<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934, FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934, FOR THE TRANSITION
PERIOD FROM TO
COMMISSION FILE NUMBER 1-10139
NETEGRITY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-2911320
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
245 WINTER STREET
WALTHAM, MA 02451
(Address of principal executive offices) (Zip Code)
(781) 890-1700
(Registrant's Telephone Number)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such other shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days [X] Yes No [ ]
As of October 15, 1999 there were 14,416,279 shares of Common Stock outstanding,
exclusive of Treasury stock.
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FORM 10-Q/A
QUARTERLY REPORT
TABLE OF CONTENTS
Facing Sheet................................................................. 1
Table of Contents............................................................ 2
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets............................... 3
Consolidated Statements of Operations..................... 5
Consolidated Statements of Cash Flows..................... 7
Notes to Consolidated Financial Statements................ 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 21
PART II. OTHER INFORMATION
Item 5. Exhibits ................................................. 24
SIGNATURES .......................................................... 24
Exhibit 11............................................................. 25
Exhibit 27............................................................. 26
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PART I. - FINANCIAL INFORMATION
NETEGRITY, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,
1999 December 31,
(unaudited) 1998
Restated Restated
----------- ----------
CURRENT ASSETS:
Cash and cash equivalents $11,211,960 $1,174,625
Accounts receivable-trade, net of
allowance for doubtful accounts
of $529,905 and $247,063 September 30,
1999 and December 31, 1998, respectively 2,875,408 1,746,645
Deferred maintenance asset 302,472 308,926
Prepaid expenses 88,560 30,163
Other current assets 61,789 15,848
----------- ----------
TOTAL CURRENT ASSETS 14,540,189 3,276,207
----------- ----------
EQUIPMENT AND LEASEHOLD
IMPROVEMENTS, NET 1,000,029 736,341
CAPITALIZED SOFTWARE COSTS --
175,629
Other Assets 53,219 37,114
----------- ----------
TOTAL ASSETS $15,593,437 $4,225,291
=========== ==========
The accompanying notes are an integral part of the financial statements.
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NETEGRITY, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
September 30,
1999 December 31,
(unaudited) 1998
Restated Restated
----------- -----------
CURRENT LIABILITIES:
Accounts payable-trade $ 910,774 $ 897,734
Deferred maintenance liability 885,049 938,004
Deferred revenue 150,104 285,857
Accrued employer expenses 172,563 180,328
Other accrued expenses 980,049 766,898
Accrued compensation 455,292 160,687
----------- -----------
TOTAL CURRENT LIABILITIES 3,553,831 3,229,508
----------- -----------
TOTAL LIABILITIES 3,553,831 3,229,508
----------- -----------
REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Preferred Stock, $.01 par value 5,000,000 shares
authorized and none outstanding as of September
30, 1999; 3,333,333 Series D Preferred shares
authorized and outstanding as of December 31, 1998 -- 4,487,575
STOCKHOLDERS' EQUITY(DEFICIT):
Common stock, voting, $.01 par value,
authorized 40,000,000 as of September 30, 1999;
14,441,379 shares issued and 14,416,279 shares
outstanding as of September 30, 1999; 9,425,446
shares issued and 9,400,345 shares
outstanding at December 31, 1998 144,163 94,254
Additional paid-in capital 33,547,343 11,561,044
Accumulated deficit (21,368,243) (14,863,433)
Loan to officer (200,000) (200,000)
----------- -----------
12,123,263 (3,408,135)
Less - Treasury Stock, at cost:
25,101 shares (83,657) (83,657)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY(DEFICIT) 12,039,606 (3,491,792)
----------- -----------
TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT) $15,593,437 $ 4,225,291
=========== ===========
The accompanying notes are an integral part of the financial statements.
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NETEGRITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended
September 30,
1999 1998
Restated Restated
-------- --------
Revenues:
SiteMinder software $ 2,008,493 $ 410,873
SiteMinder services 600,582 109,761
Other 719,070 736,427
----------- -----------
Total revenues 3,328,145 1,257,061
Cost of revenues 838,487 431,464
----------- -----------
Gross profit 2,489,658 825,597
Selling, general and administrative expenses 3,218,816 1,503,794
Research and development costs 1,011,707 500,290
Non-cash stock compensation (income)expense 821,278 (55,380)
----------- -----------
Loss from operations $(2,562,143) $(1,123,107)
Interest income (expense), net 51,767 31,246
----------- -----------
Net loss (2,510,376) (1,091,861)
Accretion of preferred stock (137,627) (137,627)
----------- -----------
Net loss attributable to common stockholders (2,648,003) (1,229,488)
=========== ===========
Basic and diluted loss per share attributable
to common stockholders $ (0.25) $ (0.13)
Weighted average shares outstanding
(basic and diluted) 10,575,516 9,397,526
The accompanying notes are an integral part of the financial statements.
