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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 1-10139
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______TO_______
NETEGRITY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 04-2911320
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
245 WINTER STREET
WALTHAM, MASSACHUSETTS 02451
(Address of principal executive offices, including Zip Code)
</TABLE>
(781) 890-1700
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
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 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. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting Common Stock held by
non-affiliates of the registrant was $59,692,808 based on the closing price of
the registrant's Common Stock on March 9, 1999 as reported by the Nasdaq
Over-the-Counter Interdealer Automated Quotation System ($5.813 per share). As
of March 9, 1999, there were 10,268,847 shares of Common Stock outstanding.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
We are a leading provider of software and services that manage and control
user access to web-based e-commerce applications. Our SiteMinder product is part
of the software infrastructure that is used to build and manage an e-commerce
web site. SiteMinder manages the complex process of identifying users and
assigning those users privileges to multiple e-commerce applications on a
company's web site. These assigned privileges determine what information a user
can see and what transactions a user can perform on the web site. SiteMinder
enables our customers to centrally control access to e-commerce web sites
requiring secure log-in, while distributing the administrative responsibilities
to the most appropriate parties. SiteMinder is designed to be scalable and
reliable, to integrate with our customers' existing systems and to accommodate
emerging Internet technology. We offer a wide range of support services that
enable our customers to successfully implement SiteMinder into their
organizations. As of December 31, 1998 we had 64 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.
INDUSTRY BACKGROUND
The growth in e-commerce is driving companies to develop a new set of
web-based applications accessed by a large and diverse range of corporate users,
including customers, business partners and employees. In many cases, these new
applications are becoming the principal business processes of an organization.
These include online retail, customer service, supply chain procurement, and
delivery of operational and transactional data. This new generation of
applications has created a demand for new Internet security and user management
solutions to handle the size and scope of these applications.
Before the advent of e-commerce and the transition to web-based computing,
most large businesses deployed client/server architectures to support enterprise
computing. In the client/server model, applications are generally limited to
traditional enterprise resource planning functions such as accounting, human
resources and material resource planning. Defined groups, limited to selected
employees, access these applications through a company's internal computing
resources or dedicated remote access solutions. As a result of this limited
usage, controlling and securing access to these applications and administering
the associated users and their rights of usage, or privileges, can be adequately
handled by the organization's information technology, or IT, department. With
only a limited number of applications and a small number of defined users, the
assignment of privileges to these users is accomplished by embedding the
security and privilege functions into each application.
E-commerce, however, is fundamentally changing traditional business
processes because companies now need to conduct business online with their
customers and business partners. According to Forrester Research,
business-to-business e-commerce is expected to grow from $43 billion in 1998 to
$1.3 trillion in 2003. Forrester also estimates that business-to-consumer
e-commerce will grow from $8 billion in 1998 to $108 billion in 2003. Companies
are developing new web-based applications that support key revenue and
relationship management aspects of the companies' business processes.
International Data Corporation estimates that the global e-commerce application
market will grow $444 million in 1998 to over $13 billion in 2003.
Companies are also attempting to leverage their existing investments in
traditional enterprise applications by integrating them into their web sites. In
this new e-commerce business model, applications accessed through the web site
are not just supporting business operations, but, in many instances, become the
focal point for companies' interactions with their constituencies, including
remote and mobile employees, existing and potential customers, suppliers,
vendors, distributors and other business partners.
As larger and more diverse constituencies access wider ranges of
applications, the management and security of users become increasingly important
and complex. The software infrastructure required to support
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these applications, developed in different languages, running on different web
servers and operating on different hardware platforms, dramatically adds to this
complexity. Traditional security and management software solutions, whether
developed in house or provided by a third party, face significant difficulties
in meeting these challenges effectively. Most e-commerce web sites have
continued the practice of embedding security in each application. This requires
users to provide a password to access each application, resulting in a
cumbersome and time-consuming user experience. Lack of centralized user
management also creates security issues. Companies cannot take corrective
actions in a timely fashion because the security and privileges must be modified
in each application. In addition, many companies find it difficult to
accommodate relationships with business customers and partners because the
companies' IT departments do not have the information necessary to manage the
privileges of individual customer and partner users.
Even organizations that have achieved early success with web-based
e-commerce business models face challenges as their models evolve. For example,
many e-commerce businesses initially focused on a direct sales relationship with
their customers and therefore only needed to manage this single application. As
their operations have matured, however, they have needed to deploy additional
applications, such as customer service. These early e-commerce businesses had no
alternative but to build their own security and user management infrastructure
to manage the increased number of applications. Today, the software
infrastructure that was built faces scalability and user-management issues,
resulting in mounting development and support costs.
In order for e-commerce to be successful, companies require a secure and
scalable user management infrastructure for conducting business. E-commerce
sites must be capable of managing the large numbers of users and multiple user
transactions without jeopardizing the integrity of the site's security policies.
As companies seek to attract customers and partners to their e-commerce sites,
and to increase the efficiency of their employees, they require a solution
providing a seamless and integrated view of the applications on their web sites.
The solution must provide single sign-on to personalized information based on
the profile of the particular user. As the number of applications proliferates
and the complexity of data increases, the solution must reduce the burden of
managing these applications. Companies require a solution that easily and
seamlessly integrates with their existing investments in information technology
infrastructure, including web servers, application servers, directory servers
and various forms of user identification. Finally, companies require an open and
extensible architecture in order to accommodate the introduction of new,
evolving web technologies.
THE NETEGRITY SOLUTION
We are a leading provider of software and services for secure user
management for e-commerce applications. Key benefits of our solution include:
Centralized privilege management. SiteMinder provides centralized control
of users and privileges that extends across multiple web-based applications on a
company's web site. SiteMinder manages the privileges of customers, business
partners and employees accessing applications on a company's web site. Our
solution provides this centralized privilege management as a shared service that
includes all of the e-commerce applications deployed by our customers. This
approach provides many benefits. Security changes can be effected swiftly and
efficiently across all of a company's e-commerce applications. Moreover, it
makes application developers much more productive because they are free to focus
on business processes and leave security, privilege management and
personalization to SiteMinder.
Superior user experience through single sign-on and personalized
content. With SiteMinder, users sign-on to a web site once and gain access to
all relevant information as defined by their user privileges. Single sign- on
provides access to a personalized view of content drawn from multiple
applications which run on multiple servers, multiple operating systems, and
across multiple Internet domains. This benefits end users by providing them with
a high-quality user experience, personalized to meet their individual needs. By
providing a superior user experience on its web site, a company is able to
protect its brand and build customer loyalty.
Distributed and delegated administration. SiteMinder provides policy-based
administration of security policies, so that administrative responsibilities can
be easily delegated to individual business units, remote
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trading partners or other administrators without jeopardizing control. Delegated
administrators control only the users and policies for which they have been
granted explicit responsibility. SiteMinder assigns administrative
responsibility where the knowledge resides, while still maintaining the overall
security of a site. As a result, a company's administrative burdens and
associated costs are dramatically reduced.
Leverages existing investments in technology infrastructure. SiteMinder
has been designed to support the existing systems currently employed by
companies and to easily accommodate emerging Internet technologies. SiteMinder
integrates with leading user directories, web servers, application servers and
authentication technologies. SiteMinder also provides support for multiple web
servers and operating platforms involving Microsoft and Netscape Web servers,
and Windows NT and UNIX platforms, which facilitates cross-platform development,
deployment and migration.
Scalability and high-availability. Our customers require a platform that
scales as they deploy additional applications and as user traffic grows, while
providing the highest level of reliability. SiteMinder provides a scalable
high-availability platform to meet the requirements of demanding web sites.
Based on independent third-party testing, published data from other vendors and
feedback from customers, we believe that SiteMinder provides significantly
higher transaction rates than other competing solutions.
STRATEGY
Our objective is to become the market leader in secure user management
solutions that support business-to-business and business-to-consumer e-commerce
applications. Key elements of our strategy include:
Extend technology leadership in secure user management market. We believe
that our technology enables us to offer a complete and cost-effective secure
user management solution for web-based applications. By building upon our
ability to use a company's existing directories rather than creating another
database, a feature called native integration, single sign-on capabilities and
our ability to scale to support millions of users, we believe we can extend our
leadership in the secure user management market by adding new features and
capabilities. Specifically, we plan to offer additional platform support for our
SiteMinder solution and integration with non-web-based, legacy applications. In
addition, we intend to continue to incorporate industry-leading technologies
such as support for eXtensible Markup Language, or XML, and Simple Network
Management Protocol, or SNMP, protocols, into SiteMinder.
Expand applications of SiteMinder into new markets. While most of our
customers' deployments have been in the business-to-business e-commerce market,
our customers are beginning to deploy SiteMinder in the business-to-consumer
e-commerce market. We believe that our capabilities will enable us to offer
solutions that support portal and targeted community applications in the
business-to-consumer market. We will continue to expand and tailor SiteMinder as
necessary to meet the requirements of our customers for new e-commerce
applications.
Expand strategic partnerships and distribution channels. We have developed
strategic relationships in order to significantly increase distribution of our
products, provide validation of SiteMinder, and enhance market awareness. We are
also focused on building our reseller channel and establishing relationships
with leading systems integrators and technology consulting firms. We expect to
continue to establish strategic and other third-party relationships with vendors
of Internet-related systems and application software.
Pursue international expansion. Although we principally focus our
marketing efforts in the United States, we plan to expand our sales force and
support organizations with the objective of gaining broad international market
acceptance of SiteMinder through adoption into strategic accounts. In addition,
we are developing products intended to address the specific needs of
international markets, with an initial focus on Europe and Asia. These include
developing localized versions of our products and local consulting services.
Expand service resources. We believe that a customer's decision to
purchase our products is based, in part, on our ability to provide a high level
of customer service and technical support. The mission-critical nature of
product implementations further heightens customer's need for our support. We
believe that
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demand for our services will grow as the size and scope of installation
increases. We expect to expand our service resources and offer our customers a
range of services that addresses the needs of larger scale deployments.
PRODUCTS AND SERVICES
SiteMinder Product
SiteMinder 3.6 was released in August 1999. SiteMinder interacts with the
four main components of an e-commerce web site:
- Web Servers: SiteMinder is designed to support all major web servers and
provide access control to content distributed through these servers.
- Application Servers: SiteMinder is designed to support all major
application servers and provide generalized privilege management to the
content and transactions delivered through these servers.
- Authentication Services: SiteMinder provides broad support for
authentication methods that enable web sites to authenticate users
through a variety of methods that meet the unique security requirements
of each application.
- Directory Servers: SiteMinder integrates with all industry leading
directory servers and utilizes them as repositories for all user and
privilege data.
The SiteMinder product consists of three key components: Policy Servers,
Agents and an Administration Console. Additionally, SiteMinder is delivered with
a developer kit, which allows developers to construct web sites in both C++ and
Java applications. The following briefly describes each of the primary
components:
- Policy Server: The Policy Server is a generalized security policy
engine, which includes processes for authentication, authorization,
session management, administration and auditing. The Policy Server, which
handles all requests for managing, and enforcing user privileges, runs on
Windows NT and UNIX platforms.
- Agents: Agents are distributed components deployed on web servers,
application servers, or as part of an application itself. Agents
communicate policies to the application governing user privileges.
SiteMinder ships with web Agents compatible with most popular web
servers, including Microsoft IIS, Netscape Enterprise Server and Apache.
SiteMinder also supports application server Agents compatible with most
popular application servers, including those from Allaire, Bluestone,
Microsoft, Oracle and the Sun-Netscape Alliance.
- Administration Console: The Administration Console is a secure Java
applet that allows administrators to create and manage user privilege
policies from any Java-enabled web browser.
SiteMinder 3.6 provides the following services:
- Privilege management infrastructure: SiteMinder provides a single
location for defining the policies that specify which users may access
particular e-commerce applications and content. By providing a single
location for these policies, SiteMinder enables web sites to apply
consistent personalized content and application access for users
throughout the site.
- Single sign-on: SiteMinder provides robust single sign-on services
across e-commerce sites spanning web servers and application environments
running on multiple operating systems and spanning multiple Internet
domains. Using encrypted cookies, SiteMinder is able to recognize a
previously authenticated and authorized user and allow the user to access
applications and content without being prompted repeatedly for new
passwords.
- Policy-based authentication services: SiteMinder manages the entire
authentication process. It supports all leading authentication
technologies including basic name-password, forms based authentication,
digital certificates, two-factor authentication, and method chaining.
SiteMinder's policy-based approach enables customers to apply different
authentication technologies depending on the value
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and risk of the application being accessed. For example, companies can
easily use name-passwords for most applications while requiring a
digital certificate for an on-line trading system.
- Distributed administration: Using any Java-enabled browser, web
administrators are able to access SiteMinder and modify user privilege
policies from anywhere on the network. The user interface supports
multiple levels of delegation among administrators.
SiteMinder is the only secure user management system on the market that
provides native integration with industry-standard Lightweight Directory Access
Protocol, or LDAP, Windows NT directory services, and SQL databases. As a
result, customers do not need to install and manage separate and redundant user
directories, which are expensive to maintain, unnecessarily complex, and
therefore prone to failure. SiteMinder's native directory support works with
multiple directory services from multiple vendors to provide our customers with
the freedom to deploy on their preferred platforms.
SiteMinder has been developed with a scalable, highly available
architecture. Key features of this robust architecture include:
- Load balancing: SiteMinder Agents can easily be configured to balance
loads across multiple policy servers, as well as across multiple user
directories. The result is nearly linear scaling as additional servers
are deployed.
- Automatic fail-over: SiteMinder Agents can easily be configured to
automatically communicate with a new Policy Server should their primary
Policy Server be taken off line or fail. Likewise, SiteMinder Policy
Servers can easily be configured to automatically utilize a new user
directory should their primary user directory be taken off line or fail.
The result is a fully redundant architecture that provides high
availability.
- Local caching: Both Policy Servers and Agents can be configured to cache
appropriate data thereby minimizing unnecessary traffic and processing
requirements. SiteMinder's session management will automatically update
cached information should policies or user profiles change.
We typically license SiteMinder based on the following categories:
- Intranets, in which all the users are employees or contractors working
for our customer. Prices start at approximately $40 per user for small
sites and are discounted as volumes grow.
- Extranets, in which our customers conduct transactions with their
corporate customers, suppliers and partners. Prices start at
approximately $30 per user for small sites and are discounted as volumes
grow.
- Internet sites, in which users are consumers seeking products or
information from our customers. Prices start at less than $2 per user for
volumes greater than 250,000 users.
Standard SiteMinder licenses include a web Agent site license and unlimited
Policy Server licenses. Essentially, our customers pay us for the size of the
web site they are building, as measured by the number of users of that site. Our
standard product license gives the customer the right to replicate and install
our SiteMinder software components throughout its web site infrastructure as
needed to meet scalability and redundancy requirements.
SiteMinder Services
Our professional services organization provides consulting and integration
services that aid our customers in successfully implementing SiteMinder within
their organizations. Our professional services include application
infrastructure planning, application prototyping and integration, SiteMinder
deployment, SiteMinder extensions and custom agents, and training for developers
and solutions architects.
In addition to our professional services offerings, we offer annual support
maintenance contracts to each SiteMinder customer. These maintenance contracts
are usually purchased at the time of the initial software purchase, and are
renewed annually. We provide our customers with a variety of specialized
maintenance
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programs ranging from standard business hours support, to more robust support
plans providing 24-hour, 7 day per week coverage.
SiteMinder Products in Development (as of September 15, 1999)
Two additional versions of SiteMinder are currently under development for
scheduled release in the next twelve months: SiteMinder Portal Edition and
SiteMinder 4.0. The SiteMinder Portal Edition is being developed to provide
additional support for corporate e-commerce portals. SiteMinder 4.0 is being
designed to integrate with additional legacy applications, extend the current
product support to additional platforms and provide integrated support for
additional web and application servers.
Other Products and Services
In addition to the sales and marketing of SiteMinder, we are a
non-exclusive distributor of Check Point Software Technologies' FireWall-1
product, complementary products from other vendors and related maintenance,
consulting and training services. We sell these products and services directly
to end users through a small, dedicated sales organization throughout the United
States.
SALES, MARKETING AND DISTRIBUTION
We directly market our SiteMinder software and services domestically
through a field sales organization supported by inside sales representatives. We
also indirectly market through strategic partnerships and other third-party
relationships with vendors of Internet-related systems and application software
as well as through resellers and systems integrators. As of December 31, 1998,
our sales and marketing organization consisted of 34 individuals.
Direct Sales Force. As of December 31, 1998, our direct sales force
consisted of 16 individuals, 7 of whom were field sales representatives
covering seven domestic regions. Our sales organization identifies prospects
that have e-commerce plans and requirements, and deploys a solution-selling
approach once customers are qualified. Our inside sales representatives qualify,
develop and pursue leads generated through a variety of sources. Our field sales
group conducts on-site meetings with accounts that have substantial product and
service requirements. We target SiteMinder software and services to large,
corporate customers and smaller firms that need to protect access to
mission-critical information while providing the users of their applications
with a personalized, seamless experience. We generally sell to e-commerce
business managers, product managers, web application development managers,
Internet architects, security administrators, network/systems administrators and
other people responsible for analyzing and selecting e-commerce solutions. We
plan to continue to focus on building our direct sales force, especially our
field sales representatives, both domestically and internationally.
