<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 2, 1999
REGISTRATION NO. 333-87171
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
NETEGRITY, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 04-2911320
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
</TABLE>
245 WINTER STREET
WALTHAM, MASSACHUSETTS 02451
(781) 890-1700
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------
JAMES E. HAYDEN
CHIEF FINANCIAL OFFICER
NETEGRITY, INC.
245 WINTER STREET
WALTHAM, MASSACHUSETTS 02451
(781) 890-1700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
COPIES OF ALL COMMUNICATIONS, INCLUDING ALL COMMUNICATIONS SENT TO THE AGENT FOR
SERVICE, SHOULD BE SENT TO:
<TABLE>
<S> <C>
Anthony J. Medaglia, Jr., Esq. Mark L. Johnson, Esq.
Hutchins, Wheeler & Dittmar Richard G. Costello, Esq.
A Professional Corporation Foley, Hoag & Eliot LLP
101 Federal Street One Post Office Square
Boston, Massachusetts 02110 Boston, Massachusetts 02109
(617) 951-6600 (617) 832-1000
</TABLE>
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
EXPLANATORY NOTE
This registration statement contains two forms of prospectus: (1) one
prospectus to be used in connection with an offering in the United States and
Canada and (2) one prospectus to be used in connection with a concurrent
offering outside of the United States and Canada. The U.S. prospectus and the
international prospectus are identical in all respects except for the front
cover page and the "Underwriting" section. The front cover page and the
"Underwriting" section of the international prospectus are included immediately
before Part II of this registration statement.
<PAGE> 3
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING
OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS
NOT PERMITTED.
SUBJECT TO COMPLETION, DATED NOVEMBER 2, 1999
[NETEGRITY CORPORATE LOGO]
3,000,000 SHARES
COMMON STOCK
Netegrity, Inc. is offering 2,450,000 shares of its common stock, and the
selling stockholders identified in this prospectus are offering an additional
550,000 shares. Our common stock is listed on the Nasdaq National Market under
the symbol "NETE." The last reported sale price of our common stock on the
Nasdaq National Market on October 29, 1999 was $27.00 per share.
------------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 8.
------------------------------
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<CAPTION>
PER SHARE TOTAL
----------------- -----------------
<S> <C> <C>
Public offering price...................................... $ $
Underwriting discounts and commissions..................... $ $
Proceeds to Netegrity...................................... $ $
Proceeds to selling stockholders........................... $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
We and the selling stockholders have granted the underwriters a 30-day
option to purchase up to an additional 450,000 shares of our common stock to
cover over-allotments.
------------------------------
ROBERTSON STEPHENS
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER
INCORPORATED
THOMAS WEISEL PARTNERS LLC
THE DATE OF THIS PROSPECTUS IS , 1999.
<PAGE> 4
[Description of gatefold artwork:
Graphic entitled "Netegrity. Enabling and securing e-commerce relationships
through SiteMinder," incorporating a paragraph stating: "The rapid growth in
e-commerce is changing the way companies do business. Companies conducting
business online are deploying more e-commerce applications which are accessed by
increasingly diverse groups of users. Netegrity is a leading provider of
software and services that manage and control user access to electronic
commerce, or e-commerce, applications. Netegrity's SiteMinder is part of the
software infrastructure that is used to build and manage an e-commerce web site.
SiteMinder centrally manages the complex process of identifying users and
assigning those users rights, or privileges, to access content and perform
transactions on a company's web site." The graphic further depicts the manner in
which SiteMinder permits single sign-on to multiple applications across multiple
servers; scales to handle increasing numbers of users; and provides centralized
control of user access to applications. A separate diagram depicts the manner in
which SiteMinder integrates the technologies used to build e-commerce sites: web
servers, application servers, authentication servers and directory servers.]
[Description of inside front cover page artwork
A chart captioned "SiteMinder customers include" lists:
Aetna Lucent
Arthur Anderson MCI WorldCom
The Associates Merrill Lynch
Autodesk Mitsubishi
Carrier Nextel Communications
Citibank Paychex
Compaq PG&E
Corio SAIC-FBI/LEO
Country Wide State of Utah
Delta Airlines Tandy
General Electric Tektronix
GTE Internetworking Thomson
Ingram Micro US Steel
Inova Health Systems Virginia Power]
<PAGE> 5
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF COMMON STOCK.
------------------------------
TABLE OF CONTENTS
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<CAPTION>
PAGE
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<S> <C>
Summary..................................................... 5
Risk Factors................................................ 8
Forward-Looking Statements and Industry Data................ 15
Use of Proceeds............................................. 15
Price Range of Common Stock................................. 16
Dividend Policy............................................. 16
Capitalization.............................................. 17
Selected Consolidated Financial Data........................ 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 20
Business.................................................... 30
Management.................................................. 40
Transactions with Related Parties........................... 43
Principal and Selling Stockholders.......................... 44
Underwriting................................................ 46
Legal Matters............................................... 48
Experts..................................................... 48
Where You Can Find More Information......................... 49
Index to Consolidated Financial Statements.................. F-1
</TABLE>
------------------------------
We own or have rights to trademarks or trade names that we use in
conjunction with the sale of our products and services. SiteMinder and Netegrity
are registered trademarks owned by us. This prospectus also refers to trademarks
and trade names of other companies.
3
<PAGE> 6
[THIS PAGE INTENTIONALLY LEFT BLANK.]
4
<PAGE> 7
SUMMARY
You should read the following summary together with the more detailed
information, including our consolidated financial statements and related notes,
appearing elsewhere in this prospectus. Unless otherwise indicated, all
information in this prospectus assumes the underwriters will not exercise their
over-allotment option and reflects the conversion of all of our outstanding
preferred stock into common stock, which will take effect before the closing of
this offering.
NETEGRITY
Our Business.................. Netegrity is a leading provider of software and
services that manage and control user access to
electronic commerce, or e-commerce,
applications. Our SiteMinder product is part of
the software infrastructure that is used to
build and manage an e-commerce web site.
SiteMinder centrally manages the complex
process of identifying users and assigning
those users rights, or privileges, to access
content and perform transactions over multiple
applications on a company's web site.
SiteMinder allows companies to effect security
changes quickly and efficiently, while
distributing administrative responsibilities to
the most appropriate parties. SiteMinder
improves the user experience by enabling the
delivery of personalized content over multiple
applications with a single sign-on. In addition
to our SiteMinder software, we offer a wide
range of support services to facilitate the
successful implementation of SiteMinder into
our customers' organizations.
Our Market.................... We target our products and services to
companies deploying e-commerce applications on
their web sites. Forrester Research estimates
that business-to-business e-commerce will grow
from $43 billion in 1998 to $1.3 trillion in
2003 and that business-to-consumer e-commerce
will grow from $8 billion in 1998 to $108
billion in 2003. The growth in e-commerce is
driving companies to develop a new set of
web-based applications accessed by a large and
diverse range of users, including customers,
business partners and employees. These
applications include online retail, customer
service, supply chain procurement, and delivery
of operational and transactional data.
International Data Corporation estimates that
the global e-commerce application market will
grow from $444 million in 1998 to over $13
billion in 2003. In many cases, these new
applications are becoming companies' principal
business processes. In order for e-commerce to
be successful, companies require a secure and
scalable user management infrastructure for
conducting business.
Our Products.................. SiteMinder provides centralized control of
users and privileges that extend across
multiple web-based applications on a company's
web site. With SiteMinder, users sign on to a
web site once and gain access, as defined by
their user privileges, to content drawn from
multiple applications. SiteMinder provides
policy-based administration of security
policies, so that administrative
responsibilities can be easily delegated to
individual business units, remote trading
partners or other administrators without
jeopardizing control. SiteMinder has been
designed to support the existing systems used
by our customers and to easily accommodate
emerging Internet technologies. SiteMinder
provides a scalable, reliable platform to meet
the requirements of demanding web sites.
5
<PAGE> 8
Our Customers................. As of September 30, 1999, we licensed
SiteMinder software to 109 end-user customers.
Our customers include Arthur Andersen, Delta
Airlines, General Electric, GTE
Internetworking, Ingram Micro, MCI WorldCom and
Merrill Lynch. We sell our products through a
direct sales force and through our distribution
partners, which include Allaire, GTE
Cybertrust, Network Associates and the Sun-
Netscape Alliance. To date, most of our
customers' deployments of SiteMinder have
supported business-to-business e-commerce
applications, but our customers are beginning
to deploy SiteMinder for business-to-consumer
e-commerce applications.
Recent Developments........... On September 9, 1999, we completed a private
placement of 534,242 shares of common stock to
five investors at a purchase price of $20.59
per share. We received net proceeds of
approximately $10.3 million from the private
placement, after deducting the placement
agent's fee and our estimated expenses. We have
filed with the SEC a registration statement,
which was declared effective on October 8,
1999, covering the 534,242 shares sold in the
private placement. The purchasers of 242,836 of
those shares have agreed that they will not,
during the period ending 90 days after the date
of this prospectus, sell or otherwise dispose
of those shares without the consent of
Robertson Stephens.
Our Address................... Our executive offices are located at 245 Winter
Street, Waltham, Massachusetts, 02451 and our
telephone number is (781) 890-1700. Our web
site is located at www.netegrity.com.
Information contained on our web site is not
part of this prospectus.
6
<PAGE> 9
THE OFFERING
Common stock offered by Netegrity.......... 2,450,000 shares
Common stock offered by the selling
stockholders............................... 550,000 shares
Common stock to be outstanding after the
offering................................... 16,866,279 shares
Use of proceeds............................ General corporate purposes,
including working capital and
potential acquisitions.
Nasdaq National Market symbol.............. NETE
The number of shares of common stock to be outstanding after the offering
is based on shares outstanding as of September 30, 1999. This number excludes:
- 3,382,707 shares issuable upon exercise of outstanding options with a
weighted average exercise price of $4.51 per share;
- 1,625,787 shares issuable upon exercise of outstanding warrants with a
weighted average exercise price of $2.26 per share; and
- 545,779 shares reserved for future issuance under our stock-based
compensation plans.
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables summarize the financial data of our business. After
our fiscal year ended March 31, 1996, we changed our fiscal year end from March
31 to December 31. The as adjusted data reflect the sale of 2,450,000 shares of
common stock offered by us at an assumed public offering price of $27.00 per
share and our application of our estimated net proceeds of this offering.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
------------------ ----------------- -----------------
1996 1997 1997 1998 1998 1999
------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
SiteMinder software................. -- $ 237 $ 237 $ 1,483 $ 784 $ 4,476
SiteMinder services................. -- 12 12 468 236 1,406
Other............................... $3,637 3,497 4,484 2,840 2,101 2,145
Total revenues...................... 3,637 3,746 4,733 4,791 3,121 8,027
Gross profit.......................... 1,461 1,811 2,263 3,027 1,737 5,695
Loss from continuing operations....... (1,406) (4,604) (5,252) (5,229) (4,060) (4,597)
Gain on sale of assets of discontinued
operations.......................... 6,000 -- -- -- -- --
Net income (loss)..................... 4,000 (4,604) (5,252) (5,229) (3,960) (4,478)
Basic and diluted earnings per share:
From continuing operations.......... $(0.16) $ (0.50) $ (0.57) $ (0.56) $ (0.43) $ (0.45)
Net income (loss)................... $ 0.45 $ (0.50) $ (0.57) $ (0.56) $ (0.42) $ (0.44)
Weighted average shares outstanding... 8,944 9,209 9,279 9,362 9,348 10,273
</TABLE>
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<CAPTION>
SEPTEMBER 30, 1999
----------------------
ACTUAL AS ADJUSTED
------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $11,212 $73,389
Working capital............................................. 10,986 73,163
Total assets................................................ 15,593 77,770
Total stockholders' equity.................................. 12,040 74,217
</TABLE>
7
<PAGE> 10
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks and uncertainties described below and the other information in this
prospectus before deciding whether to invest in shares of our common stock. If
any of the following risks actually occur, our business, financial condition or
operating results could be materially adversely affected. This could cause the
market price of our common stock to decline, and could cause you to lose part or
all of your investment.
WE HAVE INCURRED SUBSTANTIAL LOSSES AND MAY NOT BE PROFITABLE IN THE FUTURE.
In recent years, we have incurred substantial operating losses in every
fiscal period. We cannot predict when we will become profitable, if at all, and
if we do, that we will remain profitable for any substantial period of time.
Failure to achieve profitability within the time frame expected by investors may
adversely affect the market price of our common stock. In the nine months ended
September 30, 1999, we had a net loss of $4.5 million. As a result of ongoing
operating losses, at September 30, 1999, we had an accumulated deficit of $19.1
million. We have generated relatively small amounts of SiteMinder revenues until
recent fiscal quarters, while increasing expenditures in all areas, particularly
in research and development and sales and marketing, in order to execute our
business plan. Although we have experienced revenue growth in connection with
SiteMinder in recent periods, the growth has been off of a small base, and it is
unlikely that the recent growth rates are sustainable.
DISAPPOINTING QUARTERLY RESULTS COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK
TO FALL SUBSTANTIALLY.
Our quarterly revenues and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter. If our quarterly revenues
or operating results fall below the expectations of investors, the price of our
common stock could fall substantially.
Our quarterly revenues may fluctuate for several reasons, including the
following:
- market acceptance of our SiteMinder products;
- our success in obtaining follow-on sales to existing customers;
- the long sales and deployment cycle for sales of SiteMinder licenses;
- our ability to hire and retain personnel, particularly in services and
sales and marketing;
- the release of new versions of SiteMinder or other products; and
- the development of our direct and indirect sales channels.
In addition, because our revenues from services are largely correlated with
our SiteMinder software revenues, a decline in SiteMinder software revenues
could also cause a decline in our SiteMinder services revenues in the same
quarter or in subsequent quarters. Other factors, many of which are outside our
control, could also cause variations in our quarterly revenues and operating
results.
Most of our expenses, such as employee compensation and rent, are
relatively fixed. Moreover, our expense levels are based, in part, on our
expectations regarding future revenue increases. As a result, any shortfall in
revenues in relation to our expectations could cause significant changes in our
operating results from quarter to quarter and could result in increased
quarterly losses.
OUR FUTURE SUCCESS WILL DEPEND ON OUR ABILITY TO MARKET SITEMINDER AND RELATED
SERVICES SUCCESSFULLY.
The sale of SiteMinder licenses and related services provides a substantial
majority of our total revenues. These sales accounted for 73% of our total
revenues in the nine months ended September 30, 1999. We expect that our future
financial performance will depend on SiteMinder sales. Prior to the release of
SiteMinder 3.0 in June 1998, there had been very few commercial installations of
SiteMinder. Since June 1998, all commercial deployments of SiteMinder have
supported business-to-business web applications. Broad market acceptance of
SiteMinder will depend on the development of the market for secure user
management, including usage of SiteMinder for business-to-consumer applications,
and customer demand for the specific functionality of SiteMinder. We cannot be
sure that either will occur. Like most technology products at an early stage of
development, SiteMinder may require extensive reengineering or upgrading if it
8
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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 IBM/DASCOM. In addition, a number of other security and
software companies have indicated that they offer products which may compete
with ours. We expect that additional competitors will emerge in the future.
Current and potential competitors have established, or may in the future
establish, cooperative relationships with third parties to increase the
availability of their products to the marketplace. It is possible that new
competitors or alliances may emerge and rapidly acquire significant market
share. Potential competitors may have significantly greater financial,
marketing, technical and other competitive resources than we have. If, in the
future, a competitor chooses to bundle a competing secure user management
product with other e-commerce applications, the demand for our products might be
substantially reduced. Many of these factors are out of our control, and there
can be no assurance that we can maintain or enhance our competitive position
against current and future competitors.
THE DEVELOPMENT OF A MARKET FOR SITEMINDER IS UNCERTAIN.
We provide secure user management solutions for web-based e-commerce
applications. Our market is new and rapidly evolving. If the market for secure
user management solutions does not grow at a significant rate, this will have a
material adverse effect on our business, operating results and financial
condition. As is typical for new and rapidly evolving industries, customer
demand for recently introduced secure user management products is highly
uncertain.
OUR BUSINESS WILL BE ADVERSELY AFFECTED IF THE INTERNET DOES NOT BECOME A VIABLE
AND SUBSTANTIAL COMMERCIAL MEDIUM.
Our future success depends heavily on the acceptance and wide use of the
Internet for e-commerce. If e-commerce does not continue to grow or grows more
slowly than expected, significant demand for SiteMinder and related services may
fail to develop. Consumers and businesses may reject the Internet as a viable
commercial medium for a number of reasons, including potentially inadequate
network infrastructure,
9
<PAGE> 12
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.
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.
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OUR FAILURE TO MANAGE OUR RAPID GROWTH EFFECTIVELY COULD HURT OUR BUSINESS.
Our failure to manage our rapid growth effectively could have a material
adverse effect on the quality of our products, our ability to retain key
personnel and our business, operating results and financial condition. We have
been experiencing a period of rapid growth that has been placing a significant
strain on all of our resources. From December 31, 1997 to September 30, 1999,
the number of our employees increased from 40 to 109. To manage future growth
effectively we must maintain and enhance our financial and accounting systems
and controls, integrate new personnel and manage expanded operations.
IF WE LOSE THE SERVICES OF BARRY BYCOFF OR ANY OTHER MEMBER OF OUR MANAGEMENT
TEAM, OUR BUSINESS COULD SUFFER.
Our future success depends, to a significant degree, on the skill,
experience and efforts of Barry Bycoff, our chief executive officer, and the
rest of our management team. The loss of any member of our management team could
have a material adverse effect on our business, operating results and financial
condition. We also depend on the ability of our officers and key employees to
work effectively as a team.
AS WE EXPAND OUR INTERNATIONAL OPERATIONS, WE WILL FACE NEW RISKS TO OUR
SUCCESS.
Historically, we have not derived a significant portion of our total
revenues from sales to customers outside the United States. However, we intend
to expand our international operations in the future. This expansion will
require additional resources and management attention, and will subject us to
new regulatory, economic and political risks. We have very little experience in
international markets. As a result, we cannot be sure that our expansion into
global markets will be successful. In addition, we will face new risks in doing
business internationally. These risks could reduce demand for our products and
services, increase the prices at which we can sell our products and services, or
otherwise have an adverse effect on our operating results. Among the risks we
believe are most likely to affect us are:
- longer payment cycles and problems in collecting accounts receivable;
- adverse changes in trade and tax regulations, including restrictions on
the import and export of sensitive technologies, such as encryption
technologies, that we use or may wish to use in our software products;
- the absence or significant lack of legal protection for intellectual
property rights;
- difficulties in managing an organization spread over several countries,
including complications arising from cultural, language and time
differences that may lengthen sales and implementation cycles;
- currency risks, including fluctuations in exchange rates; and
- political and economic instability.
OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR PROPRIETARY RIGHTS.
Our success depends to a significant degree upon the protection of our
software and other proprietary technology. The unauthorized reproduction or
other misappropriation of our proprietary technology could enable third parties
to benefit from our technology without paying us for it. This could have a
material adverse effect on our business, operating results and financial
condition. We depend upon a combination of trademark, trade secret and copyright
laws, license agreements and non-disclosure and other contractual provisions to
protect proprietary and distribution rights in our products. In addition, we
attempt to protect our proprietary information and the proprietary information
of our vendors and partners through confidentiality and/or license agreements
with our employees and others. Although we have taken steps to protect our
proprietary technology, they may be inadequate. Existing trade secret, copyright
and trademark laws offer only limited protection. Moreover, the laws of other
countries in which we market our products may afford little or no effective
protection of our intellectual property. If we resort to legal proceedings to
enforce our intellectual property rights, the proceedings could be burdensome
and expensive, even if we were to prevail.
CLAIMS BY OTHER COMPANIES THAT WE INFRINGE THEIR PROPRIETARY TECHNOLOGY COULD
HURT OUR FINANCIAL CONDITION.
If we discover that any of our products violated third party proprietary
rights, there can be no assurance that we would be able to reengineer our
product or to obtain a license on commercially reasonable terms to
11
<PAGE> 14
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.
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.
We have filed two shelf registration statements on Form S-3 with the SEC in
connection with two of our recent private financings. These registration
statements cover an aggregate of 1,329,893 shares of our common stock, which may
be sold into the public market at any time. Sales of these shares could increase
the volatility of our stock price.
The stock market in general, and the market prices for Internet-related
companies in particular, have experienced extreme volatility that often has been
unrelated to the operating performance of these companies. These broad market
and industry fluctuations may adversely affect the market price of our common
stock, regardless of our operating performance. Recently, when the market price
of a stock has been volatile, holders
12
<PAGE> 15
of that stock have often instituted securities class action litigation against
the company that issued the stock. If any of our stockholders brought a lawsuit
against us, we could incur substantial costs defending the lawsuit. The lawsuit
could also divert the time and attention of our management.
WE MAY LOSE MONEY ON FIXED-PRICE CONSULTING CONTRACTS.
In the future, an increased portion of our SiteMinder services revenues may
be derived from fixed-price contracts. We work with complex technologies in
compressed time frames and it can be difficult to judge the time and resources
necessary to complete a project. If we miscalculate the resources or time we
need to complete work under fixed-price contracts, our operating results could
be materially harmed.
LOSS OF OUR FIREWALL-1 RESELLER BUSINESS WOULD ADVERSELY AFFECT OUR OPERATING
RESULTS.
While we recently have focused our resources on developing and marketing
our SiteMinder software and services, we continue to generate a significant
portion of our revenues from our sales of Check Point Software Technologies'
FireWall-1 product. Our FireWall-1 reseller business experiences competition
from companies that compete with FireWall-1, including Axent Technologies, Cisco
Systems and Trusted Information Systems, as well as from other resellers of
FireWall-1. As a result, we may not be able to maintain the current revenue
levels generated by our FireWall-1 reseller business.
OUR DIRECTORS AND MANAGEMENT WILL EXERCISE SIGNIFICANT CONTROL OVER OUR COMPANY.
After this offering, our directors and executive officers and their
affiliates will collectively control approximately 31.8% of our outstanding
common stock. As a result, these stockholders, if they act together, will be
able to influence our management and affairs and all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. This concentration of ownership may have the
effect of delaying or preventing a change in control of our company and might
affect the market price of our common stock.
CERTAIN PROVISIONS OF OUR CHARTER AND OF DELAWARE LAW MAKE A TAKEOVER OF OUR
COMPANY MORE DIFFICULT.
Our corporate documents and Delaware law contain provisions that might
enable our management to resist a takeover of our company. These provisions
might discourage, delay or prevent a change in the control of Netegrity or a
change in our management. These provisions could also discourage proxy contests
and make it more difficult for you and other stockholders to elect directors and
take other corporate actions. The 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.
13
<PAGE> 16
- Year 2000 problems that affect our internal systems. We believe that our
internal software systems are Year 2000 compliant. Although we have
tested these systems for Year 2000 compliance, we cannot be certain that
these tests have detected all potential Year 2000 problems. It is
possible that these systems could contain undetected problems that could
cause serious and costly disruptions which would have a material adverse
effect on our business and operating results.
- Year 2000 problems that affect products and services provided to us by
third parties. We have relied on certifications from our software
vendors and suppliers regarding the Year 2000 readiness of products and
services they provide to us. We have not conducted independent tests of
these products and services. It is possible that these systems could
contain undetected problems that could cause serious and costly delivery
delays which would have a material adverse effect on our business and
operating results.
THE YEAR 2000 ISSUE MAY CAUSE OUR CURRENT AND POTENTIAL CUSTOMERS TO DELAY
IMPLEMENTING OUR SOFTWARE.
Some of our customers and potential customers have implemented policies
that prohibit or discourage changing their internal computer systems until after
January 1, 2000. Our revenues may suffer if potential customers delay the
purchase of our products until after January 1, 2000. Purchasing decisions may
be delayed as potential customers halt development of their internal computer
systems or use their information technology budgets to address Year 2000 issues.
If our potential customers delay purchasing or implementing our products in
preparation for the Year 2000 problem, our business could be seriously harmed.
WE MAY USE OUR PROCEEDS FROM THIS OFFERING IN WAYS WITH WHICH YOU MAY NOT AGREE.
We have not identified specific uses for our proceeds from this offering,
and we will have broad discretion in how we use them. You will not have the
opportunity to evaluate the economic, financial or other information on which we
base our decisions on how to use our proceeds.
14
<PAGE> 17
FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This prospectus and the documents incorporated in it by reference contain
forward-looking statements about our plans, objectives, expectations and
intentions. You can identify these statements by words such as "expect,"
"anticipate," "intend," "plan," "believe," "seek," "estimate," "may," "will" and
"continue" or similar words. You should read statements that contain these words
carefully. They discuss our future expectations, contain projections of our
future results of operations or our financial condition or state other
forward-looking information, and may involve known and unknown risks over which
we have no control. You should not place undue reliance on forward-looking
statements. We cannot guarantee any future results, levels of activity,
performance or achievements. Moreover, we assume no obligation to update
forward-looking statements or update the reasons actual results could differ
materially from those anticipated in forward-looking statements. The factors
discussed in the sections captioned "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business"
identify important factors that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
This prospectus contains data related to the e-commerce market. These
market data have been included in studies published by the market research firms
of Forrester Research and International Data Corporation. These data include
projections that are based on a number of assumptions, including increasing
worldwide business use of the Internet, the growth in the number of web access
devices per user, the absence of any failure of the Internet, and the continued
improvement of security on the Internet. If any of these assumptions is
incorrect, actual results may differ from the projections based on those
assumptions.
USE OF PROCEEDS
We estimate that the net proceeds from our sale of 2,450,000 shares of
common stock will be approximately $62.2 million, based upon an assumed public
offering price of $27.00 per share and after deducting estimated underwriting
discounts and commissions and estimated offering expenses that we will pay. We
estimate that our net proceeds will be approximately $63.5 million if the
underwriters exercise their over-allotment option in full. We will not receive
any proceeds from the sale of shares by the selling stockholders.
We intend to use our net proceeds for general corporate purposes, including
working capital. We may also use a portion of the net proceeds to acquire or
invest in complementary businesses or products or to obtain rights to use
complementary technologies. We are not currently involved in negotiations
regarding, and we have no specific understandings, commitments or agreements
with respect to, any acquisition or investment. Pending these uses, we intend to
invest our net proceeds in short-term, investment-grade, interest-bearing
instruments, repurchase agreements or high grade corporate notes.
15
<PAGE> 18
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq National Market under the symbol
"NETE." It was traded on the Nasdaq SmallCap Market prior to September 28, 1999.
The following table sets forth, for the periods indicated, the range of high and
low sale prices per share of our common stock, as reported on the Nasdaq
SmallCap Market for the period prior to September 28, 1999 and on the Nasdaq
National Market for the time period from September 28, 1999 through October 29,
1999.
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
------------------
HIGH LOW
------- -------
<S> <C> <C>
1997 FISCAL YEAR
First Quarter............................................... $ 4.000 $ 1.813
Second Quarter............................................ $ 2.813 $ 1.250
Third Quarter............................................. $ 2.688 $ 1.125
Fourth Quarter............................................ $ 2.063 $ 1.156
1998 FISCAL YEAR
First Quarter............................................. $ 2.344 $ 1.406
Second Quarter............................................ $ 3.000 $ 1.625
Third Quarter............................................. $ 4.125 $ 1.500
Fourth Quarter............................................ $ 4.531 $ 1.063
1999 FISCAL YEAR
First Quarter............................................. $15.000 $ 4.125
Second Quarter............................................ $18.313 $10.000
Third Quarter............................................. $30.000 $15.875
Fourth Quarter (through October 29, 1999)................. $28.250 $21.313
</TABLE>
On October 29, 1999, the last sale price of our common stock as reported on
the Nasdaq National Market was $27.00 per share. As of October 29, 1999, there
were 164 holders of record of common stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock, and
we do not anticipate paying cash dividends in the foreseeable future. We
currently intend to retain future earnings, if any, to fund the expansion and
growth of our business. Payment of future dividends, if any, will be at the
discretion of the board of directors, after taking into account various factors,
including our financial condition, operating results, current and anticipated
cash needs, and plans for expansion.
16
<PAGE> 19
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999:
- on an actual basis, giving effect to an amendment to our certificate of
incorporation filed on October 7, 1999 to increase the number of
authorized shares of our common stock to 55,000,000; and
- on an as adjusted basis to reflect our sale of 2,450,000 shares of common
stock at an assumed public offering price of $27.00 per share and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses that we will pay.
