<COMMON> 92,886
<OTHER-SE> 1,892,553
<TOTAL-LIABILITY-AND-EQUITY> 5,497,336
<SALES> 809,821
<TOTAL-REVENUES> 808,821
<CGS> 346,556
<TOTAL-COSTS> 1,848,521
<OTHER-EXPENSES> 304,432
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 599
<INCOME-PRETAX> (1,473,531)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,473,531)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,473,531)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