Indirect Distribution. We have signed partnership agreements with several
leading technology providers and systems integrators. We classify our partner
companies as follows:
- Alliance partners. Through our alliance partners, we license restricted
use of our versions of our SiteMinder product to sell with their
platforms or applications.
- Systems integrators. We continue to develop partnerships with leading
systems integrators to aid in the integration and systems design of our
software at customer sites. We plan to utilize systems integrators as
well as our internal service and support personnel to provide superior
customer installation and support.
- Resellers. We enter into agreements with selected resellers of our
product.
- ISV/Co-marketing partners. We also actively seek partnerships with
companies that provide products to our customers which are complementary
to SiteMinder. We work together with these vendors
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to provide technical integration of our product. In many cases we also
work together on sales and marketing initiatives.
Product Marketing Programs. We engage in a broad range of product
marketing activities, including sponsoring seminars for prospective customers,
exhibiting at targeted conferences for both the technology and financial
communities, as well as providing paper and e-mail based direct mailings. We
also maintain an active public relations program. This program issues press
releases highlighting major customer additions, strategic partnerships and new
product releases, manages relations with industry analysts and promotes coverage
of the firm in the trade and business press. We devote significant resources to
our web site to provide product and company information as well as customer
profiles. We continue to enhance our web site with features, including
interactive tours, streaming demos, presentations and seminar content online,
customer and developer chat rooms and more customer application stories. In
addition, we plan to launch a series of test banner campaigns on leading
Internet portal sites.
Our product marketing programs are aimed at informing customers of the
capabilities and benefits of the SiteMinder solution and increasing demand
across all industry segments. We plan to continue to devote significant
resources to marketing our product and brand.
In addition to the sales and marketing of SiteMinder, we are also a
non-exclusive distributor of Check Point Software Technologies' FireWall-1
product, complementary products from other vendors and related maintenance,
consulting and training services. We sell these products and services directly
to end-users through a small, dedicated sales organization in the United States.
We also benefit from marketing programs conducted by Check Point Software
Technologies.
CUSTOMERS
As of December 31, 1998, we licensed SiteMinder software to 46 end-user
customers. Our customer base spans multiple industry segments, focusing
primarily on financial services, high tech, government, insurance, retail and
telephone companies and internet service providers.
No single customer, including direct end users or resellers, accounted for
more than 10% of our total revenues during any of the years ended December 31,
1998, 1997 and 1996.
We also sold Check Point Software Technologies' FireWall-1 to over 300
customers and continue to provide support to most of them.
COMPETITION
The market for secure user management products and sources is new, rapidly
evolving and highly competitive. We expect competition to continue to increase
both from existing competitors and new market
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entrants. We believe that our ability to compete depends on many factors both
within and beyond our control, including:
- the performance, reliability, features, price and ease of use of our
SiteMinder product line as compared to those of our competitors;
- our ability to secure and maintain key strategic relationships with
distributors, resellers and other partners;
- our ability to expand both our domestic and international sales
operations; and
- the timing and market acceptance of new solutions and enhancements to
existing solutions developed by us and our competitors.
Until recently, our primary source of competition was from custom-built
secure user management software developed in-house. Many of our potential
customers have the resources to establish in-house software development
capabilities, and some of them, from time to time, may choose to develop their
own secure user management technology competitive with ours. Our primary
competitors now include enCommerce and a partnership between IBM and DASCOM. We
also have faced competition from web development professional services
organizations. In addition, a number of other security and software companies
have indicated that they offer products which may compete with ours. Additional
competition may develop as the market matures and other companies begin to offer
similar products, and as our product offerings expand to other segments of the
marketplace. Current and potential competitors have established, or may in the
future establish, cooperative selling relationships with third parties to
increase the distribution of their products to the marketplace. Accordingly, it
is possible that new competitors may emerge and rapidly acquire significant
market share.
Some of our competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than we do. Many of
these companies have broader customer relationships that can be leveraged,
including relationships with many of our customers. These companies also have
more established customer support and implementation services than we do. In
addition, these companies may adopt aggressive pricing policies. As a result, we
may not be able to maintain a competitive position against current or future
competitors.
As new participants enter the secure user management market, we will face
increased competition. Potential competitors may bundle their products in a
manner that discourages users from purchasing our products. It is also possible
that current and potential competitors may be able to respond more quickly to
new or emerging technologies or customer requirements, resulting in the
acquisition of market share.
Our FireWall-1 reseller business experiences competition from companies
that offer products competing with Check Point Software Technologies' FireWall-1
product, including Axent Technologies, Cisco Systems and Trusted Information
Systems. We also compete with other resellers of FireWall-1.
PRODUCT RESEARCH AND DEVELOPMENT
The market for e-commerce security products is characterized by rapid
technological change, changes in customer requirements, new product
introductions and enhancements, and emerging industry standards. We devote
significant time and resources to analyzing and responding to changes in the
industry, such as changes in operating systems, application software, security
standards and networking software and evolving customer requirements.
E-commerce applications have significant requirements for scalability,
reliability, sophisticated security and ease of administration. These increased
demands drive the need for a centralized access control model for administrators
and a single point of access for end-users. With the growing implementation of
standards-based user directories, such as LDAP, and the proliferation of
flexible and easy-to-use security products, businesses are able to take
advantage of best-of-breed solutions as they deploy e-commerce applications
across heterogeneous networks. We have made, and expect to continue to make, a
substantial investment in research and development. In the year ended December
31, 1998, we spent approximately $2.0 million, or 42% of
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total revenues, on research and development of our SiteMinder product. We will
continue our product development efforts for our current product, as well as
developing next generation versions of our product line. As of December 31,
1998, we had 20 employees engaged in research and development activities.
We believe our future success depends largely on our ability to enhance and
broaden our existing product line to meet the evolving needs of the market.
There can be no assurance that we will be able to respond effectively to
technological changes or new industry standards or developments. Our operating
results and business could be adversely affected if we were to incur significant
delays or be unsuccessful in developing new products or enhancing our existing
products, or if any such enhancements or new products do not gain market
acceptance. In addition, a number of factors may cause variations in our future
operating results. These include the timing of product introductions and
enhancements by us or our competitors, market acceptance of new products, or
customer order deferrals in anticipation of new products.
PROPRIETARY RIGHTS
Our success and ability to compete are dependent to a significant degree on
our ability to develop and maintain the proprietary aspects of our technology
and operate without infringing on the proprietary rights of others. We rely on a
combination of trademark, trade secret and copyright laws and licenses and
contractual restrictions to protect the proprietary aspects of our technology.
These legal protections afford only limited protection for our technology. We
seek to protect our source code for our software, documentation and other
written materials under trade secret and copyright laws. We license our software
pursuant to signed license agreements, which impose restrictions on the
licensee's ability to utilize the software. Finally, we seek to limit disclosure
of our intellectual property by requiring employees and consultants with access
to our proprietary information to execute confidentiality agreements with us and
by restricting access to our source code. Due to rapid technological change, we
believe that factors such as the technological and creative skills of our
personnel, new product developments and enhancements to existing products are
more important than the various legal protections of our technology to
establishing and maintaining a technology leadership position.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult and while we are unable to determine the extent to which piracy of our
software exists, software piracy can be expected to be a persistent problem. In
addition, the laws of many countries do not protect our proprietary rights to as
great an extent as do the laws of the United States. Litigation may be necessary
in the future to enforce our intellectual property rights, to protect our trade
secrets, to determine the validity and scope of the proprietary rights of others
or to defend against claims of infringement or invalidity. Any such resulting
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on our business, operating results and
financial condition. There can be no assurance that our means of protecting our
proprietary rights will be adequate or that our competitors will not
independently develop similar technology. Any failure by us to meaningfully
protect our property could have a material adverse effect on our business,
operating results and financial condition.
There can be no assurance that third parties will not claim infringement
with respect to our current or future products. We expect that developers of
web-based application software products will increasingly be subject to
infringement claims as the number of products and competitors in our industry
segment grows and as the functionality of products in different segments of the
software industry increasingly overlaps. Any such claims, with or without merit,
could be time consuming to defend, result in costly litigation, divert
management's attention and resources, cause product shipment delays or require
us to enter into terms acceptable to us or at all. A successful infringement
claim against us and our failure or inability to license the infringed rights or
develop or license technology with comparable functionality could have a
material adverse effect on our business, financial condition and operating
results.
We integrate third-party software into our products. This third-party
software may not continue to be available on commercially reasonable terms. We
believe, however, there are alternative sources for such
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<PAGE> 11
technology. If we could not maintain licenses to the third-party software
included in our products, however, distribution of our products could be delayed
until equivalent software could be developed or licensed and integrated into our
products, which could materially adversely affect our business, operating
results and financial condition.
EMPLOYEES
As of December 31, 1998, we had a total of 64 full-time employees, of which
20 were involved in research and development, 34 in sales, marketing and
customer support, and 10 in administration and finance. None of our employees
are represented by a labor union. We have not experienced any work stoppages and
believe that our relationships with employees are good. Our future success will
depend in part on our ability to attract, retain and motivate highly qualified
technical and management personnel, for whom competition is intense.
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<PAGE> 12
FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This report and the documents incorporated in it by reference contain
forward-looking statements about our plans, objectives, expectations and
intentions. You can identify these statements by words such as "expect,"
"anticipate," "intend," "plan," "believe," "seek," "estimate," "may," "will"
and "continue" or similar words. You should read statements that contain these
words carefully. They discuss our future expectations, contain projections of
our future results of operations or our financial condition or state other
forward-looking information, and may involve known and unknown risks over which
we have no control. You should not place undue reliance on forward-looking
statements. We cannot guarantee any future results, levels of activity,
performance or achievements. Moreover, we assume no obligation to update
forward-looking statements or update the reasons actual results could differ
materially from those anticipated in forward-looking statements. The factors
discussed in the sections captioned "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business"
in this report and the documents incorporated in it by reference identify
important factors that may cause our actual results to differ materially from
the expectations we describe in our forward-looking statements.
This report and the documents incorporated in it by reference contain
data related to the e-commerce market. These market data have been included in
studies published by the market research firms of Forrester Research and
International Data Corporation. These data include projections that are based
on a number of assumptions, including increasing worldwide business use of the
Internet, the growth in the number of web access devices per user, the absence
of any failure of the Internet, and the continued improvement of security on
the Internet. If any of these assumptions is incorrect, actual results may
differ from the projections based on those assumptions.
RISK FACTORS
The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward-looking statements. In that context, the discussion
in this Item contains forward-looking statements which involve certain degrees
of risk and uncertainties, including statements relating to liquidity and
capital resources. Except for the historical information contained herein,
the matters discussed in this section are such forward-looking statements
that involve risks and uncertainties, including:
WE HAVE INCURRED SUBSTANTIAL LOSSES AND MAY NOT BE PROFITABLE IN THE FUTURE.
In recent years, we have incurred substantial operating losses in every
fiscal period. We cannot predict when we will become profitable, if at all, and
if we do, that we will remain profitable for any substantial period of time.
Failure to achieve profitability within the time frame expected by investors may
adversely affect the market price of our common stock. In the year ended
December 31, 1998, we had a net loss of $5.2 million. As a result of ongoing
operating losses, at December 31, 1998, we had an accumulated deficit of $14.6
million. We have generated relatively small amounts of SiteMinder revenues until
recent fiscal quarters, while increasing expenditures in all areas, particularly
in research and development and sales and marketing, in order to execute our
business plan. Although we have experienced revenue growth in connection with
SiteMinder in recent periods, the growth has been off of a small base, and it is
unlikely that the recent growth rates are sustainable.
DISAPPOINTING QUARTERLY RESULTS COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK
TO FALL SUBSTANTIALLY.
Our quarterly revenues and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter. If our quarterly revenues
or operating results fall below the expectations of investors, the price of our
common stock could fall substantially.
Our quarterly revenues may fluctuate for several reasons, including the
following:
- market acceptance of our SiteMinder products;
- our success in obtaining follow-on sales to existing customers;
- the long sales and deployment cycle for sales of SiteMinder licenses;
- our ability to hire and retain personnel, particularly in services and
sales and marketing;
- the release of new versions of SiteMinder or other products; and
- the development of our direct and indirect sales channels.
In addition, because our revenues from services are largely correlated with
our SiteMinder software revenues, a decline in SiteMinder software revenues
could also cause a decline in our SiteMinder services revenues in the same
quarter or in subsequent quarters. Other factors, many of which are outside our
control, could also cause variations in our quarterly revenues and operating
results.
Most of our expenses, such as employee compensation and rent, are
relatively fixed. Moreover, our expense levels are based, in part, on our
expectations regarding future revenue increases. As a result, any shortfall in
revenues in relation to our expectations could cause significant changes in our
operating results from quarter to quarter and could result in increased
quarterly losses.
OUR FUTURE SUCCESS WILL DEPEND ON OUR ABILITY TO MARKET SITEMINDER AND RELATED
SERVICES SUCCESSFULLY.
The sale of SiteMinder licenses and related services provides a substantial
majority of our total revenues. These sales accounted for 41% of our total
revenues for the year ended December 31, 1998. 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
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SiteMinder for business-to-consumer applications, and customer demand for the
specific functionality of SiteMinder. We cannot be sure that either will occur.
Like most technology products at an early stage of development, SiteMinder may
require extensive reengineering or upgrading if it fails to meet the performance
needs or expectations of our customers when shipped or contains significant
software defects or bugs. If we fail in marketing SiteMinder products and
services, for whatever reason, our business would be harmed.
OUR SUCCESS IS DEPENDENT ON OUR ABILITY TO ENHANCE OUR SITEMINDER PRODUCT LINE
AND DEVELOP NEW PRODUCTS.
We believe our success is dependent, in large part, on our ability to
enhance and broaden our SiteMinder product line to meet the evolving needs of
both the business-to-business and business-to-consumer market. We cannot be sure
that we will be able to respond effectively to technological changes or new
industry standards or developments. In the past, we have been forced to delay
introduction of several new product versions. In the future, we could be
adversely affected if we incur significant delays or are unsuccessful in
enhancing our SiteMinder product line or developing new products, or if any of
our enhancements or new products do not gain market acceptance.
OUR PERFORMANCE DEPENDS ON OUR ABILITY TO OBTAIN FOLLOW-ON SALES.
Customers typically place small initial orders for SiteMinder installations
to allow them to evaluate its performance. Our strategy is to pursue more
significant follow-on sales after these initial installations. Our financial
performance depends on successful initial deployments of SiteMinder that, in
turn, lead to follow-on sales. We cannot be sure that initial deployments of
SiteMinder by our customers will be successful, or that we will be able to
obtain follow-on sales.
WE FACE SIGNIFICANT COMPETITION FROM THE INTERNAL EFFORTS OF POTENTIAL CUSTOMERS
AND FROM OTHER TECHNOLOGY COMPANIES AND WE MAY NOT BE ABLE TO COMPETE
EFFECTIVELY.
The market for secure user management products and services is relatively
immature and highly competitive. We expect the level of competition to increase
as a result of the anticipated growth of e-commerce. Until recently, our primary
source of competition was from secure user management software developed
in-house. Many of our potential customers have the resources to establish
in-house software development capabilities, and some of them, from time to time,
may choose to develop their own secure user management technology that is
competitive with ours. In addition, we have faced competition from web
development professional services organizations. Today our primary competitors
include enCommerce and the partnership between IBM and DASCOM. In addition, a
number of other security and software companies have indicated that they offer
products which may compete with ours. We expect that additional competitors will
emerge in the future. Current and potential competitors have established, or may
in the future establish, cooperative relationships with third parties to
increase the availability of their products to the marketplace. It is possible
that new competitors or alliances may emerge and rapidly acquire significant
market share. Potential competitors may have significantly greater financial,
marketing, technical and other competitive resources than we have. If, in the
future, a competitor chooses to bundle a competing secure user management
product with other e-commerce applications, the demand for our products might be
substantially reduced. Many of these factors are out of our control, and there
can be no assurance that we can maintain or enhance our competitive position
against current and future competitors.
THE DEVELOPMENT OF A MARKET FOR SITEMINDER IS UNCERTAIN.
We provide secure user management solutions for web-based e-commerce
applications. Our market is new and rapidly evolving. If the market for secure
user management solutions does not grow at a significant rate, this will have a
material adverse effect on our business, operating results and financial
condition. As is typical for new and rapidly evolving industries, customer
demand for recently introduced secure user management products is highly
uncertain.
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OUR BUSINESS WILL BE ADVERSELY AFFECTED IF THE INTERNET DOES NOT BECOME A VIABLE
AND SUBSTANTIAL COMMERCIAL MEDIUM.
Our future success depends heavily on the acceptance and wide use of the
Internet for e-commerce. If e-commerce does not continue to grow or grows more
slowly than expected, significant demand for SiteMinder and related services may
fail to develop. Consumers and businesses may reject the Internet as a viable
commercial medium for a number of reasons, including potentially inadequate
network infrastructure, slow development of enabling technologies, insufficient
commercial support or privacy concerns. In addition, delays in the development
or adoption of new standards and protocols required to handle increased levels
of e-commerce, or increased government regulation or taxation, could cause the
Internet to lose its viability as a commercial medium.
REGULATIONS OR CONSUMER CONCERNS REGARDING THE USE OF "COOKIES" ON THE INTERNET
COULD REDUCE THE FUNCTIONALITY OF SITEMINDER.
