SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
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XX Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, For the quarterly period
ended June 30, 1999, or
Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, For the transition
period from -------- to --------
Commission File Number 1-10139
---------------------_
NETEGRITY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2911320
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
245 Winter Street
Waltham, MA 02154-8799
(Address of principal executive offices) (Zip Code)
(781)890-1700
(Registrant's Telephone Number)
Securities registered pursuant to Section 12(g) of the Act: NONE
----------------
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such other shorter period that the Registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days XX Yes No
As of August 11, 1999 there were 10,420,288 shares of Common
Stock outstanding.
FORM 10-Q
QUARTERLY REPORT
----------------
TABLE OF CONTENTS
Facing Sheet.................................................1
Table of Contents............................................2
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets..........................3
Consolidated Statements of Operations................5
Consolidated Statements of Cash Flows................7
Notes to Consolidated Financial Statements...........9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................11
Item 3. Quantitative and Qualitative Disclosures about
Market Risk.........................................21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................22
Item 2. Changes in Securities and use of proceeds...........22
Item 3. Defaults Upon Senior Securities.....................22
Item 4. Submission of Matters to a Vote of Security Holders.22
Item 5. Other Information...................................23
Item 6. Exhibits and Reports on Form 8-K....................24
SIGNATURES..................................................25
Exhibit 11 - Computation of earnings per share..............26
PART I. - FINANCIAL INFORMATION
NETEGRITY, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
1999 December 31,
(unaudited) 1998
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $3,075,406 $1,174,625
Accounts receivable-trade, net of
allowance for doubtful accounts
of $238,563 and $247,063 June 30,
1999 and December 31, 1998,
respectively 2,290,784 1,746,645
Deferred maintenance asset 328,993 308,926
Prepaid expenses 63,560 6,889
Other current assets 9,235 39,122
--------- --------
TOTAL CURRENT ASSETS 5,767,978 3,276,207
EQUIPMENT AND LEASEHOLD
IMPROVEMENTS, NET 869,012 736,341
CAPITALIZED SOFTWARE COSTS --- 175,629
Other Assets 52,379 37,114
--------- ---------
TOTAL ASSETS $6,689,369 $4,225,291
========= =========
The accompanying notes are an integral part of the financial
statements.
NETEGRITY, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30,
1999 December 31,
(unaudited) 1998
----------- -----------
CURRENT LIABILITIES:
Accounts payable-trade $ 993,444 $ 897,734
Deferred maintenance liability 1,168,406 938,004
Deferred revenue 173,540 285,857
Accrued employer expenses 151,739 121,097
Other accrued expenses 680,222 645,801
Accrued compensation 485,145 341,015
---------- ----------
TOTAL CURRENT LIABILITIES 3,652,496 3,229,508
COMMITMENTS AND CONTINGENCIES --- ---
---------- ----------
TOTAL LIABILITIES 3,652,496 3,229,508
STOCKHOLDERS' EQUITY:
Series D Preferred Stock, $.01
par value 3,333,333 shares
authorized and outstanding
as of June 30, 1999 33,333 33,333
Common stock, voting, $.01
par value, authorized 25,000,000
shares: 10,341,484 shares issued
and 10,316,383 shares outstanding
at June 30, 1999; 9,425,446
shares issued and 9,400,345
shares outstanding at
December 31, 1998 103,852 94,254
Additional paid-in capital 20,600,887 15,780,049
Cumulative deficit (17,417,542) (14,628,196)
Loan to officer (200,000) (200,000)
---------- ----------
3,120,530 1,079,440
Less - Treasury Stock, at cost:
25,101 shares (83,657) (83,657)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 3,036,873 995,783
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 6,689,369 $ 4,225,291
========== ==========
The accompanying notes are an integral part of the financial
statements.
<PAGE>
NETEGRITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended
June 30,
1999 1998
--------------------------
Net revenues $ 2,638,495 $1,054,434
Cost of revenues 777,984 443,752
---------- ---------
Gross profit 1,860,511 610,682
Selling, general and
administrative expenses 2,486,525 1,534,649
Research and development costs 775,021 451,997
---------- ---------
Loss from operations (1,401,035) (1,375,964)
Interest income 47,437 36,686
--------- ---------
Net loss $(1,353,598) $(1,339,278)
========= =========
Basic & diluted loss per share $(0.13) $(0.14)
Weighted average shares
outstanding (basic & diluted) 10,316,383 9,362,876
The accompanying notes are an integral part of the financial
statements.
NETEGRITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the six months ended
June 30,
1999 1998
------------------------
Net revenues $ 4,698,529 $1,864,255
Cost of revenues 1,492,955 953,171
---------- ---------
Gross profit 3,205,574 911,084
Selling, general and
administrative expenses 4,587,644 2,919,696
Research and development costs 1,474,420 872,853
--------- ---------
Loss from operations (2,856,490) (2,881,465)
Interest income 67,145 68,657
--------- ---------
Net loss $(2,789,345) $(2,812,808)
========= =========
Basic & diluted loss per share $(0.27) $(0.30)
Weighted average shares
outstanding (basic & diluted) 10,158,342 9,322,896
The accompanying notes are an integral part of the financial
statements.
<PAGE>
NETEGRITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months ended
June 30,
1999 1998
------------------------
OPERATING ACTIVITIES:
Net(loss) income from continuing
operations $(2,789,345) $(2,812,808)
Adjustments to reconcile (loss)
income to net cash (used for)
provided by operating activities:
Depreciation and amortization 165,187 97,976
Provision for doubtful accounts
receivable (8,500) (5,990)
Change in operating assets and
liabilities:
Accounts receivable (535,639) (57,264)
Other current assets (46,851) 5,214
Other assets (15,265) 69,081
Accounts payable 95,710 (552,298)
Other accrued expenses 327,278 137,232
--------- ---------
Total adjustments (18,080) (306,049)
--------- ---------
Net cash used for continuing
operating activities (2,807,425) (3,118,857)
Net cash used for operating
activities $(2,807,425) $(3,118,857)
--------- ---------
The accompanying notes are an integral part of the financial
statements.
NETEGRITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.)
(Unaudited)
For the six months ended
June 30,
1999 1998
------------------------
INVESTING ACTIVITIES:
Capitalized software costs $ 175,629 $ 27,658
Capital expenditures for equipment
and leasehold improvements (297,859) (177,673)
Proceeds from sale of certain assets --- 25,863
--------- ---------
Net cash used for investing
activities (122,230) (124,152)
--------- ---------
FINANCING ACTIVITIES:
Net proceeds from issuance of
preferred stock --- 4,950,001
Net proceeds from issuance of stock 4,830,436 194,205
Principal payments under capital
leases --- (22,721)
--------- ---------
Net cash provided by financing
activities 4,830,436 5,121,485
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS 1,900,781 1,878,476
Cash and cash equivalents at
beginning of period 1,174,625 2,133,586
--------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $3,075,406 $4,012,062
========= =========
The accompanying notes are an integral part of the financial
statements.
<PAGE>
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - The unaudited financial information furnished
herein reflects all adjustments which are of a normal recurring
nature, which in the opinion of management are necessary to
fairly state the Company's financial position, cash flows and the
results of its operations for the periods presented. Certain
information and footnote disclosure normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
This information should be read in conjunction with the Company's
audited financial statements for the fiscal year ended December
31, 1998, included in Form 10-K filed on March 31, 1999.
NOTE 2 - The results of operations for the three-month and
six month periods ended June 30, 1999 are not necessarily
indicative of the results to be expected for the entire year
ending December 31, 1999.
NOTE 3 - On July 7, 1999, the Financial Accounting Standards
Board issued Statement of Accounting Standards No. 137 ("SFAS
137"), "Accounting for Derivative Instruments and Hedging
Activities Deferral of the Effective Date of FASB Statement No.
133 - an amendment of FASB Statement No. 133." SFAS 137 defers
the implementation of SFAS 133 by one year. SFAS 133, as amended
by SFAS 137, is effective for fiscal quarters beginning after
January 1, 2000 for the Company, and its adoption is not expected
to have a material effect on the Company's financial position or
results of operations.