This table should be read together with the consolidated financial
statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
--------------------------
ACTUAL AS ADJUSTED
--------- -------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Preferred stock, $0.01 par value; 5,000,000 shares
authorized, actual and as adjusted; no shares issued or
outstanding, actual and as adjusted....................... -- --
Common stock, $0.01 par value; 55,000,000 shares authorized,
actual and as adjusted; 14,441,379 shares issued and
14,416,279 shares outstanding, actual; 16,891,379 shares
issued and 16,866,279 shares outstanding, as adjusted....... $ 144 $ 169
Additional paid-in capital.................................. 31,286 93,438
Cumulative deficit.......................................... (19,106) (19,106)
Loan to officer............................................. (200) (200)
Less -- treasury stock, at cost; 25,101 shares actual and as
adjusted.................................................. (84) (84)
------- -------
Total stockholders' equity............................. $12,040 $74,217
======= =======
</TABLE>
17
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with our consolidated financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this prospectus. The statement of operations data for the
nine months ended December 31, 1996 and the years ended December 31, 1997 and
1998, and the balance sheet data as of December 31, 1997 and 1998, are derived
from, and are qualified by reference to, consolidated financial statements
audited by PricewaterhouseCoopers LLP and included elsewhere in this prospectus.
The statement of operations data for the years ended March 31, 1995 and 1996 and
the balance sheet data as of March 31, 1995, March 31, 1996 and December 31,
1996, are derived from audited consolidated financial statements not included in
this prospectus. The statement of operations data for the nine months ended
September 30, 1998 and 1999, and the balance sheet data as of September 30,
1999, are derived from unaudited consolidated financial statements appearing
elsewhere in this prospectus. The statement of operations data for the pro forma
twelve months ended December 31, 1996 and the nine months ended December 31,
1997, are unaudited. The unaudited consolidated financial statements have been
prepared on the same basis as the audited consolidated financial statements and,
in the opinion of our management, include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
information set forth therein. Historical results are not necessarily indicative
of operating results to be expected in the future.
<TABLE>
<CAPTION>
NINE MONTHS PRO FORMA NINE MONTHS
YEARS ENDED ENDED TWELVE MONTHS YEARS ENDED ENDED
MARCH 31, DECEMBER 31, ENDED DECEMBER 31, SEPTEMBER 30,
-------------- ----------------- DECEMBER 31, ----------------- -----------------
1995 1996 1996 1997 1996 1997 1998 1998 1999
----- ------ ------- ------- ------------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
SiteMinder software............. -- -- -- $ 237 -- $ 237 $ 1,483 $ 784 $ 4,476
SiteMinder services............. -- -- -- 12 -- 12 468 236 1,406
Other........................... $ 959 $3,725 $ 3,637 3,497 $ 4,966 4,484 2,840 2,101 2,145
----- ------ ------- ------- ------- ------- ------- ------- -------
Total revenues.................. 959 3,725 3,637 3,746 4,966 4,733 4,791 3,121 8,027
Cost of revenues.................. 488 2,173 2,176 1,935 2,931 2,470 1,764 1,384 2,332
----- ------ ------- ------- ------- ------- ------- ------- -------
Gross profit...................... 471 1,552 1,461 1,811 2,035 2,263 3,027 1,737 5,695
Selling, general and
administrative expenses......... 305 1,178 2,303 4,487 2,702 5,509 6,395 4,424 7,806
Research and development costs.... -- -- 705 927 705 1,028 1,991 1,373 2,486
----- ------ ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations..... 166 374 (1,547) (3,603) (1,372) (4,274) (5,359) (4,060) (4,597)
Interest income (expense), net.... (1) 20 181 124 188 203 130 100 119
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) (3,960) (4,478)
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) (3,960) (4,478)
Provision for income taxes........ -- 25 (74) -- (74) -- -- -- --
----- ------ ------- ------- ------- ------- ------- ------- -------
Net income (loss)................. $ 196 $ 129 $ 4,000 $(4,604) $ 3,967 $(5,252) $(5,229) $(3,960) $(4,478)
===== ====== ======= ======= ======= ======= ======= ======= =======
Basic and diluted earnings per
share:
From continuing operations...... $0.02 $ 0.05 $ (0.16) $ (0.50) $ (0.12) $ (0.57) $ (0.56) $ (0.42) $ (0.44)
From operation of discontinued
operations.................... -- (0.03) (0.06) -- (0.07) -- -- -- --
Gain on sale of assets.......... -- -- 0.67 -- 0.61 -- -- -- --
----- ------ ------- ------- ------- ------- ------- ------- -------
Net income (loss)............... $0.02 $ 0.02 $ 0.45 $ (0.50) $ 0.40 $ (0.57) $ (0.56) $ (0.42) $ (0.44)
===== ====== ======= ======= ======= ======= ======= ======= =======
Weighted average shares
outstanding..................... 8,710 8,835 8,944 9,209 9,901 9,279 9,362 9,348 10,273
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------------- --------------------------- SEPTEMBER 30,
1995 1996 1996 1997 1998 1999
------ ------- ------- ------ ------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 672 $ 1,410 $ 6,791 $2,134 $1,175 $11,212
Working capital.............................. 651 401 4,629 9 47 10,986
Total assets................................. 9,170 10,456 10,259 4,849 4,225 15,593
Total stockholders' equity................... 1,950 1,903 6,149 1,016 996 12,040
</TABLE>
19
<PAGE> 22
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 56% of total revenues in the nine
months ended September 30, 1999, and 31% of total revenues in the year ended
December 31, 1998. SiteMinder services revenues accounted for 17% of total
revenues in the nine months ended September 30, 1999 and 10% of total revenues
in the year ended December 31, 1998. Other revenues accounted for 27% of total
revenues in the nine months ended September 30, 1999 and 59% of total revenues
in the year ended December 31, 1998. We expect SiteMinder software and services
revenues to increase as a percentage of total revenues.
We recognize our SiteMinder and other software license revenues in
accordance with Statement of Position 97-2, "Software Revenue Recognition."
Statement of Position 97-2 generally requires revenues earned on software
arrangements involving multiple elements to be allocated to each element based
on the relative fair values of the elements. We generally recognize revenues
allocated to software licenses upon delivery of the software products, provided
that we have no remaining significant obligations with regard to implementation,
the license fee is fixed or determinable and collection of the fee is probable.
Revenues derived from arrangements with resellers of our products are not
recognized until the software is shipped to the end user. Generally, the price
of a SiteMinder license is based upon a specified number of directory server
users. The price per licensed user decreases as the number of licensed users
increases. Our SiteMinder and other customers often contract for maintenance,
which provides them with new releases of software and various technical support
and services for a specified period which is typically one year. These
agreements are generally separately negotiated and priced based on a percentage
of software license revenues. We recognize maintenance revenues from these
contracts ratably over the contractual period. We provide consulting and
training services on either a daily rate or fixed-cost basis. We recognize
revenues from the sale of consulting services provided at a daily rate ratably
over the support term and revenues from the sale of consulting and training
services provided on a fixed cost basis as the services are performed.
We currently sell our SiteMinder products through a combination of our
direct sales force, worldwide resellers and licensees. In the second half of
1999, we have begun to increase our presence in Europe and Asia. We anticipate
that the percentage of our revenues derived outside of North America will
increase. Revenues from North America represented 91% of our SiteMinder software
and services revenues for the nine months ended September 30, 1999. Increasing
our international sales may subject us to risks, many of which are
20
<PAGE> 23
outside our control, including economic uncertainties, currency fluctuations,
political instability and uncertain cultural and regulatory environments.
We record cash receipts from customers and billed amounts due from
customers in excess of recognized revenues as deferred revenue. The timing and
amount of cash receipts from customers can vary significantly depending on
specific contract terms and therefore can have a significant impact on the
amount of deferred revenues in any given period.
Our gross profit is impacted by, among other things, royalties due to third
parties for technology included in our products, product fulfillment costs, and
salaries and related expenses for our consulting, education and technical
support services organizations, and the associated cost of training facilities.
In addition, our gross profit is impacted by the mix of software versus services
revenues. We anticipate that, as SiteMinder software revenues increase as a
percentage of total revenues, our gross profit will increase because our costs
associated with SiteMinder software revenues are lower than the costs associated
with our other products and services.
Our operating expenses are classified into two general categories: sales,
general and administrative and research and development. Sales, general and
administrative expenses consist primarily of salaries and other related costs
for sales, administrative and marketing personnel, sales commissions, travel,
legal and accounting services, public relations, marketing materials, trade
shows and certain facilities-related expenses. Research and development expenses
consist primarily of personnel costs to support product development.
We record software development costs in accordance with Financial
Accounting Standards Board Statement No. 86. We did not have any software
development costs that were capitalized during the nine months ended September
30, 1999. Previously capitalized software development costs were fully amortized
at June 30, 1999.
Since 1996, we have incurred substantial costs to develop our technology
and products, to recruit and train personnel for our research and development,
sales, marketing and professional services departments, and to establish an
administrative organization. We have incurred net losses in each fiscal quarter
since 1996 and had an accumulated deficit of $19.1 million as of September 30,
1999. We anticipate that our operating expenses will increase substantially in
future quarters as we increase sales and marketing operations, expand
distribution channels, increase research and development, broaden professional
services, expand facilities and support, and improve operational and financial
systems. Accordingly, we expect to incur additional losses through at least
2000.
Although we have experienced significant growth in revenues in recent
periods, that growth has been from a relatively small base, and there can be no
assurance that those growth rates are sustainable. Therefore, historical growth
rates should not be considered indicative of future operating results. There can
also be no assurance that we will be able to continue to increase our revenues
or attain profitability or, if increases in revenue and profitability are
achieved, that they can be sustained. We believe that the period-to-period
comparisons of our historical operating results are not meaningful and should
not be relied upon as an indication of future performance.
As of December 31, 1998, we had net operating loss carryforwards of $12.9
million available for federal purposes to reduce future taxable income expiring
on various dates through 2018. Provisions of the Internal Revenue Code may limit
the net operating loss available for use in any given year, based upon
significant past or future changes of our ownership.
As of June 28, 1996, we completed the divestiture of our catalog-related
business, consisting of The Programmer's SuperShop catalog and web site, the
corporate sales group, SDC Germany and SDC Communications. We incurred $2.6
million in expenses and write-offs related to the divestiture and realized a
gain of $6.0 million from the sale of assets. We utilized a portion of our
available operating loss carryforwards at that time to decrease the amount of
federal and state corporate income taxes.
21
<PAGE> 24
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 NINE MONTHS
ENDED TWELVE MONTHS YEARS ENDED ENDED
DECEMBER 31, ENDED DECEMBER 31, SEPTEMBER 30,
------------- DECEMBER 31, ------------ -------------
1996 1997 1996 1997 1998 1998 1999
---- ----- ------------- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
SiteMinder software......................... -- 7% -- 5% 31% 25% 56%
SiteMinder services......................... -- -- -- -- 10 8 17
Other....................................... 100% 93 100% 95 59 67 27
--- ---- --- ---- ---- ---- ---
Total revenues.............................. 100 100 100 100 100 100 100
Cost of revenues.............................. 60 52 59 52 37 44 29
--- ---- --- ---- ---- ---- ---
Gross profit.................................. 40 48 41 48 63 56 71
Selling, general and administrative
expenses.................................... 63 120 54 116 133 142 97
Research and development costs................ 20 24 15 22 42 44 31
--- ---- --- ---- ---- ---- ---
Loss from operations.......................... (43) (96) (28) (90) (112) (130) (57)
Interest income (expense), net................ 5 3 4 4 3 3 1
Share of loss from investment in Encotone,
Inc......................................... (1) (2) (1) (3) -- -- --
Write off of investment in Encotone LTD....... -- (28) -- (22) -- -- --
--- ---- --- ---- ---- ---- ---
Loss from continuing operations............... (39) (123) (25) (111) (109) (127) (56)
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) (127) (56)
Provision for income taxes.................... (2) -- (1) -- -- -- --
--- ---- --- ---- ---- ---- ---
Net income (loss)............................. 110% (123)% 80% (111)% (109)% (127)% (56)%
=== ==== === ==== ==== ==== ===
</TABLE>
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September
30, 1998
Revenues. Total revenues increased by $4.9 million, or 157%, to $8.0
million in the nine months ended September 30, 1999, from $3.1 million in the
nine months ended September 30, 1998.
SiteMinder software revenues increased by $3.7 million, or 471%, to $4.5
million in the nine months ended September 30, 1999, from $784,000 in the nine
months ended September 30, 1998. This increase is due to the continued increase
in market awareness and the acceptance of the SiteMinder product and expansion
of our sales organization. There were no significant revenues from SiteMinder
prior to the release of SiteMinder 3.0 in June 1998.
SiteMinder services revenues increased by $1.2 million, or 495%, to $1.4
million in the nine months ended September 30, 1999, from $236,000 in the nine
months ended September 30, 1998. This increase reflected the continued growth in
the installed base of SiteMinder software licenses and the increasing
requirement to provide installation and integration services for customers.
Other revenues increased by $44,000, or 2%, to $2.1 million in the nine
months ended September 30, 1999, from $2.1 million in the nine months ended
September 30, 1998.
Gross profit. Gross profit increased by $4.0 million, or 228%, to $5.7
million in the nine months ended September 30, 1999, from $1.7 million in the
nine months ended September 30, 1998. The increase in SiteMinder software
revenues resulted in higher gross profit due to lower costs associated with
SiteMinder software revenues.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $3.4 million, or 76%, to $7.8 million in
the nine months ended September 30, 1999, from $4.4 million in the nine months
ended September 30, 1998. This increase was primarily a result of the continued
development of
22
<PAGE> 25
our sales and marketing infrastructure to support planned growth in sales of our
SiteMinder product and services.
Research and development costs. Research and development costs increased
by $1.1 million, or 81%, to $2.5 million in the nine months ended September 30,
1999, from $1.4 million in the nine months ended September 30, 1998. The
increase was primarily due to our continued development of SiteMinder and our
increase in research and development personnel. We expect to continue to
increase the amount spent on research and development in the foreseeable future
as we continue to develop and enhance our product line to address the evolving
needs of customers deploying large-scale and transaction-based e-commerce
applications. Research and development costs may be incurred substantially in
advance of the related revenues and in some cases may not generate revenues. In
the nine months ended September 30, 1998, we capitalized $249,000 of research
and development costs, net of amortization, as a result of our realizing
technological feasibility. We did not capitalize any research and development
costs in the nine months ended September 30, 1999. There was no capitalized
software as of September 30, 1999.
Interest income (expense), net. Net interest income increased by $19,000,
or 19%, to $119,000 in the nine months ended September 30, 1999, from $100,000
in the nine months ended September 30, 1998. This increase was mainly
attributable to a higher cash balance in the nine months ended September 30,
1999. There were no borrowings outstanding during the nine months ended
September 30, 1998 or the nine months ended September 30, 1999.
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> 26
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 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
24
<PAGE> 27
forma twelve months ended December 31, 1996. In the year ended December 31,
1997, we capitalized $310,000 of research and development expenditures, net of
amortization, as a result of our realizing technological feasibility. No costs
were capitalized in the pro forma twelve months ended December 31, 1996.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth unaudited quarterly financial data for each
of our last two fiscal years and each of the quarters in the nine months ended
September 30, 1999, and those data expressed as percentages of our total
revenues for the respective quarters. This information has been derived from
unaudited consolidated financial statements that, in the opinion of our
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the quarterly information. The
operating results for any quarter are not necessarily indicative of results to
be expected for any future period.
<TABLE>
<CAPTION>
QUARTERS ENDED
-----------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1997 1997 1997 1997 1998 1998 1998 1998 1999
--------- -------- --------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenues:
SiteMinder
software........... -- -- -- $ 237 $ 131 $ 242 $ 411 $ 700 $ 995
SiteMinder
services........... -- -- -- 12 39 87 110 231 358
Other................ $ 987 $ 1,184 $ 1,120 1,193 640 725 736 739 707
------ ------- ------- ------- ------- ------- ------- ------- -------
Total revenues....... 987 1,184 1,120 1,442 810 1,054 1,257 1,670 2,060
Cost of revenues...... 535 700 571 664 509 444 431 579 715
------ ------- ------- ------- ------- ------- ------- ------- -------
Gross profit.......... 452 484 549 778 301 610 826 1,091 1,345
Selling, general and
administrative
expenses............. 1,022 1,273 1,502 1,527 1,385 1,535 1,504 1,772 2,101
Research and
development costs.... 101 185 304 623 421 452 500 618 699
------ ------- ------- ------- ------- ------- ------- ------- -------
Loss from
operations........... (671) (974) (1,257) (1,372) (1,505) (1,377) (1,178) (1,299) (1,455)
Interest income
(expense), net....... 79 63 43 18 32 37 31 30 19
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) (1,436)
Provision for income
taxes................ -- -- -- -- -- -- -- -- --
------ ------- ------- ------- ------- ------- ------- ------- -------
Net loss........... $ (648) $(1,959) $(1,283) $(1,362) $(1,473) $(1,340) $(1,147) $(1,269) $(1,436)
====== ======= ======= ======= ======= ======= ======= ======= =======
<CAPTION>
QUARTERS ENDED
--------------------
JUNE 30, SEPT. 30,
1999 1999
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenues:
SiteMinder
software........... $ 1,473 $ 2,008
SiteMinder
services........... 447 601
Other................ 719 719
------- -------
Total revenues....... 2,639 3,328
Cost of revenues...... 778 838
------- -------
Gross profit.......... 1,861 2,490
Selling, general and
administrative
expenses............. 2,487 3,219
Research and
development costs.... 775 1,012
------- -------
Loss from
operations........... (1,401) (1,741)
Interest income
(expense), net....... 47 52
Share of loss from
investment in
Encotone, Inc........ -- --
Write off of
investment in
Encotone LTD. ....... -- --
------- -------
Loss before provision
for income taxes..... (1,354) (1,689)
Provision for income
taxes................ -- --
------- -------
Net loss........... $(1,354) $(1,689)
======= =======
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
QUARTERS ENDED
-----------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1997 1997 1997 1997 1998 1998 1998 1998 1999
--------- -------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF
TOTAL REVENUES:
Revenues:
SiteMinder
software........... -- -- -- 16% 16% 23% 33% 42% 48%
SiteMinder
services........... -- -- -- 1 5 8 9 14 17
Other................ 100% 100% 100% 83 79 69 58 44 35
------ ------- ------- ------- ------- ------- ------- ------- -------
Total revenues....... 100 100 100 100 100 100 100 100 100
Cost of revenues...... 54 59 51 46 63 42 34 35 35
------ ------- ------- ------- ------- ------- ------- ------- -------
Gross profit.......... 46 41 49 54 37 58 66 65 65
Selling, general and
administrative
expenses............. 104 108 134 106 171 146 120 106 102
Research and
development costs.... 10 15 27 43 52 43 40 37 34
------ ------- ------- ------- ------- ------- ------- ------- -------
Loss from
operations........... (68) (82) (112) (95) (186) (131) (94) (78) (71)
Interest income
(expense), net....... 8 5 4 1 4 4 3 2 1
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) (70)
Provision for income
taxes................ -- -- -- -- -- -- -- -- --
------ ------- ------- ------- ------- ------- ------- ------- -------
Net loss.............. (66)% (165)% (115)% (95)% (182)% (127)% (91)% (76)% (70)%
====== ======= ======= ======= ======= ======= ======= ======= =======
<CAPTION>
QUARTERS ENDED
--------------------
JUNE 30, SEPT. 30,
1999 1999
-------- ---------
<S> <C> <C>
AS A PERCENTAGE OF
TOTAL REVENUES:
Revenues:
SiteMinder
software........... 56% 60%
SiteMinder
services........... 17 18
Other................ 27 22
------- -------
Total revenues....... 100 100
Cost of revenues...... 29 25
------- -------
Gross profit.......... 71 75
Selling, general and
administrative
expenses............. 94 97
Research and
development costs.... 29 30
------- -------
Loss from
operations........... (53) (52)
Interest income
(expense), net....... 2 1
Share of loss from
investment in
Encotone, Inc........ -- --
Write off of
investment in
Encotone LTD. ....... -- --
------- -------
Loss before provision
for income taxes..... (51) (51)
Provision for income
taxes................ -- --
------- -------
Net loss.............. (51)% (51)%
======= =======
</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
26
<PAGE> 29
fixed, particularly in the short term. There can be no assurance that our
expectations regarding future 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 nine months ended September 30,
1999 was $5.2 million, primarily due to a net loss of $4.5 million and an
increase in accounts receivable, partially offset by increases in accounts
payable, accrued expenses and deferred revenue. Cash used for operating
activities in the year ended December 31, 1998 was $5.8 million, primarily due
to a net loss of $5.2 million and an increase in accounts receivable, partially
offset by increases in accounts payable, accrued expenses and deferred revenue.
Cash used for investing activities was $334,000 in the nine months ended
September 30, 1999, and $301,000 in the year ended December 31, 1998. Investing
activities for the periods consisted primarily of the purchases of equipment,
consisting largely of computer servers, workstations and networking equipment.
Cash provided by financing activities in the nine months ended September
30, 1999 was approximately $15.5 million, as a result of our sale of 795,651
shares of common stock to certain investors in a private placement on February
8, 1999 at a price of $5.75 per share and our sale of 534,242 shares of common
stock to certain investors in a private placement on September 9, 1999 at a
price of $20.59 per share. We received net proceeds of approximately $10.3
million from the September 9, 1999 private placement, after deducting the
placement agent's fee and our estimated expenses. Cash provided by financing
activities in the year ended December 31, 1998 was $5.2 million, primarily due
to our issuance of preferred stock and warrants for net proceeds totaling $5.0
million.
As of September 30, 1999, our primary financial commitments consisted of
obligations outstanding under operating leases.
As of September 30, 1999, we had cash and cash equivalents totaling $11.2
million.
In recent years, we have significantly increased our operating expenses. We
anticipate that we will continue to experience significant growth in our
operating expenses for the foreseeable future and that our operating expenses
and capital expenditures will constitute a material use of our cash resources.
In addition, we may utilize cash resources to fund acquisitions or investments
in businesses, technologies, products or services that are complementary to our
business. We believe that the net proceeds of this offering and our September
1999 sale of stock, together with our existing cash and cash equivalent
balances, will be sufficient to meet our anticipated cash requirements for
working capital and capital expenditures for at least the next twelve months.
Thereafter, if cash generated from operations is insufficient to satisfy our
liquidity requirements, we may seek to sell additional equity or debt
securities, or obtain additional credit facilities. The issuance of additional
equity or convertible debt securities could result in additional dilution to our
stockholders.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. This could
result in a system failure or miscalculations if a computer
27
<PAGE> 30
program recognizes a date of "00" as the year 1900 instead of 2000. If not
corrected, many computer systems could fail or create erroneous results in 2000.
State of Readiness
We have completed our initial assessment and testing of products, systems
and processes with respect to the "Year 2000" issue. We plan to continue our
assessment and testing of products, systems and processes throughout the
remainder of 1999.
Products
All dates used within our SiteMinder 3.0 product utilize a standard
four-digit year format. SiteMinder 3.0 has been tested by configuring a test
environment with the system dates on the test computers set to various dates in
the twenty-first century. SiteMinder 3.0 was then put through a regression test
and the output verified with previous test runs with no errors. We have verified
that when used properly and in conformity with the product information we
supply, SiteMinder 3.0 will accurately store, display, process, provide and
receive data from, into and between 1999 and 2000, including leap year
calculations, provided that all other technology used in combination with
SiteMinder 3.0 properly exchanges date data with SiteMinder 3.0.
The assessment of whether a complete system or device in which SiteMinder
3.0 is embedded will operate correctly for an end user depends in large part on
the year 2000 readiness of the system's other components, most of which are
supplied by parties other than our company. Users must test their unique
combination of hardware, system software, and transaction and application
software in order to assess the Year 2000 capability of a user's particular
system. In addition, we have relied on representations of Check Point Software
Technologies as to the Year 2000 readiness of FireWall-1. Any failure of
FireWall-1 to be Year 2000 compliant may have a material adverse effect on our
FireWall-1 reseller business, our customer relationships and our operating
results.
Internal Systems and Processes
We have completed our assessment of our internal systems and processes,
including computers and related systems, office and facilities equipment,
including fax machines, photocopiers, telephone switches, security systems and
other common devices that may be affected by the Year 2000 problem. In September
1999, we installed a necessary telephone system upgrade. Based on our assessment
to date, we believe that all of our other internal systems and processes are
Year 2000 capable.
Third-Party Vendors and Suppliers
We have reviewed Year 2000 statements provided by our significant vendors.
We have not independently verified Year 2000 statements made by third parties,
and we can express no assurances as to the Year 2000 compliance status of third
parties. We may not be able to know with certainty whether vendors are
compliant. Failure of critical vendors to achieve Year 2000 compliance could
result in delayed deliveries of products and services to us. If those delays are
extensive, they could have a material adverse effect on our business.
Costs of Year 2000 Compliance
All costs related to Year 2000 issues are being expensed as incurred. We do
not expect the total costs of evaluation and testing to be material. Other
potential costs may include updating of computer software and hardware, as well
as other out-of-pocket costs. Costs associated with Year 2000 issues totaled
approximately $100,000 through September 30, 1999. We anticipate that we may
incur up to an additional $100,000 in future costs associated with our Year 2000
readiness.
28
<PAGE> 31
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 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.
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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 September 30, 1999 we had 109 customers, including Arthur
Andersen, Delta Airlines, General Electric, GTE Internetworking, Ingram Micro,
MCI WorldCom and Merrill Lynch. We sell our products through a direct sales
force and through our distribution partners who include Allaire, GTE Cybertrust,
Network Associates and the Sun-Netscape Alliance. To date, most of our
customers' deployments of SiteMinder have supported business-to-business
e-commerce applications, but our customers are beginning to deploy SiteMinder
for business-to-consumer applications.
INDUSTRY BACKGROUND
The growth in e-commerce is driving companies to develop a new set of
web-based applications accessed by a large and diverse range of corporate users,
including customers, business partners and employees. In many cases, these new
applications are becoming the principal business processes of an organization.
These include online retail, customer service, supply chain procurement, and
delivery of operational and transactional data. This new generation of
applications has created a demand for new Internet security and user management
solutions to handle the size and scope of these applications.
Before the advent of e-commerce and the transition to web-based computing,
most large businesses deployed client/server architectures to support enterprise
computing. In the client/server model, applications are generally limited to
traditional enterprise resource planning functions such as accounting, human
resources and material resource planning. Defined groups, limited to selected
employees, access these applications through a company's internal computing
resources or dedicated remote access solutions. As a result of this limited
usage, controlling and securing access to these applications and administering
the associated users and their rights of usage, or privileges, can be adequately
handled by the organization's information technology, or IT, department. With
only a limited number of applications and a small number of defined users, the
assignment of privileges to these users is accomplished by embedding the
security and privilege functions into each application.
E-commerce, however, is fundamentally changing traditional business
processes because companies now need to conduct business online with their
customers and business partners. According to Forrester Research,
business-to-business e-commerce is expected to grow from $43 billion in 1998 to
$1.3 trillion in 2003. Forrester also estimates that business-to-consumer
e-commerce will grow from $8 billion in 1998 to $108 billion in 2003. Companies
are developing new web-based applications that support key revenue and
relationship management aspects of the companies' business processes.
International Data Corporation estimates that the global e-commerce application
market will grow from $444 million in 1998 to over $13 billion in 2003.
Companies are also attempting to leverage their existing investments in
traditional enterprise applications by integrating them into their web sites. In
this new e-commerce business model, applications accessed through the web site
are not just supporting business operations, but, in many instances, become the
focal point for companies' interactions with their constituencies, including
remote and mobile employees, existing and potential customers, suppliers,
vendors, distributors and other business partners.
As larger and more diverse constituencies access wider ranges of
applications, the management and security of users become increasingly important
and complex. The software infrastructure required to support
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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. These
relationships include our worldwide licensing agreements with Allaire, GTE
Cybertrust, Network Associates and the Sun-Netscape Alliance and reseller
agreements with Banyan Systems and Intraware. We are also focused on building
our reseller channel and establishing relationships with leading systems
integrators and technology consulting firms. We expect to continue to establish
strategic and other third-party relationships with vendors of Internet-related
systems and application software.