SiteMinder uses cookies to support its single sign-on functionality. A
cookie is information keyed to a specific user that is stored on the hard drive
of the user's computer, typically without the user's knowledge. Cookies are
generally removable by the user, and can be refused by the user at the point at
which the information would be stored on the user's hard drive. A number of
governmental bodies and commentators in the United States and abroad have urged
passage of laws limiting or abolishing the use of cookies. The passage of laws
limiting or abolishing the use of cookies, or the widespread deletion or refusal
of cookies by web site users, could reduce or eliminate the effectiveness of
single sign-on and could reduce market demand for SiteMinder.
WE MUST HIRE AND RETAIN SKILLED PERSONNEL IN A TIGHT LABOR MARKET.
Qualified personnel are in great demand throughout the software industry.
Our success depends, in large part, upon our ability to attract, train, motivate
and retain highly skilled employees, particularly software engineers,
professional services personnel, sales and marketing personnel, and other senior
personnel. Our failure to attract and retain the highly trained technical
personnel that are integral to our product development, professional services
and direct sales teams may limit the rate at which we can generate sales and
develop new products or product enhancements. This could have a material adverse
effect on our business, operating results and financial condition.
OUR SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP OUR DIRECT SALES AND INDIRECT
DISTRIBUTION CHANNELS.
To increase our revenues, we must develop our direct sales channel and
increase the number of our indirect channel partners. A failure to do so could
have a material adverse effect on our business, operating results and financial
condition. There is intense competition for sales personnel in our business, and
we cannot be sure that we will be successful in attracting, integrating,
motivating and retaining sales personnel. In addition, we must increase the
number of strategic partnerships and other third-party relationships with
vendors of Internet-related systems and application software, resellers and
systems integrators. Our existing or future channel partners may choose to
devote greater resources to marketing and supporting the products of other
companies. In addition, we will need to resolve potential conflicts among our
sales force and channel partners.
OUR FAILURE TO EXPAND OUR PROFESSIONAL SERVICES RESOURCES COULD LIMIT THE
SUCCESS OF SITEMINDER.
Our professional services organization provides critical support to our
customers' installation and deployment of SiteMinder. If we fail to expand our
professional services resources, our ability to increase sales of SiteMinder may
be limited. In addition, if we cannot adequately support SiteMinder
installations, our customers' use of our products may fail, which could harm our
reputation and hurt our business.
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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 December 31, 1998, the
number of our employees increased from 40 to 64. To manage future growth
effectively we must maintain and enhance our financial and accounting systems
and controls, integrate new personnel and manage expanded operations.
IF WE LOSE THE SERVICES OF BARRY BYCOFF OR ANY OTHER MEMBER OF OUR MANAGEMENT
TEAM, OUR BUSINESS COULD SUFFER.
Our future success depends, to a significant degree, on the skill,
experience and efforts of Barry Bycoff, our chief executive officer, and the
rest of our management team. The loss of any member of our management team could
have a material adverse effect on our business, operating results and financial
condition. We also depend on the ability of our officers and key employees to
work effectively as a team.
AS WE EXPAND OUR INTERNATIONAL OPERATIONS, WE WILL FACE NEW RISKS TO OUR
SUCCESS.
Historically, we have not derived a significant portion of our total
revenues from sales to customers outside the United States. However, we intend
to expand our international operations in the future. This expansion will
require additional resources and management attention, and will subject us to
new regulatory, economic and political risks. We have very little experience in
international markets. As a result, we cannot be sure that our expansion into
global markets will be successful. In addition, we will face new risks in doing
business internationally. These risks could reduce demand for our products and
services, increase the prices at which we can sell our products and services, or
otherwise have an adverse effect on our operating results. Among the risks we
believe are most likely to affect us are:
- longer payment cycles and problems in collecting accounts receivable;
- adverse changes in trade and tax regulations, including restrictions on
the import and export of sensitive technologies, such as encryption
technologies, that we use or may wish to use in our software products;
- the absence or significant lack of legal protection for intellectual
property rights;
- difficulties in managing an organization spread over several countries,
including complications arising from cultural, language and time
differences that may lengthen sales and implementation cycles;
- currency risks, including fluctuations in exchange rates; and
- political and economic instability.
OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR PROPRIETARY RIGHTS.
Our success depends to a significant degree upon the protection of our
software and other proprietary technology. The unauthorized reproduction or
other misappropriation of our proprietary technology could enable third parties
to benefit from our technology without paying us for it. This could have a
material adverse effect on our business, operating results and financial
condition. We depend upon a combination of
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<PAGE> 16
trademark, trade secret and copyright laws, license agreements and
non-disclosure and other contractual provisions to protect proprietary and
distribution rights in our products. In addition, we attempt to protect our
proprietary information and the proprietary information of our vendors and
partners through confidentiality and/or license agreements with our employees
and others. Although we have taken steps to protect our proprietary technology,
they may be inadequate. Existing trade secret, copyright and trademark laws
offer only limited protection. Moreover, the laws of other countries in which we
market our products may afford little or no effective protection of our
intellectual property. If we resort to legal proceedings to enforce our
intellectual property rights, the proceedings could be burdensome and expensive,
even if we were to prevail.
CLAIMS BY OTHER COMPANIES THAT WE INFRINGE THEIR PROPRIETARY TECHNOLOGY COULD
HURT OUR FINANCIAL CONDITION.
If we discover that any of our products violated third party proprietary
rights, there can be no assurance that we would be able to reengineer our
product or to obtain a license on commercially reasonable terms to continue
offering the product without substantial reengineering. We do not conduct
comprehensive patent searches to determine whether the technology used in our
products infringes patents held by third parties. In addition, product
development is inherently uncertain in a rapidly evolving technology environment
in which there may be numerous patent applications pending, many of which are
confidential when filed, with regard to similar technologies. Any claim of
infringement could cause us to incur substantial costs defending against the
claim, even if the claim is invalid, and could distract our management from our
business. Furthermore, a party making such a claim could secure a judgment that
requires us to pay substantial damages. A judgment could also include an
injunction or other court order that could prevent us from selling our products.
Any of these events could have a material adverse effect on our business,
operating results and financial condition.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF OUR PRODUCTS CONTAIN ERRORS.
Software products as complex as ours may contain undetected errors or
"bugs" that result in product failures. The occurrence of errors could result in
loss of or delay in revenues, loss of market share, failure to achieve market
acceptance, diversion of development resources, injury to our reputation, or
damage to our efforts to build brand awareness, any of which could have a
material adverse effect on our business, operating results and financial
condition.
WE COULD INCUR SUBSTANTIAL COSTS RESULTING FROM PRODUCT LIABILITY CLAIMS
RELATING TO OUR CUSTOMERS' USE OF OUR PRODUCTS.
Many of the e-commerce applications supported by our products are critical
to the operations of our customers' businesses. Any failure in a customer's web
site or application caused or allegedly caused by our products could result in a
claim for substantial damages against us, regardless of our responsibility for
the failure. Although we maintain general liability insurance, including
coverage for errors and omissions, there can be no assurance that our existing
coverage will continue to be available on reasonable terms or will be available
in amounts sufficient to cover one or more large claims, or that the insurer
will not disclaim coverage as to any future claim.
IF WE ACQUIRE OTHER COMPANIES OR BUSINESSES, WE WILL BE SUBJECT TO RISKS THAT
COULD HURT OUR COMPANY.
In the future, we may pursue acquisitions to obtain complementary products,
services and technologies. An acquisition may not produce the revenues, earnings
or business synergies that we anticipated, and an acquired product, service or
technology might not perform as we expected. If we pursue any acquisition, our
management could spend a significant amount of time and effort in identifying
and completing the acquisition. If we complete an acquisition, we would probably
have to devote a significant amount of management resources to integrate the
acquired business with our existing business.
To pay for an acquisition, we might use our stock or cash. Alternatively,
we might borrow money from a bank or other lender. If we use our stock, our
stockholders would experience dilution of their ownership interests. If we use
cash or debt financing, our financial liquidity will be reduced.
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THE MARKET PRICE OF OUR COMMON STOCK HAS BEEN AND MAY CONTINUE TO BE VOLATILE
AND YOU MAY NOT BE ABLE TO SELL YOUR SHARES AT OR ABOVE THE PUBLIC OFFERING
PRICE.
Our stock price, like that of other technology companies, has been
extremely volatile. The announcement of new products, services, technological
innovations or distribution partners by us or our competitors, quarterly
variations in our operating results, changes in revenues or earnings estimates
by securities analysts and speculation in the press or investment community are
among the factors affecting our stock price. In addition, our common stock is
listed on the Nasdaq SmallCap Market, which may increase investors' difficulty
in buying and selling our common stock, which could have the effect of
increasing the volatility of our stock price.
The stock market in general, and the market prices for Internet-related
companies in particular, have experienced extreme volatility that often has been
unrelated to the operating performance of these companies. These broad market
and industry fluctuations may adversely affect the market price of our common
stock, regardless of our operating performance. Recently, when the market price
of a stock has been volatile, holders of that stock have often instituted
securities class action litigation against the company that issued the stock. If
any of our stockholders brought a lawsuit against us, we could incur substantial
costs defending the lawsuit. The lawsuit could also divert the time and
attention of our management.
WE MAY LOSE MONEY ON FIXED-PRICE CONSULTING CONTRACTS.
In the future, an increased portion of our SiteMinder services revenues may
be derived from fixed-price contracts. We work with complex technologies in
compressed time frames and it can be difficult to judge the time and resources
necessary to complete a project. If we miscalculate the resources or time we
need to complete work under fixed-price contracts, our operating results could
be materially harmed.
LOSS OF OUR FIREWALL-1 RESELLER BUSINESS WOULD ADVERSELY AFFECT OUR OPERATING
RESULTS.
While we recently have focused our resources on developing and marketing
our SiteMinder software and services, we continue to generate a significant
portion of our revenues from our sales of Check Point Software Technologies'
FireWall-1 product. Our FireWall-1 reseller business experiences competition
from companies that compete with FireWall-1, including Axent Technologies, Cisco
Systems and Trusted Information Systems, as well as from other resellers of
FireWall-1. As a result, we may not be able to maintain the current revenue
levels generated by our FireWall-1 reseller business.
CERTAIN PROVISIONS OF OUR CHARTER AND OF DELAWARE LAW MAKE A TAKEOVER OF OUR
COMPANY MORE DIFFICULT.
Our corporate documents and Delaware law contain provisions that might
enable our management to resist a takeover of our company. These provisions
might discourage, delay or prevent a change in the control of Netegrity or a
change in our management. These provisions could also discourage proxy contests
and make it more difficult for you and other stockholders to elect directors and
take other corporate actions. The
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existence of these provisions could limit the price that investors might be
willing to pay in the future for shares of our common stock.
WE MAY BE ADVERSELY IMPACTED BY UNEXPECTED YEAR 2000 ISSUES.
Computer systems and software must accept four digit entries to distinguish
twenty-first century dates from twentieth century dates. As a result, many
software and computer systems may need to be upgraded in order to be Year 2000
compliant. Significant uncertainties exist in the software industry concerning
the potential effects associated with such compliance. We have assessed the
impact of Year 2000 compliance on our products and systems. We cannot, however,
be certain that we have identified all of the potential risks to our business
that could result from matters related to the Year 2000. We have identified the
following risks that you should be aware of:
- Undetected Year 2000 problems that could affect our products. We believe
that all of our versions of our SiteMinder software products were Year
2000 compliant at the time of installation. Although we have tested
these products for Year 2000 compliance, we cannot be certain that these
tests have detected all potential Year 2000 problems. The failure of our
currently supported products to be fully Year 2000 compliant could
result in claims by or liability to our customers, which could have a
material adverse effect on our business and operating results. In
addition, we have relied on representations of Check Point as to the
Year 2000 readiness of FireWall-1. Any failure of FireWall-1 to be Year
2000 compliant may have a material adverse affect on our FireWall-1
reseller business, our customer relationships and our operating results.
- Year 2000 problems that affect our internal systems. We believe that our
internal software systems are Year 2000 compliant. Although we have
tested these systems for Year 2000 compliance, we cannot be certain that
these tests have detected all potential Year 2000 problems. It is
possible that these systems could contain undetected problems that could
cause serious and costly disruptions which would have a material adverse
effect on our business and operating results.
- Year 2000 problems that affect products and services provided to us by
third parties. We have relied on certifications from our software
vendors and suppliers regarding the Year 2000 readiness of products and
services they provide to us. We have not conducted independent tests of
these products and services. It is possible that these systems could
contain undetected problems that could cause serious and costly delivery
delays which would have a material adverse effect on our business and
operating results.
THE YEAR 2000 ISSUE MAY CAUSE OUR CURRENT AND POTENTIAL CUSTOMERS TO DELAY
IMPLEMENTING OUR SOFTWARE.
Some of our customers and potential customers have implemented policies
that prohibit or discourage changing their internal computer systems until after
January 1, 2000. Our revenues may suffer if potential customers delay the
purchase of our products until after January 1, 2000. Purchasing decisions may
be delayed as potential customers halt development of their internal computer
systems or use their information technology budgets to address Year 2000 issues.
If our potential customers delay purchasing or implementing our products in
preparation for the Year 2000 problem, our business could be seriously harmed.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with our consolidated financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere herein. The statement of operations data for the nine months
ended December 31, 1996 and the years ended December 31, 1997 and 1998, and the
balance sheet data as of December 31, 1997 and 1998, are derived from, and are
qualified by reference to, consolidated financial statements audited by
PricewaterhouseCoopers LLP and included elsewhere herein. The statement of
operations data for the years ended March 31, 1995 and 1996 and the balance
sheet data as of March 31, 1995, March 31, 1996 and December 31, 1996, are
derived from audited consolidated financial statements not included herein. The
statement of operations data for the pro forma twelve months ended December 31,
1996 and the nine months ended December 31, 1997, are unaudited. The unaudited
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements and, in the opinion of our management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the information set forth therein.
Historical results are not necessarily indicative of operating results to be
expected in the future.
<TABLE>
<CAPTION>
NINE MONTHS PRO FORMA
YEARS ENDED ENDED TWELVE MONTHS YEARS ENDED
MARCH 31, DECEMBER 31, ENDED DECEMBER 31,
-------------- ----------------- DECEMBER 31, -----------------
1995 1996 1996 1997 1996 1997 1998
----- ------ ------- ------- ------------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
SiteMinder software............. -- -- -- $ 237 -- $ 237 $ 1,483
SiteMinder services............. -- -- -- 12 -- 12 468
Other........................... $ 959 $3,725 $ 3,637 3,497 $ 4,966 4,484 2,840
----- ------ ------- ------- ------- ------- -------
Total revenues.................. 959 3,725 3,637 3,746 4,966 4,733 4,791
Cost of revenues.................. 488 2,173 2,176 1,935 2,931 2,470 1,764
----- ------ ------- ------- ------- ------- -------
Gross profit...................... 471 1,552 1,461 1,811 2,035 2,263 3,027
Selling, general and
administrative expenses......... 305 1,178 2,303 4,487 2,702 5,509 6,395
Research and development costs.... -- -- 705 927 705 1,028 1,991
----- ------ ------- ------- ------- ------- -------
Income (loss) from operations..... 166 374 (1,547) (3,603) (1,372) (4,274) (5,359)
Interest income (expense), net.... (1) 20 181 124 188 203 130
Share of loss from investment in
Encotone, Inc. ................. -- -- (40) (76) (40) (132) --
Write off of investment in
Encotone LTD.................... -- -- -- (1,049) -- (1,049) --
----- ------ ------- ------- ------- ------- -------
Income (loss) from continuing
operations...................... 165 394 (1,406) (4,604) (1,224) (5,252) (5,229)
Income (loss) from discontinued
operations...................... 31 (240) (520) -- (735) -- --
Gain on sale of assets of
discontinued operations......... -- -- 6,000 -- 6,000 -- --
----- ------ ------- ------- ------- ------- -------
Income (loss) before provision for
income taxes.................... 196 154 4,074 (4,604) 4,041 (5,252) (5,229)
Provision for income taxes........ -- 25 (74) -- (74) -- --
----- ------ ------- ------- ------- ------- -------
Net income (loss)................. $ 196 $ 129 $ 4,000 $(4,604) $ 3,967 $(5,252) $(5,229)
===== ====== ======= ======= ======= ======= =======
Basic and diluted earnings per
share:
From continuing operations...... $0.02 $ 0.05 $ (0.16) $ (0.50) $ (0.12) $ (0.57) $ (0.56)
From operation of discontinued
operations.................... -- (0.03) (0.06) -- (0.07) -- --
Gain on sale of assets.......... -- -- 0.67 -- 0.61 -- --
----- ------ ------- ------- ------- ------- -------
Net income (loss)............... $0.02 $ 0.02 $ 0.45 $ (0.50) $ 0.40 $ (0.57) $ (0.56)
===== ====== ======= ======= ======= ======= =======
Weighted average shares
outstanding..................... 8,710 8,835 8,944 9,209 9,901 9,279 9,362
</TABLE>
18
<PAGE> 20
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------------- ---------------------------
1995 1996 1996 1997 1998
------ ------- ------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 672 $ 1,410 $ 6,791 $2,134 $1,175
Working capital................................... 651 401 4,629 9 47
Total assets...................................... 9,170 10,456 10,259 4,849 4,225
Total stockholders' equity........................ 1,950 1,903 6,149 1,016 996
</TABLE>
19
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Consolidated
Financial Data" and our consolidated financial statements and related notes
appearing elsewhere in this prospectus. This discussion and analysis contains
forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from those anticipated in these forward-looking
statements, as described under "Forward-Looking Statements and Industry Data."