NOTE 4 -The Company has adopted AICPA Statement of Position
97-2 "Software Revenue Recognition." Adoption of this
pronouncement did not have a material effect on the revenue
recognition practices of the Company. Effective December 15,
1998, SOP 98-9 amended SOP 98-4, Deferral of the Effective Date
of a Provision of SOP 97-2, Software Revenue Recognition, to
extend the deferral of the application of certain passages of SOP
97-2 provided by SOP 98-4 to fiscal quarters beginning after
January 1, 2000 for the Company.
NOTE 5 - On February 8, 1999, the Company entered into a
Stock Purchase Agreement (the "Stock Purchase Agreement") with an
institutional investor, the Pequot Entities and the parties named
therein. Pursuant to the terms of the Stock Purchase Agreement,
the Company sold 795,651 shares of Common Stock at $5.75 per
share for total gross proceeds of $4,574,993 and subsequently
filed a registration statement on Form S-3.
NOTE 6 - Certain 1998 information has been reclassified to
conform with 1999 financial statement presentation. Such
reclassifications have no impact on the results of operations in
1998.
NOTE 7 -On June 4, 1999, a suit was brought in the Court of
Chancery of the State of Delaware styled Applebaum et. al. v.
Netegrity, Inc. et al., purportedly on behalf of the common
stockholders of the Company, alleging that certain amendments to
the Company's Certificate of Incorporation previously adopted by
the stockholders were invalid because the Company did not obtain
the required statutory votes. On August 5, 1999, the parties
entered into a settlement agreement, subject to Court approval at
a hearing scheduled for September 24, 1999. If approved by the
Court, the settlement agreement requires that the Company obtain
the approval from the holders of its preferred stock and common
stock, in separate class votes, of the previously adopted
amendments which increased the authorized shares of their
respective classes of stock. The Company believes that the costs
associated with this settlement will not have a material effect
on its results of operations, assets or financial condition.
NETEGRITY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Private Securities Litigation Reform Act of 1995
contains certain safe harbors regarding forward-looking
statements. In that context, the discussion in this Item
contains forward-looking statements which involve certain degrees
of risk and uncertainties, including statements relating to
liquidity and capital resources. Except for the historical
information contained herein, the matters discussed in this
section are such forward-looking statements that involve risks
and uncertainties, including:
The Development of a Market for Our Products Is Uncertain
We provide security management to the electronic commerce
market. If either the electronic commerce market or the market
for security management for electronic commerce do not grow at a
significant rate, our business, operating results and financial
condition will be materially adversely affected. Electronic
commerce has been used widely for only a short time, and the
market for Web development products is new and rapidly evolving.
As is typical for new and rapidly evolving industries, demand for
recently introduced products is highly uncertain.
Our Performance Depends on Our Ability to Obtain Follow-on Sales
Customers place SiteMinder orders for initial applications
or sites with the expectation of placing future orders for
follow-on deployments for additional extranet and intranet sides
and applications. Our plan calls for receiving substantial
follow-on sales from customers. Our future financial performance
will depend on the successful deployment of SiteMinder by
customers in order to generate follow-on sales. There can be no
assurance that customers will place follow-on orders.
Our Success Depends on Our Ability to Expand Our Sales Force and
Distribution Channels
To increase our revenue, we must increase the size of our
sales force and the number of our indirect channel partners. In
particular, we must increase the number of strategic partnerships
and other third-party relationships with vendors of
Internet-related systems, application software and resellers and
systems integrators. In addition, our existing license
relationships must generate increased revenues. 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 there can be
no assurance that we will be successful in attracting,
integrating, motivating and retaining new sales personnel. 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.
We May Not Be Profitable in the Future
Since we began operations, we have incurred substantial net
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 periods. Failure to achieve profitability may
adversely affect the market price of our common stock. For the
six months ended June 30, 1999, we had a net loss of $2,789,345.
As a result of accumulated operating losses, at June 30, 1999, we
had an accumulated deficit of $17,417,542. We have generated
relatively small amounts of SiteMinder revenue 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, it is unlikely that these growth rates are
sustainable.
Our Quarterly Results May Fluctuate
Our quarterly revenue and operating results are difficult to
predict and may fluctuate significantly from quarter to quarter.
If our quarter revenue or operating results fall below our
expectations and the expectations of investors, the price of our
common stock could fall substantially. There can be no assurance
that we will attain predicted quarterly revenue or operating
results amounts.