Pursue international expansion. Although we principally focus our
marketing efforts in the United States, we plan to expand our sales force and
support organizations with the objective of gaining broad international market
acceptance of SiteMinder through adoption into strategic accounts. In addition,
we are developing products intended to address the specific needs of
international markets, with an initial focus on Europe and Asia. These include
developing localized versions of our products and local consulting services.
Expand service resources. We believe that a customer's decision to
purchase our products is based, in part, on our ability to provide a high level
of customer service and technical support. The mission-critical nature of
product implementations further heightens customer's need for our support. We
believe that
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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 is the current version of the SiteMinder product. SiteMinder
interacts with the four main components of an e-commerce web site:
- Web Servers: SiteMinder is designed to support all major web servers and
provide access control to content distributed through these servers.
- Application Servers: SiteMinder is designed to support all major
application servers and provide generalized privilege management to the
content and transactions delivered through these servers.
- Authentication Services: SiteMinder provides broad support for
authentication methods that enable web sites to authenticate users
through a variety of methods that meet the unique security requirements
of each application.
- Directory Servers: SiteMinder integrates with all industry leading
directory servers and utilizes them as repositories for all user and
privilege data.
The SiteMinder product consists of three key components: Policy Servers,
Agents and an Administration Console. Additionally, SiteMinder is delivered with
a developer kit, which allows developers to construct web sites in both C++ and
Java applications. The following briefly describes each of the primary
components:
- Policy Server: The Policy Server is a generalized security policy
engine, which includes processes for authentication, authorization,
session management, administration and auditing. The Policy Server, which
handles all requests for managing, and enforcing user privileges, runs on
Windows NT and UNIX platforms.
- Agents: Agents are distributed components deployed on web servers,
application servers, or as part of an application itself. Agents
communicate policies to the application governing user privileges.
SiteMinder ships with web Agents compatible with most popular web
servers, including Microsoft IIS, Netscape Enterprise Server and Apache.
SiteMinder also supports application server Agents compatible with most
popular application servers, including those from Allaire, Bluestone,
Microsoft, Oracle and the Sun-Netscape Alliance.
- Administration Console: The Administration Console is a secure Java
applet that allows administrators to create and manage user privilege
policies from any Java-enabled web browser.
SiteMinder 3.6 provides the following services:
- Privilege management infrastructure: SiteMinder provides a single
location for defining the policies that specify which users may access
particular e-commerce applications and content. By providing a single
location for these policies, SiteMinder enables web sites to apply
consistent personalized content and application access for users
throughout the site.
- Single sign-on: SiteMinder provides robust single sign-on services
across e-commerce sites spanning web servers and application environments
running on multiple operating systems and spanning multiple Internet
domains. Using encrypted cookies, SiteMinder is able to recognize a
previously authenticated and authorized user and allow the user to access
applications and content without being prompted repeatedly for new
passwords.
- Policy-based authentication services: SiteMinder manages the entire
authentication process. It supports all leading authentication
technologies including basic name-password, forms based authentication,
digital certificates, two-factor authentication, and method chaining.
SiteMinder's policy-based approach enables customers to apply different
authentication technologies depending on
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the value 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
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 September 30, 1999,
our sales and marketing organization consisted of 55 individuals.
Direct Sales Force. As of September 30, 1999, our direct sales force
consisted of 34 individuals, 15 of whom were field sales representatives
covering seven domestic regions. Our sales organization identifies prospects
that have e-commerce plans and requirements, and deploys a solution-selling
approach once customers are qualified. Our inside sales representatives qualify,
develop and pursue leads generated through a variety of sources. Our field sales
group conducts on-site meetings with accounts that have substantial product and
service requirements. We target SiteMinder software and services to large,
corporate customers and smaller firms that need to protect access to
mission-critical information while providing the users of their applications
with a personalized, seamless experience. We generally sell to e-commerce
business managers, product managers, web application development managers,
Internet architects, security administrators, network/systems administrators and
other people responsible for analyzing and selecting e-commerce solutions. We
plan to continue to focus on building our direct sales force, especially our
field sales representatives, both domestically and internationally.
Indirect Distribution. We have signed partnership agreements with several
leading technology providers and systems integrators. We classify our partner
companies as follows:
- Alliance partners. Through our alliance partners, we license restricted
use of our versions of our SiteMinder product to sell with their
platforms or applications. Key alliance partners include Allaire, GTE
Cybertrust, Network Associates and the Sun-Netscape Alliance.
- Systems integrators. We continue to develop partnerships with leading
systems integrators to aid in the integration and systems design of our
software at customer sites. We plan to utilize systems integrators as
well as our internal service and support personnel to provide superior
customer installation and support. Systems integrators with which we have
relationships include Navidec, Omicron and SDG.
- Resellers. We enter into agreements with selected resellers of our
product, including Banyan Systems and Intraware.
- ISV/Co-marketing partners. We also actively seek partnerships with
companies that provide products to our customers which are complementary
to SiteMinder. We work together with these
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vendors to provide technical integration of our product. In many cases we
also work together on sales and marketing initiatives. Key partners in
this arena include Baltimore, IBM, Microsoft, Novell, Verisign and
Vignette.
Product Marketing Programs. We engage in a broad range of product
marketing activities, including sponsoring seminars for prospective customers,
exhibiting at targeted conferences for both the technology and financial
communities, as well as providing paper and e-mail based direct mailings. We
also maintain an active public relations program. This program issues press
releases highlighting major customer additions, strategic partnerships and new
product releases, manages relations with industry analysts and promotes coverage
of the firm in the trade and business press. We devote significant resources to
our web site to provide product and company information as well as customer
profiles. We continue to enhance our web site with features, including
interactive tours, streaming demos, presentations and seminar content online,
customer and developer chat rooms and more customer application stories. In
addition, we plan to launch a series of test banner campaigns on leading
Internet portal sites.
Our product marketing programs are aimed at informing customers of the
capabilities and benefits of the SiteMinder solution and increasing demand
across all industry segments. We plan to continue to devote significant
resources to marketing our product and brand.
In addition to the sales and marketing of SiteMinder, we are also a
non-exclusive distributor of Check Point Software Technologies' FireWall-1
product, complementary products from other vendors and related maintenance,
consulting and training services. We sell these products and services directly
to end-users through a small, dedicated sales organization in the United States.
We also benefit from marketing programs conducted by Check Point Software
Technologies.
CUSTOMERS
As of September 30, 1999, we licensed SiteMinder software to 109 end-user
customers. Our customer base spans multiple industry segments, focusing
primarily on financial services, high tech, government, insurance, retail and
telephone companies and internet service providers. The following is a
representative list of our customers who have purchased SiteMinder:
Aetna
Arthur Andersen
The Associates
Autodesk
Carrier
Citibank
Compaq
Corio
Country Wide
Delta Airlines
General Electric
GTE Internetworking
Ingram Micro
Inova Health Systems
Lucent
MCI WorldCom
Merrill Lynch
Mitsubishi
Nextel Communications
Paychex
PG&E
SAIC-FBI/LEO
State of Utah
Tandy
Tektronix
Thomson
US Steel
Virginia Power
No single customer, including direct end users or resellers, accounted for
more than 10% of our total revenues during any of the years ended December 31,
1998, 1997 and 1996.
We also sold Check Point Software Technologies' FireWall-1 to over 300
customers and continue to provide support to most of them.
COMPETITION
The market for secure user management products and sources is new, rapidly
evolving and highly competitive. We expect competition to continue to increase
both from existing competitors and new market
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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 IBM/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 current and potential 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. In the
nine months ended September 30, 1999, we spent approximately $2.5 million, or
31% of total revenues, on research and development of our SiteMinder product. We
will continue our product development efforts for our current product, as well
as developing next generation versions of our product line. As of September 30,
1999, we had 36 employees engaged in research and development activities.
We believe our future success depends largely on our ability to enhance and
broaden our existing product line to meet the evolving needs of the market.
There can be no assurance that we will be able to respond effectively to
technological changes or new industry standards or developments. Our operating
results and business could be adversely affected if we were to incur significant
delays or be unsuccessful in developing new products or enhancing our existing
products, or if any such enhancements or new products do not gain market
acceptance. In addition, a number of factors may cause variations in our future
operating results. These include the timing of product introductions and
enhancements by us or our competitors, market acceptance of new products, or
customer order deferrals in anticipation of new products.
PROPRIETARY RIGHTS
Our success and ability to compete are dependent to a significant degree on
our ability to develop and maintain the proprietary aspects of our technology
and operate without infringing on the proprietary rights of others. We rely on a
combination of trademark, licenses, trade secret and copyright laws and
contractual restrictions to protect the proprietary aspects of our technology.
These legal protections afford only limited protection for our technology. We
seek to protect our source code for our software, documentation and other
written materials under trade secret and copyright laws. We license our software
pursuant to signed license agreements, which impose restrictions on the
licensee's ability to utilize the software. Finally, we seek to limit disclosure
of our intellectual property by requiring employees and consultants with access
to our proprietary information to execute confidentiality agreements with us and
by restricting access to our source code. Due to rapid technological change, we
believe that factors such as the technological and creative skills of our
personnel, new product developments and enhancements to existing products are
more important than the various legal protections of our technology to
establishing and maintaining a technology leadership position.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult and while we are unable to determine the extent to which piracy of our
software exists, software piracy can be expected to be a persistent problem. In
addition, the laws of many countries do not protect our proprietary rights to as
great an extent as do the laws of the United States. Litigation may be necessary
in the future to enforce our intellectual property rights, to protect our trade
secrets, to determine the validity and scope of the proprietary rights of others
or to defend against claims of infringement or invalidity. Any such resulting
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on our business, operating results and
financial condition. There can be no assurance that our means of protecting our
proprietary rights will be adequate or that our competitors will not
independently develop similar technology. Any failure by us to meaningfully
protect our property could have a material adverse effect on our business,
operating results and financial condition.
There can be no assurance that third parties will not claim infringement
with respect to our current or future products. We expect that developers of
web-based application software products will increasingly be subject to
infringement claims as the number of products and competitors in our industry
segment grows and as the functionality of products in different segments of the
software industry increasingly overlaps. Any such claims, with or without merit,
could be time consuming to defend, result in costly litigation, divert
management's attention and resources, cause product shipment delays or require
us to enter into terms acceptable to us or at all. A successful infringement
claim against us and our failure or inability to license the infringed rights or
develop or license technology with comparable functionality could have a
material adverse effect on our business, financial condition and operating
results.
We integrate third-party software into our products. This third-party
software may not continue to be available on commercially reasonable terms. We
believe, however, there are alternative sources for such
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<PAGE> 41
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 September 30, 1999, we had a total of 109 full-time employees, of
which 36 were involved in research and development, 61 in sales, marketing and
customer support, and 12 in administration and finance. None of our employees
are represented by a labor union. We have not experienced any work stoppages and
believe that our relationships with employees are good. Our future success will
depend in part on our ability to attract, retain and motivate highly qualified
technical and management personnel, for whom competition is intense.
PROPERTIES
Our headquarters consist of two separate leased office suites located at
245 Winter Street in Waltham, Massachusetts. We occupy 5,760 square feet of
space for current monthly payments of $8,880 under a lease expiring in May 2001.
Additionally, we occupy 8,015 square feet of office space in the same building
for current monthly payments of $11,552 under a sub-lease expiring in December
1999. We are currently seeking larger quarters and believe that suitable space
will be available on acceptable terms to meet our needs.
In order to support our field sales and consulting staff, we lease office
space in Los Angeles and San Francisco, California; New York, New York; Chicago,
Illinois; Reston, Virginia; Atlanta, Georgia and Paris, France.
LEGAL PROCEEDINGS
On June 4, 1999, a suit was brought in the Delaware Court of Chancery,
purportedly on behalf of our common stockholders, alleging that certain
amendments to our certificate of incorporation previously adopted by our
stockholders increasing the authorized shares of various classes of stock were
invalid because we did not obtain the required statutory votes. On August 5,
1999, the parties entered into a settlement agreement, subject to court approval
and approval from the holders of our preferred stock and common stock, in
separate class votes, of the previously adopted amendments. The settlement was
approved by the Court of Chancery on September 24, 1999 and the appeal period
for this approval expired without any appeal being filed, on October 25, 1999.
The holders of our preferred and common stock approved the previously adopted
amendments at a meeting of our stockholders held on October 7, 1999. We believe
that the costs associated with this settlement will not have a material effect
on our results of operations, assets or financial condition.
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<PAGE> 42
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors as of October 31, 1999 were:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Barry N. Bycoff.................... 50 President, Chief Executive Officer and Director
James E. Hayden.................... 44 Vice President of Finance and Administration, Chief
Financial Officer and Treasurer
Thomas Palka....................... 57 Vice President of Sales
Deepak Taneja...................... 38 Vice President of Development
James Rosen........................ 45 Vice President of Business Development
William Bartow..................... 36 Vice President of Marketing
Stephen L. Watson(1)............... 57 Director
Ralph B. Wagner(2)................. 65 Director
Michael L. Mark(1)(2).............. 53 Director
Eric R. Giler(2)................... 43 Director
James P. McNiel(1)................. 36 Director
</TABLE>
- ---------------
(1) Member of audit committee.
(2) Member of compensation committee.
Barry N. Bycoff became our President and Chief Executive Officer and one of
our directors in April 1993. From December 1991 to December 1992, during his
tenure at MapInfo Corporation, a provider of desktop mapping software, he held
positions as Chief Operating Officer, Senior Vice President of Sales and
Marketing, and Director. From January 1984 to October 1991, he ran a number of
business units for Prime Computer, a manufacturer of mainframe and minicomputer
systems; his positions included Vice President-Marketing in the Computer Systems
Business Unit, Vice President-General Purpose Product Line, Vice President-Prime
Information Business Group, Director-Finance and Administration/Worldwide Sales,
and Director-Corporate Planning and Analysis. Prior to that, Mr. Bycoff held
various management positions at Gillette Company from November 1973 to December
1983. Mr. Bycoff is also a director of Encotone, Ltd.
James E. Hayden was named our Vice President of Finance and Administration,
Chief Financial Officer and Treasurer in April 1998. Prior to joining us, he was
with Computervision Corporation, a manufacturer of mainframe and minicomputer
systems, serving as Principal Accounting Officer from June 1994 to January 1998,
and as Director of Finance for Worldwide Field Operations from July 1993 to May
1994. From 1989 to 1993, Mr. Hayden served as Finance Director for Prime
Computer/Computervision's Northern European Region. From 1986 to 1989, he served
in various finance management positions for Prime Computer/ Computervision.
Thomas Palka was named our Vice President of Sales and Services in
September 1998. From March 1997 to August 1998, he was Vice President of
Worldwide Sales & Consulting Services for VenturCom Software, a developer of
software tools for the embedded and real-time market. From 1991 to December
1997, Mr. Palka was with Ardent Software, a database, data warehouse, and
development tools company, where he served as Vice President of Worldwide Sales
from February 1991 to December 1995 and Vice President of Marketing from January
1996 to December 1997. From 1990 to 1991, he was Vice President of North
American Sales at Data General Corporation, and from 1981 to 1990, he was Vice
President of North American Sales at Prime Computer, a manufacturer of mainframe
and minicomputer systems.
Deepak Taneja joined us in January 1998 as Vice President of Development.
From July 1996 to December 1997, he was Director of Development for Switchboard,
an Internet directory services firm. From 1987 to 1996, Mr. Taneja held various
positions at Banyan Systems, a developer of network software products, including
Director of Development for Messaging Products from July 1995 to June 1996 and
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<PAGE> 43
Director of Development for Network and Systems Management products from August
1994 to June 1995. From June 1983 to November 1987, he was a Senior Software
Engineer with Intel Corporation.
James Rosen joined us in April 1997 as Vice President of Marketing &
Business Development. From October 1995 to March 1997 Mr. Rosen was Director of
Business Alliances at BBN Planet Corporation, an internet services provider, now
known as GTE Internetworking. From 1991 to 1995, he held various positions at
Lotus Development Corporation, including Director of Strategic Alliances from
October 1992 to July 1995, Senior Manager of Lotus Notes Alliance Partner
Program Alliances from November 1991 to October 1992, and Senior Manager of
Notes Product Management from April 1991 to November 1991. From 1985 to 1991,
Mr. Rosen was a co-founder and held senior management positions, including
Executive Vice President and Vice President for LanSystems, a systems
integration and software firm.
William Bartow joined us in October 1999 as Vice President of Marketing.
From August 1998 to October 1999 Mr. Bartow was Vice President of Marketing and
Engineering at the internet division of Powersoft Corporation, a subsidiary of
Sybase, Inc. He was employed by Powersoft Corporation as Director of the Power
Builder Product Line from July 1996 to July 1998 and as Power Builder Product
Marketing Manager from July 1995 to July 1996. From June 1994 to July 1995 he
was a senior product manager at Lotus Development Corporation.
Stephen L. Watson has been our Chairman of the Board since December 1991
and has served as one of our directors since March 1986. Mr. Watson previously
served as our President and Chief Operating Officer from March 1991 to April
1993 and our Chief Executive Officer from May 1991 until April 1993. Since 1984
he has been a private investor. He was a co-founder and from December 1994 to
July 1997 was Chairman and Chief Executive Officer of ScanCenters of America, a
document imaging and conversion services company. From July 1988 to June 1989,
he was President of California Micro Solutions, a franchise of Computerland
Corporation, a retailer of personal computer systems. From April 1987 to July
1988, he was Senior Vice President of Computerland Corporation, a retailer of
personal computer software and hardware systems. Mr. Watson is a director of
several privately-held companies.
Ralph B. Wagner became one of our directors in September 1992. He is a
director and co-founder of Keyfile Corporation, a manufacturer and marketer of
document image software products for use on personal computers. Mr. Wagner is a
member of Walnut Venture Associates, an early stage angel investment group.
Since 1983, Mr. Wagner has served as a director of several private companies
including Alpha Software, a developer, manufacturer and marketer of software for
the software industry, and DYS Analytics, a software developer specializing in
information flow analysis.
Michael L. Mark became one of our directors in October 1994. Mr. Mark is a
private investor. From October 1985 until March 1990 he served as Vice
President, System Integration at Interleaf, an electronic publishing software
developer, and was Vice President and co-founder of Cadmus Computer Corporation,
a workstation manufacturer. Mr. Mark also serves as a director of Progress
Software Corporation, a manufacturer of software development tools, and several
private companies.
Eric R. Giler became one of our directors in December 1996. Mr. Giler is
founder and since 1984 has been President and a director of Brooktrout
Technology, a supplier of advanced software and hardware products in the
electronic messaging market. Prior to founding Brooktrout Technology, he worked
primarily in the area of technical marketing and sales as a product manager with
Teradyne and as an applications engineer manager for Intec Corporation. Mr.
Giler serves on the boards of the MIT Enterprise Forum, the Massachusetts
Telecommunications Council and the New England-Israel Chamber of Commerce. Mr.
Giler is also a member of the American Electronics Association and the
Massachusetts Computer Software Council.
James P. McNiel became one of our directors in January 1998. He was
selected by the holders of our series D preferred stock pursuant to provisions
of our charter. Since July 1, 1999, Mr. McNiel has been a Vice President and
general partner of Pequot Capital Management. From February 1998 to January
1999, Mr. McNiel was a director and Executive Vice President of Spike
Technologies, a developer of wireless local loop communications equipment. Since
May 1996, he has been the President of McNiel Group Ltd. a
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<PAGE> 44
professional consulting firm. From 1990 to April 1996, Mr. McNiel was Executive
Vice President of Corporate Development for Cheyenne Software Corporation, now
known as Computer Associates International. From 1989 to 1990, Mr. McNiel was
Director of Marketing for Archive Corporation, now Seagate Technology, and from
1986 to 1989, he was Senior Manager of Advanced Products for AST Computer, a
manufacturer of desktop computers and network file servers. From 1981 to 1986,
Mr. McNiel was Lead Software Engineer and Team Leader for Lucas Film/Convergence
Corporation, developers of post-production video editing equipment and film
production tools.
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<PAGE> 45
TRANSACTIONS WITH RELATED PARTIES
In May 1996, Barry N. Bycoff, our President and Chief Executive Officer,
exercised an option to purchase 200,000 shares of common stock at a price of
$1.00 per share. The board of directors approved our acceptance of a full
recourse note from Mr. Bycoff in payment of the exercise price. The note is
secured by the 200,000 shares of common stock, has an interest rate of 7% per
annum and is due and payable on demand by us, in the discretion of the board of
directors. At September 30, 1999, the note had an outstanding balance of
$252,054.
On January 6, 1998, we entered into a preferred stock and warrant purchase
agreement with Pequot Private Equity Fund, a Delaware limited partnership, and
Pequot Offshore Private Equity Fund, a British Virgin Islands corporation. In
accordance with this agreement:
- on January 7, 1998, we sold to the two funds a total of 1,666,667 shares
of series D preferred stock and 750,393 common stock warrants with a per
share exercise price of $2.00 for an aggregate purchase price of
$2,500,000;
- on June 5, 1998, we sold to the two funds a total of 833,334 shares of
series D preferred stock and 375,197 common stock warrants with a per
share exercise price of $2.00 for an aggregate purchase price of
$1,250,000; and
- on June 30, 1998, we sold to the two funds a total of 833,333 shares of
series D preferred stock and 375,196 common stock warrants with a per
share exercise price of $2.00 for an aggregate purchase price of
$1,250,000.
Each share of series D preferred stock converted into one share of common stock
on September 30, 1999. The two Pequot funds beneficially own, in the aggregate,
more than five percent of our outstanding common stock. In connection with these
investments, James McNiel joined the board of directors as the designee of the
two Pequot funds and agreed to provide consulting services to us. As partial
compensation for those services, we issued to Mr. McNiel warrants for the
purchase of 100,000 shares of common stock at a price of $1.50 per share.
On February 8, 1999, we entered into a stock purchase agreement with the
two Pequot funds, Fidelity Securities Fund: Fidelity OTC Portfolio and another
party named therein under which we sold 795,651 shares of common stock at a
price of $5.75 per share for an aggregate purchase price of $4,574,993. Fidelity
beneficially owns more than five percent of our outstanding common stock.
The board of directors has adopted a policy that all transactions between
us and our officers, directors and principal stockholders, or any affiliates of
those parties, must be on terms no less favorable to us than could be obtained
from unaffiliated third parties. Those transactions, including any loans to
officers, also must be approved by a majority of the disinterested outside
directors.
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<PAGE> 46
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information about the beneficial ownership
of our outstanding common stock on September 30, 1999, by (1) each person who is
known by us to own beneficially more than five percent of our common stock, (2)
each of our directors, (3) our chief executive officer and next four most highly
compensated executive officers, (4) all of our executive officers and directors
as a group and (5) each of the other selling stockholders. Except as noted
below, we believe that the persons named in the table have sole voting and
investment power with respect to the shares of common stock set forth opposite
their names. The address of each of our executive officers and directors is in
care of Netegrity, Inc., 245 Winter Street, Waltham, Massachusetts 02451.
In accordance with SEC rules, beneficial ownership includes any shares as
to which a person or entity has sole or shared voting power or investment power
and any shares as to which the person or entity has the right to acquire
beneficial ownership within 60 days after September 30, 1999 through the
exercise of any stock option or warrant. Percentage of beneficial ownership is
based on 14,416,279 shares of common stock outstanding as of September 30, 1999
and 16,866,279 shares of common stock outstanding after completion of this
offering.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
BEFORE OFFERING NUMBER OF AFTER OFFERING
----------------------- SHARES ------------------------
NAME NUMBER PERCENTAGE TO BE OFFERED NUMBER PERCENTAGE
- ---- --------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Pequot Private Equity Fund
L.P.(1)........................
Pequot Offshore Private Equity
Fund Inc. ....................... 4,921,076 30.9% 410,000 4,511,076 24.6%
354 Pequot Avenue
Southport, Connecticut 06490
Fidelity Securities Fund:
Fidelity OTC Portfolio......... 700,000 4.9 -- 700,000 4.2
c/o Fidelity Management &
Research Company
82 Devonshire Street E 20E
Boston, Massachusetts 02109
Barry N. Bycoff(2)............... 683,000 4.6 70,000 613,000 3.5
Stephen L. Watson(3)............. 363,000 2.5 40,000 323,000 1.9
Michael L. Mark(4)............... 109,553 * 10,000 94,303 *
Ralph B. Wagner(5)............... 88,837 * -- 87,962 *
James Rosen(6)................... 68,200 * 5,000 63,200 *
James E. Hayden(7)............... 45,500 * 5,000 40,500 *
Deepak Taneja(8)................. 66,100 * 5,000 61,100 *
James P. McNiel(9)............... 84,723 * -- 69,447 *
Thomas M. Palka(10).............. 15,500 * 5,000 10,500 *
Eric R. Giler(11)................ 12,000 * -- 12,000 *
All executive officers and
directors as a group (10
persons)(12)................... 1,536,413 9.9 140,000 1,394,413 7.8
</TABLE>
- ------------
* Less than 1%.
(1) Includes warrants to purchase 1,500,787 shares of common stock.
(2) Includes 10,000 shares of common stock held in trust for the benefit of Mr.
Bycoff's children and options to purchase 468,000 shares of common stock.
Excludes options to purchase 397,000 shares of common stock that will not
vest prior to November 30, 1999.
(3) Includes options to purchase 255,000 shares of common stock. Excludes
options to purchase 7,500 shares of common stock that will not vest prior
to November 30, 1999.
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<PAGE> 47
(4) Includes options to purchase 31,250 shares of common stock. Excludes
options to purchase 12,750 shares of common stock that will not vest prior
to November 30, 1999.
(5) Includes options to purchase 51,100 shares of common stock. Excludes
options to purchase 19,000 shares of common stock that will not vest prior
to November 30, 1999.
(6) Includes options to purchase 46,200 shares of common stock. Excludes
options to purchase 148,800 shares of common stock that will not vest prior
to November 30, 1999.
(7) Includes options to purchase 45,000 shares of common stock. Excludes
options to purchase 165,000 shares of common stock that will not vest prior
to November 30, 1999.
(8) Consists of options to purchase 66,100 shares of common stock. Excludes
options to purchase 163,900 shares of common stock that will not vest prior
to November 30, 1999.
(9) Consists of warrants to purchase 84,723 shares of common stock. Excludes
options to purchase 53,468 shares of common stock that will not vest prior
to November 30, 1999.
(10) Includes options to purchase 15,000 shares of common stock. Excludes
options to purchase 185,000 that will not vest prior to November 30, 1999.
(11) Consists of options to purchase 12,000 shares of common stock. Excludes
options to purchase 18,000 that will not vest prior to November 30, 1999.
(12) Includes the following shares of common stock which the specified
individual has the right to acquire on or before November 30, 1999 upon the
exercise of outstanding options: Mr. Watson, 255,000 shares; Mr. Wagner,
51,100 shares; Mr. Mark, 31,250 shares; Mr. Giler, 12,000 shares; Mr.
Bycoff, 468,000 shares; Mr. Rosen, 46,200 shares; Mr. Hayden, 45,000
shares; Mr. Taneja, 66,100 shares; Mr. McNiel, 69,447 shares and Mr. Palka,
15,000 shares.
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<PAGE> 48
UNDERWRITING
The underwriters named below have entered into an underwriting agreement to
purchase from us and the selling stockholders the number of shares of common
stock listed next to their names below. BancBoston Robertson Stephens Inc., Dain
Rauscher Wessels, a division of Dain Rauscher Incorporated, and Thomas Weisel
Partners LLC are the representatives of the underwriters. The underwriters have
committed to purchase and pay for all of the shares listed below if any shares
are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ------------ ---------
<S> <C>
BancBoston Robertson Stephens Inc...........................
Dain Rauscher Wessels.......................................
Thomas Weisel Partners LLC..................................
---------
Total.................................................. 3,000,000
=========
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the public offering price listed on the cover page of this prospectus. Any
shares sold by underwriters to securities dealers will be sold at a discount of
up to $ per share from the public offering price. Those securities dealers
may resell any shares purchased from the underwriters to other brokers or
dealers at a discount of up to $ per share from the public offering price.
If all the shares are not sold at the initial offering price, the
representatives may change the offering price and other selling terms.