OVERVIEW
We are a leading provider of software and services for managing and
controlling user access to web-based e-commerce applications. We introduced our
flagship product, SiteMinder, with the first commercial release of SiteMinder
2.0 in November 1997. In June 1998, we began shipment of SiteMinder 3.0, the
first commercially available directory-enabled secure user management solution
for web-based e-commerce applications. We changed our fiscal year end from March
31 to December 31, effective with the fiscal period ending December 31, 1996.
The financial statements for the period ended December 31, 1996 reflect our
operating results for the nine months then ended.
We derive our revenues from the sale of SiteMinder software and services
and from revenues related to the resale of Check Point Software Technologies'
FireWall-1 software product. SiteMinder software revenues are derived from the
sale of SiteMinder product licenses. SiteMinder service revenues are derived
from fees related to the implementation and maintenance of SiteMinder and
training on the SiteMinder product. Other revenues are derived from the resale,
through a dedicated sales organization, of FireWall-1, complementary products
from other vendors and related maintenance, consulting and training services.
SiteMinder software revenues accounted for 31% of total revenues in the year
ended December 31, 1998 and 5% of total revenues in the year ended December 31,
1997. SiteMinder services revenues accounted for 10% of total revenues in the
year ended December 31, 1998 and less than 1% of total revenues in the year
ended December 31, 1997. Other revenues accounted for 59% of total revenues in
the year ended December 31, 1998 and 95% of total revenues in the year ended
December 31, 1997. We expect SiteMinder software and services revenues to
increase as a percentage of total revenues.
We recognize our SiteMinder and other software license revenues in
accordance with Statement of Position 97-2, "Software Revenue Recognition."
Statement of Position 97-2 generally requires revenues earned on software
arrangements involving multiple elements to be allocated to each element based
on the relative fair values of the elements. We generally recognize revenues
allocated to software licenses upon delivery of the software products, provided
that we have no remaining significant obligations with regard to implementation,
the license fee is fixed or determinable and collection of the fee is probable.
Revenues derived from arrangements with resellers of our products are not
recognized until the software is shipped to the end user. Generally, the price
of a SiteMinder license is based upon a specified number of directory server
users. The price per licensed user decreases as the number of licensed users
increases. Our SiteMinder and other customers often contract for maintenance,
which provides them with new releases of software and various technical support
and services for a specified period which is typically one year. These
agreements are generally separately negotiated and priced based on a percentage
of software license revenues. We recognize maintenance revenues from these
contracts ratably over the contractual period. We provide consulting and
training services on either a daily rate or fixed-cost basis. We recognize
revenues from the sale of consulting services provided at a daily rate ratably
over the support term and revenues from the sale of consulting and training
services provided on a fixed cost basis as the services are performed.
We currently sell our SiteMinder products through a combination of our
direct sales force, worldwide resellers and licensees. We anticipate that the
percentage of our revenues derived outside of North America will increase.
Increasing our international sales may subject us to risks, many of which are
outside
20
<PAGE> 22
our control, including economic uncertainties, currency fluctuations, political
instability and uncertain cultural and regulatory environments.
We record cash receipts from customers and billed amounts due from
customers in excess of recognized revenues as deferred revenue. The timing and
amount of cash receipts from customers can vary significantly depending on
specific contract terms and therefore can have a significant impact on the
amount of deferred revenues in any given period.
Our gross profit is impacted by, among other things, royalties due to third
parties for technology included in our products, product fulfillment costs, and
salaries and related expenses for our consulting, education and technical
support services organizations, and the associated cost of training facilities.
In addition, our gross profit is impacted by the mix of software versus services
revenues. We anticipate that, as SiteMinder software revenues increase as a
percentage of total revenues, our gross profit will increase because our costs
associated with SiteMinder software revenues are lower than the costs associated
with our other products and services.
Our operating expenses are classified into two general categories: sales,
general and administrative and research and development. Sales, general and
administrative expenses consist primarily of salaries and other related costs
for sales, administrative and marketing personnel, sales commissions, travel,
legal and accounting services, public relations, marketing materials, trade
shows and certain facilities-related expenses. Research and development expenses
consist primarily of personnel costs to support product development.
We record software development costs in accordance with Financial
Accounting Standards Board Statement No. 86. In the year ended December 31,
1998, we capitalized $282,000 of research and development costs as a result of
our realizing technological feasibility. Capitalized software costs, net of
amortization, is $176,000 at December 31, 1998.
Since 1996, we have incurred substantial costs to develop our technology
and products, to recruit and train personnel for our research and development,
sales, marketing and professional services departments, and to establish an
administrative organization. We have incurred net losses in each fiscal quarter
since 1996 and had an accumulated deficit of $14.6 million as of December 31,
1998. We anticipate that our operating expenses will increase substantially in
future quarters as we increase sales and marketing operations, expand
distribution channels, increase research and development, broaden professional
services, expand facilities and support, and improve operational and financial
systems. Accordingly, we expect to incur additional losses through at least
2000.
Although we have experienced significant growth in revenues in recent
periods, that growth has been from a relatively small base, and there can be no
assurance that those growth rates are sustainable. Therefore, historical growth
rates should not be considered indicative of future operating results. There can
also be no assurance that we will be able to continue to increase our revenues
or attain profitability or, if increases in revenue and profitability are
achieved, that they can be sustained. We believe that the period-to-period
comparisons of our historical operating results are not meaningful and should
not be relied upon as an indication of future performance.
As of December 31, 1998, we had net operating loss carryforwards of $12.9
million available for federal purposes to reduce future taxable income expiring
on various dates through 2018. Provisions of the Internal Revenue Code may limit
the net operating loss available for use in any given year, based upon
significant past or future changes of our ownership.
As of June 28, 1996, we completed the divestiture of our catalog-related
business, consisting of The Programmer's SuperShop catalog and web site, the
corporate sales group, SDC Germany and SDC Communications. We incurred $2.6
million in expenses and write-offs related to the divestiture and realized a
gain of $6.0 million from the sale of assets. We utilized a portion of our
available operating loss carryforwards at that time to decrease the amount of
federal and state corporate income taxes.
21
<PAGE> 23
RESULTS OF OPERATIONS
The following table presents statement of operations data as percentages of
total revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS PRO FORMA
ENDED TWELVE MONTHS YEARS ENDED
DECEMBER 31, ENDED DECEMBER 31,
------------- DECEMBER 31, ------------
1996 1997 1996 1997 1998
---- ----- ------------- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
SiteMinder software......................... -- 7% -- 5% 31%
SiteMinder services......................... -- -- -- -- 10
Other....................................... 100% 93 100% 95 59
--- ---- --- ---- ----
Total revenues.............................. 100 100 100 100 100
Cost of revenues.............................. 60 52 59 52 37
--- ---- --- ---- ----
Gross profit.................................. 40 48 41 48 63
Selling, general and administrative
expenses.................................... 63 120 54 116 133
Research and development costs................ 20 24 15 22 42
--- ---- --- ---- ----
Loss from operations.......................... (43) (96) (28) (90) (112)
Interest income (expense), net................ 5 3 4 4 3
Share of loss from investment in Encotone,
Inc......................................... (1) (2) (1) (3) --
Write off of investment in Encotone LTD....... -- (28) -- (22) --
--- ---- --- ---- ----
Loss from continuing operations............... (39) (123) (25) (111) (109)
Loss from discontinued operations............. (14) -- (15) -- --
Gain on sale of assets of discontinued
operations.................................. 165 -- 121 -- --
--- ---- --- ---- ----
Income (loss) before provision for income
taxes....................................... 112 (123) 81 (111) (109)
Provision for income taxes.................... (2) -- (1) -- --
--- ---- --- ---- ----
Net income (loss)............................. 110% (123)% 80% (111)% (109)%
=== ==== === ==== ====
</TABLE>
22
<PAGE> 24
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues. Total revenues increased by $58,000, or 1%, to $4.8 million in
the year ended December 31, 1998, from $4.7 million in the year ended December
31, 1997.
SiteMinder software revenues increased by $1.2 million, or 526%, to $1.5
million in the year ended December 31, 1998, from $237,000 in the year ended
December 31,1997. The first commercial release of SiteMinder was version 2.0 in
November 1997. SiteMinder 3.0 was released in June 1998, after which revenues
increased each quarter.
SiteMinder services revenues increased by $456,000 to $468,000 in the year
ended December 31, 1998, from $12,000 in the year ended December 31, 1997. As
the number of SiteMinder software customers grew in 1998, support and consulting
services grew accordingly.
Other revenues decreased by $1.6 million, or 37%, to $2.8 million in the
year ended December 31, 1998, from $4.5 million in the year ended December 31,
1997. This decrease is a result of our de-emphasis on the FireWall-1 related
products and services as we shifted resources to SiteMinder products and
services.
Gross profit. Gross profit increased by $764,000, or 34%, to $3.0 million
in the year ended December 31, 1998, from $2.3 million in the year ended
December 31, 1997. The increase in SiteMinder software revenues resulted in
higher gross profit due to lower costs of sales associated with SiteMinder
software revenues.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $886,000, or 16%, to $6.4 million in the
year ended December 31, 1998, from $5.5 million in the year ended December 31,
1997. This increase was primarily a result of our continuing to build our sales
and marketing infrastructure to support planned growth in sales of our
SiteMinder product and services.
Research and development costs. Research and development costs, net of
capitalized software, increased by $963,000, or 94%, to $2.0 million in the year
ended December 31, 1998, from $1.0 million in the year ended December 31, 1997.
In the year ended December 31, 1997, we capitalized $310,000 of research and
development costs, net of amortization, as a result of our realizing
technological feasibility. Capitalized software costs, net of amortization, were
$176,000 at December 31, 1998.
Interest income (expense), net. Net interest income decreased $73,000, or
36%, to $130,000 in the year ended December 31, 1998, from $203,000 in the year
ended December 31, 1997. This decrease was mainly attributable to a lower
average cash balance in 1998.
23
<PAGE> 25
Nine Months Ended December 31, 1997 Compared to Nine Months Ended December 31,
1996
Revenues. Total revenues increased by $109,000, or 3%, to $3.7 million in
the nine months ended December 31, 1997, from $3.6 million in the nine months
ended December 31, 1996.
SiteMinder software revenues were $237,000 in the nine months ended
December 31, 1997. There were no SiteMinder software revenues in the nine months
ended December 31, 1996.
SiteMinder services revenues were $12,000 in the nine months ended December
31, 1997. There were no SiteMinder services revenues in the nine months ended
December 31, 1996.
Other revenues decreased by $140,000, or 4%, to $3.5 million in the nine
months ended December 31, 1997, from $3.6 million in the nine months ended
December 31, 1996. This decrease resulted from our decision to eliminate
hardware sales associated with the sale of FireWall-1 products during 1996,
which was partially offset by an increase in network security consulting fees.
Gross profit. Gross profit increased by $350,000, or 24%, to $1.8 million
in the nine months ended December 31, 1997, from $1.5 million in the nine months
ended December 31, 1996.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $2.2 million, or 95%, to $4.5 million in
the nine months ended December 31, 1997, from $2.3 million in the nine months
ended December 31, 1996. This increase resulted from building our management and
development staff infrastructure to bring our SiteMinder product to market.
Research and development costs. Research and development costs, net of
capitalized software, increased by $222,000, or 31%, to $927,000 in the nine
months ended December 31, 1997, from $705,000 in the nine months ended December
31, 1996. In the nine months ended December 31, 1997, we capitalized $344,000 of
research and development expenditures, net of amortization, as a result of our
realizing technological feasibility. We did not capitalize any research and
development expenditures in the nine months ended December 31, 1996. Capitalized
software costs, net of amortization, were $310,000 at December 31, 1997.
Interest income (expense), net. Net interest income decreased by $57,000,
or 31%, to $124,000 in the nine months ended December 31, 1997, from $181,000 in
the nine months ended December 31, 1996. This decrease is mainly attributable to
a lower average cash balance in the nine months ended December 31, 1997.
Year Ended December 31, 1997 Compared to Pro Forma Twelve Months Ended
December 31, 1996
Revenues. Total revenues decreased by $233,000, or 5%, to $4.7 million in
the year ended December 31, 1997, from $5.0 million in the pro forma twelve
months ended December 31, 1996.
SiteMinder software revenues were $237,000 in the twelve months ended
December 31, 1997. There were no SiteMinder software revenues in the pro forma
twelve months ended December 31, 1996.
SiteMinder services revenues were $12,000 in the twelve months ended
December 31, 1997. There were no SiteMinder services revenues in the pro forma
twelve months ended December 31, 1996.
Other revenues decreased by $482,000, or 10%, to $4.5 million in the twelve
months ended December 31, 1997, from $5.0 million in the pro forma twelve months
ended December 31, 1996. This decrease resulted from our decision to eliminate
hardware sales associated with the sale of FireWall-1 products during 1996.
Gross profit. Gross profit increased by $228,000, or 11%, to $2.3 million
in the year ended December 31, 1997, from $2.0 million in the pro forma twelve
months ended December 31, 1996. The increase in gross profit was attributable to
our elimination of hardware sales, as described above, which produced lower
gross profits.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $2.8 million, or 104%, to $5.5 million in
the year ended December 31, 1997, from $2.7 million in the pro
24
<PAGE> 26
forma twelve months ended December 31, 1996. This increase was a result of the
expansion of our sales and management to bring to market our SiteMinder product
to market and to manage our growth.
Research and development costs. Research and development costs, net of
capitalized software, increased by $323,000, or 46%, to $1.0 million in the year
ended December 31, 1997, from $705,000 in the pro forma twelve months ended
December 31, 1996. In the year ended December 31, 1997, we capitalized $310,000
of research and development expenditures, net of amortization, as a result of
our realizing technological feasibility. No costs were capitalized in the pro
forma twelve months ended December 31, 1996.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth unaudited quarterly financial data for each
of our last two fiscal years and those data expressed as percentages of our
total revenues for the respective quarters. This information has been derived
from unaudited consolidated financial statements that, in the opinion of our
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the quarterly information.
The operating results for any quarter are not necessarily indicative of results
to be expected for any future period.
<TABLE>
<CAPTION>
QUARTERS ENDED
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
SiteMinder software..... -- -- -- $ 237 $ 131 $ 242 $ 411 $ 700
SiteMinder services..... -- -- -- 12 39 87 110 231
Other................... $ 987 $ 1,184 $ 1,120 1,193 640 725 736 739
------ ------- ------- ------- ------- ------- ------- -------
Total revenues.......... 987 1,184 1,120 1,442 810 1,054 1,257 1,670
Cost of revenues.......... 535 700 571 664 509 444 431 579
------ ------- ------- ------- ------- ------- ------- -------
Gross profit.............. 452 484 549 778 301 610 826 1,091
Selling, general and
administrative
expenses................ 1,022 1,273 1,502 1,527 1,385 1,535 1,504 1,772
Research and development
costs................... 101 185 304 623 421 452 500 618
------ ------- ------- ------- ------- ------- ------- -------
Loss from operations...... (671) (974) (1,257) (1,372) (1,505) (1,377) (1,178) (1,299)
Interest income (expense),
net..................... 79 63 43 18 32 37 31 30
Share of loss from
investment in Encotone,
Inc..................... (56) (48) (20) (8) -- -- -- --
Write off of investment in
Encotone LTD. .......... -- (1,000) (49) -- -- -- -- --
------ ------- ------- ------- ------- ------- ------- -------
Loss before provision for
income taxes............ (648) (1,959) (1,283) (1,362) (1,473) (1,340) (1,147) (1,269)
Provision for income
taxes................... -- -- -- -- -- -- -- --
------ ------- ------- ------- ------- ------- ------- -------
Net loss.............. $ (648) $(1,959) $(1,283) $(1,362) $(1,473) $(1,340) $(1,147) $(1,269)
====== ======= ======= ======= ======= ======= ======= =======
</TABLE>
25
<PAGE> 27
<TABLE>
<CAPTION>
QUARTERS ENDED
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL
REVENUES:
Revenues:
SiteMinder software..... -- -- -- 16% 16% 23% 33% 42%
SiteMinder services..... -- -- -- 1 5 8 9 14
Other................... 100% 100% 100% 83 79 69 58 44
------ ------- ------- ------- ------- ------- ------- -------
Total revenues.......... 100 100 100 100 100 100 100 100
Cost of revenues.......... 54 59 51 46 63 42 34 35
------ ------- ------- ------- ------- ------- ------- -------
Gross profit.............. 46 41 49 54 37 58 66 65
Selling, general and
administrative
expenses................ 104 108 134 106 171 146 120 106
Research and development
costs................... 10 15 27 43 52 43 40 37
------ ------- ------- ------- ------- ------- ------- -------
Loss from operations...... (68) (82) (112) (95) (186) (131) (94) (78)
Interest income (expense),
net..................... 8 5 4 1 4 4 3 2
Share of loss from
investment in Encotone,
Inc..................... (6) (4) (2) (1) -- -- -- --
Write off of investment in
Encotone LTD. .......... -- (84) (4) -- -- -- -- --
------ ------- ------- ------- ------- ------- ------- -------
Loss before provision for
income taxes............ (66) (165) (115) (95) (182) (127) (91) (76)
Provision for income
taxes................... -- -- -- -- -- -- -- --
------ ------- ------- ------- ------- ------- ------- -------
Net loss.................. (66)% (165)% (115)% (95)% (182)% (127)% (91)% (76)%
====== ======= ======= ======= ======= ======= ======= =======
</TABLE>
Our total SiteMinder-related revenues have increased in each quarter
following the release of SiteMinder 3.0 in June 1998. The increase in each
quarter has been due to the increase in the number of our customers. This
resulted from increased market awareness and acceptance of our SiteMinder
software, expansion of our sales organization and increased SiteMinder services
revenues, which reflect the growth in the installed base of product licenses.