Our quarterly revenue may fluctuate for several reasons,
including the following:
- --continued market acceptance for our SiteMinder product for
controlling user access to electronic commerce application;
- --the long sales and deployment cycles for potentially large
order sizes of SiteMinder;
- --the time and execution of individual contracts;
- --the timing and releases of new versions of SiteMinder or other
products; and continued development of our direct and indirect
sales channels.
In addition, because our revenue from services is largely
correlated with our license revenue, a decline in license revenue
could also cause a decline in our services revenue in the same
quarter or in subsequent quarters. Other factors, many of which
are outside our control, could also cause variations in our
quarterly revenue 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 revenue in relation to
our expectations could cause significant changes in our operating
results from quarter to quarter and could result in quarterly
losses.
We Face Significant Competition from Other Technology Companies
The market for secure user management and access control is
relatively immature and will become highly competitive based on
the anticipated growth of the electronic commerce market. This
market is subject to rapid technological change, and competition
is beginning to intensify as a result of the increasing demand
for intranet and extranet security products. Until recently, our
primary source of competition was from our customers' internal
information services departments that had been building their own
solutions. Today, we are also experiencing competition from a
number of new technologies from companies like Aventail
Corporation, DASCOM, enCommerce, Inc., Intellisoft, SecureSoft,
Inc., and Securant Corporation. We expect that additional larger
competitors will appear in the future as the market matures.
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.
Accordingly, 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. 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.
Our Success Depends on Our Ability to Sustain Current Revenues
Relating to the Firewall Reseller Business
Our firewall reseller business experiences competition from
companies that compete with Check Point's FireWall-1 product such
as Axent Technologies, Trusted Information Systems, Inc., Cisco
Systems, Inc., as well as other resellers of the FireWall-1
product. There can be no assurance that we can maintain the
current levels of revenue generated by our firewall reseller
business.
We May Have Difficulty Managing Our Growth
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 June 30, 1999, the number of our employees
increased from 40 to 90. To manage future growth effectively we
must maintain and enhance our financial and accounting systems
and controls, integrate new personnel and manage expanded
operations. Any failure to do so 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 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 sales and marketing personnel, software
engineers and other senior personnel. Our failure to attract and
retain the highly trained technical personnel that are integral
to our direct sales, product development, service and support
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.
We Are Dependent on Key Personnel
Our future success depends to a significant degree on the
skill, experience and efforts of our officers and other key
employees, as well as our ability to retain and motivate our
officers and key employees. The loss of our officers or key
employees 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.
Our Success Depends on Our Ability to Protect Our Proprietary
Rights
We depend upon a combination of patent and trademark laws,
license agreements, 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 those of our vendors and partners through
confidentiality and/or license agreements with our employees and
others. Despite these precautions, it may be possible for
unauthorized third parties to obtain information that we regard
as proprietary and/or confidential.
Other Companies May Claim That We Infringe Their Proprietary
Technology
Although we attempt to avoid infringing known proprietary
rights of third parties, we are subject to the risk of claims
alleging infringement of third party proprietary rights. If we
were to discover that any of our products violated third party
proprietary rights, there can be no assurance that we would be
able to obtain licenses on commercially reasonable terms to
continue offering the product without substantial reengineering
or that any effort to understand such reengineering would be
successful. 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" which result in product failures. The occurrence
of errors could result in loss of or delay in revenue, 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 May Be Subject to Risks Associated with Future Acquisitions
In the future, we may pursue acquisitions to obtain
complementary products, services and technologies. At present, we
have no agreements or other arrangements with respect to any
acquisition. An acquisition may not produce the revenue, 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 integrating the acquired business with our existing
business.
To pay for an acquisition, we might use capital stock or
cash. Alternatively, we might borrow money from a bank or other
lender. If we use capital stock, our stockholders would
experience dilution of their ownership interests. If we use cash
or debt financing, our financial liquidity will be reduced.
Our Future Success Will Depend on Our Ability to Enhance Existing
Products and Develop New Products
We believe our future success will depend in large part 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. In addition,
we 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, including 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, may cause variations in our future operating results.