Option to Purchase Additional Shares. We and the selling stockholders have
granted to the underwriters an option, exercisable during the 30-day period
after the date of this prospectus, to purchase up to 450,000 additional shares
of common stock at the same price per share as we and the selling stockholders
will receive for the 3,000,000 shares that the underwriters have agreed to
purchase. To the extent that the underwriters exercise this option, each of the
underwriters will have a firm commitment to purchase approximately the same
percentage of additional shares that the number of shares of common stock to be
purchased by it shown in the above table represents as a percentage of the
3,000,000 shares offered in this prospectus. If purchased, additional shares
will be sold by the underwriters on the same terms as those on which the
3,000,000 shares are being sold. We will be obligated to sell these shares if
the underwriters exercise their option to purchase additional shares. If the
option is exercised in full, the total price to the public, underwriting
discounts and commissions, proceeds to Netegrity and proceeds to the selling
stockholders will be $93,150,000, $4,890,375, $63,456,250 and $24,303,375,
respectively, assuming a public offering price of $27.00 per share and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses.
Indemnity. The underwriting agreement contains covenants of indemnity
among the underwriters, the selling stockholders and us against civil
liabilities, including liabilities under the Securities Act and liabilities
arising from breaches of representations and warranties contained in the
underwriting agreement.
Agreements Not to Sell Shares. Each of our officers and directors, each of
the selling stockholders, and three additional stockholders have agreed, during
the period ending 90 days after the date of this prospectus, subject to limited
exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose
of loan, pledge or grant any rights with respect to any shares of common stock
or any options or warrants to purchase any shares of common stock, or any
securities convertible into or exchangeable for shares of common stock owned as
of the date of this prospectus or later acquired directly by those holders or
with respect to which they have the power of disposition, without the prior
written consent of BancBoston Robertson Stephens Inc. However, BancBoston
Robertson Stephens Inc. may, in its sole discretion and at any time without
notice, release all or any portion of securities subject to the agreements not
to sell shares. There are no existing agreements
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<PAGE> 49
between the representatives of the underwriters and any of our stockholders
providing consent to the sale of shares prior to the expiration of the 90-day
period.
Future Sales by Us. In addition, we have agreed that during the 90 days
after the date of this prospectus we will not, without the prior written consent
of BancBoston Robertson Stephens Inc., subject to specified exceptions, (1)
consent to the disposition of any shares held by stockholders subject to
agreements not to sell shares prior to the expiration of the 90-day period or
(2) issue, sell, contract to sell, or otherwise dispose of, any shares of common
stock, any options to purchase any shares of common stock or any securities
convertible into, exercisable for or exchangeable for shares of common stock
other than our sale of shares in this offering, the issuance of common stock
upon the exercise of outstanding options, and the issuance of options under
existing stock option and incentive plans, provided those options do not vest
prior to the expiration of the 90-day period.
Listing. Our common stock currently is traded on the Nasdaq National
Market under the symbol "NETE."
Stabilization. The representatives of the underwriters have advised us
that, pursuant to Regulation M under the Securities Act, some of the persons
participating in this offering may engage in transactions, including stabilizing
bids, syndicate covering transactions or the imposition of penalty bids, that
may have the effect of stabilizing or maintaining the market price of the common
stock at a level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of common stock on behalf of the
underwriters for the purpose of fixing or maintaining the price of the common
stock. A "syndicate covering transaction" is the bid for or the purchase of
common stock on behalf of the underwriters to reduce a short position incurred
by the underwriters in connection with this offering. A "penalty bid" is an
arrangement permitting the representatives to reclaim the selling concession
otherwise accruing to an underwriter or syndicate member in connection with this
offering if the common stock originally sold by the underwriter or syndicate
member is purchased by the representatives in a syndicate covering transaction
and has therefore not been effectively placed by the underwriter or syndicate
member. The representatives have advised us that these types of transactions may
be effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
Passive Market Making. In connection with this offering, underwriters and
selling group members, if any, that are qualified market makers on the Nasdaq
National Market may engage in passive market making transactions in our common
stock on the Nasdaq National Market in accordance with Rule 103 of Regulation M
under the Securities Exchange Act during the business day prior to the pricing
of this offering before the commencement of offers or sales of our common stock.
Passive market makers must comply with applicable volume and price limitations
and must be identified as such. In general, a passive market maker must display
its bid at a price not in excess of the highest independent bid of a security;
if all independent bids are lowered below the passive market maker's bid,
however, the passive market maker's bid must be lowered when applicable purchase
limits are exceeded.
Expenses of this Offering. We estimate our total expenses of this
offering, excluding underwriting discounts and commissions, to be $500,000.
Prior Relationship. On September 9, 1999, we completed a private placement
of 534,242 shares of common stock at a purchase price of $20.59 per share.
BancBoston Robertson Stephens Inc. acted as placement agent in this transaction
and received a placement fee of $632,500. We received net proceeds of
approximately $10.3 million from the private placement, after deducting the
placement agent's fee and our estimated expenses.
New Underwriter. Thomas Weisel Partners, one of the representatives of the
underwriters, was organized and registered as a broker-dealer in December 1998.
Since December 1998, Thomas Weisel Partners has been named as a lead or
co-manager on 79 filed public offerings of equity securities, of which 58 have
been completed, and has acted as a syndicate member in an additional 41 public
offerings of equity securities. Thomas Weisel Partners does not have any
material relationship with us or any of our officers,
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<PAGE> 50
directors or other controlling persons, except with respect to its contractual
relationship with us and the selling stockholders pursuant to the underwriting
agreement entered into in connection with this offering.
Completion Date. BancBoston Robertson Stephens Inc. expects to deliver the
shares of common stock to purchasers on , 1999.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Hutchins, Wheeler & Dittmar, A Professional Corporation, Boston,
Massachusetts. Anthony J. Medaglia, Jr., a stockholder of the firm, beneficially
owns 15,195 shares of common stock. Legal matters will be passed upon for the
underwriters by Foley, Hoag & Eliot LLP, Boston, Massachusetts.
EXPERTS
The consolidated financial statements of Netegrity, Inc. as of December 31,
1997 and 1998, for the years ended December 31, 1998 and 1997 and the nine-month
period ended December 31, 1996 included in this prospectus and in the
registration statement have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in accounting and auditing.
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<PAGE> 51
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. Our SEC filings are also available to the public
from commercial document retrieval services and the SEC's website at
http://www.sec.gov.
We have filed a registration statement to register with the SEC the shares
of our common stock that are being offered. This prospectus is a part of the
registration statement and, as the SEC rules permit, does not contain all the
information that stockholders can find in the registration statement or the
exhibits to the registration statement.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and information that we file later
with the SEC will automatically update and supersede this information. This
prospectus incorporates by reference the documents listed below:
- Annual Report on Form 10-K for the year ended December 31, 1998; as
amended by Forms 10-K/A filed on July 6, 1999 and September 17, 1999;
- Proxy Statement filed on March 19, 1999 for the 1999 Annual Meeting of
Stockholders, and Proxy Statement filed on September 7, 1999 for the
Special Meeting of Stockholders to be held on October 7, 1999;
- Quarterly Reports on Form 10-Q for the quarters ended March 31, 1999,
June 30, 1999, the latter as amended by a Form 10-Q/A filed on September
17, 1999, and September 30, 1999; and
- Form 8-A, filed on December 6, 1988, as amended by Amendment No. 1 to
Form 8-A, filed on December 13, 1988, setting forth a discussion of our
capital stock.
We incorporate by reference in this prospectus additional documents that we
may file with the SEC between the date the registration statement was initially
filed and the consummation of this offering. These include periodic reports,
such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K, as well as proxy statements.
You may request a copy of these filings, at no cost, by writing or
telephoning our Chief Financial Officer as follows:
NETEGRITY, INC.
245 Winter Street
Waltham, Massachusetts 02451
(781) 890-1700
49
<PAGE> 52
NETEGRITY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998
and September 30, 1999...................................... F-3
Consolidated Statements of Operations for the Nine Months
Ended December 31, 1996, the Years Ended December 31, 1997
and 1998 and the Nine Months Ended September 30, 1998 and
1999...................................................... F-4
Consolidated Statements of Stockholders' Equity for the Nine
Months Ended December 31, 1996, the Years Ended December
31, 1997 and 1998 and the Nine Months Ended September 30,
1999...................................................... F-5
Consolidated Statements of Cash Flows for the Nine Months
Ended December 31, 1996, the Years Ended December 31, 1997
and 1998 and the Nine Months Ended September 30, 1998 and
1999...................................................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 53
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
and Stockholders of Netegrity, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Netegrity, Inc. (the "Company") at
December 31, 1997 and 1998, and the results of its operations and its cash flows
for the nine months ended December 31, 1996, and for the years ended December
31, 1997 and 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
February 8, 1999
F-2
<PAGE> 54
NETEGRITY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1997 1998 1999
----------- ------------ -------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,133,586 $ 1,174,625 $ 11,211,960
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; $529,905 at September 30, 1999....... 791,369 1,746,645 2,875,408
Deferred maintenance asset................................ 304,721 308,926 302,472
Prepaid rent.............................................. -- 30,163 88,560
Other current assets...................................... 8,252 15,848 61,789
----------- ------------ -------------
TOTAL CURRENT ASSETS.................................... 3,837,928 3,276,207 14,540,189
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET (Note B).......... 585,055 736,341 1,000,029
CAPITALIZED SOFTWARE COSTS, NET............................. 309,891 175,629 --
OTHER ASSETS:
Investment in Encotone, Inc. (Note C)..................... 78,199 -- --
Other..................................................... 37,438 37,114 53,219
----------- ------------ -------------
TOTAL OTHER ASSETS...................................... 115,637 37,114 53,219
----------- ------------ -------------
TOTAL ASSETS................................................ $ 4,848,511 $ 4,225,291 $ 15,593,437
=========== ============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable-trade.................................... $ 1,507,071 $ 897,734 $ 910,774
Deferred revenue.......................................... -- 285,857 885,049
Accrued bonus............................................. 215,000 160,687 150,104
Accrued commissions....................................... 64,722 180,328 172,563
Other accrued expenses.................................... 1,355,533 766,898 980,049
Deferred maintenance liability............................ 667,416 938,004 455,292
Current portion of capital lease obligations.............. 19,068 -- --
----------- ------------ -------------
TOTAL CURRENT LIABILITIES............................... 3,828,810 3,229,508 3,553,831
LONG-TERM CAPITAL LEASE OBLIGATIONS......................... 3,653 -- --
----------- ------------ -------------
TOTAL LIABILITIES........................................... 3,832,463 3,229,508 3,553,831
COMMITMENTS AND CONTINGENCIES (Note D)...................... -- --
STOCKHOLDERS' EQUITY:
Preferred stock, Series D voting; $.01 par value;
3,333,333 shares issued and outstanding at December 31,
1998 and none outstanding as of September 30, 1999...... -- 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; 25,000,000 shares
authorized, 9,425,446 shares issued and 9,400,345 shares
outstanding at December 31, 1998; 40,000,000 shares
authorized, 14,441,379 shares issued and 14,416,279
shares outstanding at September 30, 1999................ 92,793 94,254 144,163
Additional paid-in capital................................ 10,578,330 15,780,049 31,285,741
Cumulative translation adjustment......................... 28,028 -- --
Cumulative deficit........................................ (9,399,446) (14,628,196) (19,106,641)
Loan to officer (Note E).................................. (200,000) (200,000) (200,000)
----------- ------------ -------------
1,099,705 1,079,440 12,123,263
Less -- Treasury Stock, at cost: 25,101 shares.............. (83,657) (83,657) (83,657)
----------- ------------ -------------
TOTAL STOCKHOLDERS' EQUITY.................................. 1,016,048 995,783 12,039,606
----------- ------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $ 4,848,511 $ 4,225,291 $ 15,593,437
=========== ============ =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 55
NETEGRITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------------- -------------------------
1996 1997 1998 1998 1999
----------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
SiteMinder software................. -- $ 237,217 $ 1,483,296 $ 783,673 $ 4,476,094
SiteMinder services............... -- 12,012 467,568 236,381 1,405,609
Other............................. $ 3,637,037 4,483,420 2,840,253 2,101,262 2,144,970
----------- ----------- ----------- ----------- -----------
Total revenues.................... 3,637,037 4,732,649 4,791,117 3,121,316 8,026,673
Cost of revenues.................... 2,175,626 2,469,891 1,763,825 1,384,426 2,331,442
----------- ----------- ----------- ----------- -----------
Gross profit........................ 1,461,411 2,262,758 3,027,292 1,736,890 5,695,231
Selling, general and administrative
expenses.......................... 2,303,478 5,508,813 6,394,918 4,423,700 7,806,460
Research and development costs...... 705,298 1,028,094 1,991,239 1,373,143 2,486,126
----------- ----------- ----------- ----------- -----------
Loss from operations................ (1,547,365) (4,274,149) (5,358,865) (4,059,953) (4,597,355)
Interest income (expense), net...... 181,881 203,205 130,115 99,903 118,912
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) (3,960,050) (4,478,443)
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) (3,960,050) (4,478,443)
Provision for income taxes.......... 74,300 -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss)................... $ 3,999,971 $(5,251,896) $(5,228,750) $(3,960,050) $(4,478,443)
=========== =========== =========== =========== ===========
Basic and diluted earnings per
share:
From continuing operations........ $ (0.16) $ (0.57) $ (0.56) $ (0.42) $ (0.44)
From operation of discontinued
operations...................... (0.06) -- -- -- --
Gain on sale of assets............ 0.67 -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss)................. $ 0.45 $ (0.57) $ (0.56) $ (0.42) $ (0.44)
=========== =========== =========== =========== ===========
Weighted average shares
outstanding....................... 8,944,000 9,279,000 9,362,000 9,348,455 10,272,682
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 56
NETEGRITY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE TOTAL
PREFERRED COMMON PAID-IN TRANSLATION CUMULATIVE LOAN TO TREASURY STOCKHOLDERS'
STOCK STOCK CAPITAL ADJUSTMENT DEFICIT OFFICER STOCK EQUITY
--------- -------- ----------- ----------- ------------ --------- -------- -------------
<S> <C> <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) $ 1,903,363
Net income(loss)............ -- -- -- -- 3,999,971 -- -- 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 -- -- -- -- 439,631
Translation adjustment...... -- -- -- 6,459 -- -- -- 6,459
Loan to officer (Note E).... -- -- -- -- -- $(200,000) -- (200,000)
------- -------- ----------- ------- ------------ --------- -------- -----------
BALANCE AT DECEMBER 31,
1996...................... -- 92,049 10,460,554 28,028 (4,147,550) (200,000) (83,657) 6,149,424
------- -------- ----------- ------- ------------ --------- -------- -----------
Net income(loss)............ -- -- -- -- (5,251,896) -- -- (5,251,896)
Issuance of Common Stock
(74,400 shares)........... -- 744 117,776 -- -- -- -- 118,520
------- -------- ----------- ------- ------------ --------- -------- -----------
BALANCE AT DECEMBER 31,
1997...................... -- 92,793 10,578,330 28,028 (9,399,446) (200,000) (83,657) 1,016,048
------- -------- ----------- ------- ------------ --------- -------- -----------
Net income(loss)............ -- -- -- -- (5,228,750) -- -- (5,228,750)
Issuance of Preferred Stock
(3,333,333 shares) --
Series D.................. 33,333 -- 4,916,668 -- -- -- -- 4,950,001
Issuance of Common Stock
(146,100 shares).......... -- 1,461 257,023 -- -- -- -- 258,484
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) 995,783
------- -------- ----------- ------- ------------ --------- -------- -----------
Net income(loss)............ -- -- -- -- (4,478,443) -- -- (4,478,443)
Issuance of Common Stock
(959,800 shares).......... (33,333) 49,909 15,505,692 -- -- -- -- 15,522,268
------- -------- ----------- ------- ------------ --------- -------- -----------
BALANCE AT SEPTEMBER 30,
1999...................... $ -- $144,163 $31,285,741 $ -- $(19,106,641) $(200,000) $(83,657) $12,039,606
======= ======== =========== ======= ============ ========= ======== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 57
NETEGRITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS ENDED
ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------------- -------------------------
1996 1997 1998 1998 1999
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss from continuing operations...................... $(1,405,484) $(5,251,896) $(5,228,750) $(3,960,050) $(4,478,443)
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.......................... 26,487 116,187 231,713 160,519 245,913
Provision for doubtful accounts receivable, net........ 56,771 (3,337) 182,603 (5,990) 282,842
Change in operating assets and liabilities:
Escrow receivable...................................... (600,000) -- 600,000 -- --
Accounts receivable.................................... 137,935 (252) (1,137,879) (225,392) (1,411,605)
Other current assets................................... 389,156 246,259 (41,966) 652,576 (97,884)
Inventory.............................................. 21,400 -- -- -- --
Other assets........................................... 52,053 (14,078) 324 63,095 (16,105)
Accounts payable....................................... 622,784 (592,364) (609,337) (563,949) 13,040
Other accrued expenses................................. (1,548,083) 292,781 25,646 (548,442) 311,283
----------- ----------- ----------- ----------- -----------
Total adjustments.................................... (801,497) 1,226,148 (748,896) (467,583) (672,516)
----------- ----------- ----------- ----------- -----------
Net cash used for continuing operating activities.... (2,206,981) (4,025,748) (5,843,384) (4,427,632) (5,150,959)
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) (4,427,632) 5,150,959)
----------- ----------- ----------- ----------- -----------
INVESTING ACTIVITIES:
Proceeds from sale of certain assets................... 9,435,000 -- 25,863 25,863 --
Capitalized software costs............................. -- (309,891) 134,262 61,220 175,629
Capital expenditures for equipment and leasehold
improvements......................................... (256,886) (384,458) (408,860) (282,993) (509,603)
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) (195,910) (333,974)
----------- ----------- ----------- ----------- -----------
FINANCING ACTIVITIES:
Net proceeds from issuance of preferred stock.......... -- -- 4,950,001 4,950,001 --
Net proceeds from issuance of stock.................... 239,631 118,520 258,484 194,205 15,522,268
Payment on notes payable-related party................. (300,000) -- -- -- --
Net payments on line of credit......................... (723,470) -- -- -- --
Principal payments under capital leases................ -- (9,653) (22,721) (22,721) --
----------- ----------- ----------- ----------- -----------
Net cash (used for) provided by financing activities... (783,839) 108,867 5,185,764 5,121,485 15,522,268
----------- ----------- ----------- ----------- -----------
Effect of exchange rate changes on cash.................. 6,459 -- -- -- --
----------- ----------- ----------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS.................. 5,380,612 (4,657,471) (958,961) 497,942 10,037,335
Cash and cash equivalents at beginning of period......... 1,410,445 6,791,057 2,133,586 2,133,586 1,174,625
----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............... $ 6,791,057 $ 2,133,586 $ 1,174,625 $ 2,631,528 $11,211,960
=========== =========== =========== =========== ===========
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.
F-6
<PAGE> 58
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"), Personal Computing Tools (PCT) and Netegrity Europe SRL. The Company
acquired 94% of the outstanding capital stock of PCT on June 29, 1993. The 6%
equity interest in PCT not acquired by the Company would be shown as minority
interest in the December 31, 1996 consolidated balance sheets and the statements
of operations for the nine months ended December 31, 1996 and the fiscal years
ended March 31, 1996, respectively. As of June 30, 1996, the Company
discontinued all operations related to its SDC Germany and PCT catalog
operation. The operating loss incurred in 1996 is accounted for in loss from
discontinued operations.
Cash and Cash Equivalents
Cash and cash equivalents include time deposits with a maturity of three
months or less at the date of purchase.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of cash and cash equivalents and trade
receivables. The Company restricts investment of temporary cash investments to
financial institutions with high credit standing. Credit risk on trade
receivables is minimal.
Revenue Recognition
The Company's revenues from continuing operations are primarily generated
from the sale of its proprietary SiteMinder products and services and from
licensing the rights to use software products developed by Checkpoint Software
Technologies, Ltd. to end users and resellers. The Company generates its
services revenue from consulting and training services performed for customers
and from support and software update rights (i.e., maintenance). Revenues from
perpetual software license agreements are recognized as revenue upon delivery of
the software as long as there are no significant post-delivery obligations.
Revenues for maintenance are recognized ratably over the term of the
support period. If maintenance is included in a license agreement, such amounts
are unbundled from the license fee at their fair market value based on the value
established by independent sale of such maintenance to customers. Consulting
revenues are primarily related to implementation services performed under
separate service arrangements related to the installation of software products.
Such services do not include customization or modification of the underlying
software code. If included in a license agreement, such services are unbundled
at their fair market value based on the value established by the independent
sale of such services to customers. Revenues from consulting and training
services are recognized as the services are performed.
In December 1998, the Accounting Standards Executive Committee, or AcSEC,
issued SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions." SOP 98-9 amends SOP 97-2 to require that an
entity recognize revenue for multiple element arrangements by means of the
"residual method" when (1) there is vendor-specific objective evidence of the
fair values of all
F-7
<PAGE> 59
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the undelivered elements that are not accounted for by means of long-term
contract accounting and (2) vendor-specific objective evidence of fair value
does not exist for one or more of the delivered elements. All revenue
recognition criteria of SOP 97-2 and SOP 98-9 will be effective for the
Company's transactions entered into beginning in its year ending December 31,
2000. The Company does not expect SOP 98-9 to have a material effect on our
financial position or results of operations.
Capitalization of Software Costs
The Company capitalizes certain internally generated software development
costs after technological feasibility of the product has been established. Such
costs are amortized over the estimated life of the product. The Company
continually compares the unamortized costs of capitalized software to the
expected future revenues for the products. If the unamortized costs exceed the
expected future net realizable value, the excess amount is written off. At
December 31, 1998 and September 30, 1999, the Company had amortized $134,262 and
$175,629, respectively of software development costs.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost, less accumulated
depreciation and amortization. Depreciation is provided using the straight-line
method over estimated useful lives from five to seven years. Amortization of
leasehold improvements is provided using the straight-line method over the lives
of the respective leases or the useful lives of the improvements, whichever is
shorter.
Maintenance and repairs are charged to operations as incurred. Renewals and
betterments which materially extend the life of assets are capitalized and
depreciated. Upon disposal, the asset cost and related accumulated depreciation
are removed from their respective accounts. Any resulting gain or loss is
reflected in earnings.
Customer Advances
Prepayments made by customers are included as customer advances and
recorded as sales when shipments are made.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected future
tax consequences of events that have been included in the financial statements
which are temporarily different than the tax basis. The amount of deferred tax
asset or liability recognized, net of valuation allowances, is based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Investments
Investments in equity securities, other than investments accounted for by
the equity method are recorded at cost. Management determines the appropriate
classification of its investments at the time of purchase and reevaluates such
determinations, as well as potential impairments of value on a periodic basis,
but at a minimum, quarterly.
Marketing Expenses
Marketing expenses are charged to selling, general and administrative
expenses as incurred.
F-8
<PAGE> 60
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Support Services
The Company provides, free of charge, pre-sale telephone technical support
and product literature. The Company provides post-sales support to its customers
who are covered under maintenance agreements. The costs relating to these
services are expensed as incurred and included in selling, general and
administrative expenses.
Earnings (Loss) Per Share
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 128 "Earnings Per Share" and has retroactively restated the earnings per
share (EPS) for 1995, 1996, 1997 and for the quarter ended September 30, 1997.
SFAS 128 requires presentation of basic and diluted EPS. Basic EPS is computed
by dividing net income by the number of weighted average common shares
outstanding. Diluted EPS reflects potential dilution from outstanding stock
options, using the treasury stock method. Potentially dilutive securities at
December 31, 1998 and September 30, 1999 include stock options outstanding to
purchase 3,103,442 and 3,414,207 common shares, respectively, and warrants to
purchase 1,600,787 and 1,600,787 common shares, respectively (see Note H);
however, such securities have not been included in the net loss per share
calculation because their effect would be anti-dilutive.
Segment Reporting
The Company is in one business segment, the design, development, marketing
and support of software for controlling user access to electronic commerce. The
Company follows the requirements of Statement of Financial Accounting Standards
No. 131, "Disclosure about Segments of an Enterprise and Related Information."
Export Sales
The Company generates some revenues from international business. For all
periods reported herein, the Company's export sales are deemed immaterial.
Foreign Currency Translation
The functional currency of the Company's former foreign subsidiary is the
local currency. Balance sheet accounts of the Company's former foreign
subsidiary are translated into U.S. dollars at current exchange rates. Income
statement items are translated at the average rates during the year. Net
translation gains or losses are recorded directly to a separate component of
stockholders' equity. Foreign currency transaction gains and losses are included
in the determination of net income for the nine months ended December 31, 1996.
Post-Retirement Benefits Other Than Pensions
The Company does not offer post-employment benefits to its retirees and as
a result, is unaffected by Statement of Financial Accounting Standards No. 106
or 112 issued in December 1990 and November 1992, respectively.
401(k) Plan
The Company maintains a 401K Plan for its employees. The Plan is intended
as a retirement and tax deferred savings vehicle. All employees of the Company
whose customary employment is for more than 20 hours per week are eligible to
participate in the 401K Plan. Employees make their contributions through semi-
monthly payroll deductions which are invested in any combination of several
investment funds. The Company has made no matching contributions and has no
current plans to do so.
F-9
<PAGE> 61
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires the Company to disclose estimated
fair values for its financial instruments, exclusive of leases, for which it is
practicable to estimate fair value.
For financial instruments including cash, accounts receivable and payable,
and accrued expenses it is assumed that the carrying amount approximates fair
value due to their short maturities.
Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Reclassifications
Certain items on the prior year financial statements presented herein have
been reclassified to conform to the current year presentation.
Unaudited Interim Financial Information
The interim financial information at September 30, 1999 and for the nine
months ended September 30, 1998 and 1999, all of which is unaudited, was
prepared by the Company on a basis consistent with the audited financial
statements. In management's opinion, such information reflects all adjustments,
which are only of a normal recurring nature, necessary to present fairly the
results of the periods presented.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. The statement initially was to be effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. In July 1999, the Financial
Accounting Standards Board issued SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities Deferral of the Effective Date of FASB
Statement No. 133 -- An amendment of FASB Statement No. 133." SFAS 137 defers
the implementation of SFAS 133 by one year. SFAS 133, as amended by SFAS 137, is
effective for the Company's fiscal quarters beginning after January 1, 2000. The
Company does not expect the adoption of SFAS 133 to have a material effect on
its financial position or results of operations.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". SOP 98-1 requires computer
software costs associated with internal use software to be charged to operations
as incurred until certain capitalization criteria are met. SOP 98-1 is effective
beginning January 1, 1999. We do not expect adoption of this statement to have a
material effect on consolidated financial position or results of operations.
F-10
<PAGE> 62
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,
---------------------- SEPTEMBER 30,
1997 1998 1999
--------- --------- -------------
<S> <C> <C> <C>
Computer equipment and software................. $ 582,464 $ 944,555 $1,441,922
Leasehold improvements.......................... 30,248 73,557 83,778
Furniture and fixtures.......................... 124,987 97,577 99,591
Less accumulated depreciation and
amortization.................................. (152,644) (379,348) (625,262)
--------- --------- ----------
$ 585,055 $ 736,341 $1,000,029
========= ========= ==========
</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, and the
nine-month period ended September 30, 1999, was $116,187, $245,915 and $245,915,
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. The settlement was approved by the Court of
Chancery on September 24, 1999 and the appeal period for this approval expired,
without any appeal being filed, on October 25, 1999. The holders of the
Company's preferred and common stock approved the previously adopted amendments
at a meeting of the Company's stockholders held on October 7, 1999. The Company
believes that the costs associated with this settlement will not have a material
effect on 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 and the nine months ended
September 30, 1999, the Company incurred total
F-11
<PAGE> 63
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operating lease expense of $173,600, $299,825, and $292,587, 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.
F-12
<PAGE> 64
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 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 833,334 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 833,334 shares of Series D Preferred Stock, at
$1.50 per share, and 375,197 Warrants to the Pequot
F-13
<PAGE> 65
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Entities for an aggregate purchase price of $1,250,000. The Series D Preferred
Stock converted to Common Stock in September 1999.
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. On September
9, 1999, the Company completed a private placement of 534,242 shares of common
stock to certain investors at a purchase price of $20.59 per share. The Company
recorded net proceeds of approximately $10.3 million from the private placement,
after deducting the placement agent's fee and the Company's estimated expenses.
NOTE I: STOCK PLANS
The Company has stock option plans as described hereunder. Options are
granted at fair market value at the date of grant being the average of the
closing bid and asked prices of the Common Stock on the day preceding the date
of grant.