Gross profit has increased in conjunction with our increases in SiteMinder
software revenues.
Our selling, general and administrative expenses have generally increased
on a quarterly basis, primarily as a result of the timing and number of
additions in personnel and compensation and the timing, number and significance
of specific marketing and sales activities, such as trade shows and other
promotional activities. Our research and development costs have varied from
quarter to quarter primarily as a result of the timing and number of additions
of personnel and related compensation costs.
In addition, a variety of factors, many of which are outside of our
control, may affect our quarterly operating results. These factors include:
- market acceptance of our SiteMinder products;
- our success in obtaining follow-on sales to existing customers;
- the long sales and deployment cycle for sales of SiteMinder licenses;
- our ability to hire and retain personnel, particularly in services and
sales and marketing;
- the release of new versions of SiteMinder or other products; and
- the development of our direct and indirect sales channels.
The limited history of deployment of our SiteMinder product and the
undeveloped nature of the market for web-based e-commerce applications make
predicting future revenues difficult. Our expense levels are based, in part, on
our expectations regarding future revenue increases, and to a large extent such
expenses are fixed, particularly in the short term. There can be no assurance
that our expectations regarding future
26
<PAGE> 28
revenues are accurate. Moreover, we may be unable to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall. Accordingly, any
significant shortfall of revenues in relation to our expectations would likely
cause a significant increase in our net loss, or a significant decrease in our
net income, for that period.
Due to the foregoing factors, our operating results are difficult to
forecast. We believe that period-to-period comparisons of our historical
operating results are not meaningful and should not be relied upon as an
indication of future performance. Also, our operating results may fall below the
expectations of securities analysts or investors in some future quarter and, as
a result, the market price of our common stock could decrease significantly.
LIQUIDITY AND CAPITAL RESOURCES
In recent years, we have funded our operations primarily from sales of
securities.
Cash used for operating activities in the 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 $301,000 in the year ended
December 31, 1998. Investing activities for the periods consisted primarily of
the purchases of equipment, consisting largely of computer servers,
workstations and networking equipment.
Cash provided by financing activities in the 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 December 31, 1998, our primary financial commitments consisted of
obligations outstanding under operating leases.
As of December 31, 1998, we had cash and cash equivalents totaling $1.2
million. On February 8, 1999, the Company entered into a Stock Purchase
Agreement (the "Stock Purchase Agreement") with an institutional investor and
the Pequot Entities. Pursuant to the terms of the Stock Purchase Agreement, the
Company sold 795,651 shares of Common Stock at $5.75 per share.
In recent years, we have significantly increased our operating expenses. We
anticipate that we will continue to experience significant growth in our
operating expenses for the foreseeable future and that our operating expenses
and capital expenditures will constitute a material use of our cash resources.
In addition, we may utilize cash resources to fund acquisitions or investments
in businesses, technologies, products or services that are complementary to our
business. We believe that the net proceeds of the February 8, 1999 sale of
stock, together with our existing cash and cash equivalent balances, will be
sufficient to meet our anticipated cash requirements for working capital and
capital expenditures for at least the next twelve months. Thereafter, if cash
generated from operations is insufficient to satisfy our liquidity
requirements, we may seek to sell additional equity or debt securities, or
obtain additional credit facilities. The issuance of additional equity or
convertible debt securities could result in additional dilution to our
stockholders.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. This could
result in a system failure or miscalculations if a computer program recognizes a
date of "00" as the year 1900 instead of 2000. If not corrected, many computer
systems could fail or create erroneous results in 2000.
27
<PAGE> 29
State of Readiness
We have completed our initial assessment and testing of products, systems
and processes with respect to the "Year 2000" issue. We plan to continue our
assessment and testing of products, systems and processes in 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. Based on
our assessment to date, we believe that all of our other internal systems and
processes will be 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 $50,000 through December 31, 1998. We anticipate that we may incur
up to an additional $150,000 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
28
<PAGE> 30
the general uncertainty of the Year 2000 readiness of third parties, we are
unable to determine at this time whether the consequences of Year 2000 failures
will have a material adverse impact on our results of operations, liquidity or
financial position. Our assessment, testing and contingency planning are
expected to reduce, but not eliminate, our level of uncertainty about the Year
2000 issue and the readiness of third parties. We believe that the completion of
our assessment, testing and contingency planning should reduce the possibility
of significant interruptions to normal operations.
Contingency Plan
Based on our assessments to date, we believe our existing internal systems
and procedures, including our standard redundant systems and servers, will
enable us to continue to deliver our software in 2000 without significant
interruption. As a result, we do not intend to formulate a detailed contingency
plan for Year 2000 failures. We do not plan to assess the specific Year 2000
compliance of external forces such as utility and transportation systems or Year
2000 compliance failures that might generally affect industry and commerce. Any
Year 2000 failure of this type, or any other significant unforeseen Year 2000
failure, could have a material adverse effect on our business and operating
results.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, or SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires
computer software costs associated with internal use software to be charged to
operations as incurred until certain capitalization criteria are met. SOP 98-1
became effective for us beginning January 1, 1999. The adoption of this
statement to have a material effect on our financial position or results of
operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. The statement initially was to be effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. In July 1999, the Financial
Accounting Standards Board issued SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities Deferral of the Effective Date of FASB
Statement No. 133 -- An amendment of FASB Statement No. 133." SFAS 137 defers
the implementation of SFAS 133 by one year. SFAS 133, as amended by SFAS 137, is
effective for our fiscal quarters beginning after January 1, 2000. We do not
expect our adoption of SFAS 133 to have a material effect on our financial
position or results of operations.
In December 1998, the Accounting Standards Executive Committee, or AcSEC,
issued SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions." SOP 98-9 amends SOP 97-2 to require that an
entity recognize revenue for multiple element arrangements by means of the
"residual method" when (1) there is vendor-specific objective evidence of the
fair values of all the undelivered elements that are not accounted for by means
of long-term contract accounting and (2) vendor-specific objective evidence of
fair value does not exist for one or more of the delivered elements. All revenue
recognition criteria of SOP 97-2 and SOP 98-9 will be effective for our
transactions entered into beginning in our year ending December 31, 2000. We do
not expect SOP 98-9 to have a material effect on our financial position or
results of operations.
29
<PAGE> 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements and the related
auditors' reports are presented in the following pages. The consolidated
financial statements filed in this Item 8 are as follows:
- Report of Independent Auditors
- Consolidated Balance Sheets--December 31, 1998 and 1997
- Consolidated Statements of Operations for the fiscal years ended
December 31, 1998 and 1997, and the nine-month transition period
ended December 31, 1996
- Consolidated Statements of Stockholders' Equity for the fiscal years
ended December 31, 1998 and 1997, and the nine-month transition
period ended December 31, 1996
- Consolidated Statements of Cash Flows for the fiscal years ended
December 31, 1998 and 1997, and the nine-month transition period
ended December 31, 1996
- Notes to Consolidated Financial Statements
30
<PAGE> 32
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
and Stockholders of Netegrity, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Netegrity, Inc. (the "Company") at
December 31, 1997 and 1998, and the results of its operations and its cash flows
for the nine months ended December 31, 1996, and for the years ended December
31, 1997 and 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
February 8, 1999
31
<PAGE> 33
NETEGRITY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,133,586 $ 1,174,625
Escrow receivable (Note F)................................ 600,000 --
Accounts receivable-trade, net of allowance for doubtful
accounts of $64,460 at December 31, 1997; $247,063 at
December 31, 1998....................................... 791,369 1,746,645
Deferred maintenance asset................................ 304,721 308,926
Prepaid rent.............................................. -- 30,163
Other current assets...................................... 8,252 15,848
----------- ------------
TOTAL CURRENT ASSETS.................................... 3,837,928 3,276,207
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET (Note B).......... 585,055 736,341
CAPITALIZED SOFTWARE COSTS, NET............................. 309,891 175,629
OTHER ASSETS:
Investment in Encotone, Inc. (Note C)..................... 78,199 --
Other..................................................... 37,438 37,114
----------- ------------
TOTAL OTHER ASSETS...................................... 115,637 37,114
----------- ------------
TOTAL ASSETS................................................ $ 4,848,511 $ 4,225,291
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable-trade.................................... $ 1,507,071 $ 897,734
Deferred revenue.......................................... -- 285,857
Accrued bonus............................................. 215,000 160,687
Accrued commissions....................................... 64,722 180,328
Other accrued expenses.................................... 1,355,533 766,898
Deferred maintenance liability............................ 667,416 938,004
Current portion of capital lease obligations.............. 19,068 --
----------- ------------
TOTAL CURRENT LIABILITIES............................... 3,828,810 3,229,508
LONG-TERM CAPITAL LEASE OBLIGATIONS......................... 3,653 --
----------- ------------
TOTAL LIABILITIES........................................... 3,832,463 3,229,508
COMMITMENTS AND CONTINGENCIES (Note D)...................... -- --
STOCKHOLDERS' EQUITY:
Preferred stock, Series D voting; $.01 par value;
3,333,333 shares issued and outstanding at December 31,
1998 (aggregate liquidation value, $4,999,999.50)....... -- 33,333
Common stock, voting, $.01 par value; 25,000,000 shares
authorized; 9,279,346 shares issued and 9,254,245 shares
outstanding at December 31, 1997; 9,425,446 shares
issued and 9,400,345 shares outstanding at December 31,
1998 ................................................... 92,793 94,254
Additional paid-in capital................................ 10,578,330 15,780,049
Cumulative translation adjustment......................... 28,028 --
Cumulative deficit........................................ (9,399,446) (14,628,196)
Loan to officer (Note E).................................. (200,000) (200,000)
----------- ------------
1,099,705 1,079,440
Less -- Treasury Stock, at cost: 25,101 shares.............. (83,657) (83,657)
----------- ------------
TOTAL STOCKHOLDERS' EQUITY.................................. 1,016,048 995,783
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $ 4,848,511 $ 4,225,291
=========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
32
<PAGE> 34
NETEGRITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED DECEMBER 31,
DECEMBER 31, -------------------------
1996 1997 1998
----------------- ----------- -----------
<S> <C> <C> <C>
Revenues:
SiteMinder software............... -- $ 237,217 $ 1,483,296
SiteMinder services............... -- 12,012 467,568
Other............................. $ 3,637,037 4,483,420 2,840,253
----------- ----------- -----------
Total revenues.................... 3,637,037 4,732,649 4,791,117
Cost of revenues.................... 2,175,626 2,469,891 1,763,825
----------- ----------- -----------
Gross profit........................ 1,461,411 2,262,758 3,027,292
Selling, general and administrative
expenses.......................... 2,303,478 5,508,813 6,394,918
Research and development costs...... 705,298 1,028,094 1,991,239
----------- ----------- -----------
Loss from operations................ (1,547,365) (4,274,149) (5,358,865)
Interest income (expense), net...... 181,881 203,205 130,115
Share of loss from investment in
Encotone, Inc..................... (40,000) (131,801) --
Write off of investment in Encotone
LTD............................... -- (1,049,151) --
----------- ----------- -----------
Loss from continuing operations..... (1,405,484) (5,251,896) (5,228,750)
Loss from discontinued operations... (520,245) -- --
Gain on sale of assets of
discontinued operations........... 6,000,000 -- --
----------- ----------- -----------
Income (loss) before provision for
income taxes...................... 4,074,271 (5,251,896) (5,228,750)
Provision for income taxes.......... 74,300 -- --
----------- ----------- -----------
Net income (loss)................... $ 3,999,971 $(5,251,896) $(5,228,750)
=========== =========== ===========
Basic and diluted earnings per
share:
From continuing operations........ $ (0.16) $ (0.57) $ (0.56)
From operation of discontinued
operations...................... (0.06) -- --
Gain on sale of assets............ 0.67 -- --
----------- ----------- -----------
Net income (loss)................. $ 0.45 $ (0.57) $ (0.56)
=========== =========== ===========
Weighted average shares
outstanding....................... 8,944,000 9,279,000 9,362,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
33
<PAGE> 35
NETEGRITY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE
PREFERRED COMMON PAID-IN TRANSLATION CUMULATIVE LOAN TO TREASURY
STOCK STOCK CAPITAL ADJUSTMENT DEFICIT OFFICER STOCK
--------- -------- ----------- ----------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
MARCH 31, 1996............ $ 6,283 $ 81,979 $10,024,710 $21,569 $ (8,147,521) -- $(83,657)
Net income(loss)............ -- -- -- -- 3,999,971 -- --
Conversion of Preferred
Stock (628,330
shares) -- Series C....... (6,283) 6,283 -- -- -- -- --
Issuance of Common Stock
(378,729 shares).......... -- 3,787 435,844 -- -- -- --
Translation adjustment...... -- -- -- 6,459 -- -- --
Loan to officer (Note E).... -- -- -- -- -- $(200,000) --
------- -------- ----------- ------- ------------ --------- --------
BALANCE AT DECEMBER 31,
1996...................... -- 92,049 10,460,554 28,028 (4,147,550) (200,000) (83,657)
------- -------- ----------- ------- ------------ --------- --------
Net income(loss)............ -- -- -- -- (5,251,896) -- --
Issuance of Common Stock
(74,400 shares)........... -- 744 117,776 -- -- -- --
------- -------- ----------- ------- ------------ --------- --------
BALANCE AT DECEMBER 31,
1997...................... -- 92,793 10,578,330 28,028 (9,399,446) (200,000) (83,657)
------- -------- ----------- ------- ------------ --------- --------
Net income(loss)............ -- -- -- -- (5,228,750) -- --
Issuance of Preferred Stock
(3,333,333 shares) --
Series D.................. 33,333 -- 4,916,668 -- -- -- --
Issuance of Common Stock
(146,100 shares).......... -- 1,461 257,023 -- -- -- --
Translation adjustment...... -- -- 28,028 (28,028) -- -- --
------- -------- ----------- ------- ------------ --------- --------
BALANCE AT DECEMBER 31,
1998...................... $33,333 $ 94,254 $15,780,049 $ -- $(14,628,196) $(200,000) $(83,657)
======= ======== =========== ======= ============ ========= ========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
BALANCE AT
MARCH 31, 1996............ $ 1,903,363
Net income(loss)............ 3,999,971
Conversion of Preferred
Stock (628,330
shares) -- Series C....... --
Issuance of Common Stock
(378,729 shares).......... 439,631
Translation adjustment...... 6,459
Loan to officer (Note E).... (200,000)
-----------
BALANCE AT DECEMBER 31,
1996...................... 6,149,424
-----------
Net income(loss)............ (5,251,896)
Issuance of Common Stock
(74,400 shares)........... 118,520
-----------
BALANCE AT DECEMBER 31,
1997...................... 1,016,048
-----------
Net income(loss)............ (5,228,750)
Issuance of Preferred Stock
(3,333,333 shares) --
Series D.................. 4,950,001
Issuance of Common Stock
(146,100 shares).......... 258,484
Translation adjustment...... --
-----------
BALANCE AT DECEMBER 31,
1998...................... $ 995,783
===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
34
<PAGE> 36
NETEGRITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEARS ENDED DECEMBER 31,
DECEMBER 31, -------------------------
1996 1997 1998
------------ ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss from continuing operations...................... $(1,405,484) $(5,251,896) $(5,228,750)
Adjustments to reconcile loss to net cash used for
operating activities:
Share of loss from investment.......................... 40,000 131,801 --
Write off of investment in Encotone, LTD............... -- 1,049,151 --
Depreciation and amortization.......................... 26,487 116,187 231,713
Provision for doubtful accounts receivable, net........ 56,771 (3,337) 182,603
Change in operating assets and liabilities:
Escrow receivable...................................... (600,000) -- 600,000
Accounts receivable.................................... 137,935 (252) (1,137,879)
Other current assets................................... 389,156 246,259 (41,966)
Inventory.............................................. 21,400 -- --
Other assets........................................... 52,053 (14,078) 324
Accounts payable....................................... 622,784 (592,364) (609,337)
Other accrued expenses................................. (1,548,083) 292,781 25,646
----------- ----------- -----------
Total adjustments.................................... (801,497) 1,226,148 (748,896)
----------- ----------- -----------
Net cash used for continuing operating activities.... (2,206,981) (4,025,748) (5,843,384)
Net cash (used for) provided by discontinuing
operating activities............................... 436,859 (46,241) --
----------- ----------- -----------
Net cash used for operating activities................. (1,770,122) (4,071,989) (5,977,646)
----------- ----------- -----------
INVESTING ACTIVITIES:
Proceeds from sale of certain assets................... 9,435,000 -- 25,863
Capitalized software costs............................. -- (309,891) 134,262
Capital expenditures for equipment and leasehold
improvements......................................... (256,886) (384,458) (408,860)
Investment in Encotone, LTD............................ (1,000,000) -- --
Investment in Encotone, Inc. .......................... (250,000) -- 81,656
----------- ----------- -----------
Net cash (used for) provided by investing activities... 7,928,114 (694,349) (167,079)
----------- ----------- -----------
FINANCING ACTIVITIES:
Net proceeds from issuance of preferred stock.......... -- -- 4,950,001
Net proceeds from issuance of stock.................... 239,631 118,520 258,484
Payment on notes payable-related party................. (300,000) -- --
Net payments on line of credit......................... (723,470) -- --
Principal payments under capital leases................ -- (9,653) (22,721)
----------- ----------- -----------
Net cash (used for) provided by financing activities... (783,839) 108,867 5,185,764
----------- ----------- -----------
Effect of exchange rate changes on cash.................. 6,459 -- --
----------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS.................. 5,380,612 (4,657,471) (958,961)
Cash and cash equivalents at beginning of period......... 1,410,445 6,791,057 2,133,586
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............... $ 6,791,057 $ 2,133,586 $ 1,174,625
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
Interest paid.......................................... $ 17,778 $ 3,143 $ 872
Income taxes paid...................................... -- 63,557 --
Supplemental Disclosure of Non-Cash Activities:
Loan to officer in exchange for common stock........... 200,000 -- --
Write off of investment in Encotone LTD................ -- 1,049,151 --
Property purchased under capital leases................ -- 32,374 --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
35
<PAGE> 37
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: NATURE OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
The Company currently operates in the secure user management market. During
June, 1996, the Company completed a full divestiture of its catalog business and
changed its name from The Software Developer's Company, Inc. to Netegrity, Inc.