Volatility of Stock Price
Our stock price, like that of other technology companies, is
subject to significant volatility. The announcement of new
products, services or technological innovations by us or our
competitors, quarterly variations in our results of operations,
changes in revenue or earnings estimates by the investment
community and speculation in the press or investment community
are among the factors affecting our stock price. In addition, the
stock price may be affected by general market conditions and
domestic and international economic factors unrelated to our
performance. Because of these reasons, recent trends should not
be considered reliable indicators of future stock prices or
financial results.
We May Be Adversely Impacted by Year 2000 Issues
See section, "Impact of the Year 2000 Issues."
COMPANY DESCRIPTIION
Netegrity, Inc. ("Netegrity" or the "Company") designs,
develops, markets and supports software for controlling user
access to electronic commerce (e-commerce) applications.
Netegrity also offers a full range of professional services to
integrate, implement and support its software product offering.
Netegrity's flagship product, SiteMinder, is the industry's first
directory-enabled secure user management system providing
centralized access control, single sign-on, distributed user
management and personalized content for e-commerce applications.
Netegrity is also a leading value-added firewall reseller
distinguishing itself by providing comprehensive pre- and
post-sales support and consulting services. Netegrity's
customers are Fortune 2000 companies and smaller organizations
whose business model is built on intensive Internet use. These
companies are using electronic commerce as a means to interact
with their customers, suppliers, partners and employees. Typical
industries include the financial services, high tech,
manufacturing, telecommunications and insurance industries, as
well as academia and the government. Netegrity's dedicated focus
on intranet and extranet security helps customers design
electronic business applications that allows them to securely
exchange mission-critical information.
The Company's revenues were generated by the sale of
security management and access control products and integration
and support services to companies doing business on the Internet
and internal networks(intranets). The Company plans to continue
to enhance product features to meet its customers' needs in
deploying large-scale and complex transaction-based intranets and
extranets for conducting electronic business. The Company plans
to continue to adopt the latest industry standards and new
technologies allowing for the deployment of secure applications
for the Web. There can be no assurance that the Company will be
able to develop new products or that such products will achieve
market acceptance, or, if market acceptance is achieved, that the
Company will be able to maintain such acceptance for a
significant period of time.
RESULTS OF OPERATIONS
The following information should be read in conjunction with
the consolidated financial statements and notes thereto:
Period to Period %
Increase/(Decrease)
% to Net Revenue Three Months Ended
For the three months June 30,
ended June 30, 1999 1998 1999 vs. 1998
- -------------------- ---------------- ------------------
Net Revenues:
Product sales 100% 100% 150%
Gross Margins:
Product sales 71% 58% 205%
Selling, general and
administrative expenses 94% 146% 62%
Research & development
costs 29% 43% 71%
(Loss) from operations (53%) (130%) 2%
Revenues: Total net revenues for the second quarter ended June
30, 1999 increased by $1,584,061, or 150%, to $2,638,495 from
$1,054,434 in the second quarter ended June 30, 1998.
SiteMinder-related revenue increased by $1,590,084, or 483%, to
$1,919,383 in the second quarter of fiscal 1999 from $329,299 in
the second quarter of 1998. Revenue from the Company's
firewall-related business decreased by $6,024, or 1%, to $719,112
in the second quarter of 1999 from $725,136 in the second quarter
of 1998.
Gross Profit: Total gross profit dollars for the second quarter
ended June 30, 1999 increased by $1,249,829, or 205%, to
$1,860,511 as compared to $610,682 in the second quarter ended
June 30, 1998. This increase is due to the higher gross margins
relating to increased revenue on the Company's proprietary
SiteMinder product and maintenance.
Selling, General and Administrative Expenses: Selling, General
and Administrative (SG&A) expenses increased by $951,876, or 62%
to $2,486,525 for the second quarter ended June 30, 1999 from
$1,534,649 in the quarter ended June 30, 1998. This increase is
primarily a result of the Company continuing to build its sales
and marketing infrastructure to support planned growth in sales
of its SiteMinder product and services.
Research and Development Costs: Research and Development
expenditures for the second quarter ended June 30, 1999 increased
by $323,024, or 71% to $775,021 as compared to $451,997 for the
quarter ended June 30, 1998. The Company continues to develop
and enhance its product line to address the evolving needs of
customers deploying large-scale and transaction-based e-commerce
applications for conducting business. Certain research and
development expenditures are incurred substantially in advance of
the related revenue, and in some cases, do not generate revenue.