Stock Option Plans for Outside Directors: The Company's stock option plans
for outside directors provide for the granting of options to members of the
Board of Directors who are neither employees nor officers of the Company in
appreciation of their service. The timing, amounts, recipients and other terms
of the option grants are determined by the provisions of or formulas in, the
directors' option plans. The exercise price of the options is equal to the fair
market value of Common Stock on the date of the grant. The options have a term
of 10 years from the date of the grant and become exercisable per the terms of
option plan. Total outstanding grants as of December 31, 1997 and 1998 are
572,542. Total outstanding grants as of September 30, 1999 are 547,792. Total
options exercisable at December 31, 1997 and 1998 and September 30, 1999 are
371,859, 478,259 and 422,292, respectively. At December 31, 1998, options for
62,500 shares were available for grant.
Stock Option Plans for Employees and Officers: The Company's stock option
plans for employees, consultants and officers provide for the granting of
options as inducement to obtain and retain the services of qualified persons.
Incentive stock options may be granted to officers and employees, and
non-qualified stock options may be granted to directors, officers, employees or
consultants. The Compensation Committee of the Company determines the exercise
price and vesting period of the options. Total outstanding grants as of December
31, 1997 and 1998 and September 30, 1999 are 1,830,800, 2,530,900 and 2,991,915,
respectively. Total options exercisable at December 31, 1997 and 1998 and
September 30, 1999 are 622,900, 639,168 and 1,272,823, respectively. At December
31, 1998, options for 932,315 shares were available for grant.
1990 Employee Stock Purchase Plan: The 1990 Employee Stock Purchase Plan
("Stock Purchase Plan") is intended as an incentive to, and to encourage stock
ownership by, all eligible employees of the Company and participating
subsidiaries and to encourage them to remain in the employ of the Company.
Substantially all employees of the Company and any participating subsidiary who
have completed six months of employment with the Company or any subsidiary and
whose customary employment is for more than 20 hours per week and more than five
months per calendar year are eligible to participate in the Stock Purchase Plan.
F-14
<PAGE> 66
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Stock Purchase Plan presently authorizes the issuance of 100,000 shares
of Common Stock (subject to adjustment for capital changes) pursuant to the
exercise of nontransferable options granted to participating employees. During
the years ended December 31, 1997 and 1998 and the nine months ended September
30, 1999, 2,400, 14,100 and 10,781, shares, respectively, of the Company's
Common Stock were issued under the Stock Purchase Plan.
Information as to the Company's stock options is as follows:
In October, 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation." SFAS 123 is effective for periods beginning after December
15, 1995. SFAS 123 requires that companies either recognize compensation
expense for grants of stock, stock options, and other equity instruments
based on fair value, or provide pro-forma disclosure of net income and
earnings per share in the notes to the financial statements.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates as calculated in
accordance with SFAS 123, the Company's net income and earnings per share for
the years ended December 31, 1997 and 1998 would have been reduced to the pro-
forma amounts indicated below:
<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.
F-15
<PAGE> 67
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 September 30, 1999 and changes during the periods
ending on those dates is presented below:
<TABLE>
<CAPTION>
FOR THE FOR THE
NINE MONTHS FOR THE YEARS ENDED NINE MONTHS
ENDED DECEMBER 31, ENDED
DECEMBER 31, ---------------------------- SEPTEMBER 30,
1996 1997 1998 1999
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Options outstanding at beginning of
period................................ 1,523,845 2,196,095 2,403,342 4,704,229
Option activity during the period:
Granted............................... 1,125,250 640,750 2,826,487(1) 647,500
Exercised............................. (374,360) (72,000) (132,000) (316,825)
Canceled.............................. (78,640) (361,503) (393,600) (45,910)
---------- ---------- ---------- -----------
Options outstanding at end of period.... 2,196,095 2,403,342 4,704,229(1) 4,988,994(1)
========== ========== ========== ===========
Price range of outstanding options...... $0.78-4.50 $0.63-4.00 $0.63-4.13 $0.63-24.38
Price range of options exercised........ $0.50-1.72 $0.50-1.71 $1.37-2.63 $0.63- 3.13
Options exercisable..................... 1,179,937 994,759 2,718,214 2,835,418
</TABLE>
- ------------
(1) Includes warrants outstanding at December 31, 1998 and September 30, 1999
(see Note H).
NOTE J: COMPARATIVE FINANCIAL INFORMATION
As reported on Form 8-K, dated August 21, 1996, the Company's Board of
Directors approved on August 14, 1996 a change in the Company's fiscal year from
March 31 to December 31. The following represents unaudited comparative
financial information for the period January 1, 1996 to December 31, 1996, which
may be read in conjunction with the audited fiscal years ended December 31, 1997
and 1998, presented on the consolidated statements of operations.
<TABLE>
<CAPTION>
PRO FORMA
TWELVE MONTHS ENDED
DECEMBER 31, 1996
-------------------
<S> <C>
Net revenues.............................................. $ 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>
F-16
<PAGE> 68
[NETEGRITY CORPORATE LOGO]
<PAGE> 69
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING
OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS
NOT PERMITTED.
SUBJECT TO COMPLETION, DATED NOVEMBER 2, 1999
[NETEGRITY CORPORATE LOGO]
3,000,000 SHARES
COMMON STOCK
Netegrity, Inc. is offering 2,450,000 shares of its common stock, and the
selling stockholders identified in this prospectus are offering an additional
550,000 shares. Our common stock is listed on the Nasdaq National Market under
the symbol "NETE." The last reported sale price of our common stock on the
Nasdaq National Market on October 29, 1999 was $27.00 per share.
------------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 8.
------------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
----------------- -----------------
<S> <C> <C>
Public offering price...................................... $ $
Underwriting discounts and commissions..................... $ $
Proceeds to Netegrity...................................... $ $
Proceeds to selling stockholders........................... $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
We and the selling stockholders have granted the underwriters a 30-day
option to purchase up to an additional 450,000 shares of our common stock to
cover over-allotments.
------------------------------
ROBERTSON STEPHENS INTERNATIONAL LIMITED
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
THOMAS WEISEL PARTNERS LLC
THE DATE OF THIS PROSPECTUS IS , 1999
<PAGE> 70
UNDERWRITING
The underwriters named below, have entered into an underwriting agreement
to purchase from us and the selling stockholders the number of shares of common
stock listed next to their names below. BancBoston Robertson Stephens Inc., Dain
Rauscher Wessels, a division of Dain Rauscher Incorporated, and Thomas Weisel
Partners LLC are the representatives of the underwriters. The underwriters have
committed to purchase and pay for all of the shares listed below if any shares
are purchased.
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------
<S> <C>
U.S. UNDERWRITERS
BancBoston Robertson Stephens Inc...........................
Dain Rauscher Wessels.......................................
Thomas Weisel Partners LLC..................................
INTERNATIONAL UNDERWRITERS
BancBoston Robertson Stephens International Limited.........
Dain Rauscher Wessels.......................................
Thomas Weisel Partners LLC..................................
---------
Total............................................. 3,000,000
=========
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the public offering price listed on the cover page of this prospectus. Any
shares sold by underwriters to securities dealers will be sold at a discount of
up to $ per share from the public offering price. Those securities dealers
may resell any shares purchased from the underwriters to other brokers or
dealers at a discount of up to $ per share from the public offering price.
If all the shares are not sold at the initial offering price, the
representatives may change the offering price and other selling terms.
Option to Purchase Additional Shares. We and the selling stockholders have
granted to the underwriters an option, exercisable during the 30-day period
after the date of this prospectus, to purchase up to 450,000 additional shares
of common stock at the same price per share as we and the selling stockholders
will receive for the 3,000,000 shares that the underwriters have agreed to
purchase. To the extent that the underwriters exercise this option, each of the
underwriters will have a firm commitment to purchase approximately the same
percentage of additional shares that the number of shares of common stock to be
purchased by it shown in the above table represents as a percentage of the
3,000,000 shares offered in this prospectus. If purchased, additional shares
will and the selling stockholders be sold by the underwriters on the same terms
as those on which the 3,000,000 shares are being sold. We will be obligated to
sell these shares if the underwriters exercise their option to purchase
additional shares. If the option is exercised in full, the total price to the
public, underwriting discounts and commissions, proceeds to Netegrity and
proceeds to the selling stockholders will be $93,153,000, $4,890,375,
$63,456,250 and $24,303,375, respectively, assuming a public offering price of
$27.00 per share and after deducting estimated underwriting discounts and
commissions and estimated offering expenses.
46
<PAGE> 71
Indemnity. The underwriting agreement contains covenants of indemnity
among the underwriters, the selling stockholders and us against civil
liabilities, including liabilities under the Securities Act and liabilities
arising from breaches of representations and warranties contained in the
underwriting agreement.
Agreements Not to Sell Shares. Each of our officers and directors, each of
the selling stockholders, and three additional stockholders have agreed, during
the period ending 90 days after the date of this prospectus, subject to limited
exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose
of loan, pledge or grant any rights with respect to any shares of common stock
or any options or warrants to purchase any shares of common stock, or any
securities convertible into or exchangeable for shares of common stock owned as
of the date of this prospectus or later acquired directly by those holders or
with respect to which they have the power of disposition, without the prior
written consent of BancBoston Robertson Stephens Inc. However, BancBoston
Robertson Stephens Inc. may, in its sole discretion and at any time without
notice, release all or any portion of securities subject to the agreements not
to sell shares. There are no existing agreements between the representatives of
the underwriters and any of our stockholders providing consent to the sale of
shares prior to the expiration of the 90-day period.
Future Sales by Us. In addition, we have agreed that during the 90 days
after the date of this prospectus we will not, without the prior written consent
of BancBoston Robertson Stephens Inc., subject to specified exceptions, (1)
consent to the disposition of any shares held by stockholders subject to
agreements not to sell shares prior to the expiration of the 90-day period or
(2) issue, sell, contract to sell, or otherwise dispose of, any shares of common
stock, any options to purchase any shares of common stock or any securities
convertible into, exercisable for or exchangeable for shares of common stock
other than our sale of shares in this offering, the issuance of common stock
upon the exercise of outstanding options, and the issuance of options under
existing stock option and incentive plans, provided those options do not vest
prior to the expiration of the 90-day period.
Listing. Our common stock currently is traded on the Nasdaq National
Market under the symbol "NETE."
Stabilization. The representatives of the underwriters have advised us
that, pursuant to Regulation M under the Securities Act, some of the persons
participating in this offering may engage in transactions, including stabilizing
bids, syndicate covering transactions or the imposition of penalty bids, that
may have the effect of stabilizing or maintaining the market price of the common
stock at a level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of common stock on behalf of the
underwriters for the purpose of fixing or maintaining the price of the common
stock. A "syndicate covering transaction" is the bid for or the purchase of
common stock on behalf of the underwriters to reduce a short position incurred
by the underwriters in connection with this offering. A "penalty bid" is an
arrangement permitting the representatives to reclaim the selling concession
otherwise accruing to an underwriter or syndicate member in connection with this
offering if the common stock originally sold by the underwriter or syndicate
member is purchased by the representatives in a syndicate covering transaction
and has therefore not been effectively placed by the underwriter or syndicate
member. The representatives have advised us that these types of transactions may
be effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
Passive Market Making. In connection with this offering, underwriters and
selling group members, if any, that are qualified market makers on the Nasdaq
National Market may engage in passive market making transactions in our common
stock on the Nasdaq National Market in accordance with Rule 103 of Regulation M
under the Securities Exchange Act during the business day prior to the pricing
of this offering before the commencement of offers or sales of our common stock.
Passive market makers must comply with applicable volume and price limitations
and must be identified as such. In general, a passive market maker must display
its bid at a price not in excess of the highest independent bid of a security;
if all independent bids are lowered below the passive market maker's bid,
however, the passive market maker's bid must be lowered when applicable purchase
limits are exceeded.
Expenses of this Offering. We estimate our total expenses of this
offering, excluding underwriting discounts and commissions, to be $500,000.
47
<PAGE> 72
Prior Relationship. On September 9, 1999, we completed a private placement
of 534,242 shares of common stock at a purchase price of $20.59 per share.
BancBoston Robertson Stephen Inc. acted as placement agent in this transaction
and received a placement fee of $632,500. We received net proceeds of
approximately $10.3 million from the private placement, after deducting the
placement agent's fee and our estimated expenses.
New Underwriter. Thomas Weisel Partners, one of the representatives of the
underwriters, was organized and registered as a broker-dealer in December 1998.
Since December 1998, Thomas Weisel Partners has been named as a lead or
co-manager on 79 filed public offerings of equity securities, of which 58 have
been completed, and has acted as a syndicate member in an additional 41 public
offerings of equity securities. Thomas Weisel Partners does not have any
material relationship with us or any of our officers, directors or other
controlling persons, except with respect to its contractual relationship with us
and the selling stockholders pursuant to the underwriting agreement entered into
in connection with this offering.
Completion Data. BancBoston Robertson Stephens International Limited
expects to deliver the shares of common stock to purchasers on ,
1999.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Hutchins, Wheeler & Dittmar, A Professional Corporation, Boston,
Massachusetts. Anthony J. Medaglia, Jr., a stockholder of the firm, beneficially
owns 15,195 shares of common stock. Legal matters will be passed upon for the
underwriters by Foley, Hoag & Eliot LLP, Boston, Massachusetts.
EXPERTS
The consolidated financial statements of Netegrity, Inc. as of December 31,
1997 and 1998, for the years ended December 31, 1998 and 1997 and the nine-month
period ended December 31, 1996 included in this prospectus and registration
statement have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent certified public accountants, given on
the authority of said firm as experts in accounting and auditing.
48
<PAGE> 73
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an estimate of the expenses expected to be
incurred by Netegrity in connection with the issuance and distribution of the
securities being registered, other than underwriting discounts and commissions:
<TABLE>
<S> <C>
Registration Fee -- Securities and Exchange Commission...... $ 24,545
National Association of Securities Dealers, Inc. filing
fee......................................................... 9,329
Nasdaq National Market listing fee.......................... 17,500
Blue Sky fees and expenses.................................. 5,000
Printing and engraving expenses............................. 95,000
Legal and accounting fees and expenses...................... 250,000
Miscellaneous............................................... 98,626
--------
TOTAL.................................................. $500,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law and Netegrity's Certificate of
Incorporation and By-Laws allow for indemnification of Netegrity's directors and
officers for liabilities and expenses that they may incur in such capacities. In
general, directors and officers are indemnified with respect to actions taken in
good faith in a manner reasonably believed to be in, or not opposed to, the best
interests of Netegrity, and with respect to any criminal action or proceeding,
actions that the indemnitee has no reasonable cause to believe were unlawful.
Article V of the Amended and Restated By-Laws of Netegrity provides as
follows:
ARTICLE V
INDEMNIFICATION
Section 5.1 Third Party Actions. The Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Corporation) by reason of the fact that he is or was a Director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise (each an
"Indemnitee"), against expenses (including attorney's fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding.
Section 5.2 Derivative Actions. The Corporation shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the Corporation to
procure a judgment in its favor by reason of the fact that he is or was a
Director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit.
Section 5.3 Expenses. To the extent that a Director, officer, employee or
agent of the Corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in Sections 5.1 and 5.2,
or in defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection therewith.
II-1
<PAGE> 74
Section 5.4 Authorization and Request for Indemnification.
(a) Any indemnification requested by the Indemnitee under Section 5.1
hereof shall be made no later than ten (10) days after receipt of the written
request of the Indemnitee, unless it shall have been adjudicated by a court of
final determination that the Indemnitee did not act in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests of
the Corporation, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
(b) Any indemnification requested by the Indemnitee under Section 5.2
hereof shall be made no later than ten (10) days after receipt of the written
request of the Indemnitee, unless it shall have been adjudicated by a court of
final determination that the Indemnitee did not act in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests of
the Corporation, the Indemnitee shall have been finally adjudged to be liable to
the Company by a court of competent jurisdiction due to willful misconduct of a
culpable nature in the performance of the Indemnitee's duty to the Corporation
unless and only to the extent that any court in which such proceeding was
brought shall determine upon application that despite the adjudication of
liability, but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses as such court
shall deem proper.
Section 5.5 Advance Payment of Expenses. Subject to Section 5.4 above, the
Corporation shall advance all expenses incurred by the Indemnitee in connection
with the investigation, defense, settlement or appeal of any proceeding to which
the Indemnitee is a party or is threatened to be made a party by reason of the
fact that the Indemnitee is or was an agent of the Corporation. The Indemnitee
hereby undertakes to repay such amounts advanced only if, and to the extent
that, it shall ultimately be determined that the Indemnitee is not entitled to
be indemnified by the Corporation. The advances to be made hereunder shall be
paid by the Corporation to or on behalf of the Indemnitee within 30 days
following delivery of a written request therefor by the Indemnitee to the
Corporation.
Section 5.6 Non-Exclusiveness. The indemnification provided by this
Article V shall not be deemed exclusive of any other rights to which those
seeking indemnification may be entitled under any by-law, agreement, vote of
stockholders or disinterested Directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a Director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
Section 5.7 Insurance. The Corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a Director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the Corporation would have the power to
indemnify him against such liability under the provisions of this Article V.
Section 5.8 Constituent Corporations. The Corporation shall have power to
indemnify any person who is or was a director, officer, employee or agent of a
constituent corporation absorbed in a consolidation or merger with this
Corporation or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, in the same manner as hereinabove
provided for any person who is or was a Director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise.
Section 5.9 Additional Indemnification. In addition to the foregoing
provisions of this Article V, the Corporation shall have the power, to the full
extent provided by law, to indemnify any person for any act or omission of such
person against all loss, cost, damage and expense (including attorney's fees) if
such person is determined (in the manner prescribed in Section 5.4 hereof) to
have acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interest of the Corporation.
II-2
<PAGE> 75
ITEM 16. EXHIBITS.
The following exhibits, required by Item 601 of Regulation S-K, are filed
as a part of this Registration Statement. Exhibit numbers, where applicable, in
the left column correspond to those of Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT NO. ITEM
- ----------- ----
<C> <S>
1 Form of Underwriting Agreement
4 Specimen certificate for shares of Common Stock of the
Registrant (filed as Exhibit 4.01 to the Registrant's
Registration Statement on Form S-18, No. 33-24446-B, and
incorporated by reference).
5 Legal Opinion of Hutchins, Wheeler & Dittmar, A Professional
Corporation*
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Hutchins, Wheeler & Dittmar, A Professional
Corporation (included in Exhibit 5)
24 Power of Attorney (contained on Signature Page of
Registration Statement as filed initially)*
27.1 Financial Data Schedule for the Nine Months Ended December
31, 1996 (incorporated by reference from the Annual Report
on Form 10-K for the nine months ended December 31, 1996)
27.2 Financial Data Schedule for the Twelve Months Ended December
31, 1997*
27.3 Financial Data Schedule for the Twelve Months Ended December
31, 1998*
27.4 Financial Data Schedule for the Nine Months Ended September
30, 1999 (incorporated by reference from the Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999)
</TABLE>
- ------------
* Filed previously.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereto.
(b) Insofar as indemnification for liabilities under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as a part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
II-3
<PAGE> 76
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereto.
II-4
<PAGE> 77
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 2 to
Registration Statement on Form S-3 to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Waltham, Massachusetts on
November 2, 1999.
NETEGRITY, INC.
By: /s/ JAMES E. HAYDEN
------------------------------------
James E. Hayden
Vice President of Finance and
Administration,
Chief Financial Officer and
Treasurer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement on Form S-3 has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
---- -------- ----
<C> <S> <C>
/s/ BARRY N. BYCOFF President, Chief Executive Officer November 2, 1999
- --------------------------------------------- and Director (Principal Executive
Barry N. Bycoff Officer)
/s/ JAMES E. HAYDEN Vice President of Finance and November 2, 1999
- --------------------------------------------- Administration, Chief Financial
James E. Hayden Officer and Treasurer (Principal
Accounting and Financial Officer)
* Director November 2, 1999
- ---------------------------------------------
Eric R. Giler
* Director November 2, 1999
- ---------------------------------------------
Michael L. Mark
* Director November 2, 1999
- ---------------------------------------------
James P. McNiel
* Director November 2, 1999
- ---------------------------------------------
Ralph B. Wagner
* Director November 2, 1999
- ---------------------------------------------
Stephen L. Watson
* By: /s/ JAMES E. HAYDEN
--------------------------------------
James E. Hayden
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 78
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
1 Form of Underwriting Agreement
4 Specimen certificate for shares of Common Stock of the
Registrant (filed as Exhibit 4.01 to the Registrant's
Registration Statement on Form S-18, No. 33-24446-B, and
incorporated by reference)
5 Legal Opinion of Hutchins, Wheeler & Dittmar, A Professional
Corporation*
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Hutchins, Wheeler & Dittmar, A Professional
Corporation (included in Exhibit 5)
24 Power of Attorney (contained on Signature Page of
Registration Statement as filed initially)*
27.1 Financial Data Schedule for the Nine Months Ended December
31, 1996 (incorporated by reference to the Annual Report on
Form 10-K for the nine months ended December 31, 1996)
27.2 Financial Data Schedule for the Twelve Months Ended December
31, 1997*
27.3 Financial Data Schedule for the Twelve Months Ended December
31, 1998*
27.4 Financial Data Schedule for the Nine Months Ended September
30, 1999 (incorporated by reference from the Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999)
</TABLE>
- ---------------
* Filed previously
<PAGE> 1
Exhibit 1
Draft of 11/1/99
UNDERWRITING AGREEMENT
_____________, 1999
BANCBOSTON ROBERTSON STEPHENS INC.
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
THOMAS WEISEL PARTNERS LLC
As Representatives of the several Underwriters
c/o BancBoston Robertson Stephens Inc.
555 California Street, Suite 2600
San Francisco, California 94104
Ladies and Gentlemen:
INTRODUCTORY. Netegrity, Inc., a Delaware corporation (the "Company"),
proposes to issue and sell to the several underwriters named in SCHEDULE A (the
"Underwriters") an aggregate of 2,450,000 shares of its common stock, $.01 par
value per share ("Common Shares"); and the stockholders of the Company named in
SCHEDULE B (collectively, the "Selling Stockholders") severally propose to sell
to the Underwriters an aggregate of 550,000 Common Shares. The 2,450,000 Common
Shares to be sold by the Company and the 550,000 Common Shares to be sold by the
Selling Stockholders are collectively called the "Firm Shares." In addition, the
Company has granted to the Underwriters an option to purchase up to an
additional 50,000 Common Shares and the Selling Stockholders have severally
granted to the Underwriters an option to purchase up to an additional 400,000
Common Shares, each Selling Stockholder selling up to the amount set forth
opposite such Selling Stockholder's name in SCHEDULE B, all as provided in
Section 2. The additional 50,000 Common Shares to be sold by the Company and the
additional 400,000 Common Shares to be sold by the Selling Stockholders pursuant
to such option are collectively called the "Option Shares". The Firm Shares and,
if and to the extent such option is exercised, the Option Shares are
collectively called the "Shares." BancBoston Robertson Stephens Inc., Dain
Rauscher Wessels, a division of Dain Rauscher Incorporated, and Thomas Weisel
Partners LLC have agreed to act as representatives of the several Underwriters
(in such capacity, the "Representatives") in connection with the offering and
sale of the Common Shares.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-3 (File No.
333-87171), which contains a form of prospectus to be used in connection with
the public offering and sale of the Shares. Such registration statement, as
amended, in the form in which it was declared effective by the Commission under
the Securities Act of 1933 and the rules and regulations promulgated thereunder
(collectively, the "Securities Act"), including (a) the financial statements,
financial schedules and exhibits thereto, (b) any information deemed to be a
part thereof at the time of effectiveness pursuant to Rule 430A under the
Securities Act, and (c) all documents filed under the Securities Exchange Act of
1934 and the rules and regulations promulgated thereunder (collectively, the
"Exchange Act") and incorporated or deemed to be incorporated by reference in
such registration statement, as amended, is called the "Registration Statement."
Any registration statement filed by the Company pursuant to Rule 462(b) under
the Securities Act is called the "Rule 462(b) Registration Statement," and from
and after the date and time of filing of the Rule 462(b) Registration Statement
the term "Registration Statement" shall include the Rule 462(b) Registration
Statement. Such prospectus, in the form first used by the Underwriters to
confirm sales of the Shares, is called the "Prospectus." All references in this
Agreement to the Registration Statement, the Rule 462(b) Registration Statement,
any prospectus subject to completion (each a "preliminary prospectus") or the
Prospectus, or any amendments or supplements to any of the foregoing, shall
include any copy thereof filed pursuant to the Commission's Electronic Data
Gathering, Analysis and Retrieval system. All references in this Agreement to
financial statements, financial schedules and other information that is
<PAGE> 2
"contained," "included" or "stated" in the Registration Statement or the
Prospectus (and all other references of like import) shall be deemed to mean and
include all such financial statements, financial schedules and other information
that is or is deemed to be incorporated by reference in the Registration
Statement or the Prospectus, as the case may be; and all references in this
Agreement to amendments or supplements to the Registration Statement or the
Prospectus shall be deemed to mean and include the filing of any document under
the Exchange Act that is or is deemed to be incorporated by reference in the
Registration Statement or the Prospectus, as the case may be.
The Company and the Selling Stockholders hereby confirm their respective
agreements with the Underwriters as follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES.
A. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents, warrants and covenants to each Underwriter as follows:
(a) Compliance with Registration Requirements. The Registration
Statement and any Rule 462(b) Registration Statement have been declared
effective by the Commission under the Securities Act. The Company has
complied to the Commission's satisfaction with all requests of the
Commission for additional or supplemental information. No stop order
suspending the effectiveness of the Registration Statement or any Rule
462(b) Registration Statement is in effect, and no proceedings for such
purpose have been instituted, are pending or, to the knowledge of the
Company, are contemplated or threatened by the Commission. Each
preliminary prospectus and the Prospectus when filed complied in all
material respects with the Securities Act and, if filed by electronic
transmission pursuant to the Commission's Electronic Data Gathering,
Analysis and Retrieval system, was identical to the copy thereof delivered
to the Underwriters for use in connection with the offer and sale of the
Shares. Each of the Registration Statement, any Rule 462(b) Registration
Statement, and any post-effective amendment to the Registration Statement
or any Rule 462(b) Registration Statement, at the time it became effective
and at all subsequent times, complied and will comply in all material
respects with the Securities Act and did not and will not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading. The Prospectus, as amended or supplemented, as of its date
and at all subsequent times, did not and will not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading. The representations and
warranties set forth in the two immediately preceding sentences do not
apply to statements in or omissions from the Registration Statement, any
Rule 462(b) Registration Statement, any post-effective amendment to the
Registration Statement or any Rule 462(b) Registration Statement, the
Prospectus, or any amendment or supplement to the Prospectus made in
reliance upon and in conformity with information relating to any
Underwriter furnished to the Company in writing by the Representatives
expressly for use therein. There are no contracts or other documents
required to be described in the Prospectus or to be filed as exhibits to
the Registration Statement that have not been described or filed as
required.
(b) Exchange Act Compliance. The documents incorporated or deemed to
be incorporated by reference in the Prospectus, at the time they were or
hereafter are filed with the Commission, complied and will comply in all
material respects with the requirements of the Exchange Act.
(c) Exchange Act Reports Filed. The Company has filed all reports
required to be filed by it pursuant to the Exchange Act.
(d) Conditions for Use of Form S-3. The Company has satisfied the
conditions for the use of Form S-3, as set forth in the general
instructions thereto, with respect to the Registration Statement.
2
<PAGE> 3
(e) Offering Materials Furnished to Underwriters. The Company has
delivered to the Representatives (i) three complete conformed copies of
the Registration Statement, including each consent of experts filed as a
part thereof, and (ii) conformed copies of the Registration Statement
(without exhibits), each preliminary prospectus and the Prospectus, as
amended or supplemented, in such quantities and at such places as the
Representatives have reasonably requested for each of the Underwriters.
(f) Distribution of Offering Material by the Company. The Company
has not distributed and will not distribute, prior to the later of the
Second Closing Date (as defined below) and the completion of the
Underwriters' distribution of the Shares, any offering material in
connection with the offering and sale of the Shares other than any
preliminary prospectus, the Prospectus or the Registration Statement.
(g) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding
agreement of, the Company, enforceable in accordance with its terms,
except as rights to indemnification hereunder may be limited by applicable
law and except as the enforcement hereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other laws relating to or
affecting the rights and remedies of creditors or by general equitable
principles.
(h) Authorization of the Shares to be Sold by the Company. The
Shares to be purchased by the Underwriters from the Company have been duly
authorized for issuance and sale pursuant to this Agreement and, when
issued and delivered by the Company pursuant to this Agreement, will be
validly issued, fully paid and nonassessable.