The results of operations of the divested catalog business are presented as
discontinued operations herein.
Principles of Consolidation
The financial statements of the Company also include the accounts and
operations of its subsidiaries, Software Developers Company, GmbH ("SDC
Germany") and Personal Computing Tools (PCT). The Company acquired 94% of the
outstanding capital stock of PCT on June 29, 1993. The 6% equity interest in PCT
not acquired by the Company would be shown as minority interest in the December
31, 1996 consolidated balance sheets and the statements of operations for the
nine months ended December 31, 1996 and the fiscal years ended March 31, 1996,
respectively. As of June 30, 1996, the Company discontinued all operations
related to its SDC Germany and PCT catalog operation. The operating loss
incurred in 1996 is accounted for in loss from discontinued operations.
Cash and Cash Equivalents
Cash and cash equivalents include time deposits with a maturity of three
months or less at the date of purchase.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of cash and cash equivalents and trade
receivables. The Company restricts investment of temporary cash investments to
financial institutions with high credit standing. Credit risk on trade
receivables is minimal.
Revenue Recognition
The Company's revenues from continuing operations are primarily generated
from the sale of its proprietary SiteMinder products and services and from
licensing the rights to use software products developed by Checkpoint Software
Technologies, Ltd. to end users and resellers. The Company generates its
services revenue from consulting and training services performed for customers
and from support and software update rights (i.e., maintenance). Revenues from
perpetual software license agreements are recognized as revenue upon delivery of
the software as long as there are no significant post-delivery obligations.
Revenues for maintenance are recognized ratably over the term of the
support period. If maintenance is included in a license agreement, such amounts
are unbundled from the license fee at their fair market value based on the value
established by independent sale of such maintenance to customers. Consulting
revenues are primarily related to implementation services performed under
separate service arrangements related to the installation of software products.
Such services do not include customization or modification of the underlying
software code. If included in a license agreement, such services are unbundled
at their fair market value based on the value established by the independent
sale of such services to customers. Revenues from consulting and training
services are recognized as the services are performed.
In December 1998, the Accounting Standards Executive Committee, or AcSEC,
issued SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions." SOP 98-9 amends SOP 97-2 to require that an
entity recognize revenue for multiple element arrangements by means of the
"residual method" when (1) there is vendor-specific objective evidence of the
fair values of all
36
<PAGE> 38
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the undelivered elements that are not accounted for by means of long-term
contract accounting and (2) vendor-specific objective evidence of fair value
does not exist for one or more of the delivered elements. All revenue
recognition criteria of SOP 97-2 and SOP 98-9 will be effective for the
Company's transactions entered into beginning in its year ending December 31,
2000. The Company does not expect SOP 98-9 to have a material effect on our
financial position or results of operations.
Capitalization of Software Costs
The Company capitalizes certain internally generated software development
costs after technological feasibility of the product has been established. Such
costs are amortized over the estimated life of the product. The Company
continually compares the unamortized costs of capitalized software to the
expected future revenues for the products. If the unamortized costs exceed the
expected future net realizable value, the excess amount is written off. At
December 31, 1998, the Company amortized $134,262 of software development costs.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost, less accumulated
depreciation and amortization. Depreciation is provided using the straight-line
method over estimated useful lives from five to seven years. Amortization of
leasehold improvements is provided using the straight-line method over the lives
of the respective leases or the useful lives of the improvements, whichever is
shorter.
Maintenance and repairs are charged to operations as incurred. Renewals and
betterments which materially extend the life of assets are capitalized and
depreciated. Upon disposal, the asset cost and related accumulated depreciation
are removed from their respective accounts. Any resulting gain or loss is
reflected in earnings.
Customer Advances
Prepayments made by customers are included as customer advances and
recorded as sales when shipments are made.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected future
tax consequences of events that have been included in the financial statements
which are temporarily different than the tax basis. The amount of deferred tax
asset or liability recognized, net of valuation allowances, is based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Investments
Investments in equity securities, other than investments accounted for by
the equity method are recorded at cost. Management determines the appropriate
classification of its investments at the time of purchase and reevaluates such
determinations, as well as potential impairments of value on a periodic basis,
but at a minimum, quarterly.
Marketing Expenses
Marketing expenses are charged to selling, general and administrative
expenses as incurred.
37
<PAGE> 39
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Support Services
The Company provides, free of charge, pre-sale telephone technical support
and product literature. The Company provides post-sales support to its customers
who are covered under maintenance agreements. The costs relating to these
services are expensed as incurred and included in selling, general and
administrative expenses.
Earnings (Loss) Per Share
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 128 "Earnings Per Share" and has retroactively restated the earnings per
share (EPS) for 1995, 1996, 1997 and for the quarter ended September 30, 1997.
SFAS 128 requires presentation of basic and diluted EPS. Basic EPS is computed
by dividing net income by the number of weighted average common shares
outstanding. Diluted EPS reflects potential dilution from outstanding stock
options, using the treasury stock method. Potentially dilutive securities at
December 31, 1998 include stock options outstanding to purchase 3,103,442 common
shares, respectively, warrants to purchase 1,600,787 common shares and 3,333,333
shares of convertible preferred stock (see Note H); however, such securities
have not been included in the net loss per share calculation because their
effect would be anti-dilutive.
Segment Reporting
The Company is in one business segment, the design, development, marketing
and support of software for controlling user access to electronic commerce. The
Company follows the requirements of Statement of Financial Accounting Standards
No. 131, "Disclosure about Segments of an Enterprise and Related Information."
Export Sales
The Company generates some revenues from international business. For all
periods reported herein, the Company's export sales are deemed immaterial.
Foreign Currency Translation
The functional currency of the Company's former foreign subsidiary is the
local currency. Balance sheet accounts of the Company's former foreign
subsidiary are translated into U.S. dollars at current exchange rates. Income
statement items are translated at the average rates during the year. Net
translation gains or losses are recorded directly to a separate component of
stockholders' equity. Foreign currency transaction gains and losses are included
in the determination of net income for the nine months ended December 31, 1996.
Post-Retirement Benefits Other Than Pensions
The Company does not offer post-employment benefits to its retirees and as
a result, is unaffected by Statement of Financial Accounting Standards No. 106
or 112 issued in December 1990 and November 1992, respectively.
401(k) Plan
The Company maintains a 401K Plan for its employees. The Plan is intended
as a retirement and tax deferred savings vehicle. All employees of the Company
whose customary employment is for more than 20 hours per week are eligible to
participate in the 401K Plan. Employees make their contributions through semi-
monthly payroll deductions which are invested in any combination of several
investment funds. The Company has made no matching contributions and has no
current plans to do so.
38
<PAGE> 40
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires the Company to disclose estimated
fair values for its financial instruments, exclusive of leases, for which it is
practicable to estimate fair value.
For financial instruments including cash, accounts receivable and payable,
and accrued expenses it is assumed that the carrying amount approximates fair
value due to their short maturities.
Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Reclassifications
Certain items on the prior year financial statements presented herein have
been reclassified to conform to the current year presentation.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. The statement initially was to be effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. In July 1999, the Financial
Accounting Standards Board issued SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities Deferral of the Effective Date of FASB
Statement No. 133 -- An amendment of FASB Statement No. 133." SFAS 137 defers
the implementation of SFAS 133 by one year. SFAS 133, as amended by SFAS 137, is
effective for the Company's fiscal quarters beginning after January 1, 2000. The
Company does not expect the adoption of SFAS 133 to have a material effect on
its financial position or results of operations.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". SOP 98-1 requires computer
software costs associated with internal use software to be charged to operations
as incurred until certain capitalization criteria are met. SOP 98-1 is effective
beginning January 1, 1999. We do not expect adoption of this statement to have a
material effect on consolidated financial position or results of operations.
39
<PAGE> 41
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B: EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost and consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1998
--------- ---------
<S> <C> <C>
Computer equipment and software................. $ 582,464 $ 944,555
Leasehold improvements.......................... 30,248 73,557
Furniture and fixtures.......................... 124,987 97,577
Less accumulated depreciation and
amortization.................................. (152,644) (379,348)
--------- ---------
$ 585,055 $ 736,341
========= =========
</TABLE>
Depreciation is computed on the straight-line method based upon estimated
useful lives ranging from three to seven years. The depreciation expense
recognized for the fiscal years ended December 31, 1997 and 1998, was
$116,187 and $231,713, respectively.
NOTE C: INVESTMENT AND JOINT VENTURE
In October of 1996, the Company invested $1,000,000 for a 10% equity
interest in Encotone, LTD., a Jerusalem, Israel high-technology firm which
develops technology and products that provide enhanced security for both voice
and data network transactions. The Company accounted for its investment in
Encotone, LTD. under the cost method. In the quarter ended September 30, 1997,
the Company determined that the value of the investment was permanently impaired
and wrote off the entire amount.
In October of 1996, the Company and Encotone, LTD. formed a joint venture
in the U.S., Encotone, Inc., which was equally funded by both companies. The
Company accounted for its investment in Encotone, Inc. under the equity method,
and as of December 31, 1997, has reduced its investment by $131,801, its share
of Encotone, Inc.'s operating loss for the initial period ended December 31,
1997.
In January, 1998, the Company sold to Encotone, LTD. its full interest in
Encotone, Inc. In return, the Company received an additional 9.9% of the common
stock of Encotone, LTD., providing the Company with an equity position of 19.9%.
The Company also received $81,656 in cash.
NOTE D: COMMITMENTS AND CONTINGENCIES
On June 4, 1999, a suit was brought in the Delaware Court of Chancery,
purportedly on behalf of the Company's common stockholders, alleging that
certain amendments to the Company's certificate of incorporation previously
adopted by the Company's stockholders increasing the authorized shares of
various classes of stock were invalid because the Company did not obtain the
required statutory votes. On August 5, 1999, the parties entered into a
settlement agreement, subject to court approval and approval from the holders of
the Company's preferred stock and common stock, in separate class votes, of the
previously adopted amendments. A hearing on the settlement is scheduled for
September 24, 1999. The Company believes that the costs associated with this
settlement will not have a material effect on its results of operations, assets
or financial condition.
The Company leases certain facilities under noncancellable operating
leases. For the years ended December 31, 1997 and 1998 the Company incurred
total operating
40
<PAGE> 42
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
lease expense of $173,600 and $299,825, respectively. Future minimum
lease payments under these leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -------------------------
<S> <C>
1999.................................................. $171,400
2000.................................................. 100,800
2001.................................................. 42,000
--------
$314,200
========
</TABLE>
NOTE E: LOAN TO OFFICER
In May, 1996, an Officer of the Company exercised an option to purchase
200,000 shares of the Company's common stock at a price of $1.00 per share. The
Company's Board of Directors approved a loan to the Officer as payment for this
transaction. The Officer issued the Company a full recourse note that is secured
by the 200,000 shares of common stock. This note has an interest rate of 7% per
annum.
NOTE F: ASSET SALE
As of June 28, 1996, the Company completed the divestiture of its catalog
related business, consisting of The Programmer's SuperShop ("TPS") catalog, the
TPS web site, the corporate sales group, SDC Germany and SDC Communications. The
Company completed the transaction for an aggregate price of $10,035,000. The
aggregate price consisted of payment of $9,300,000 in immediately available
funds and the deposit of $735,000 under an escrow arrangement. During August,
1996, $135,000 of the escrow was returned to the Company.
The aggregate price of $10,035,000 was in exchange for the Company's
tangible net assets of the catalog related business that at the time was
estimated at approximately $1,500,000. The revenues of the divested catalog
business were $11,800,000 for the nine months ended December 31, 1996. These
revenues are a component of the net income (loss) from discontinued operations.
The Company incurred $2,587,000 in expenses and write-offs related to the
divestiture. These expenses were primarily comprised of write-off of goodwill,
severance costs, professional fees, buy-outs of capital leases, and facility
shut-down costs for its corporate offices and distribution facility. The Company
reported a gain of $6,000,000 from the sale of the assets of its catalog related
business. The Company utilized a deferred tax benefit related to net operating
loss carryforwards of approximately $2,200,000 to offset Federal and State
corporate income taxes.
In September of 1998, the Company reached a settlement with Programmers
Paradise, Inc. ("Programmer's") with regard to a valuation dispute arising from
the 1996 divestiture of Software Developer's Company. The case was settled with
the release of the escrow account ($600,000) to Programmer's and a payment of
$50,000. The full amount was charged to a reserve maintained specifically for
this purpose.
41
<PAGE> 43
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G: INCOME TAXES
Significant components of the deferred tax assets are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
Net operating loss carryforward................... $ 2,842,447 $ 5,188,919
Loss on investment................................ 1,324,650 971,562
Accruals and reserves............................. 138,517 232,625
Deferred revenue.................................. -- 115,115
Software development costs........................ -- (70,726)
Research and development tax credits.............. 254,739 318,450
Depreciation...................................... (17,890) (25,346)
Alternative minimum tax credit.................... 74,773 74,773
Valuation allowance............................... (4,617,236) (6,805,372)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
The provision for income taxes differs from the federal statutory rate of
34% as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
Federal provision at 34%.......................... $(1,785,645) $(1,777,775)
Meals and entertainment........................... 9,962 13,829
Current year Federal loss, not benefited.......... 1,775,683 1,763,946
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
Due to the uncertainty surrounding the realization of tax benefits in
future tax returns of the continuing business, the net deferred tax assets at
December 31, 1997 and 1998 have been offset by a valuation allowance.
At December 31, 1998, the Company has available for Federal income tax
purposes net operating tax loss carryforwards of approximately $12,885,000 that
are available to offset future taxable income at various dates through fiscal
2018. Certain provisions in the Internal Revenue Code may limit the net
operating loss available for use in any given year in the event of any
significant change of ownership.
NOTE H: CAPITAL STOCK AND CAPITAL STOCK WARRANTS
Series D Preferred Stock: On January 6, 1998, the Company, entered into a
Preferred Stock and Warrant Purchase Agreement (the "Agreement") with Pequot
Private Equity Fund, L.P., a Delaware limited partnership ("PPEF") and Pequot
Offshore Private Equity Fund, Inc., a British Virgin Islands corporation
(together with PPEF, the "Pequot Entities"). Pursuant to the terms of the
Agreement, on January 7, 1998, the Company sold 1,666,667 shares of Series D
Preferred Stock, at $1.50 per share, and 750,393 Warrants to the Pequot Entities
for an aggregate purchase price of $2,500,000.50. The Series D Preferred Stock
is automatically convertible into Common Stock on a one-for-one basis, subject
to adjustment. Series D Preferred Stock has one-for-one voting rights and has
preferential distribution in the event of any voluntary or involuntary
liquidation. When and if declared by the Board of Directors, Series D Preferred
Stock shall have preference to receive cumulative dividends in the form of
Common Stock at an annual rate of 7.5% from and after the Issue Date. The
Company did not declare dividends in fiscal year 1998. In addition, the Series D
Preferred Stock is subject to mandatory conversion into Common Stock upon
certain circumstances.
42
<PAGE> 44
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company entered into an amendment on June 5, 1998 to the Preferred
Stock and Warrant Purchase Agreement with the Pequot Entities. Pursuant to the
terms of the amended Agreement, on June 5, 1998, the Company sold 833,333 shares
of Series D Preferred Stock, at $1.50 per share, and 375,197 Warrants to the
Pequot Entities for an aggregate purchase price of $1,250,001. On June 30, 1998,
the Company sold an additional 833,333 shares of Series D Preferred Stock, at
$1.50 per share, and 375,197 Warrants to the Pequot Entities for an aggregate
purchase price of $1,250,000.
Warrants: In conjunction with the Pequot Agreement as described above,
warrants to purchase 1,500,787 shares of common stock exercisable at $2.00 were
issued to Pequot expiring on January 7, 2003.