Interest Income: Net interest income for the first quarter ended
June 30, 1999 increased by $10,751, or 29%, to $47,437 from
$36,686 for the same period last year. This increase is mainly
attributable to a higher average cash balance in the three-month
period ended June 30, 1999.
Period to Period %
Increase/(Decrease)
Six Months Ended
For the six months % to Net Revenue June 30,
ended June 30, 1999 1998 1999 vs. 1998
- ------------------ ---------------- -------------------
Net Revenues:
Product sales 100% 100% 152%
Gross Margins:
Product sales 68% 49% 252%
Selling, general and
administrative expenses 98% 157% 57%
Research and development
costs 31% 47% 69%
(Loss) from operations (61%) (155%) (1%)
Revenues: Total net revenues for the six months ended June 30,
1999 increased by $2,834,274, or 152%, to $4,698,529 from
$1,864,255 in the six months ended June 30, 1998.
SiteMinder-related revenue increased by $2,773,206, or 555%, to
$3,272,628 for the first six months of 1999 from $499,422 in the
first six months of 1998. Revenue from the Company's
firewall-related business increased by 61,068, or 5%, to
$1,425,901 for the six-month period ended June 30, 1999 from
$1,364,833 in the same period last year.
Gross Profit: Total gross profit dollars for the six months ended
June 30, 1999 increased by $2,294,490, or 252%, to $3,205,574
from $911,084 in the six months ended June 30, 1998. This
increase is due to the higher gross margins relating to increased
revenue on the Company's proprietary SiteMinder product and
maintenance.
Selling, General and Administrative Expenses: Selling, General
and Administrative (SG&A) expenses increased by $1,667,948, or
57%, to $4,587,644 for the six months ended June 30, 1999 from
$2,919,696 in the six months ended June 30, 1998.This increase is
primarily a result of the Company continuing to build its sales
and marketing infrastructure to support planned growth in sales
of its SiteMinder product and services.
Research and Development Costs: Research and Development
expenditures for the first six months of 1999 increased by
$601,567, or 69% to $1,474,420 as compared to $872,853 for the
first six months of 1998. The Company continues to develop and
enhance its product line to address the evolving needs of
customers deploying large-scale and transaction-based e-commerce
applications for conducting business. Certain research and
development expenditures are incurred substantially in advance of
the related revenue, and in some cases, do not generate revenue.
Interest Income: Net interest income for the six-month period
ended June 30, 1999 decreased by $1,512 or 2%, to $67,145 from
$68,657 for the same period last year. This decrease is mainly
attributable to a lower interest rates in the six-month period
ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
(in thousands, except ratios)
June 30, December 31,
Financial Condition as of 1999 1998
- ------------------------- ------- -----------
Cash and cash equivalents $3,075 $1,175
Working capital 2,115 47
Current ratio 1.58 1.01
Cash Flow Activity Summary for June 30, June 30,
the Six Months Ended 1999 1998
- ------------------------------ ------- -------
Net cash used for operating activities $(2,807) $(3,119)
Net cash used for investing activities (122) (124)
Net cash provided by (used for)
financing activities 4,830 5,121
The Company's net cash balance increased by $1,900,781, or
162%, to $3,075,406 at June 30, 1999 from $1,174,625 at December
31, 1998. This increase was attributable to proceeds from a
common stock offering entered into with an institutional investor
and the Pequot Entities on February 8, 1999 (see Note 6), offset
by expenditures related to building its sales, marketing, and
development infrastructure for its SiteMinder product business.
Accounts receivable-trade (net of allowance for doubtful
accounts) increased by $544,139, or 31% to $2,290,784 at June 30,
1999 from $1,746,645 at December 31, 1998. This increase
resulted from the corresponding increase in net cash as discussed
above.
Working capital increased by $2,068,783, or 4430%, to
$2,115,482 at June 30, 1999 from $46,699 at December 31, 1998.