(i) Authorization of the Firm Shares to be Sold by the Selling
Stockholders. The Firm Shares to be purchased by the Underwriters from the
Selling Stockholders were duly authorized when issued and are validly
issued, fully paid and nonassessable.
(j) No Applicable Registration or Other Similar Rights. There are no
persons with registration or other similar rights to have any equity or
debt securities registered for sale under the Registration Statement or
included in the offering contemplated by this Agreement, except for (i)
such rights of the Selling Stockholders with respect to Shares included in
the Registration Statement and (ii) such rights as have been duly waived.
(k) No Material Adverse Change. Subsequent to the respective dates
as of which information is given in the Prospectus:
(i) there has been no material adverse change, or any
development that reasonably could be expected to result in
a material adverse change, in the condition, financial or
otherwise, or in the earnings, business, operations or
prospects, whether or not arising from transactions in the
ordinary course of business, of the Company and the
Subsidiaries (as defined below), considered as one entity
(any such change or effect is called a "Material Adverse
Change" or "Material Adverse Effect");
(ii) neither the Company nor any of the Subsidiaries has
incurred any liability or obligation, indirect, direct or
contingent, not in the ordinary course of business or has
entered into any transaction or agreement not in the
ordinary course of business, other than any such
liabilities, obligations, transactions and agreements that
are not, in the aggregate, material to the Company and the
Subsidiaries, considered as one entity; and
(iii) there has not been any dividend or distribution of any kind
declared, paid or made by the Company or any of the
Subsidiaries on any class of capital stock or any
repurchase or redemption by the Company or any of the
Subsidiaries of any class of capital stock.
3
<PAGE> 4
(l) Independent Certified Public Accountants. PricewaterhouseCoopers
LLP, who have expressed their opinion with respect to the consolidated
financial statements (which term as used in this Agreement includes the
related notes thereto) and any supporting schedules filed with the
Commission as a part of the Registration Statement and included in the
Prospectus, are independent certified public accountants with respect to
the Company and the Subsidiaries within the meaning of the Securities Act.
(m) Preparation of the Financial Statements. The consolidated
financial statements filed with the Commission as a part of the
Registration Statement and included in the Prospectus present fairly in
all material respects the consolidated financial position of the Company
and the Subsidiaries as of and at the dates indicated and the results of
operations and cash flows of the Company and the Subsidiaries for the
periods specified. Any supporting schedules included in the Registration
Statement present fairly in all material respects the information required
to be stated therein. Such consolidated financial statements and
supporting schedules have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis throughout
the periods involved, except as may be expressly stated in the related
notes thereto. No other financial statements or supporting schedules are
required to be included in the Registration Statement. The financial data
set forth in the Prospectus under the captions "Summary--Summary
Consolidated Financial Data," "Selected Consolidated Financial Data" and
"Capitalization" fairly present in all material respects the information
set forth therein on a basis consistent with that of the audited
consolidated financial statements contained in the Registration Statement.
(n) Accounting Systems. Each of the Company and the Subsidiaries
maintains a system of accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with
management's general or specific authorization; (ii) transactions are
recorded as necessary to permit preparation of consolidated financial
statements in conformity with generally accepted accounting principles and
to maintain accountability for assets; (iii) access to assets is permitted
only in accordance with management's general or specific authorization;
and (iv) the recorded accountability for assets is compared with existing
assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(o) Subsidiaries of the Company. The Company does not own or
control, directly or indirectly, any corporation, association or other
entity other than Software Developers Company GmbH, Personal Computing
Tools and Netegrity Europe SRL (collectively, the "Subsidiaries"). The
Company is in the process of incorporating subsidiaries in Singapore and
the United Kingdom.
(p) Incorporation and Good Standing of the Company and the
Subsidiaries. Each of the Company and the Subsidiaries (i) has been duly
organized and is validly existing as a corporation in good standing under
the laws of the jurisdiction in which it is organized, with full corporate
power and authority to own its properties and conduct its business as
described in the Prospectus, and (ii) except where the failure to do so
would not have a Material Adverse Effect, is duly qualified to do business
as a foreign corporation and is in good standing under the laws of each
jurisdiction that requires such qualification.
(q) Capitalization of the Subsidiaries. All the outstanding shares
of capital stock of each of the Subsidiaries (i) have been duly authorized
and are validly issued, fully paid and nonassessable and (ii) except as
otherwise stated in the Registration Statement, are owned by the Company,
free and clear of any security interests, claims, liens or encumbrances.
(r) No Prohibition on Subsidiaries Paying Dividends or Making Other
Distributions. None of the Subsidiaries (except as limited by statutory
obligations) is prohibited, directly or indirectly, from (i) paying any
dividends to the Company, (ii) making any other distribution on its
capital stock, (iii) repaying to the Company or the other Subsidiary any
loans or advances from the Company or such other Subsidiary or (iv)
transferring any of its properties or assets to the Company,
4
<PAGE> 5
(s) Capitalization and Other Capital Stock Matters. The authorized,
issued and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization" (other than for subsequent
issuances, if any, pursuant to employee benefit plans described in the
Prospectus or upon exercise of outstanding options or warrants described
in the Prospectus). The Common Shares, including the Shares, conform in
all material respects to the description thereof contained in the
Prospectus. All of the issued and outstanding Common Shares (i) have been
duly authorized and are validly issued, fully paid and nonassessable and
(ii) have been issued in compliance with federal and state securities
laws. None of the outstanding Common Shares were issued in violation of
any preemptive rights, rights of first refusal, or other similar rights to
subscribe for or purchase securities of the Company. There are no
authorized or outstanding options, warrants, preemptive rights, rights of
first refusal or other rights to purchase, or equity or debt securities
convertible into or exchangeable or exercisable for, any capital stock of
the Company or any of the Subsidiaries other than those identified in the
Prospectus. The description of the Company's stock option and other stock
plans or arrangements, and the options or other rights granted thereunder,
set forth in the Prospectus accurately and fairly presents in all material
respects the information required to be shown with respect to such plans,
arrangements, options and rights.
(t) Listing. The Shares have been approved for inclusion on the
Nasdaq National Market, subject only to official notice of issuance.
(u) No Consents, Approvals or Authorizations Required. No consent,
approval, authorization or order of, or filing with, any court or
governmental agency or regulatory body is required in connection with the
transactions contemplated herein, except such as have been obtained or
made under the Securities Act and such as may be required by the blue sky
laws of any state or other jurisdiction of the United States, the by-laws,
rules and regulations of the National Association of Securities Dealers,
Inc. (the "NASD"), or federal or provincial securities laws of Canada.
(v) Non-Contravention of Existing Instruments and Agreements.
Neither the issue and sale of the Shares, the consummation of any of the
other transactions contemplated herein nor the fulfillment of the terms
hereof will conflict with, result in a breach or violation of, or result
in the imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any of the Subsidiaries pursuant to (i) the
charter or by-laws of the Company or any of the Subsidiaries, (ii) the
terms of any indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other agreement, obligation, condition,
covenant or instrument to which the Company or any of the Subsidiaries is
a party or bound or to which its properties are subject or (iii) any
statute, law, rule, regulation, judgment, order or decree applicable to
the Company or any of the Subsidiaries of any court, regulatory body,
administrative agency, governmental body, arbitrator or other authority
having jurisdiction over the Company, any of the Subsidiaries or any of
their properties.
(w) No Defaults or Violations. Neither the Company nor any of the
Subsidiaries is in violation or default of (i) any provision of its
charter or by-laws, (ii) the terms of any indenture, contract, lease,
mortgage, deed of trust, note agreement, loan agreement or other
agreement, obligation, condition, covenant or instrument to which it is a
party or bound or to which its properties are subject or (iii) any
statute, law, rule, regulation, judgment, order or decree of any court,
regulatory body, administrative agency, governmental body, arbitrator or
other authority having jurisdiction over the Company or such Subsidiary or
any of its properties, as applicable, except for any such violations or
defaults that do not and will not, in the aggregate, have a Material
Adverse Effect.
(x) No Actions, Suits or Proceedings. Except as disclosed in the
Registration Statement, no action, suit or proceeding by or before any
court, any governmental agency, authority or body, or any arbitrator
involving the Company, any of the Subsidiaries, or its or their properties
is pending or, to the knowledge of the Company, threatened that reasonably
could be expected (i) to have a material adverse effect on the performance
of this Agreement or the consummation of any of the transactions
contemplated hereby or (ii) to result in a Material Adverse Effect.
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(y) All Necessary Permits, etc. Except where failure to do so would
not have a Material Adverse Effect, each of the Company and the
Subsidiaries possesses all valid and current certificates, authorizations
and permits issued by the appropriate state, federal or foreign regulatory
agencies or bodies necessary to conduct its business. Neither the Company
nor any of the Subsidiaries has received any notice of proceedings
relating to the revocation or modification of, or non-compliance with,
any such certificate, authorization or permit that, in the aggregate, if
the subject of unfavorable decisions, rulings or findings, reasonably
could be expected to result in a Material Adverse Change.
(z) Title to Properties. The Company and the Subsidiaries have good
and marketable title to all the properties and assets reflected as owned
in the consolidated financial statements referred to in Section 1(A)(l) or
elsewhere in the Prospectus, in each case free and clear of any security
interests, mortgages, liens, encumbrances, equities, claims and other
defects, except such as, in the aggregate, do not materially and adversely
affect the value of such properties and do not materially interfere with
the use made or proposed to be made of such properties by the Company and
the Subsidiaries. The real property, improvements, equipment and personal
property held under lease by the Company or any of the Subsidiaries are
held under valid and enforceable leases, with such exceptions as, in the
aggregate, are not material and do not materially interfere with the use
made or proposed to be made of such real property, improvements, equipment
or personal property by the Company or such Subsidiary.
(aa) Tax Law Compliance. The Company and the Subsidiaries have (i)
filed all necessary federal, state and foreign income and franchise tax
returns or have properly requested extensions thereof and (ii) paid all
taxes required to be paid by any of them and, if due and payable, any
related or similar assessment, fine or penalty levied against any of them
except as is being contested in good faith and by appropriate proceedings.
The Company has made adequate charges, accruals and reserves in the
applicable consolidated financial statements referred to in Section
1(A)(l) in respect of all federal, state and foreign income and franchise
taxes for all periods as to which the tax liability of the Company or any
of the Subsidiaries has not been finally determined. Other than in
connection with a sales tax audit presenting being conducted by the
Commonwealth of Massachusetts, the Company is not aware of any tax
deficiency that has been or might be asserted or threatened against the
Company or any of the Subsidiaries and that reasonably could be expected
to result in a Material Adverse Change.
(bb) Intellectual Property Rights. Each of the Company and the
Subsidiaries owns or possesses adequate rights to use all patents, patent
rights or licenses, inventions, collaborative research agreements, trade
secrets, know-how, trademarks, service marks, trade names and copyrights
that are necessary to conduct its businesses as described in the
Registration Statement and the Prospectus. The expiration of any patents,
patent rights, trade secrets, trademarks, service marks, trade names or
copyrights of the Company and the Subsidiaries would not result in a
Material Adverse Effect that is not otherwise disclosed in the Prospectus.
Neither the Company nor any of the Subsidiaries has received any notice
of, or has any knowledge of, any infringement of or conflict with asserted
rights of the Company by others with respect to any patent, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade
names or copyrights. Neither the Company nor any of the Subsidiaries has
received any notice of, or otherwise has any knowledge of, any
infringement of or conflict with asserted rights of others with respect to
any patent, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names or copyrights that, in the
aggregate, if the subject of an unfavorable decisions, rulings or
findings, reasonably could be expected to have a Material Adverse Effect.
There is no claim being made against the Company or any of the
Subsidiaries regarding patents, patent rights or licenses, inventions,
collaborative research, trade secrets, know-how, trademarks, service
marks, trade names or copyrights. The Company and the Subsidiaries do not
in the conduct of their business as now or proposed to be conducted (as
described in the Prospectus) infringe or conflict with any right or patent
of any third party, or any discovery, invention, product or process that
is the subject of a patent application filed by any third party, known to
the Company or any of the Subsidiaries, which infringement or conflict
reasonably could be expected to result in a Material Adverse Change.
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(cc) Year 2000 Preparedness. There are no issues related to the
preparedness of the Company or any of the Subsidiaries for the Year 2000
that (i) are of a character required to be described or referred to in the
Registration Statement or Prospectus by the Securities Act that have not
been accurately described in the Registration Statement and the Prospectus
or (ii) reasonably could be expected to result in a Material Adverse
Change or to materially affect their properties, assets or rights.
(dd) No Transfer Taxes or Other Fees. There are no transfer taxes or
other similar fees or charges under federal law or the laws of any state,
or any political subdivision thereof, required to be paid in connection
with the execution and delivery of this Agreement or the issuance and sale
of Shares by the Company.
(ee) Company Not an "Investment Company." The Company has been
advised of the rules and requirements under the Investment Company Act of
1940, as amended. The Company is not, and after receipt of payment for the
Shares will not be, an "investment company" or an entity "controlled" by
an "investment company" within the meaning of such Act. The Company will
conduct its business in a manner so that it will not become subject to
such Act.
(ff) Insurance. The Company and the Subsidiaries are insured by
recognized, financially sound and reputable institutions with policies in
such amounts, with such deductibles and covering such risks as are
adequate and customary for their businesses, including policies covering
(i) real and personal property owned or leased by the Company and the
Subsidiaries against theft, damage, destruction, acts of vandalism and
earthquakes, (ii) general liability, and (iii) directors' and officers'
liability. The Company has no reason to believe that it or any of the
Subsidiaries will not be able (i) to renew its existing insurance coverage
as and when such policies expire or (ii) to obtain comparable coverage
from similar institutions as may be necessary or appropriate to conduct
its business as now conducted and at a cost that would not result in a
Material Adverse Change. Neither the Company nor any of the Subsidiaries
has been denied any insurance coverage that it has sought or for which it
has applied.
(gg) Labor Matters. To the Company's knowledge, no labor disturbance
by employees of the Company or any of the Subsidiaries exists or is
imminent. The Company is not aware of any existing or imminent labor
disturbance by the employees of any of its principal suppliers, resellers,
dealers, international distributors or licensors or its significant
customers that reasonably could be expected to result in a Material
Adverse Change.
(hh) No Price Stabilization or Manipulation. The Company has not
taken and will not take, directly or indirectly, any action designed to,
or that reasonably could be expected to, cause or result in stabilization
or manipulation of the price of the Common Shares to facilitate the sale
or resale of the Shares.
(ii) Lock-Up Agreements. The persons listed on EXHIBIT A-1 have
signed an agreement substantially in the form attached hereto as EXHIBIT
A-2 (the "Lock-up Agreements"). The Company has provided to Underwriters'
Counsel executed copies of all of the Lock-up Agreements.
(jj) Related Party Transactions. There are no business relationships
or related-party transactions involving the Company, any of the
Subsidiaries or any other person that are required to be described in the
Prospectus and have not been described as required.
(kk) No Unlawful Contributions or Other Payments. Neither the
Company, any of the Subsidiaries nor, to the knowledge of the Company, any
employee or agent of the Company or any of the Subsidiaries has made any
contribution or other payment to any official of, or candidate for, any
federal, state or foreign office in violation of any law or of a character
required to be disclosed in the Prospectus.
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<PAGE> 8
(ll) Environmental Laws. The Company and the Subsidiaries are in
compliance with all existing rules, laws and regulations relating to the
use, treatment, storage and disposal of toxic substances and protection of
health or the environment ("Environmental Laws") that are applicable to
their businesses, except where the failure to comply would not result in a
Material Adverse Change. Neither the Company nor any of the Subsidiaries
has received any notice from any governmental authority or third party of
an asserted claim under Environmental Laws, which claim is required to be
disclosed in the Registration Statement and the Prospectus. Neither the
Company nor any of the Subsidiaries will be required to make future
material capital expenditures of which it is aware to comply with
Environmental Laws. No property owned, leased or occupied by the Company
or any of the Subsidiaries has been designated as a Superfund site
pursuant to the Comprehensive Response, Compensation, and Liability Act of
1980, as amended (42 U.S.C. ss. 9601, et seq.), or otherwise designated as
a contaminated site under applicable state or local law.
(mm) ERISA Compliance. The Company, the Subsidiaries and any
"employee benefit plan" (as defined under the Employee Retirement Income
Security Act of 1974, as amended, and the regulations and published
interpretations thereunder (collectively, "ERISA")) established or
maintained by the Company, any of the Subsidiaries or their "ERISA
Affiliates" (as defined below) are in compliance in all material respects
with ERISA. "ERISA Affiliate" means any member of any group of
organizations described in Section 414(b),(c),(m) or (o) of the Internal
Revenue Code of 1986, as amended (the "Code"), of which the Company or
such Subsidiary is a member. No "reportable event" (as defined under
ERISA) has occurred or is reasonably expected to occur with respect to any
"employee benefit plan" established or maintained by the Company, the
Subsidiaries or any ERISA Affiliate. No "employee benefit plan"
established or maintained by the Company, any of the Subsidiaries or any
ERISA Affiliate, if such "employee benefit plan" were terminated, would
have any "amount of unfunded benefit liabilities" (as defined under
ERISA). Neither the Company, any of the Subsidiaries nor any ERISA
Affiliate has incurred or reasonably expects to incur any liability under
(i) Title IV of ERISA with respect to termination of, or withdrawal from,
any "employee benefit plan" or (ii) Section 412, 4971, 4975 or 4980B of
the Code. Each "employee benefit plan" established or maintained by the
Company, any of the Subsidiaries or any ERISA Affiliate that is intended
to be qualified under Section 401(a) of the Code is so qualified, and
nothing has occurred, whether by action or failure to act, that would
cause the loss of such qualification.
(nn) Certificates. Any certificate signed by an officer of the
Company and delivered to the Representatives or Underwriters' Counsel in
connection with this Agreement shall be deemed to be a representation and
warranty hereunder by the Company to each Underwriter as to the matters
set forth therein.
B. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS. Each
Selling Stockholder represents, warrants and covenants to each Underwriter as
follows:
(a) The Underwriting Agreement. This Agreement (i) has been duly
authorized, executed and delivered by or on behalf of such Selling
Stockholder and (ii) is a valid and binding agreement of such Selling
Stockholder, enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as
the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other laws relating to or affecting the
rights and remedies of creditors or by general equitable principles.
(b) The Custody Agreement and Power of Attorney. Each of (i) the
Custody Agreement signed by or on behalf of such Selling Stockholder and
the Company, as custodian (the "Custodian"), relating to the deposit of
the Shares to be sold by such Selling Stockholder (the "Custody
Agreement") and (ii) the Irrevocable Power of Attorney of such Selling
Stockholder appointing Barry N. Bycoff and James A. Hayden as such Selling
Stockholder's attorneys-in-fact (each an "Attorney-in-Fact") to the extent
set forth therein relating to the transactions contemplated hereby and by
the Prospectus (with respect to such Selling Stockholder, the "Power of
Attorney") has been duly authorized, executed and delivered by or on
behalf of such Selling Stockholder and is a valid and binding agreement of
such Selling
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Stockholder, enforceable in accordance with its terms, except as the
enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other laws relating to or affecting the
rights and remedies of creditors or by general equitable principles. Such
Selling Stockholder agrees that the Shares to be sold by such Selling
Stockholder on deposit with the Custodian are subject to the interests of
the Underwriters, that the arrangements made for such custody are to that
extent irrevocable, and that the obligations of such Selling Stockholder
hereunder shall not be terminated, except as provided in this Agreement or
in the Custody Agreement, by any act of such Selling Stockholder, by
operation of law, by death or incapacity of such Selling Stockholder, or
by the occurrence of any other event. If such Selling Stockholder should
die or become incapacitated, or if any other event should occur, before
the delivery of the Shares to be sold by such Selling Stockholder
hereunder, the documents evidencing the Shares to be sold by such Selling
Stockholder then on deposit with the Custodian shall be delivered by the
Custodian in accordance with the terms and conditions of this Agreement as
if such death, incapacity or other event had not occurred, regardless of
whether or not the Custodian shall have received notice thereof.
(c) Title to Shares to be Sold. On the First Closing Date and the
Second Closing Date, such Selling Stockholder will have good and valid
title to the shares of Common Stock to be sold by such Selling Stockholder
hereunder. Upon sale and delivery of, and payment for, such Firm Shares as
provided herein, such Selling Stockholder will convey good and marketable
title to such Firm Shares, free and clear of all security interests,
claims, liens or encumbrances.
(d) All Authorizations Obtained. Such Selling Stockholder has, and
on the First Closing Date will have, (i) good and marketable title to all
of the Firm Shares being sold by such Selling Stockholder pursuant to this
Agreement and (ii) the legal right and power, and all authorizations and
approvals required by law and its organizational documents (if any) to
enter into this Agreement, the Custody Agreement and the Power of
Attorney, to sell, transfer and deliver all of the Firm Shares being sold
by such Selling Stockholder pursuant to this Agreement, and to comply with
its other obligations hereunder and thereunder.
(e) No Further Consents, Authorization or Approvals. No consent,
approval, authorization or order of any court or governmental agency or
body is required for the consummation by such Selling Stockholder of the
transactions contemplated herein, except such as may have been obtained
under the Securities Act or otherwise and such as may be required by the
blue sky laws of any state or other jurisdiction of the United States, the
by-laws, rules and regulations of the NASD, or federal or provincial
securities laws of Canada.
(f) Non-Contravention. Neither the sale of the Firm Shares being
sold by such Selling Stockholder, the consummation of any of the other
transactions herein contemplated by such Selling Stockholder, nor the
fulfillment of the terms hereof by such Selling Stockholder will conflict
with, result in a breach or violation of, or constitute a default under
any law, any indenture or other agreement or instrument to which such
Selling Stockholder is party or bound or any judgment, order or decree
applicable to such Selling Stockholder of any court or regulatory body,
administrative agency, governmental body or arbitrator having jurisdiction
over such Selling Stockholder.
(g) No Registration or Other Similar Rights. Such Selling
Stockholder does not have, or has waived prior to the date hereof, any
registration or other similar rights to have any equity or debt
securities, other than the Firm Shares to be sold hereunder by such
Selling Stockholder, registered for sale by the Company under the
Registration Statement or included in the offering contemplated by this
Agreement.
(h) No Preemptive, Co-sale or Other Similar Rights. Such Selling
Stockholder does not have, or has waived prior to the date hereof, any
preemptive right, co-sale right, right of first refusal or other similar
right to purchase any of the Shares that are to be sold by the Company or
any of the other Selling Stockholders to the Underwriters pursuant to this
Agreement. Such Selling Stockholder does not own
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any warrants, options or similar rights to acquire, and does not have any
right or arrangement to acquire, any capital stock, right, warrants,
options or other securities from the Company, other than those identified
in the Registration Statement and the Prospectus.
(i) Disclosure Made by Such Selling Stockholder in the Prospectus.
All information furnished by or on behalf of such Selling Stockholder in
writing expressly for use in the Registration Statement and the Prospectus
(i) is, and on the First Closing Date and the Second Closing Date will be,
accurate and complete in all material respects and (ii) does not, and on
the First Closing Date and the Second Closing Date will not, contain any
untrue statement of a material fact or omit to state any material fact
necessary to make such information not misleading. Such Selling
Stockholder confirms as accurate the numbers of shares of Common Shares
set forth opposite such Selling Stockholder's name in the Prospectus under
the caption "Principal and Selling Stockholders" (both prior to and after
giving effect to the sale of the Shares).
(j) No Price Stabilization or Manipulation. Such Selling Stockholder
has not taken and will not take, directly or indirectly, any action
designed to or that reasonably could be expected to cause or result in
stabilization or manipulation of the price of the Common Shares to
facilitate the sale or resale of the Shares.
(k) No Transfer Taxes or Other Fees. There are no transfer taxes or
other similar fees or charges under federal law or the laws of any state,
or any political subdivision thereof, required to be paid in connection
with the execution and delivery of this Agreement or the sale of Firm
Shares by such Selling Stockholder.
(l) Distribution of Offering Materials by Such Selling Stockholder.
Such Selling Stockholder has not distributed and will not distribute,
prior to the later of the Second Closing Date and the completion of the
Underwriters' distribution of the Shares, any offering material in
connection with the offering and sale of the Shares other than any
preliminary prospectus, the Prospectus or the Registration Statement.
(m) Confirmation of Company Representations and Warranties. Such
Selling Stockholder (i) has no reason to believe that the representations
and warranties of the Company contained in Section 1(A) are not true and
correct, (ii) is familiar with the Registration Statement and the
Prospectus and has no knowledge of any material fact, condition or
information not disclosed in the Registration Statement or the Prospectus
that has had or may result in a Material Adverse Effect and (iii) is not
prompted to sell the Firm Shares to be sold by such Selling Stockholder by
any information concerning the Company that is not set forth in the
Registration Statement and the Prospectus.
(n) Certificates. Any certificate signed by or on behalf of any
Selling Stockholder and delivered to the Representatives or Underwriters'
Counsel in connection with this Agreement shall be deemed to be a
representation and warranty hereunder by such Selling Stockholder to each
Underwriter as to the matters covered thereby.
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE SHARES.
(a) The Firm Shares. Upon the terms herein set forth, (i) the Company
agrees to issue and sell to the several Underwriters an aggregate of 2,450,000
Firm Shares and (ii) the Selling Stockholders agree to sell to the several
Underwriters an aggregate of 550,000 Firm Shares, each Selling Stockholder
selling the number of Firm Shares set forth opposite such Selling Stockholder's
name on SCHEDULE B. The agreements by the Company and each of the Selling
Stockholders to make the sales described in the preceding sentence are several
and not joint. On the basis of the representations, warranties and agreements
herein contained, and upon the terms but subject to the conditions herein set
forth, the Underwriters agree, severally and not jointly, to purchase from the
Company and the Selling Stockholders the respective numbers of Firm Shares set
forth
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opposite their names on SCHEDULE A. The purchase price per Firm Share to be paid
by the several Underwriters to the Company and the Selling Stockholders shall
be $___.
(b) The First Closing Date. Delivery of the Firm Shares to be purchased by
the Underwriters and payment therefor (in the manner described in Section 2(f)
hereof) shall be made by the Company and the Representatives at 9 A.M., Boston
time, at the offices of Hutchins, Wheeler & Dittmar, A Professional Corporation
(or at such other place as may be agreed upon between the Representatives and
the Company), (i) on the third full business day following the first day that
Shares are traded, (ii) if this Agreement is executed and delivered after 4:30
P.M., Boston time, the fourth full business day following the day that this
Agreement is executed and delivered or (iii) at such other time and date not
later that seven full business days following the first day that Shares are
traded as the Representatives and the Company may determine (or at such time and
date to which payment and delivery shall have been postponed pursuant to Section
8), such time and date of payment and delivery being herein called the "Closing
Date." Notwithstanding the foregoing, if the Company has not made available to
the Representatives copies of the Prospectus within the time provided in Section
4(d), the Representatives may, in their sole discretion, postpone the Closing
Date until no later that two full business days following delivery of copies of
the Prospectus to the Representatives.
(c) The Option Shares; the Second Closing Date. In addition, on the basis
of the representations, warranties and agreements herein contained, and upon the
terms but subject to the conditions herein set forth, the Company and the
Selling Stockholders indicated on SCHEDULE B hereby severally but not jointly
grant an option to the several Underwriters to purchase, severally and not
jointly, up to an aggregate of 450,000 Option Shares from the Company and such
Selling Stockholders at the purchase price per share to be paid by the
Underwriters for the Firm Shares. The option granted hereunder is for use by the
Underwriters solely in covering any over-allotments in connection with the sale
and distribution of the Firm Shares. The option granted hereunder may be
exercised at any time upon notice by the Representative to the Company and such
Selling Stockholders, which notice may be given at any time within 30 days from
the date of this Agreement. The time and date of delivery of the Option Shares,
if subsequent to the First Closing Date, is called the "Second Closing Date" and
shall be determined by the Representatives and shall not be earlier than three
nor later than five full business days after delivery of such notice of
exercise. If any Option Shares are to be purchased, (i) each Underwriter agrees,
severally and not jointly, to purchase the number of Option Shares (subject to
such adjustments to eliminate fractional shares as the Representatives may
determine) that bears the same proportion to the total number of Option Shares
to be purchased as the number of Firm Shares set forth on SCHEDULE A opposite
the name of such Underwriter bears to the total number of Firm Shares and (ii)
the Company and each such Selling Stockholder agree, severally and not jointly,
to sell the number of Option Shares (subject to such adjustments to eliminate
fractional shares as the Representatives may determine) that bears the same
proportion to the total number of Option Shares to be sold as the number of
Option Shares set forth in SCHEDULE B opposite the name of such Selling
Stockholder (or, in the case of the Company, as 50,000 bears to the total number
of Option Shares to be sold. The Representative may cancel the option at any
time prior to its expiration by giving written notice of such cancellation to
the Company and such Selling Stockholders.