As part of the Agreement with the Pequot Entities, described above, James
McNiel joined the Board of Directors of the Company, as designee of the Pequot
Entities, and has agreed to provide certain consulting services to the Company.
In addition to consulting fees in connection with such service, the Company
granted Mr. McNiel warrants for the purchase of 100,000 shares exercisable at
$1.50 expiring on January 7, 2003.
Subsequent Event: On February 8, 1999, the Company entered into a Stock
Purchase Agreement (the "Stock Purchase Agreement") with an institutional
investor, the Pequot Entities and the parties named therein. Pursuant to the
terms of the Stock Purchase Agreement, the Company sold 795,651 shares of Common
Stock, at $5.75 per share for total gross proceeds of $4,574,993.
NOTE I: STOCK PLANS
The Company has stock option plans as described hereunder. Options are
granted at fair market value at the date of grant being the average of the
closing bid and asked prices of the Common Stock on the day preceding the date
of grant.
Stock Option Plans for Outside Directors: The Company's stock option plans
for outside directors provide for the granting of options to members of the
Board of Directors who are neither employees nor officers of the Company in
appreciation of their service. The timing, amounts, recipients and other terms
of the option grants are determined by the provisions of or formulas in, the
directors' option plans. The exercise price of the options is equal to the fair
market value of Common Stock on the date of the grant. The options have a term
of 10 years from the date of the grant and become exercisable per the terms of
option plan. Total outstanding grants as of December 31, 1997 and 1998 are
572,542. Total options exercisable at December 31, 1997 and 1998 are 371,859 and
478,259. At December 31, 1998, options for 62,500 shares were available for
grant.
Stock Option Plans for Employees and Officers: The Company's stock option
plans for employees, consultants and officers provide for the granting of
options as inducement to obtain and retain the services of qualified persons.
Incentive stock options may be granted to officers and employees, and
non-qualified stock options may be granted to directors, officers, employees or
consultants. The Compensation Committee of the Company determines the exercise
price and vesting period of the options. Total outstanding grants as of December
31, 1997 and 1998 are 1,830,800 and 2,530,900. Total options exercisable at
December 31, 1997 and 1998 are 622,900 and 639,168. At December 31, 1998,
options for 932,315 shares were available for grant.
1990 Employee Stock Purchase Plan: The 1990 Employee Stock Purchase Plan
("Stock Purchase Plan") is intended as an incentive to, and to encourage stock
ownership by, all eligible employees of the Company and participating
subsidiaries and to encourage them to remain in the employ of the Company.
Substantially all employees of the Company and any participating subsidiary who
have completed six months of employment with the Company or any subsidiary and
whose customary employment is for more than 20 hours per week and more than five
months per calendar year are eligible to participate in the Stock Purchase Plan.
43
<PAGE> 45
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Stock Purchase Plan presently authorizes the issuance of 100,000 shares
of Common Stock (subject to adjustment for capital changes) pursuant to the
exercise of nontransferable options granted to participating employees. During
the years ended December 31, 1997 and 1998 2,400 and 14,100 shares of the
Company's Common Stock were issued under the Stock Purchase Plan.
Information as to the Company's stock options is as follows:
In October, 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation." SFAS 123 is effective for periods beginning after December
15, 1995. SFAS 123 requires that companies either recognize compensation
expense for grants of stock, stock options, and other equity instruments
based on fair value, or provide pro-forma disclosure of net income and
earnings per share in the notes to the financial statements.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates as calculated in
accordance with SFAS 123, the Company's net income and earnings per share for
the years ended December 31, 1997 and 1998 would have been reduced to the pro-
forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1998
---------------------------- ----------------------------
EARNINGS LOSS EARNINGS LOSS
NET LOSS PER SHARE NET LOSS PER SHARE
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
As reported.............................. $(5,251,898) $(0.57) $(5,228,750) $(0.56)
Pro-Forma................................ (5,500,386) (0.59) (5,661,325) (0.60)
</TABLE>
The effects of applying SFAS 123 in this proforma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to fiscal
1996 and additional awards in future years are anticipated.
The fair value of each stock option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions: an expected life of four years, expected volatility of 100%, no
dividends, and risk-free interest rates of 5.1%.
Stock options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------
WEIGHTED WEIGHTED
SHARES AVERAGE AVERAGE SHARES
RANGE OF EXERCISE PRICES OUTSTANDING LIFE(A) EXERCISE PRICE EXERCISABLE
- ------------------------ ----------- -------- -------------- -----------
<S> <C> <C> <C> <C>
$0.63-$1.00.................................. 677,592 4.3 $0.95 652,684
$1.25-$1.63.................................. 1,100,560 8.0 1.40 363,588
$1.94-$2.19.................................. 2,442,077 9.2 2.02 1,619,552
$2.38-$3.50.................................. 177,250 7.0 3.04 75,640
$3.56-$4.13.................................. 306,750 9.9 3.84 6,750
--------- ---------
$0.63-$4.13.................................. 4,704,229 8.2 1.88 2,718,214
========= =========
</TABLE>
- ------------
(a) Average contractual life remaining in years.
44
<PAGE> 46
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's stock option plans as of December
31, 1996, 1997 and 1998 and changes during the periods ending on those dates is
presented below:
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS FOR THE YEAR ENDED
ENDED DECEMBER 31,
DECEMBER 31, ----------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Options outstanding at beginning of
............................ 1,523,845 2,196,095 2,403,342
Option activity during the period:
Granted............................... 1,125,250 640,750 2,826,487(1)
Exercised............................. (374,360) (72,000) (132,000)
Canceled.............................. (78,640) (361,503) (393,600)
---------- ---------- ----------
Options outstanding at end of ..... 2,196,095 2,403,342 4,704,229(1)
========== ========== ==========
Price range of outstanding options...... $0.78-4.50 $0.63-4.00 $0.63-4.13
Price range of options exercised........ $0.50-1.72 $0.50-1.71 $1.37-2.63
Options exercisable..................... 1,179,937 994,759 2,718,214
</TABLE>
- ------------
(1) Includes warrants outstanding at December 31, 1998 (see Note H).
NOTE J: COMPARATIVE FINANCIAL INFORMATION
As reported on Form 8-K, dated August 21, 1996, the Company's Board of
Directors approved on August 14, 1996 a change in the Company's fiscal year from
March 31 to December 31. The following represents unaudited comparative
financial information for the period January 1, 1996 to December 31, 1996, which
may be read in conjunction with the audited fiscal years ended December 31, 1997
and 1998, presented on the consolidated statements of operations.
<TABLE>
<CAPTION>
PRO FORMA
TWELVE MONTHS ENDED
DECEMBER 31, 1996
-------------------
<S> <C>
Net revenue............................................... $ 4,965,948
Cost of revenues.......................................... 2,930,674
-----------
Gross profit.............................................. 2,035,274
Selling, general and administrative expenses.............. 2,702,264
Research and development costs............................ 705,298
-----------
Income (loss) from operations............................. (1,372,288)
Interest income........................................... 188,215
Share of loss from investment............................. (40,000)
-----------
Income (loss) from continuing operations.................. (1,224,073)
Income (loss) from discontinued operations................ (734,698)
Gain on sale of assets of discontinued operations......... 6,000,000
-----------
Income before provision for income taxes.................. 4,041,229
Provision for income taxes................................ 74,300
-----------
Net income................................................ $ 3,966,929
===========
</TABLE>
45
<PAGE> 47
PART III
Item 11.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
CONCERNING DIRECTORS AND OFFICERS
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation
for services in all capacities to the Company for the Company's most recent
three years ended December 31, 1998, of those persons who (i) served as the
Chief Executive Officer of the Company during any part of the year ended
December 31, 1998, and (ii) the other most highly compensated executive officers
of the Company at December 31, 1998 whose annual compensation and bonus exceeded
$100,000 (the "Named Officers"):
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS (2)
ANNUAL COMPENSATION (1) ----------------------------
CALENDAR ------------------------------- OPTIONS/ RESTRICTED
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) SARS (#) STOCK AWARDS ($)
- --------------------------- -------- ----------- --------- -------- ----------------
<S> <C> <C> <C> <C> <C>
Barry N. Bycoff................................. 1998 $166,666.00 - 130,000 -
Chief Executive Officer, 1997 166,666.00 $50,000 - -
President & Director 1996 156,824.00 40,000 400,000 -
James E. Hayden................................. 1998 $ 81,458.22 - 210,000 -
Vice President of Finance and 1997 - - - -
Administration, Chief Financial 1996 - - - -
Officer and Treasurer
James O'Connor.................................. 1998 $ 35,467.93 - - -
1997 110,000.00 $23,000 - -
1996 112,000.00 20,000 200,000 -
James Rosen..................................... 1998 $112,500.00 - 70,000 -
Vice President of Marketing 1997 80,878.00 - 125,000 -
And Business Development 1996 - - - -
Deepak Taneja................................... 1998 $123,156.97 $35,000 100,000 -
Vice President of Development 1997 - - 130,000 -
1996 - - - -
Thomas Palka.................................... 1998 $ 42,115.38 - 200,000 -
Vice President of Sales 1997 - - - -
1996 - - - -
</TABLE>
- ---------------
(1) Excludes perquisites and other personal benefits, the aggregate
annual amount of which for each officer as less than the lesser of
$50,000 or 10% of the total salary and bonus reported.
(2) The Company did not grant any restricted stock awards of stock
appreciation rights ("SARs") or make any long-term incentive plan
payouts during the three years ended December 31, 1998.
46
<PAGE> 48
OPTION GRANTS IN THE LAST FISCAL YEAR
The following table sets forth grants of stock options pursuant to
the Company's 1997 Stock Option Plan during the fiscal year ended December 31,
1998 to directors and named officers which are reflected in the Summary
Compensation Table above.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
OPTIONS PERCENT OF TOTAL EXERCISE OR OPTION TERM (1)
SAR OPTIONS/SARS GRANTED TO BASE PRICE EXPIRATION --------------------
NAME GRANTED (#) EMPLOYEES IN FISCAL YEAR $/SHARE DATE 5%($) 10%($)
- ---- ----------- ------------------------ ----------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Barry N. Bycoff.............. 100,000 8% $3.69 2008 $601,062 $ 957,091
30,000 2% 4.13 2008 201,576 320,976
James E. Hayden.............. 180,000 15% 2.13 2008 624,518 994,441
30,000 2% 4.13 2008 201,576 320,976
James Rosen.................. 15,000 1% 3.13 2008 76,477 121,776
25,000 2% 1.94 2008 79,001 125,797
30,000 2% 4.13 2008 210,576 320,976
Deepak Taneja................ 20,000 2% 3.13 2008 101,969 162,368
50,000 4% 1.94 2008 158,003 251,593
30,000 2% 4.13 2008 201,576 320,976
Thomas Palka................. 200,000 17% 1.94 2008 632,011 1,006,372
</TABLE>
- ---------------
(1) Amounts reported in these columns represent amounts that may be
realized upon exercise of the options immediately prior to the
expiration of their term assuming the specified compounded rates of
appreciation (5% and 10%) on the Company's Common Stock over the term
of the options. These numbers are calculated based on rules
promulgated by the Securities and Exchange Commission and do not
reflect the Company's estimate of future stock price growth. Actual
gains, if any, on stock option exercises and Common Stock holdings
are dependent on the timing of such exercise and the future
performance of the Company's Common Stock. There can be no assurance
that the rates of appreciation assumed in this table can be achieved
or that the amounts reflected will be received by the individuals.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth information with respect to options to
purchase the Company's Common Stock granted under the 1994 Stock Plan, as
amended, including (i) the number of shares purchased upon exercise of options
in the most recent fiscal year,(ii) the net value realized upon such exercise,
(iii) the number of unexercised options outstanding at December 31, 1998, and
(iv) the value of such unexercised options at December 31, 1998:
47
<PAGE> 49
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
DECEMBER 31, 1998 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
UNEXERCISED VALUE OF
OPTIONS AT UNEXERCISED
DECEMBER 31, 1998 IN-THE-MONEY OPTIONS AT
SHARES (#) DECEMBER 31, 1998($)(1)
ACQUIRED ON VALUE ------------------------------ ----------------------------
NAME EXERCISE REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Barry N. Bycoff........... - - 468,000 397,000 $1,486,994 $850,901
James E. Hayden........... - - - 210,000 - 398,430
James O'Connor............ 105,000 $62,250 - - - -
James Rosen............... - - 25,000 170,000 73,325 375,860
Deepak Taneja............. - - - 230,000 - 545,990
Thomas Palka.............. - - - 200,000 - 474,600
</TABLE>
- ---------------
(1) Value is based on the difference between option exercise price and
the fair market value at 1998 fiscal year-end ($4.313 per share, the
closing price on the Nasdaq SmallCap Market on December 31, 1998)
multiplied by the number of shares underlying the option.
COMPENSATION OF DIRECTORS
As compensation for serving on the Board of Directors, each
non-employee director is paid his expenses by the Company for each quarter
during which they attend meetings. In addition, the Company's policy is to
compensate each non-employee director at a rate of $1,500 for each quarter. As
payment for services in 1998, the Company paid: Mr. Giler an aggregate of
$7,500; Mr. Mark an aggregate of $6,000; Mr. Wagner an aggregate of $7,500: Mr.
Watson an aggregate of $4,500; Mr. McNiel an aggregate of $6,000; and Mr. Pappas
an aggregate of $7,500.
Each non-employee director of the Company also participates in the
Company's 1988 Non-Employee Director Stock Option Plan, 1991 Non-Employee
Director Stock Option Plan, 1993 Non-Employee Director Stock Option Plan, 1994
Non-Employee Director Plan and 1997 Non-Employee Director Plan (collectively,
the "Director Plans"). The Director Plans authorize grants of stock options to
each member of the Company's Board of Directors who is neither an employee nor
an officer of the Company. In fiscal 1997, Eric R. Giler, Michael L. Mark,
Milton J. Pappas, Ralph B. Wagner and Stephen L. Watson were each granted
options to purchase 12,500 shares of Common Stock at a price of $2.19 per share.
Twenty-five percent of each 12,500 share option grant is currently vested, five
percent of each 12,500 share option grant vests on the end of each subsequent
calendar quarter over five years.
EMPLOYMENT/CONSULTING AGREEMENTS
The Company has an employment agreement with Mr. Bycoff dated as of
May 31, 1996, providing for Mr. Bycoff to be employed as the Company's President
and Chief Executive Officer. Under the terms of the employment agreement, Mr.
Bycoff is to be paid an initial base salary of $165,000, subject to increase
from time to time by the Compensation Committee of the Board of Directors, and
is eligible to receive an annual bonus at the discretion of the Compensation
Committee which is not to exceed 50% of his then-current base salary. Mr. Bycoff
is also entitled to life insurance, health insurance and other employee fringe
benefits as are made available to the Company's key executive employees. The
initial term of the employment agreement is three years, subject to automatic
renewals for additional one year terms unless terminated by the Company. The
employment agreement also affords the Company, in addition to customary for
cause termination rights, the ability to terminate Mr. Bycoff's employment
without cause upon providing 90 days' prior written notice or payment of 90
days' salary in lieu thereof and upon payment of twelve months' salary as in
effect at that time plus insurance and other fringe benefits. Mr. Bycoff must
provide the Company with 30 business days' prior written notice in order to
terminate the employment agreement.
James McNiel joined the Board of Directors of the Company, as
designee of the holders of the Series D Preferred Stock, and entered into a
consulting agreement with the Company. Under the terms of the consulting
agreement, Mr. McNiel is to provide consulting services in the areas of
distribution strategy and the establishment of strategic relationships. In
exchange for these consulting services, the Company issued Mr. McNiel warrants
for the purchase of 100,000 shares of Common Stock at a price of $1.50 per share
in addition to the payment of $20,000 during 1998.
Except as otherwise set forth herein, the information required by
this item is incorporated by reference to the information under the caption
"Executive Compensation and Other Information Concerning Directors and Officers"
contained in the Proxy Statement for the Company's annual meeting held May 11,
1999.
48
<PAGE> 50
Item 14. Exhibits
10.1 Employment Agreement between Netegrity, Inc. and Barry Bycoff dated as
of May 31, 1996
21.1 Subsidiaries of Registrant
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule for the twelve months ended December 31,
1997
27.2 Financial Data Schedule for the twelve months ended December 31,
1998
27.3 Financial Data Schedule for the six months ended June 30, 1999
49
<PAGE> 51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report on Form 10-K/A to be
signed on its behalf by the undersigned, thereunto duly authorized.
NETEGRITY, INC.
By: /s/ Barry N. Bycoff
----------------------------------
Barry N. Bycoff
President, Chief Executive Officer
and Director (Principal Executive
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K/A has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Barry N. Bycoff President, Chief Executive September 16, 1999
- ------------------------- Officer and Director
Barry N. Bycoff
/s/ James E. Hayden Chief Financial Officer, September 16, 1999
- ------------------------- Vice President of Finance
James E. Hayden and Administration and
Treasurer
/s/ Eric R. Giler Director September 16, 1999
- -------------------------
Eric R. Giler
/s/ Michael L. Mark Director September 16, 1999
- -------------------------
Michael L. Mark
/s/ James P. McNiel Director September 16, 1999
- -------------------------
James P. McNiel
/s/ Ralph B. Wagner Director September 16, 1999
- -------------------------
Ralph B. Wagner
/s/ Stephen L. Watson Chairman of the Board September 16, 1999
- ------------------------- Director
Stephen L. Watson
50
<PAGE> 1
EXHIBIT 10.1
EXECUTIVE EMPLOYMENT AGREEMENT
AGREEMENT, effective as of the 31st day of May, 1996, by and between
Netegrity, Inc. , a Delaware corporation (the "Company"), and Barry Bycoff, an
individual residing at 3 Kress Farm Road, Hingham, Massachusetts (the
"Executive").