This increase was primarily attributable to proceeds from a
preferred stock offering entered into with the an institutional
investor and the Pequot Entities on February 8, 1999 (see Note
6), offset by expenditures related to building its sales,
marketing, and development infrastructure for its SiteMinder
product business.
The Company anticipates that its existing cash resources and
anticipated cash flow from operations will be sufficient to fund
its current operations through the Company's fiscal year ending
December 31, 1999.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being
written using two digits rather than four digits to define the
applicable year. This could result in a system failure or
miscalculations if a computer program recognizes a date of "00"
as the year 1900 instead of 2000. If not corrected, many
computer systems could fail or create erroneous results in 2000.
State of Readiness
The Company has completed its initial assessment and testing of
products, systems and processes with respect to the "Year 2000"
issue. The Company plans to continue its assessment and testing
of products, systems and processes throughout 1999.
Products
All dates used within Netegrity's SiteMinder v3.0 product (the
"Product") utilize a standard four digit year format. The
Product has been tested by configuring a test environment with
the system dates on the test computers set to various dates in
the 21st century. The Product was then put through a regression
test and the output verified with previous test runs with no
errors. Netegrity has tested and verified that the Product is
"Year 2000 Capable." As used by the Company, the phrase "Year
2000 Capable" means that when used properly and in conformity
with the product information supplied by the Company, the Product
will accurately story, display, process, provide and/or receive
data from, into and between 1999 and 2000, including leap year
calculations, provided that all other technology used in
combination with the Product properly exchanges date data with
the Product.
Despite the Year 2000 Capability of the Company's Product, the
assessment of whether a complete system or device in which the
Product 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 the 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.
Internal Systems and Processes
The Company has completed its assessment of its internal systems
and processes, including computers and related systems, office
and facilities equipment, such as fax machines, photocopiers,
telephone switches, security systems, and other common devices
which may be affected by the Year 2000 problem. The Company has
discovered that its telephone system requires an upgrade which
the Company expects to install on or before September 30, 1999.
Based on the Company's assessment to date, the Company believes
that all other internal systems and processes are Year 2000
Capable.
Third Party Vendors and Suppliers
The Company has reviewed Year 2000 statements provided by the
Company's significant vendors. The Company has not independently
verified Year 2000 statements made by third parties and the
Company can express no assurances as to the Year 2000 compliance
status of third parties. The Company may never 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 the Company. If
such delays are extensive, they could have a material adverse
effect on the Company's business.
Costs of Year 2000 Compliance
All costs related to Year 2000 issues will be expensed as
incurred and the Company does 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.
Risks of Year 2000 Issues
Although the Company believes it is taking prudent action related
to the identification and resolution of issues related to the
Year 2000 problem, the Company's assessment is still in progress.
The failure to correct a material Year 2000 problem could result
in an interruption in, or a failure of, certain normal business
activities. Such failures could materially and adversely affect
the Company's results of operations, liquidity, and financial
condition. Due to the general uncertainty inherent in the Year
2000 issue, resulting in part from the uncertainty of the Year
2000 readiness of third parties, the Company is unable to
determine at this time whether the consequences of Year 2000
failures will have a material adverse impact on the Company's
results of operations, liquidity, or financial position. The
Company's assessment, testing and contingency planning is
expected to reduce, but not eliminate, the Company's level of
uncertainty about the Year 2000 issue and the readiness of third
parties. The Company believes that the completion of its
assessment, testing and contingency planning should reduce the
possibility of significant interruptions to normal operations.
Contingency Plan
Because no specific instance of material Y2K noncompliance has
been discovered to date, the Company has not formulated a
detailed contingency plan. To minimize potential disruptions,
the Company intends to adopt an appropriate contingency plan to
address any issues raised in the course of the Company's ongoing
assessment and testing of its products, systems and processes.
Part of the Company's contingency plan will include the
replacement of any vendors which the Company believes are not
Year 2000 compliant.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company does not believe that it has any material
market risk exposure with respect to derivative or other
financial instruments that would require disclosure under this
item.