(d) Public Offering of the Shares. The Representatives hereby advise the
Company and the Selling Stockholders that the Underwriters intend to offer for
sale to the public, as described in the Prospectus, their respective portions of
the Shares as soon after this Agreement has been executed and the Registration
Statement has been declared effective as the Representatives, in their sole
judgment, have determined is advisable and practicable.
(e) Payment for the Shares. Payment for the Shares to be sold by the
Company shall be made at the First Closing Date (and, if applicable, at the
Second Closing Date) by wire transfer of immediately available funds to the
order of the Company. Payment for the Shares to be sold by the Selling
Stockholders shall be made at the First Closing Date by wire transfer of
immediately available funds to the order of the Custodian.
It is understood that the Representatives have been authorized, for
their own accounts and the accounts of the several Underwriters, to accept
delivery of and receipt for, and make payment of the purchase
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price for, the Firm Shares and any Option Shares the Underwriters have agreed to
purchase. BancBoston Robertson Stephens Inc., individually and not as one of the
Representatives, may (but shall not be obligated to) make payment for any Shares
to be purchased by any Underwriter whose funds shall not have been received by
the Representatives by the First Closing Date or the Second Closing Date, as the
case may be, for the account of such Underwriter, but any such payment shall not
relieve such Underwriter from any of its obligations under this Agreement.
Each Selling Stockholder hereby agrees that (i) it will pay all stock
transfer taxes, stamp duties and other similar taxes, if any, payable upon the
sale or delivery of the Firm Shares to be sold by such Selling Stockholder to
the several Underwriters or otherwise in connection with the performance of such
Selling Stockholder's obligations hereunder and (ii) the Custodian is authorized
to deduct for such payment any such amounts from the proceeds to such Selling
Stockholder hereunder and to hold such amounts for the account of such Selling
Stockholder with the Custodian under the Custody Agreement.
(f) Delivery of the Shares. The Company and the Selling Stockholders shall
deliver, or cause to be delivered, a credit representing the Firm Shares to an
account or accounts at The Depository Trust Company as designated by the
Representatives for the accounts of the Representatives and the several
Underwriters at the First Closing Date, against the irrevocable release of a
wire transfer of immediately available funds for the amount of the purchase
price therefor. The Company and the Selling Stockholders that granted the option
provided in Section 2 shall also deliver, or cause to be delivered, a credit
representing the Option Shares to an account or accounts at The Depository Trust
Company as designated by the Representatives for the accounts of the
Representatives and the several Underwriters at the Second Closing Date, against
the irrevocable release of a wire transfer of immediately available funds for
the amount of the purchase price therefor. Time shall be of the essence, and
delivery at the time and place specified in this Agreement is a further
condition to the obligations of the Underwriters.
(g) Delivery of Prospectus to the Underwriters. Not later than 3 P.M.,
Boston time, on the second business day following the date the Shares are
released by the Underwriters for sale to the public, the Company shall deliver
or cause to be delivered copies of the Prospectus in such quantities and at such
places as the Representatives shall request.
SECTION 3. COVENANTS OF THE COMPANY AND THE SELLING STOCKHOLDERS.
A. COVENANTS OF THE COMPANY. The Company further covenants and agrees with
each Underwriter as follows:
(a) Registration Statement Matters. The Company will use its best
efforts to cause the Registration Statement to become effective or, if the
procedure in Rule 430A of the Securities Act is followed, will prepare and
timely file with the Commission pursuant to Rule 424(b) under the
Securities Act a prospectus in a form approved by the Representatives
containing information previously omitted at the time of effectiveness of
the Registration Statement in reliance on Rule 430A of the Securities Act.
The Company will not file any amendment to the Registration Statement or
any amendment or supplement to the Prospectus of which the Representatives
have not previously been advised and furnished with a copy, to which the
Representatives have reasonably objected in writing or which is not in
compliance with the Securities Act. If the Company elects to rely on Rule
462(b) under the Securities Act, the Company will file a Rule 462(b)
Registration Statement with the Commission in compliance with Rule 462(b)
under the Securities Act prior to the time confirmations are sent or
given, as specified by Rule 462(b)(2) under the Securities Act, and will
pay the applicable fees in accordance with Rule 111 under the Securities
Act.
(b) Securities Act Compliance. The Company will advise the
Representatives promptly when (i) the Registration Statement or any
post-effective amendment thereto becomes effective, (ii) the Company
receives any comments from the Commission, (iii) the Commission requests
any amendment of the Registration Statement, any amendment or supplement
to the Prospectus, or any additional
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information and (iv) the Commission institutes any stop order suspending
the effectiveness of the Registration Statement or the use of the
Prospectus or institutes proceedings for that purpose. The Company will
use its best efforts to prevent the Commission from issuing any such stop
order and, if such a stop order is issued, to cause the Commission to lift
such stop order as soon as possible.
(c) Blue Sky Compliance. The Company will cooperate with the
Representatives and Underwriters' Counsel in endeavoring to qualify the
Shares for sale under the securities laws of such jurisdictions (both
national and foreign) as the Representatives may reasonably have
designated in writing and will make such applications, file such documents
and furnish such information as may be reasonably required for that
purpose, provided the Company shall not be required to qualify as a
foreign corporation or to file a general consent to service of process in
any jurisdiction where it is not now so qualified or required to file such
a consent. The Company will, from time to time, prepare and file such
statements, reports and other documents as are or may be required to
continue such qualifications in effect for so long a period as the
Representatives may reasonably request for distribution of the Shares.
(d) Amendments and Supplements to the Prospectus and Other
Securities Act Matters. The Company will comply with the Securities Act,
the Exchange Act and the rules and regulations of the Commission under the
Exchange Act so as to permit the completion of the distribution of the
Shares as contemplated by this Agreement and the Prospectus. If during the
period in which a prospectus is required by law to be delivered by an
underwriter or dealer, any event shall occur as a result of which, in the
judgment of the Company or in the reasonable opinion of the
Representatives or Underwriters' Counsel, it becomes necessary to amend or
supplement the Prospectus in order to make the statements therein, in the
light of the circumstances existing at the time the Prospectus is
delivered to a purchaser, not misleading, or, if it is necessary at any
time to amend or supplement the Prospectus to comply with any law, the
Company promptly will prepare and file with the Commission, and furnish at
its own expense to the Underwriters and to dealers, an appropriate
amendment to the Registration Statement or supplement to the Prospectus so
that the Prospectus as so amended or supplemented will not, in the light
of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with the law.
(e) Copies of any Amendments and Supplements to the Prospectus. The
Company will furnish to the Representatives, without charge, during the
period beginning on the date hereof and ending on the later of the Second
Closing Date or such date as in the opinion of Underwriters' Counsel the
Prospectus is no longer required by law to be delivered in connection with
sales by an underwriter or dealer (the "Prospectus Delivery Period"), as
many copies of the Prospectus and any amendments and supplements thereto
as the Representatives may request.
(f) Insurance. The Company will (i) obtain directors' and officers'
liability insurance in the minimum amount of $10,000,000 that shall apply
to the offering contemplated hereby and (ii) cause BancBoston Robertson
Stephens Inc. to be added as an additional insured to such policy in
respect of the offering contemplated hereby.
(g) Notice of Subsequent Events. If at any time during the
ninety-day period after the Registration Statement becomes effective, any
rumor, publication or event relating to or affecting the Company shall
occur as a result of which in opinion of the Representatives the market
price of the Common Shares has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after
written notice from the Representatives advising the Company to the effect
set forth above, forthwith prepare, consult with the Representatives
concerning the substance of, and disseminate a press release or other
public statement, reasonably satisfactory to Representatives, responding
to or commenting on such rumor, publication or event.
(h) Use of Proceeds. The Company will apply the net proceeds from
the sale of the Shares sold by it in the manner described under the
caption "Use of Proceeds" in the Prospectus.
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(i) Transfer Agent. The Company will engage and maintain, at its
expense, a registrar and transfer agent for the Common Shares.
(j) Earnings Statement. As soon as practicable, the Company will
make generally available to its security holders and to the
Representatives an earnings statement (which need not be audited) covering
the twelve-month period ending December 31, 2000 that satisfies the
provisions of Section 11(a) of the Securities Act.
(k) Periodic Reporting Obligations. During the Prospectus Delivery
Period, the Company will file with the Commission, on a timely basis, all
reports and documents required to be filed under the Exchange Act.
(l) Agreement Not to Offer or Sell Additional Securities. The
Company will not, for a period of 90 days after the date of the
Prospectus, offer to sell, contract to sell, or otherwise sell, dispose
of, loan, pledge or grant any rights with respect to any Common Shares,
any options or warrants to purchase any Common Shares, or any securities
convertible into or exchangeable for Common Shares without the prior
written consent of BancBoston Robertson Stephens Inc., other than (i) the
sale of the Shares to be sold by the Company hereunder, and (ii) the
Company's issuance of options or Common Shares under the Company's stock
option plan, as presently authorized.
(m) Future Reports to the Representatives. During the five-year
period commencing on the date hereof, the Company will furnish to the
Representatives (i) as soon as practicable after the end of each fiscal
year, copies of its annual report containing the consolidated balance
sheet of the Company and its subsidiaries as of the close of such fiscal
year, consolidated statements of income, stockholders' equity and cash
flows for the year then ended, and the opinion thereon of the Company's
independent certified public accountants; (ii) as soon as practicable
after the filing thereof, copies of each proxy statement, Annual Report on
Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K or
other report filed by the Company with the Commission, the Nasdaq Stock
Market, Inc. or any securities exchange; and (iii) as soon as practicable
after mailing, copies of any report or communication of the Company mailed
generally to holders of its capital stock.
B. COVENANTS OF THE SELLING STOCKHOLDERS. Each Selling Stockholder further
covenants and agrees with each Underwriter as follows:
(a) Delivery of Form W-8 or W-9. Such Selling Stockholder will
deliver to the Representatives prior to the First Closing Date a properly
completed and executed United States Treasury Department Form W-8 (if such
Selling Stockholder is a non-United States person) or Form W-9 (if such
Selling Stockholder is a United States person).
(b) Notification of Untrue Statements, etc. If, at any time prior to
the date on which the distribution of the Shares as contemplated by this
Agreement and the Prospectus has been completed, as determined by the
Representatives, such Selling Stockholder has knowledge of the occurrence
of any event as a result of which the Prospectus or the Registration
Statement, in each case as then amended or supplemented, would include an
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, such Selling Stockholder will
promptly notify the Company and the Representatives.
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SECTION 4. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS.
The obligations of the several Underwriters to purchase and pay for the
Shares as provided herein on the First Closing Date and, with respect to the
Option Shares, the Second Closing Date shall be subject to the accuracy of the
respective representations and warranties on the part of the Company and the
Selling Stockholders set forth in Section 1 as of the date hereof and as of the
First Closing Date as though then made and, with respect to the Option Shares,
as of the Second Closing Date as though then made, to the timely performance by
the Company and the Selling Stockholders of their respective covenants and other
obligations hereunder, and to each of the following additional conditions:
(a) Compliance with Registration Requirements; No Stop Order; No
Objection from the NASD. The Registration Statement shall have become
effective prior to the execution of this Agreement, or at such later date
as shall be consented to in writing by the Representatives. No stop order
suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the
knowledge of the Company, any Selling Shareholder or any Underwriter,
threatened by the Commission. Any request of the Commission for additional
information (to be included in the Registration Statement or the
Prospectus or otherwise) shall have been complied with to the reasonable
satisfaction of Underwriters' Counsel. The NASD shall have raised no
objection to the fairness and reasonableness of the underwriting terms and
arrangements.
(b) Corporate Proceedings. All corporate proceedings and other legal
matters in connection with this Agreement, the form of the Registration
Statement and the Prospectus, and the registration, authorization, issue,
sale and delivery of the Shares shall have been reasonably satisfactory to
Underwriters' Counsel. Such counsel shall have been furnished with such
papers and information as they may reasonably have requested to enable
them to pass upon the matters referred to in this Section 4.
(c) No Material Adverse Change. Subsequent to the execution and
delivery of this Agreement and prior to the First Closing Date or the
Second Closing Date, as the case may be, there shall not have been any
Material Adverse Change from that set forth in the Registration Statement
or Prospectus that in the sole judgment of the Representatives, is
material and adverse and that makes it, in the sole judgment of the
Representatives, impracticable or inadvisable to proceed with the public
offering of the Shares as contemplated by the Prospectus.
(d) Opinion of Counsel for the Company. You shall have received on
the First Closing Date or the Second Closing Date, as the case may be, an
opinion of Hutchins, Wheeler & Dittmar, A Professional Corporation,
counsel for the Company, substantially in the form of EXHIBIT B attached
hereto, dated the First Closing Date or the Second Closing Date, as the
case may be, addressed to the Underwriters and with reproduced copies or
signed counterparts thereof for each of the Underwriters. Counsel
rendering the opinion contained in EXHIBIT B may rely as to questions of
law not involving the law of the United States or Massachusetts or the
General Corporation Law of the State of Delaware upon opinions of local
counsel, and as to questions of fact upon representations or certificates
of officers of the Company and of government officials, in which case
their opinion is to state that they are so relying and that they have no
knowledge of any material misstatement or inaccuracy in any such opinion,
representation or certificate. Copies of any opinion, representation or
certificate so relied upon shall be delivered to the Representatives and
to Underwriters' Counsel.
(e) Opinion of Counsel for the Underwriters. You shall have received
on the First Closing Date or the Second Closing Date, as the case may be,
an opinion of Underwriters' Counsel, substantially in the form of EXHIBIT
C hereto. The Company shall have furnished to such counsel such documents
as they may have reasonably requested for the purpose of enabling them to
pass upon such matters.
(f) Accountants' Comfort Letter. You shall have received on the
First Closing Date and on the Second Closing Date, as the case may be, a
letter from PricewaterhouseCoopers LLP addressed to the
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<PAGE> 16
Underwriters, dated the First Closing Date or the Second Closing Date, as
the case may be, confirming that they are independent certified public
accountants with respect to the Company and the Subsidiaries within the
meaning of the Securities Act and based upon the procedures described in
such letter delivered to you concurrently with the execution of this
Agreement (herein called the "Original Letter"), but carried out to a date
not more than four business days prior to the First Closing Date or the
Second Closing Date, as the case may be, (i) confirming, to the extent
true, that the statements and conclusions set forth in the Original Letter
are accurate as of the First Closing Date or the Second Closing Date, as
the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter that are
necessary to reflect any changes in the facts described in the Original
Letter since the date of such letter or to reflect the availability of
more recent financial statements, data or information. The letter shall
not disclose any change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and
the Subsidiaries considered as one enterprise from that set forth in the
Registration Statement or the Prospectus that, in the sole judgment of the
Representatives, is material and adverse and that makes it, in the sole
judgment of the Representatives, impracticable or inadvisable to proceed
with the public offering of the Shares as contemplated by the Prospectus.
The Original Letter from PricewaterhouseCoopers LLP (i) shall be addressed
to the Underwriters, (ii) shall be satisfactory in form and substance to
the Representatives, (iii) shall represent that they are independent
accountants with respect to the Company within the meaning of the
Securities Act, (iv) shall set forth their opinion with respect to their
examination of the consolidated balance sheets of the Company as of
December 31, 1997 and 1998 and related consolidated statements of
operations, shareholders' equity, and cash flows for the nine months ended
December 31, 1996 and the fiscal years ended December 31, 1997 and 1998
and (v) shall address other matters agreed upon by PricewaterhouseCoopers
LLP and the Representatives.
(g) Officers' Certificate. You shall have received on the First
Closing Date or the Second Closing Date, as the case may be, a certificate
of the Company, dated the First Closing Date or the Second Closing Date,
as the case may be, signed by the President and Chief Executive Officer
and the Vice President of Finance, Chief Financial Officer and Treasurer
of the Company, to the effect that, and you shall be satisfied that:
(i) the representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the
First Closing Date or the Second Closing Date, as the case
may be, and the Company has complied with all the
agreements and satisfied all the conditions on its part to
be performed or satisfied at or prior to the First Closing
Date or the Second Closing Date, as the case may be;
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings
for that purpose have been instituted or are pending or
threatened under the Securities Act;
(iii) when the Registration Statement became effective and at all
times subsequent thereto up to the time of delivery of such
certificate, (A) the Registration Statement and the
Prospectus, and any amendments or supplements thereto,
contained all material information required to be included
therein by the Securities Act and conformed in all material
respects to the requirements of the Securities Act and (B)
the Registration Statement and the Prospectus, and any
amendments or supplements thereto, did not and do not
include any untrue statement of a material fact or omit to
state a material fact required to be stated therein or
necessary to make the statements therein not misleading;
(iv) since the effective date of the Registration Statement,
there has occurred no event required to be set forth in an
amendment or supplement to the Prospectus that has not been
so set forth; and
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(v) subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus,
there has not been (A) any Material Adverse Change, (B) any
transaction that is material to the Company and the
Subsidiaries considered as one enterprise, except
transactions entered into in the ordinary course of
business, (C) any obligation, direct or contingent, that is
material to the Company and the Subsidiaries considered as
one enterprise, incurred by the Company or the
Subsidiaries, except obligations incurred in the ordinary
course of business, (D) any change in the capital stock or
outstanding indebtedness of the Company or any of the
Subsidiaries that is material to the Company and the
Subsidiaries considered as one enterprise, (E) any dividend
or distribution of any kind declared, paid or made on the
capital stock of the Company or any of the Subsidiaries, or
(F) any loss or damage (whether or not insured) to the
properties of the Company or any of the Subsidiaries that
has been sustained or will have been sustained that has or
will have a Material Adverse Effect.
(h) Opinion of Counsel for the Selling Stockholders. You shall have
received, with respect to each of the Selling Stockholders, on the First
Closing Date and the Second Closing Date, if applicable, an opinion of
counsel for such Selling Stockholder (which counsel shall be Hutchins,
Wheeler & Dittmar, A Professional Corporation, or another firm reasonably
acceptable to the Representatives and Underwriters' Counsel),
substantially in the form of EXHIBIT D hereto, dated as of such Closing
Date, addressed to the Underwriters and with reproduced copies or signed
counterparts thereof for each of the Underwriters. In rendering such
opinion, such counsel may rely as to questions of law not involving the
law of the United States or Massachusetts or the General Corporation Law
of the State of Delaware upon opinions of local counsel and as to
questions of fact, upon representations or certificates of such Selling
Stockholder, officers of such Selling Stockholder (when the Selling
Stockholder is not a natural person) and governmental officials, in which
case their opinion is to state that they are so relying and that they have
no knowledge of any material misstatement or inaccuracy of any material
misstatement or inaccuracy in any such opinion, representation or
certificate so relied upon shall be delivered to the Representatives and
Underwriters' Counsel.
(i) Selling Stockholders' Certificate. You shall have received on
the First Closing Date and the Second Closing Date, as the case may be, a
written certificate executed by the Attorneys-in-Fact, dated as of such
Closing Date, to the effect that:
(i) the representations, warranties and covenants of each of
the Selling Stockholders set forth in Section 1(B) are true
and correct with the same force and effect as though
expressly made by the Selling Stockholders on and as of
such Closing Date; and
(ii) each of the Selling Stockholders has complied with all the
agreements and satisfied all the conditions on its part to
be performed or satisfied at or prior to such Closing Date.
(j) Stock Listing. The Shares shall have been approved for inclusion
on the Nasdaq National Market, subject only to official notice of
issuance.
(k) Compliance with Prospectus Delivery Requirements. The Company
shall have complied with the provisions of Sections 2(g) and 3(e) with
respect to the furnishing of Prospectuses.
(l) Additional Documents. On or before the First Closing Date or the
Second Closing Date, as the case may be, the Representatives and
Underwriters' Counsel shall have received such information, documents and
opinions as they may reasonably require (i) for the purpose of enabling
them to pass upon the issuance and sale of the Shares as contemplated
herein or (ii) in order to evidence the accuracy of any of the
representations and warranties, or the satisfaction of any of the
conditions or agreements, of the Company or the Selling Stockholders
herein contained.
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If any condition specified in this Section 4 is not satisfied when and as
required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company and the Selling Stockholders at any
time on or prior to the First Closing Date and, with respect to the Option
Shares, at any time prior to the Second Closing Date, which termination shall be
without liability on the part of any party to any other party, except that
Sections 5, 6, 7 and 10 shall at all times be effective and shall survive such
termination.
SECTION 5. PAYMENT OF EXPENSES.
The Company agrees to pay all costs, fees and expenses incurred in
connection with the performance of the obligations of the Company and the
Selling Stockholders hereunder and in connection with the transactions
contemplated hereby, including (i) all expenses incident to the issuance and
delivery of the Shares (including all printing and engraving costs), (ii) all
fees and expenses of the registrar and transfer agent of the Common Shares,
(iii) all issue, transfer and other stamp taxes in connection with the issuance
and sale of the Shares to the Underwriters, (iv) all fees and expenses of the
Company's counsel, independent accountants and other advisors, (v) all costs and
expenses incurred in connection with the preparation, printing, filing, shipping
and distribution of the Registration Statement (including financial statements,
exhibits, consents and certificates of experts), each preliminary prospectus and
the Prospectus, and all amendments and supplements thereto, and this Agreement,
(vi) all filing fees, attorneys' fees and expenses incurred by the Company or
the Underwriters in connection with qualifying or registering (or obtaining
exemptions from the qualification or registration of) all or any part of the
Shares for offer and sale under the state securities or blue sky laws or the
provincial securities laws of Canada or any other country, and, if requested by
the Representatives, preparing and printing a "Blue Sky Memorandum," an
"International Blue Sky Memorandum" or any other memoranda, and any supplements
thereto, advising the Underwriters of such qualifications, registrations and
exemptions, (vii) the filing fees incident to, and the reasonable fees and
expenses of Underwriters' Counsel in connection with, the NASD review and
approval of the Underwriters' participation in the offering and distribution of
the Shares, (viii) the fees and expenses associated with listing the Common
Shares on the Nasdaq National Market, and (ix) all other fees, costs and
expenses referred to in Item 13 of Part II of the Registration Statement. Except
as provided in this Section 5 or in Section 6 or 7, the Underwriters shall pay
their own expenses, including the fees and disbursements of their counsel.
This Section 5 shall not affect or modify any separate, valid agreement
relating to the allocation of payment of expenses between the Company, on the
one hand, and the Selling Stockholders, on the other hand.
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES.
If this Agreement is terminated by the Representatives pursuant to Section
4, 9 or 15, or if the sale to the Underwriters of the Firm Shares on the First
Closing Date is not consummated because of any refusal, inability or failure on
the part of the Company or the Selling Stockholders to perform any agreement
herein or to comply with any provision hereof, the Company agrees to reimburse
the Representatives and the other Underwriters (or such Underwriters as have
terminated this Agreement with respect to themselves), severally upon demand for
all out-of-pocket expenses that shall have been reasonably incurred by the
Representatives and the other Underwriters in connection with the proposed
purchase and the offering and sale of the Shares, including fees and
disbursements of counsel, printing expenses, travel expenses, postage, facsimile
and telephone charges.
SECTION 7. INDEMNIFICATION AND CONTRIBUTION.
(a) Indemnification of the Underwriters. The Company and each of the
Selling Stockholders agree severally, but not jointly, to indemnify and hold
harmless each Underwriter, its officers and employees, and each person, if any,
who controls any Underwriter within the meaning of the Securities Act and the
Exchange Act against any loss, claim, damage, liability or expense, as incurred,
to which such Underwriter or such controlling person may become subject, under
the Securities Act, the Exchange Act or other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of any
litigation, if such
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settlement is effected with the written consent of the Company and the Selling
Stockholders, which consent shall not be unreasonably withheld), insofar as such
loss, claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based:
(i) upon any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement, or any
amendment thereto, including any information deemed to be a part
thereof pursuant to Rule 430A under the Securities Act, or the
omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements
therein not misleading;
(ii) upon any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto), or the
omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading;
(iii) in whole or in part upon any inaccuracy in the representations
and warranties of the Company or such Selling Stockholder
contained herein;
(iv) in whole or in part upon any failure of the Company or such
Selling Stockholder to perform its or his obligations hereunder
or under law; or
(v) any act or failure to act or any alleged act or failure to act by
any Underwriter in connection with, or relating in any manner to,
the Shares or the offering contemplated hereby, which is included
as part of or referred to in any loss, claim, damage, liability
or action arising out of or based upon any matter covered by
clause (i), (ii), (iii) or (iv) above, provided that the Company
and the Selling Stockholders shall not be liable under this
clause (v) to the extent that a court of competent jurisdiction
shall have determined by a final judgment that such loss, claim,
damage, liability or action resulted directly from any such acts
or failures to act undertaken or omitted to be taken by such
Underwriter through its bad faith or willful misconduct;
and to reimburse each Underwriter and each such controlling person for any and
all expenses (including the fees and disbursements of counsel chosen by
BancBoston Robertson Stephens Inc.) as such expenses are reasonably incurred by
such Underwriter or such controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action; provided, however, that the foregoing indemnity
agreement shall not apply to any loss, claim, damage, liability or expense to
the extent, but only to the extent, arising out of or based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with written information furnished to the
Company by the Representatives expressly for use in the Registration Statement,
any preliminary prospectus or the Prospectus (or any amendment or supplement
thereto); provided, further, that with respect to any preliminary prospectus,
the foregoing indemnity agreement shall not inure to the benefit of any
Underwriter from whom the person asserting any loss, claim, damage, liability or
expense purchased Shares, or any person controlling such Underwriter, if copies
of the Prospectus were timely delivered to the Underwriter pursuant to Section 2
and a copy of the Prospectus (as then amended or supplemented if the Company
shall have furnished any amendments or supplements thereto) was not sent or
given by or on behalf of such Underwriter to such person, if required by law so
to have been delivered, at or prior to the written confirmation of the sale of
the Shares to such person, and if the Prospectus (as so amended or supplemented)
would have cured the defect giving rise to such loss, claim, damage, liability
or expense; and provided, further, that the liability of each Selling
Stockholder under the foregoing indemnity agreement shall be limited to an
amount equal to the initial public offering price of the Shares sold by such
Selling Stockholder, less the underwriting discount, as set forth on the front
cover page of the Prospectus. The indemnity agreement
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set forth in this Section 7(a) shall be in addition to any liabilities that
the Company and the Selling Stockholders may otherwise have.
(b) Indemnification of the Company, Its Directors and Officers, and the
Selling Stockholders. Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, each of its directors, each of its
officers who signed the Registration Statement, the Selling Stockholders and
each person, if any, who controls the Company or any Selling Stockholder within
the meaning of the Securities Act or the Exchange Act, against any loss, claim,
damage, liability or expense, as incurred, to which the Company, or any such
director, officer, Selling Stockholder or controlling person may become subject
under the Securities Act, the Exchange Act, or other federal or state statutory
law or regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of such
Underwriter), insofar as such loss, claim, damage, liability or expense (or
actions in respect thereof as contemplated below) arises out of or is based upon
any untrue or alleged untrue statement of a material fact contained in the
Registration Statement, any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto), or arises out of or is based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in the Registration
Statement, any preliminary prospectus, the Prospectus (or any amendment or
supplement thereto), in reliance upon and in conformity with written information
furnished to the Company and the Selling Stockholders by the Representatives
expressly for use therein; and to reimburse the Company, or any such director,
officer, Selling Stockholder or controlling person for any legal and other
expense reasonably incurred by the Company, or any such director, officer,
Selling Stockholder or controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action. The indemnity agreement set forth in this Section
7(b) shall be in addition to any liabilities that the Underwriters may otherwise
have.
(c) Information Provided by the Underwriters. The Company and each of the
Selling Stockholders hereby acknowledge that the only information that the
Underwriters have furnished to the Company and the Selling Stockholders
expressly for use in the Registration Statement, any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto) are the information set
forth in the table in the first paragraph and the statements in the second
paragraph under the caption "Underwriting" in the Prospectus and the statements
in the paragraphs entitled "Stabilization," "Passive Market Making" and "New
Underwriters" under the caption "Underwriting" in the Prospectus. The
Underwriters confirm that such statements are correct.