WHEREAS, the Company desires to engage the full-time services of the
Executive;
WHEREAS, the Executive desires to be so employed by the Company; and
WHEREAS, the Company desires to be assured that the unique and expert
services of the Executive will be available solely to the Company on such
full-time basis, and that the Executive is willing and able to render such
services on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of such employment and the mutual
covenants and promises herein contained, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Company and the Executive agree as follows:
SECTION 1. EMPLOYMENT. The Company hereby employs the Executive as its
President and Chief Executive Officer, and the Executive hereby accepts such
employment under and subject to the terms and conditions hereinafter set forth.
The Executive further agrees to serve as a member of the Board of Directors (the
"Board") of the Company if elected or appointed to such office in accordance
with the Company's By-Laws.
<PAGE> 2
SECTION 2. TERM. Unless sooner terminated as provided in Section 10,
the term of employment under this Agreement shall begin on the date first
written above and shall conclude on third anniversary thereof (the "Term")
subject to automatic renewals for additional one year terms unless terminated by
the Company upon 90 days notice prior to the end of the Term or any renewal
term.
SECTION 3. DUTIES. The Executive shall serve as President and Chief
Executive Officer, and he shall perform additional duties consistent with the
offices of President and Chief Executive Officer as the Board of Directors of
the Corporation may reasonably assign to him from time to time. The Executive
hereby agrees to devote his full business time and best efforts to the faithful
performance of such duties and to the promotion and forwarding of the business
and affairs of the Company for the Term.
SECTION 4. SALARY COMPENSATION. In consideration of the services
rendered by the Executive under this Agreement, the Company shall pay the
Executive an initial base salary (the "Base Salary") at the rate of One Hundred
Sixty-Five Thousand Dollars ($165,000) per calendar year, which Base Salary
shall be subject to an annual review by, and to an increase in the sole
discretion of, the Compensation Committee of the Board of Directors of the
Company (the "Compensation Committee"). The Base Salary shall be paid in such
installments and at such times as the Company pays its regularly salaried key
executive employees, and the Board may change the Base Salary from time to time
in its sole discretion; provided, however, that in no event shall the Base
Salary for any calendar year be less than the Base Salary in effect for the
immediately prior calendar year.
SECTION 5. BONUS COMPENSATION. The Executive shall be entitled to be
eligible to participate in the Company bonus plan, pursuant to which he may
receive an amount up to 50%
-2-
<PAGE> 3
of his Base Salary compensation, such bonus to be payable in accordance with
performance milestone reasonably prepared by the Compensation Committee and
shared with the Executive prior to each fiscal year.
SECTION 6. FRINGE BENEFITS. As a key executive employee of the Company,
the Executive shall be eligible to participate in all employee fringe benefit
programs as are made available from time to time to the Company's key executive
employees.
SECTION 7. BENEFITS. In addition to the compensation detailed in
Section 4, 5 and 6 of this Agreement, the Executive shall be entitled to the
following additional benefits:
SECTION 7.01. PAID VACATION. The Executive shall be entitled to four
(4) weeks paid vacation per calendar year, such vacation to extend for such
periods and shall be taken at such intervals as shall be appropriate and
consistent with the proper performance of the Executive's duties hereunder and
consistent with the Company's vacation policy.
SECTION 7.02. INSURANCE COVERAGE. During the Term, the Company shall
provide the Executive with group health, dental and life insurance protection to
the same extent that it makes such protection available to its other key
executive employees. In addition, during the effectiveness of this Agreement,
the Company shall at its expense obtain for the Executive's benefit (i) a term
life insurance policy providing coverage in an amount equal to two times the
Executive's Base Salary and (ii) a disability insurance policy providing
coverage in an amount equal to eighty percent (80%) of the Executive's Base
Salary.
SECTION 7.03. REIMBURSEMENT OF EXPENSES. The Company shall reimburse
the Executive for all reasonable expenses actually incurred by the Executive in
connection with the business affairs of the Company and the performance of his
duties hereunder. The Executive
-3-
<PAGE> 4
shall comply with such reasonable limitations and reporting requirements with
respect to such expenses as the Board may establish from time to time.
SECTION 8. NON-COMPETITION/NON-SOLICITATION.
(a) During the Executive's period of employment, the Executive
will devote his available business time and best efforts to promoting and
advancing the business of the Company. During the Executive's period of
employment and for a period of one (1) year after termination of such employment
(for any reason whatsoever, whether voluntarily or involuntarily), the Executive
agrees that he will not engage in any business or other commercial activity
which is or may be competitive with the products and services being designed,
marketed, distributed or developed by the Company at the time of termination of
such employment.
(b) Notwithstanding anything to the contrary contained in Section
8(a) above, the restriction on the Executive as to non-competition shall be
specifically limited to any company, organization or business entity which is
substantially engaged in the development and distribution of access control
software for the Web.
(c) During the Executive's period of employment and for a period
of one (1) year after termination of such employment (for any reason whatsoever,
whether voluntarily or involuntarily), the Executive agrees that he will not:
(i) directly or indirectly induce or attempt to influence
any then current employee of the Company or any subsidiary or affiliate thereof
to terminate his or her employment with the Company or any subsidiary or
affiliate thereof during the non-competition period as set forth in Section 8(a)
above; or
(ii) contact, directly or indirectly, any person or entity
who is or was a customer of the Company or any subsidiary or affiliate thereof
or otherwise has or had a business
-4-
<PAGE> 5
relationship with the Company or any subsidiary or affiliate thereof for
purposes of competing, or aiding another to compete with the Company or any
subsidiary or affiliate thereof in any business conducted by, or under
development by, the Company or any subsidiary or affiliate thereof during the
non-competition period as set forth in Section 8(a) above.
SECTION 9. TERMINATION. This Agreement shall be terminated at the end
of the Term, or earlier as follows:
SECTION 9.01. DEATH. This Agreement shall terminate upon the death of
the Executive, except that the compensation provided in Section 4 shall continue
through the end of the month in which the Executive's death occurs.
SECTION 9.02. PERMANENT DISABILITY. This Agreement shall terminate upon
the payment of benefit payments pursuant to Section 7.02 hereof in the event of
any physical or mental disability of the Executive determined in accordance with
the standards applicable to the disability insurance policy referred in Section
7.02 hereof.
SECTION 9.03. BY THE COMPANY FOR CAUSE. The employment of the Executive
may be terminated by the Company for Cause (as defined below) at any time
effective upon written notice to the Executive. The Company shall provide the
Executive with at least ten (10) business days' prior written notice of the
reason for termination for Cause and of a Board meeting at which a termination
for Cause will be considered and the Executive will have an opportunity to
attend and participate in that meeting. For purposes hereof, the term "Cause"
shall mean that the Board has determined that any one or more of the following
has occurred:
(a) The Executive shall have been convicted of, or shall have
pleaded guilty or NOLO CONTENDERE to, any felony;
(b) The Executive shall have intentionally committed any
fraud, embezzlement, misappropriation of funds, breach of
fiduciary duty or other act of dishonesty against the Company
which has a material adverse effect on the Company; or
-5-
<PAGE> 6
(c) the Executive shall have (i) refused to carry out the
duties reasonably assigned to him by the Board and consistent
with his status as President and Chief Executive Officer, or
(ii) refused to perform duties set forth in Sections 1 and 3
of this Agreement, which failure, refusal or breach shall have
continued for a period of at least ten (10) days after notice
from the Company describing such failure, refusal or breach in
reasonable detail.
SECTION 9.04. BY THE COMPANY WITHOUT CAUSE. The Company may terminate
the Executive's employment at any time without Cause effective upon 90 days
written notice to the Executive or payment of 90 days' salary in lieu thereof
and upon payments required under Section 10.02.
SECTION 9.05. TERMINATION WITHOUT CAUSE. Each of the following events
shall be deemed to be a "Termination Without Cause."
(i) termination of the Executive's employment for any
reason following a "Change of Control", as hereinafter defined;
(ii) any change in the location of the principal place of
work of the Executive to a location more than forty (40) miles from Hingham,
Massachusetts, as to which change the Executive has not consented, the Executive
having consented to employment at the Company's Waltham headquarters;
(iii) any reduction in the Executive's Base Salary to a
level below that paid to the Executive for the prior year;
(iv) the demotion of the Executive from his position as
President and Chief Executive Officer or the assignment to him of duties
inconsistent with his position as President and Chief Executive Officer; and
(v) the removal of the Executive from the Board of
Directors of the Company (other than as a result of a voluntary resignation).
-6-
<PAGE> 7
For purposes hereof a "Change of Control" shall mean the happening of
any of the following events: (i) an acquisition by any person or group of
persons of 50% or more of the combined voting power of the then outstanding
securities entitled to vote generally in the election of directors of the
Company; (ii) the approval by the Directors or Shareholders of the Company of a
reorganization, merger or consolidation or sale or other disposition of all
substantially all of the assets of the Company which would result in the voting
securities of the Company immediately prior to such transaction continuing to
represent less than 50% of the combined voting power of the securities entitled
to vote generally in the election of directors of the Company or such other
entity outstanding immediately after such transaction, or (iii) the members of
the Board of Directors of the Company (or their respective successors designated
by the stockholders which designated current members of the Board of Directors)
on the date hereof shall not constitute a majority of the Board of Directors of
the Company; provided however that a change in the current members of the Board
of Directors pursuant to Section 3(c)(ii) of the Company's Certificate of
Designation, Preferences and Rights of Series D Convertible Preferred Stock, as
filed with the Secretary of State of the State of Delaware on January 7, 1998,
will not be deemed a Change of Control for the purposes of this Agreement.
SECTION 9.06. BY THE EXECUTIVE VOLUNTARILY. The Executive may terminate
this Agreement at any time effective upon at least thirty (30) business days'
prior written notice to the Company.
SECTION 10. TERMINATION PAYMENTS AND BENEFITS.
SECTION 10.01. VOLUNTARY TERMINATION, TERMINATION FOR CAUSE. Upon any
termination of this Agreement: (1) voluntarily by the Executive (other than
pursuant to Section 9.04 hereof) or, (2) by the Company for Cause as provided in
Section 9.03, all payments,
-7-
<PAGE> 8
salary and other benefits hereunder shall cease at the effective date of
termination except as specifically provided in this Section 10.
SECTION 10.02. TERMINATION WITHOUT CAUSE; COMPANY ELECTION NOT TO
RENEW. In the event that this Agreement is terminated by the Company Without
Cause or the Company elects not to renew this Agreement pursuant to Section 2
hereof, the Executive shall receive as a termination settlement an amount equal
to twelve (12) month's salary as is in effect at the effective date of
termination and any payment in lieu of notice pursuant to Section 9.04 hereof
(the "Termination Payment"). The Termination Payment (other than payment in lieu
of notice pursuant to Section 9.04, which shall be paid upon the Termination
Without Cause) shall be paid in twelve (12) monthly installments on the first
business day of each month following the effective date of termination. The
Termination Payment shall be reduced by any statutorily-mandated severance,
change of control, plant closing, or similar payment to the Executive by the
Company or its stockholders. In addition to the Termination Payment, the
Executive shall continue to receive the insurance benefits and other fringe
benefits referenced in Sections 6 and 7 for a period of twelve (12) months
following the effective date of termination hereunder for a period of (eighteen)
18 months following the effective date of termination.
SECTION 10.03. TERMINATION AND VACATION TIME. Upon termination for any
reason or no reason, the Executive shall be entitled to be fully compensated for
all unused vacation time accrued as of December 31, 1997.
SECTION 10.04. TERMINATION AND EXERCISABILITY OF OPTIONS.
Notwithstanding any provision to the contrary in that certain Incentive Stock
Option Agreement dated April 5, 1994, by and between the Company (formerly known
as The Software Developer's Company, Inc.) and the Executive (the "1994 Option
Agreement") or that certain Incentive Stock Option
-8-
<PAGE> 9
Agreement dated July 27, 1995, by and between the Company and the Executive (the
"1995 Option Agreement"), in the event the Executive ceases to be an employee of
the Company or one of its subsidiaries, all options granted to the Executive
pursuant to the 1994 Option Agreement and the 1995 Option Agreement, will
terminate three hundred sixty-five (365) days from the date the Executive ceases
to be employed by the Company or one of its subsidiaries, or on the date on
which the options expire by their terms, whichever occurs first; provided that
the Board may, in its discretion, extend such three hundred sixty-five (365) day
period of exercisability for such time period as it deems appropriate.
SECTION 10.05. PUBLIC STATEMENT OF TERMINATION. In the event the
Executive's employment terminates for any reason, the Company and the Executive
shall make best efforts to agree upon a public statement pertaining to the
Executive's termination of employment, and the terms of said statement shall not
be subject to subsequent modification by either party unless required by law;
provided, however, that in the event the Company and the Executive are unable in
good faith to agree on such a statement, the Company may make public statements
as are necessary to comply with the law or relevant regulations.
SECTION 10.06. NO OTHER BENEFITS. Except as specifically provided in
this Section 10, the Executive shall not be entitled to any compensation,
severance or other benefits from the Company upon the termination of this
Agreement for any reason whatsoever.
SECTION 11. MERGER CLAUSE. The Company shall not consolidate, merge or
transfer all or a substantial portion of its assets without requiring the
transferee to assume this Agreement and the obligations hereunder.
SECTION 12. SEVERABLE PROVISIONS. The provisions of this Agreement are
severable and the invalidity of any one or more provisions shall not affect the
validity of any other provision.
-9-
<PAGE> 10
In the event that a court of competent jurisdiction shall determine that any
provision of this Agreement or the application thereof is unenforceable in whole
or in part because of the duration or scope thereof, the parties hereto agree
that said court in making such determination shall have the power to reduce the
duration and scope of such provision to the extent necessary to make it
enforceable, and that the Agreement in its reduced form shall be valid and
enforceable to the full extent permitted by law.
SECTION 13. NOTICES. All notices hereunder, to be effective, shall be
in writing and shall be delivered by hand or mailed by certified mail, postage
and fees prepaid, as follows:
If to the Company: Netegrity, Inc.
245 Winter Street
Waltham, MA 02154
Attn: Chairman of the Board
Copy to: Anthony J. Medaglia, Jr., Esq.
HUTCHINS, WHEELER & DITTMAR
A Professional Corporation
101 Federal Street
Boston, MA 02110
If to the Executive: Barry Bycoff
3 Kress Farm Road
Hingham, MA 02043
or to such other address as a party may notify the other pursuant to a notice
given in accordance with this Section 13.
SECTION 14. MISCELLANEOUS.
SECTION 14.01. MODIFICATION. This Agreement constitutes the entire
Agreement between the parties hereto with regard to the subject matter hereof,
superseding all prior understandings and agreements, whether written or oral.
This Agreement may not be amended or revised except by a writing signed by the
parties.
-10-
<PAGE> 11
SECTION 14.02. ASSIGNMENT AND TRANSFER. This Agreement shall not be
terminated by the merger or consolidation of the Company with any corporate or
other entity or by the transfer of all or substantially all of the assets of the
Company to any other person, corporation, firm or entity. The provisions of this
Agreement shall be binding on and shall inure to the benefit of any such
successor in interest to the Company. Neither this Agreement nor any of the
rights, duties or obligations of the Executive shall be assignable by the
Executive, nor shall any of the payments required or permitted to be made to the
Executive by this Agreement be encumbered, transferred or in any way
anticipated.
SECTION 14.03. CAPTIONS. Captions herein have been inserted solely for
convenience of reference and in no way define, limit or describe the scope or
substance of any provision of this Agreement.
SECTION 14.04. GOVERNING LAW. This Agreement shall be construed under
and enforced in accordance with the laws of The Commonwealth of Massachusetts.
[INTENTIONALLY LEFT BLANK]
-11-
<PAGE> 12
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as a sealed instrument as of the day and year first above written.
NETEGRITY, INC.
By: /s/ Stephen L. Watson
----------------------------------
Stephen L. Watson
Chairman of the Board
EXECUTIVE
By: /s/ Barry Bycoff
----------------------------------
Name: Barry Bycoff
-12-
<PAGE> 1
EXHIBIT 21.1
9/15/99
NETEGRITY, INC.
(The following are wholly owned
subsidiaries of Netegrity, Inc.)
STATE OR
JURISDICTION OF
NAME INCORPORATION
- ---- ---------------
Netegrity Europe SLR France
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the registration
statements on Form S-8 (File Nos. 33-35225, 33-35318, 33-37796, 33-37797,
333-44893, 333-44895 and 333-58759) of our report dated February 8, 1999, on
our audits of the consolidated financial statements of Netegrity, Inc. as of
December 31, 1998 and December 31, 1997 and for each of the three years in the
period ended December 31, 1998 and 1997, and the nine months ended December 31,
1996.
/s/ PricewaterhouseCoopers LLP
September 15, 1999
Boston, Massachusetts
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