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 4, 1999, a suit was brought in the Court of Chancery
of the State of Delaware styled Applebaum et. al. v. Netegrity,
Inc. et al., purportedly on behalf of the common stockholders of
the Company, alleging that certain amendments to the Company's
Certificate of Incorporation previously adopted by the
stockholders were invalid because the Company did not obtain the
required statutory votes. On August 5, 1999, the parties entered
into a settlement agreement, subject to Court approval at a
hearing scheduled for September 24, 1999. If approved by the
Court, the settlement agreement requires that the Company obtain
the approval from the holders of its preferred stock and common
stock, in separate class votes, of the previously adopted
amendments which increased the authorized shares of their
respective classes of stock. The Company believes that the costs
associated with this settlement will not have a material effect
on its results of operations, assets or financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
There have been no significant changes in the Company's
securities during the quarter ended June 30, 1999.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 9, 1999, the Board of Directors caused to be
distributed to stockholders of record as of March 31, 1999 a
Notice of Special Meeting in Lieu of Annual Meeting of
Stockholders, Proxy and a Proxy Statement for the Special Meeting
on May 11, 1999. On that record date, the Company had outstanding
10,268,847 shares of Common Stock (excluding treasury shares) and
3,333,333 of Series D Preferred Stock, convertible into Common
Stock on a one- for-one basis. The holders of shares of Series D
Preferred Stock and Common Stock voted together as a single
class.
At the meeting, the stockholders acted upon the following
proposals:
(1) to elect a Board of Directors;
(2) consider and act upon a proposal to ratify, confirm and
approve an amendment to the 1997 Non-Employee Director Stock
Option Plan to increase the number of shares reserved for grant
thereunder from 500,000 to 2,500,000;
(3) to consider and act upon a proposal to ratify, confirm and
approve an amendment to the Company's Restated Certificate of
Incorporation, as amended, to increase the number of authorized
shares of capital stock from 30,000,000 to 45,000,000.
Voting results were as follows:
(1) Election of Directors:
FOR WITHHELD
Stephen L. Watson 11,459,931 13,358
Barry N. Bycoff 11,459,916 13,373
Ralph B. Wagner 11,457,861 15,428
Michael L. Mark 11,459,831 13,458
Eric R. Giler 11,459,746 13,543
James McNiel 11,459,661 13,628
(2) To approve the amendment to the 1997 Non-Employee Director
Stock Option Plan:
FOR AGAINST ABSTAIN
5,440,240 136,758 36,473
(3) To approve the amdendment to the Company's Restated
Certificate of Incorporation, as amended, to increase the number
of authorized shares of capital stock from 30,000,000 to
45,000,000:
FOR AGAINST ABSTAIN
11,316,570 123,526 33,193
See Item 1, above.
ITEM 5. OTHER INFORMATION
In accordance with the provisions of Rule 14a-4(c)
promulgated under the Securities Exchange Act of 1934, if the
Company does not receive notice of a shareholder proposal to be
raised at its 2000 Annual Meeting on or before February 24, 2000,
then in such event, the management proxies shall be allowed to
use their discretionary voting authority when the proposal is
raised at the 2000 Annual Meeting of Stockholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11.00 - Computation of Earnings Per Share
(b) Exhibit 27.00 - Financial Data Schedule (Edgar only)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
NETEGRITY, INC.
Date: August 13, 1999 By:/s/ Barry N. Bycoff
Barry N. Bycoff
President and Chief
Executive Officer
(Principal Executive
Officer)
Date: August 13, 1999 By:/s/ James E. Hayden
James E. Hayden
Vice President, Finance
and Administration, and
Chief Financial Officer
(Principal Financial
and Chief Accounting
Officer)
<PAGE>
EXHIBIT 11.00
NETEGRITY, INC.
COMPUTATION OF EARNINGS PER SHARE
(UNAUDITED)
(In thousands, except per share data)
Three months ended
June 30,
1999 1998
------------------
BASIC AND DILUTED:
Average Common shares outstanding 10,316 9,363
Net loss $(1,354) $(1,339)
Per share amount $(0.13) $(0.14)
Six months ended
June 30,
1999 1998
----------------
BASIC AND DILUTED:
Average Common shares outstanding 10,158 9,323
Net loss $(2,789) $(2,813)
Per share amount $(0.27) $(0.30)
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<PERIOD-END> JUN-30-1999
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<RECEIVABLES> 2,529,347
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33,333
<COMMON> 103,852
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<SALES> 2,638,495
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