(d) Notifications and Other Indemnification Procedures. Promptly after
receipt by an indemnified party under this Section 7 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 7, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability that
it may have to any indemnified party for contribution or otherwise than under
the indemnity agreement contained in this Section 7 or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that a conflict may arise between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties that are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of such indemnifying
party's election so to assume the defense
20
<PAGE> 21
of such action and approval by the indemnified party of counsel, the
indemnifying party will not be liable to such indemnified party under this
Section 7 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with local counsel), approved by the indemnifying
party (BancBoston Robertson Stephens Inc. in the case of Sections 7(b) and 8),
representing the indemnified parties who are parties to such action), (ii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of commencement of the action, or (iii) the indemnifying party has
authorized the employment of counsel for the indemnified party at the expense of
the indemnifying party, in each of which cases the fees and expenses of counsel
shall be at the expense of the indemnifying party.
(e) Settlements. The indemnifying party under this Section 7 shall not be
liable for any settlement of any proceeding effected without its written
consent, which consent shall not be unreasonably withheld, but if settled with
such consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party against any loss, claim, damage,
liability or expense by reason of such settlement or judgment. Notwithstanding
the foregoing sentence, if at any time an indemnified party shall have requested
an indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as contemplated by Section 7(d), the indemnifying party agrees that
it shall be liable for any settlement of any proceeding effected without its
written consent if (i) such settlement is entered into more than 30 days after
receipt by such indemnifying party of the aforesaid request and (ii) such
indemnifying party shall not have reimbursed the indemnified party in accordance
with such request prior to the date of such settlement. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement, compromise or consent to the entry of judgment in any pending or
threatened action, suit or proceeding in respect of which any indemnified party
is or could have been a party and indemnity was or could have been sought
hereunder by such indemnified party, unless such settlement, compromise or
consent includes (i) an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such action, suit or
proceeding and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act by or on behalf of any indemnified party.
(f) Contribution. If the indemnification provided for in this Section 7 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 7(a) or (b) in respect of any losses, claims, damages or liabilities (or
actions or proceedings in respect thereof), then each indemnifying party shall
contribute to the aggregate amount paid or payable by such indemnified party in
such proportion as is appropriate to reflect the relative benefits received by
the Company and the Selling Stockholders on the one hand and the Underwriters on
the other from the offering of the Shares. If, however, the allocation provided
by the immediately preceding sentence is not permitted by applicable law then
each indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company and the Selling
Stockholders on the one hand and the Underwriters on the other in connection
with the statements or omissions that resulted in such losses, claims, damages
or liabilities, (or actions or proceedings in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Company and the Selling Stockholders on the one hand and the Underwriter on the
other shall be deemed to be in the same proportion as the total net proceeds
from the offering (before deducting expenses) received by the Company and the
Selling Stockholders bear to the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company and the Selling Stockholders on
the one hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company, the Selling Stockholders and the Underwriters agree
that it would not be just and equitable if contributions pursuant to this
Section 7(f) were determined by pro rata allocation (even if the
21
<PAGE> 22
Underwriters were treated as one entity for such purpose) or by any other
method of allocation that does not take account of the equitable considerations
referred to above in this Section 7(f). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) referred to above in this Section
7(f) shall be deemed to include any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this subsection (f), (i) no
Underwriter shall be required to contribute any amount in excess of the
underwriting discounts and commissions applicable to the Shares purchased by
such Underwriter and (ii) no person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this Section 7(f) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(g) Timing of Any Payments of Indemnification. Any losses, claims,
damages, liabilities or expenses for which an indemnified party is entitled to
indemnification or contribution under this Section 7 shall be paid by the
indemnifying party to the indemnified party as such losses, claims, damages,
liabilities or expenses are incurred, but in all cases, no later than thirty
days of invoice to the indemnifying party.
(h) Survival. The indemnity and contribution agreements contained in this
Section 7 and the representation and warranties of the Company set forth in this
Agreement shall remain operative and in full force and effect, regardless of (i)
any investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Company, its directors or officers or any
persons controlling the Company, (ii) acceptance of any Shares and payment
therefor hereunder, and (iii) any termination of this Agreement. A successor to
any Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 7.
(i) Acknowledgments of Parties. The parties to this Agreement hereby
acknowledge that they are sophisticated business persons who were represented by
counsel during the negotiations regarding the provisions hereof, including the
provisions of this Section 7, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 7 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and the Prospectus as required by the Securities Act.
SECTION 8. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS.
If, on the First Closing Date or the Second Closing Date, as the case may
be, any one or more of the several Underwriters shall fail or refuse to purchase
Shares that it or they have agreed to purchase hereunder on such date, and the
aggregate number of Common Shares that such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase does not exceed 10% of the
aggregate number of the Shares to be purchased on such date, the other
Underwriters shall be obligated, severally, in the proportions that the number
of Firm Common Shares set forth opposite their respective names on SCHEDULE A
bears to the aggregate number of Firm Shares set forth opposite the names of all
such non-defaulting Underwriters, or in such other proportions as may be
specified by the Representatives with the consent of the non-defaulting
Underwriters, to purchase the Shares that such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the Underwriters shall fail or refuse to purchase Shares and the
aggregate number of Shares with respect to which such default occurs exceeds 10%
of the aggregate number of Shares to be purchased on such date, and arrangements
satisfactory to the Representatives and the Company for the purchase of such
Shares are not made within 48 hours after such default, this Agreement shall
terminate without liability of any party to any other party except that the
provisions of Sections 4 and 7 shall at all times be effective and shall survive
such termination. In any such case either the Representatives or the Company
shall have the right to postpone the First Closing Date or the Second Closing
Date, as the case may be, but in no event for longer than seven days in order
that the required changes, if any, to the Registration Statement and the
Prospectus or any other documents or arrangements may be effected.
22
<PAGE> 23
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
8. Any action taken under this Section 8 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
SECTION 9. TERMINATION OF THIS AGREEMENT.
Prior to the First Closing Date, this Agreement may be terminated by the
Representatives by notice given to the Company and the Selling Stockholders if
at any time (a) trading or quotation in any of the Company's securities shall
have been suspended or limited by the Commission or by the Nasdaq Stock Market,
or trading in securities generally on either the Nasdaq Stock Market or the New
York Stock Exchange shall have been suspended or limited, or minimum or maximum
prices shall have been generally established on any of such stock exchanges by
the Commission or the NASD; (b) a general banking moratorium shall have been
declared by any of federal, New York, Delaware or California authorities; (c)
there shall have occurred any outbreak or escalation of national or
international hostilities or any crisis or calamity, or any change in the United
States or international financial markets, or any substantial change or
development involving a prospective change in United States' or international
political, financial or economic conditions, as in the judgment of the
Representatives is material and adverse and makes it impracticable or
inadvisable to market the Common Shares in the manner and on the terms described
in the Prospectus or to enforce contracts for the sale of securities; (d) in the
judgment of the Representatives there shall have occurred any Material Adverse
Change; or (e) the Company shall have sustained a loss by strike, fire, flood,
earthquake, accident or other calamity of such character as in the judgment of
the Representatives may interfere materially with the conduct of the business
and operations of the Company regardless of whether or not such loss shall have
been insured. Any termination pursuant to this Section 9 shall be without
liability on the part of (i) the Company or the Selling Stockholders to any
Underwriter, except that the Company and the Selling Stockholders shall be
obligated to reimburse the expenses of the Representatives and the Underwriters
pursuant to Sections 5 and 6, (ii) any Underwriter to the Company or the Selling
Stockholders, or (iii) any party hereto to any other party except that the
provisions of Section 7 shall at all times be effective and shall survive such
termination.
SECTION 10. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY.
The respective indemnities, agreements, representations, warranties and
other statements of the Company, of its officers, of the Selling Stockholders
and of the several Underwriters set forth in or made pursuant to this Agreement
will remain in full force and effect, regardless of any investigation made by or
on behalf of any Underwriter or the Company or any of its or their partners,
officers or directors or any controlling person, or the Selling Stockholders, as
the case may be, and will survive delivery of and payment for the Shares sold
hereunder and any termination of this Agreement.
SECTION 11. NOTICES.
All communications hereunder shall be in writing and shall be mailed, hand
delivered or telecopied and confirmed to the parties hereto as follows:
If to the Representatives: BANCBOSTON ROBERTSON STEPHENS INC.
555 California Street
San Francisco, California 94104
Facsimile: (415) 676-2696
Attention: General Counsel
If to the Company: NETEGRITY, INC.
245 Winter Street
Waltham, Massachusetts 02154
Facsimile: (781) 487-7791
Attention: President and Chief Executive Officer
23
<PAGE> 24
If to the Selling Stockholders: BARRY N. BYCOFF AND JAMES E. HAYDEN
As Attorneys-in-Fact
c/o Netegrity, Inc.
245 Winter Street
Waltham, Massachusetts 02154
Facsimile: (781) 487-7791
Any party hereto may change its address for receipt of communications by giving
written notice to the others.
SECTION 12. SUCCESSORS.
This Agreement will inure to the benefit of and be binding upon the
parties hereto, including any substitute Underwriters pursuant to Section 9, and
to the benefit of the employees, officers and directors and controlling persons
referred to in Section 7, and to their respective successors, and no other
person will have any right or obligation hereunder. The term "successors" shall
not include any purchaser of the Shares as such from any of the Underwriters
merely by reason of such purchase.
SECTION 13. PARTIAL UNENFORCEABILITY.
The invalidity or unenforceability of any Section, paragraph or provision
of this Agreement shall not affect the validity or enforceability of any other
Section, paragraph or provision hereof. If any Section, paragraph or provision
of this Agreement is for any reason determined to be invalid or unenforceable,
there shall be deemed to be made such minor changes (and only such minor
changes) as are necessary to make it valid and enforceable.
SECTION 14. GOVERNING LAW PROVISIONS.
(a) Governing Law. This agreement shall be governed by and construed in
accordance with the internal laws of the State of New York applicable to
agreements made and to be performed in such state.
(b) Consent to Jurisdiction. Any legal suit, action or proceeding arising
out of or based upon this Agreement or the transactions contemplated hereby
("Related Proceedings") may be instituted in the federal courts of the United
States of America located in the City and County of San Francisco or the courts
of the State of California in each case located in the City and County of San
Francisco (collectively, the "Specified Courts"), and each party irrevocably
submits to the exclusive jurisdiction (except for proceedings instituted in
regard to the enforcement of a judgment of any such court (a "Related
Judgment"), as to which such jurisdiction is non-exclusive) of such courts in
any such suit, action or proceeding. Service of any process, summons, notice or
document by mail to such party's address set forth above shall be effective
service of process for any suit, action or other proceeding brought in any such
court. The parties irrevocably and unconditionally waive any objection to the
laying of venue of any suit, action or other proceeding in the Specified Courts
and irrevocably and unconditionally waive and agree not to plead or claim in any
such court that any such suit, action or other proceeding brought in any such
court has been brought in an inconvenient forum. Each party not located in the
United States irrevocably appoints CT Corporation System, which currently
maintains a San Francisco office at 49 Stevenson Street, San Francisco,
California 94105, United States of America, as its agent to receive service of
process or other legal summons for purposes of any such suit, action or
proceeding that may be instituted in any state or federal court in the City and
County of San Francisco.
SECTION 15. FAILURE OF ONE OR MORE SELLING STOCKHOLDERS TO SELL AND DELIVER
SHARES.
If one or more of the Selling Stockholders shall fail to sell and deliver
to the Underwriters the Shares to be sold and delivered by such Selling
Stockholders at the First Closing Date pursuant to this Agreement, then the
Underwriters may at their option, by written notice from the Representatives to
the Company and the Selling Stockholders, either (i) terminate this Agreement
without any liability on the part of any Underwriter
24
<PAGE> 25
or, except as provided in Sections 5, 6, and 7 hereof, the Company or the
Selling Stockholders, or (ii) purchase the shares that the Company and other
Selling Stockholders have agreed to sell and deliver in accordance with the
terms hereof. If one or more of the Selling Stockholders shall fail to sell and
deliver to the Underwriters the Shares to be sold and delivered by such Selling
Stockholders pursuant to this Agreement at the First Closing Date or the Second
Closing Date, then the Underwriters shall have the right, by written notice from
the Representative to the Company and the Selling Stockholders, to postpone the
First Closing Date or the Second Closing Date, as the case may be, but in no
event for longer than seven days in order that the required changes, if any, to
the Registration Statement and the Prospectus or any other documents or
arrangements may be effected.
SECTION 16. GENERAL PROVISIONS.
This Agreement constitutes the entire agreement between the Company and
the Selling Stockholders on the one hand and the Underwriters on the other hand
to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof. This Agreement may be executed in two or more
counterparts, each one of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument. This Agreement
may not be amended or modified unless in writing by all of the parties hereto,
and no condition herein (express or implied) may be waived unless waived in
writing by each party whom the condition is meant to benefit. All references to
Sections, Schedules and Exhibits shall be deemed references to such parts of
this Agreement, except as otherwise provided. The Table of Contents and the
Section headings herein are for the convenience of the parties only and shall
not affect the construction or interpretation of this Agreement. The word
"including" as used herein shall not be construed so as to exclude any other
thing not referred to or described.
* * *
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company and the Attorneys-in-Fact the
enclosed copies hereof, whereupon this instrument, along with all counterparts
hereof, shall become a binding agreement in accordance with its terms.
Very truly yours,
NETEGRITY, INC.
By ________________________________________
President and Chief Executive Officer
SELLING STOCKHOLDERS
By _________________________________________
As Attorney-in-Fact for the Selling
Stockholders named in SCHEDULE B hereto
The foregoing Underwriting Agreement is
hereby confirmed and accepted by the
Representatives as of the date first above written:
BANCBOSTON ROBERTSON STEPHENS INC.
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
THOMAS WEISEL PARTNERS LLC
25
<PAGE> 26
On their behalf and on behalf of each of the
several Underwriters named in SCHEDULE A hereto
By BancBoston Robertson Stephens Inc.
By ______________________________
Authorized Signatory
26
<PAGE> 27
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
TO BE
UNDERWRITERS PURCHASED
- -------------- -------------
<S> <C>
BancBoston Robertson Stephens Inc. ...................................................................
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated.......................................
Thomas Weisel Partners LLC ...........................................................................
-------------
Total ........................................................................................... 3,000,000
=============
</TABLE>
<PAGE> 28
SCHEDULE B
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
FIRM SHARES OPTION SHARES
SELLING STOCKHOLDER TO BE SOLD TO BE SOLD
- ---------------------- -------------- ---------------
<S> <C> <C>
Pequot Private Equity Fund L.P./Pequot Offshore Private
Equity Fund Inc........................................................... 410,000
Barry N. Bycoff................................................................. 70,000
Stephen L. Watson............................................................... 40,000
Michael L. Mark................................................................. 10,000
James Rosen..................................................................... 5,000
James E. Hayden................................................................. 5,000
Deepak Taneja................................................................... 5,000
Thomas M. Palka................................................................. 5,000
-------------------------------
Total...................................................................... 550,000 400,000
===============================
</TABLE>
<PAGE> 29
EXHIBIT A
LOCK-UP AGREEMENT
BANCBOSTON ROBERTSON STEPHENS INC.
As Lead Representative of the several Underwriters
555 California Street, Suite 2600
San Francisco, California 94104
Ladies and Gentlemen:
The undersigned understands that you, as lead representative of the
several underwriters (the "Underwriters"), propose to enter into an Underwriting
Agreement (the "Underwriting Agreement") with Netegrity, Inc. (the "Company")
and certain selling stockholders providing for the public offering (the "Public
Offering") by the Underwriters, including yourselves, of the Company's common
stock, $.01 par value (the "Common Stock"), pursuant to a registration statement
on Form S-3 to be filed with the Securities and Exchange Commission. This letter
agreement shall terminate and be of no further force and effect upon a decision
by BancBoston Robertson Stephens Inc. or the Company not to proceed with the
Public Offering.
In consideration of the Underwriters' agreement to purchase and make the
Public Offering of the Common Stock, and for other good and valuable
consideration, the receipt of which is hereby acknowledged, the undersigned
hereby agrees that the undersigned will not, for a period commencing on the date
hereof and continuing thereafter until 90 days after the date of the final
prospectus for the Public Offering (the "Lock-Up Period"), offer to sell,
contract to sell, or otherwise sell, dispose of, loan, pledge or grant any
rights with respect to (each a "Disposition") any shares of Common Stock, any
options or warrants to purchase any shares of Common Stock, or any securities
convertible into or exchangeable for shares of Common Stock (collectively,
"Securities") now owned or hereafter acquired directly by the undersigned or
with respect to which the undersigned has or hereafter acquires the power of
disposition, otherwise than (a) as a distribution to limited partners, members
or shareholders of the undersigned, (b) by gift, will or intestacy, (c) in the
event the undersigned is an individual, to his or her immediate family or to a
trust the beneficiaries of which are exclusively the undersigned, his or her
parent or parents and/or a member or members of his or her immediate family, (d)
to the undersigned's affiliates, as such term is defined in Rule 405 under the
Securities Act of 1933, provided that the transferees, donees or distributees
thereof under clauses (a), (b), (c) and (d) (as the case may be) agree in
writing to be bound by the terms of this Lock-Up Agreement, or (e) with the
prior written consent of BancBoston Robertson Stephens Inc. The foregoing
restriction is expressly agreed to preclude the holder of the Securities from
engaging in any hedging or other transaction that is designed to or reasonably
expected to lead to or result in a Disposition of Securities during the Lock-Up
Period, even if such Securities would be disposed of by someone other than the
undersigned. Such prohibited hedging or other transactions include, without
limitation, any short sale (whether or not against the box) or any purchase,
sale or grant of any right (including, without limitation, any put or call
option) with respect to any Securities or with respect to any security (other
than a broad-based market basket or index) that includes, relates to or derives
any significant part of its value from the Securities. Notwithstanding the
foregoing, this Lock-Up Agreement does not prohibit the sale of shares of Common
Stock by the undersigned to the Underwriters in the Public Offering. The
undersigned hereby agrees and consents to the entry of stop transfer
instructions with the Company's transfer agent against the transfer of the
Securities held by the undersigned except in compliance with this Lock-Up
Agreement.
Date:________________, 1999 Very truly yours,
____________________________________
A-1
<PAGE> 30
Name (please print or type)
______________________________________
Signature
A-2
<PAGE> 31
EXHIBIT B
MATTERS TO BE COVERED IN THE OPINION OF COUNSEL FOR THE COMPANY
(i) The Company is validly existing as a corporation in good standing
under the General Corporation Law of the State of Delaware.
(ii) The Company has the corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus.
(iii) The Company is duly qualified to do business as a foreign
corporation and is in good corporate standing in [list states]. To such
counsel's knowledge, the Company does not own or control, directly or
indirectly, any corporation, association or other entity other than the
Subsidiaries.
(iv) The authorized, issued and outstanding capital stock of the Company
is as set forth in the Prospectus under the caption "Capitalization" as of the
dates stated therein, the issued and outstanding shares of capital stock of the
Company (including the Selling Stockholder Shares) have been duly and validly
issued and are fully paid and nonassessable, and, to such counsel's knowledge,
will not have been issued in violation of or subject to any preemptive right,
co-sale right, registration right, right of first refusal or other similar
right.
(v) The Firm Shares or the Option Shares, as the case may be, to be issued
by the Company pursuant to the terms of this Agreement have been duly authorized
and, upon issuance and delivery against payment therefor in accordance with the
terms hereof, will be duly and validly issued and fully paid and nonassessable,
and to such counsel's knowledge will not have been issued in violation of or
subject to any preemptive right, co-sale right, registration right, right of
first refusal or other similar right.
(vi) The Company has the corporate power and authority to enter into this
Agreement and to issue, sell and deliver to the Underwriters the Shares to be
issued and sold by it hereunder.
(vii) This Agreement has been duly authorized by all necessary corporate
action on the part of the Company and has been duly executed and delivered by
the Company.
(viii) To such counsel's knowledge, the Registration Statement has become
effective under the Act, no stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for that purpose have
been instituted or are pending or threatened under the Securities Act.
(ix) The Firm Shares or the Option Shares have been validly registered
under the Securities Act and the Rules and Regulations of the Exchange Act and
the applicable rules and regulations of the Commission thereunder.
(x) The Registration Statement and the Prospectus, and each amendment or
supplement thereto (other than the financial statements (including supporting
schedules) and financial data derived therefrom as to which such counsel need
express no opinion), as of the effective date of the Registration Statement,
complied as to form in all material respects with the requirements of the Act
and the applicable Rules and Regulations; and each of the Incorporated
Documents, as amended (other than the financial statements (including supporting
schedules) and the financial data derived therefrom as to which such counsel
need express no opinion) complied when originally filed or when finally amended
pursuant to the Exchange Act as to form in all material respects with the
requirements of the Act and the Rules and Regulations of the Exchange Act and
the applicable rules and regulations of the Commission thereunder.
(xi) The information in the Prospectus under the caption "Description of
Capital Stock," to the extent that it constitutes matters of law or legal
conclusions, has been reviewed by such counsel and is a fair summary of such
matters and conclusions; and the forms of certificates evidencing the Common
Stock and filed as exhibits to the Registration Statement comply with Delaware
law.
B-1
<PAGE> 32
(xii) The description in the Registration Statement and the Prospectus of
the charter and bylaws of the Company and of statutes are accurate and fairly
present the information required to be presented by the Securities Act.
(xiii) To such counsel's knowledge, there are no agreements, contracts,
leases or documents to which the Company is a party of a character required to
be described or referred to in the Registration Statement or Prospectus or any
Incorporated Document or to be filed as an exhibit to the Registration Statement
or any Incorporated Document which are not described or referred to therein or
filed as required.
(xiv) The performance of this Agreement and the consummation of the
transactions herein contemplated (other than performance of the Company's
indemnification obligations hereunder, concerning which no opinion need be
expressed) will not (a) result in any violation of the Company's charter or
bylaws or (b) to such counsel's knowledge, result in a material breach or
violation of any of the terms and provisions of, or constitute a default under,
any bond, debenture, note or other evidence of indebtedness, or any lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument known to such counsel to which the Company is a
party or by which its properties are bound, or any applicable statute, rule or
regulation known to such counsel or, to such counsel's knowledge, any order,
writ or decree of any court, government or governmental agency or body having
jurisdiction over the Company or any of its properties or operations.
(xv) No consent, approval, authorization or order of or qualification with
any court, government or governmental agency or body having jurisdiction over
the Company or any of its properties or operations is necessary in connection
with the consummation by the Company of the transactions herein contemplated,
except (i) such as have been obtained under the Securities Act, (ii) such as may
be required under state or other securities or Blue Sky laws in connection with
the purchase and the distribution of the Shares by the Underwriters, (iii) such
as may be required by the National Association of Securities Dealers, LLC and
(iv) such as may be required under the federal or provincial laws of Canada or
the law of any other foreign jurisdiction.
(xvi) To such counsel's knowledge, there are no legal or governmental
proceedings pending or threatened against the Company or any of the Subsidiaries
of a character required to be disclosed in the Registration Statement or the
Prospectus or any Incorporated Document by the Securities Act or by the Exchange
Act or the applicable rules and regulations of the Commission thereunder, other
than those described therein.
(xvii) To such counsel's knowledge, the Company is not presently (a) in
material violation of its respective charter or bylaws or (b) in material
breach, to such counsel's knowledge, of any order, writ or decree of any court
or governmental agency or body having jurisdiction over the Company or any of
its properties or operations.
(xviii) To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus and any Incorporated Document, no holders
of Company Shares or other securities of the Company have registration rights
with respect to securities of the Company and, except as set forth in the
Registration Statement and Prospectus, all holders of securities of the Company
having rights known to such counsel to registration of such shares of Company
Shares or other securities, because of the filing of the Registration Statement
by the Company have, with respect to the offering contemplated thereby, waived
such rights or such rights have expired by reason of lapse of time following
notification of the Company's intent to file the Registration Statement or have
included securities in the Registration Statement pursuant to the exercise of
and in full satisfaction of such rights.
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(xix) The Company is not and, after giving effect to the offering and the
sale of the Shares and the application of the proceeds thereof as described in
the Prospectus, will not be, an "investment company" as such term is defined in
the Investment Company Act of 1940, as amended.
(xx) Each document filed pursuant to the Exchange Act (other than the
financial statements and supporting schedules included therein, as to which no
opinion need be rendered) and incorporated or deemed to be incorporated by
reference in the Prospectus complied when originally filed or when finally
amended as to form in all material respects with the Exchange Act.
In addition, such counsel shall state that such counsel has participated
in conferences with officials and other representatives of the Company, the
Representatives, Underwriters' Counsel and the independent certified public
accountants of the Company, at which conferences the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although they have not verified the accuracy or completeness of the statements
contained in the Registration Statement or the Prospectus, nothing has come to
the attention of such counsel which leads them to believe that, at the time the
Registration Statement became effective and at all times subsequent thereto up
to and on the First Closing Date or Second Closing Date, as the case may be, the
Registration Statement and any amendment or supplement thereto and any
Incorporated Document, when such documents became effective or when originally
filed or as finally amended with the Commission (other than the financial
statements including supporting schedules and other financial and statistical
information derived therefrom, as to which such counsel need express no comment)
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, or at the First Closing Date or the Second Closing Date, as the
case may be, the Registration Statement, the Prospectus and any amendment or
supplement thereto and any Incorporated Document (except as aforesaid) contained
any untrue statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading. Such counsel shall also state that
the conditions for the use of Form S-3 set forth in the General Instructions
thereto have been satisfied.
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EXHIBIT C
MATTERS TO BE COVERED IN THE OPINION OF UNDERWRITERS' COUNSEL
(i) The Company is validly existing as a corporation in good standing
under the General Corporation Law of the State of Delaware.
(ii) The execution and delivery of the Underwriting Agreement have been
duly authorized by all necessary corporate action of the Company, and the
Underwriting Agreement has been duly executed and delivered by the Company.
(iii) The Shares to be issued by the Company have been duly authorized by
all necessary corporate action of the Company. When those Shares are issued and
delivered in accordance with the terms of the Underwriting Agreement, they will
be validly issued, fully paid and non-assessable.
(iv) To such counsel's knowledge, the Registration Statement has become
effective under the Securities Act, no order suspending the effectiveness of the
Registration Statement has been issued by the Commission and no proceeding for
that purpose has been instituted or threatened by the Commission.
Such counsel shall state that such counsel has reviewed the opinions
addressed to the Representatives from Hutchins, Wheeler & Dittmar, A
Professional Corporation and any other firm serving as counsel to the Selling
Stockholders, each dated the date hereof, and furnished to you in accordance
with the provisions of the Underwriting Agreement. Such opinions appear on their
face to be appropriately responsive to the requirements of the Underwriting
Agreement.
In addition, such counsel shall state that such counsel has participated
in conferences with officials and other representatives of the Company, the
Company's counsel, the Representatives and the independent certified public
accountants of the Company, at which such conferences the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although they have not verified the accuracy or completeness of the statements
contained in the Registration Statement or the Prospectus:
(a) The Registration Statement (except the financial statements
and other financial and statistical data included therein, as to which
such counsel need express no view), at the time it became effective, and
the Prospectus (except as aforesaid), as of its date, appeared on their
face to be appropriately responsive in all material respects to the
requirements of the Securities Act.
(b) No information has come to the attention of such counsel that
causes such counsel to believe that the Registration Statement (except the
financial statements and other financial and statistical data included
therein, as to which such counsel need express no view), at the time it
became effective, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading.
(c) No information has come to the attention of such counsel that
causes such counsel to believe that the Prospectus (except the financial
statements and other financial and statistical data included therein, as
to which such counsel need express no view), as of its date or the date of
such opinion, contained or contains an untrue statement of a material fact
or omitted or omits to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading.
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EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-3 of
our report dated February 8, 1999, on our audits of the consolidated financial
statements of Netegrity, Inc. as of December 31, 1998 and December 31, 1997 and
for each of the three years in the period ended December 31, 1998 and 1997, and
the nine months ended December 31, 1996, which appear in such Registration
Statement. We also consent to the reference to us under the headings "Experts"
and "Selected Financial Data" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
November 2, 1999
Boston, Massachusetts