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NETEGRITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the nine months ended
September 30,
1999 1998
Restated Restated
-------- --------
Revenues
SiteMinder software $ 4,476,094 $ 783,673
SiteMinder services 1,405,609 236,381
Other 2,144,970 2,101,262
----------- -----------
Total revenues 8,026,673 3,121,316
Cost of revenues 2,331,442 1,384,426
----------- -----------
Gross profit 5,695,231 1,736,890
Selling, general and administrative expenses 7,806,460 4,423,700
Research and development costs 2,486,126 1,373,143
Non-cash stock compensation expense 2,026,367 4,600
----------- -----------
Loss from operations (6,623,722) (4,064,553)
Interest income (expense), net 118,912 99,903
----------- -----------
Net loss $(6,504,810) $(3,964,650)
Recognition of beneficial conversion
feature and accretion of preferred
stock (412,881) (2,646,652)
----------- -----------
Net loss attributable to common stockholders (6,917,691) (6,611,302)
=========== ===========
Basic and diluted loss per share attributable
to common stockholders $ (0.67) $ (0.71)
Weighted average shares outstanding
(basic and diluted) 10,272,682 9,348,455
The accompanying notes are an integral part of the financial statements.
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NETEGRITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the nine months ended
September 30,
1999 1998
Restated Restated
-------- --------
OPERATING ACTIVITIES:
Net(loss) income from continuing operations $(6,504,810) $(3,964,650)
----------- -----------
Adjustments to reconcile (loss) income to
net cash (used for) provided by operating
activities:
Depreciation and amortization 245,913 160,519
Provision for doubtful accounts receivable 282,842 (5,989)
Compensation expense related to warrant 2,026,367 4,600
Change in operating assets and liabilities:
Accounts receivable (1,411,605) (225,392)
Other current assets (97,884) 652,576
Other assets (16,105) 63,095
Accounts payable 13,040 (563,949)
Other accrued expenses 311,283 (548,442)
----------- -----------
Total adjustments 1,353,851 (462,982)
----------- -----------
Net cash used for continuing
operating activities (5,150,959) (4,427,632)
Net cash used for operating
activities $(5,150,959) $(4,427,632)
----------- -----------
The accompanying notes are an integral part of the financial statements.
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NETEGRITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
(Unaudited)
For the nine months ended
September 30,
1999 1998
Restated Restated
-------- --------
INVESTING ACTIVITIES:
Capitalized software costs $ 175,629 $ 61,220
Capital expenditures for equipment and
leasehold improvements (509,603) (282,993)
Proceeds from sale of certain assets -- 25,863
----------- ----------
Net cash used for investing activities (333,974) (195,910)
----------- ----------
FINANCING ACTIVITIES:
Net proceeds from issuance of preferred stock -- 4,950,001
Net proceeds from issuance of stock 15,522,268 194,205
Principal payments under capital leases -- (22,721)
----------- ----------
Net cash provided by financing activities 15,522,268 5,121,485
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS 10,037,335 497,943
Cash and cash equivalents at beginning of period 1,174,625 2,133,586
----------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $11,211,960 $2,631,529
=========== ==========
The accompanying notes are an integral part of the financial statements.
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NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - The unaudited financial information furnished herein reflects all
adjustments which are of a normal recurring nature, which in the opinion of
management are necessary to fairly state the Company's financial position, cash
flows and results of operations for the periods presented. Certain information
and footnote disclosure normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. This information should be read in conjunction with the Company's
audited financial statements for the fiscal year ended December 31, 1998,
included in Form 10-K/A filed on September 16, 1999.
REVISION
The Company has revised its consolidated financial statements for the years
ended December 31, 1999 and 1998. The adjustments were to record non-cash
compensation expenses for a warrant to purchase shares of common stock which was
issued to a director in connection with the sale of the Series D Preferred Stock
in January 1998. Due to certain terms of the warrant, the warrant is being
accounted for as a variable award. The expense recorded reflects the increase in
the fair market value of the Company's common stock since the date of issuance
over the vesting period until exercised. The adjustments were also required to
reclassify the presentation of the redeemable Series D Preferred Stock which was
issued during 1998, and to record a related immediate beneficial conversion
feature and subsequent accretion for cumulative dividends on the preferred stock
until its conversion into common stock on September 30, 1999. The consolidated
financial statements and related notes to the consolidated financial statements
in this Form 10-Q/A reflect all such revisions through September 30, 1999. The
adjustments to the financial statements had no impact on the Company's total
assets, total revenues or cash flows. A summary of the impact of the adjustments
for the three and nine months ended September 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Q3, 1999
For the three months ended September 30,
1999 1998
As previously As As previously As
reported restated reported restated
<S> <C> <C> <C> <C>
Non-cash stock compensation expense (income) $ - $ 821,278 $ - $ (55,380)
Loss from operations (1,740,865) (2,562,143) (1,178,487) (1,123,107)
Net loss (1,689,098) (2,510,376) (1,147,241) (1,091,861)
Accretion of preferred stock - (137,627) - (137,627)
Net loss attributable to common stockholders (1,689,098) (2,648,003) (1,147,241) (1,229,488)
Basic and diluted earnings per share:
Net loss attributable to common stockholders (0.16) (0.25) (0.12) (0.13)
For the nine months ended September 30,
1999 2000
As previously As As previously As
reported restated reported restated
Non-cash stock compensation expense $ - $ 2,026,367 $ - $ 4,600
Loss from operations (4,597,355) (6,623,722) (4,059,953) (4,064,553)
Net loss (4,478,443) (6,504,810) (3,960,050) (3,964,650)
Recognition of beneficial conversion feature
and accretion of preferred stock - (412,881) - (2,646,652)
Net loss attributable to common stockholders (4,478,443) (6,917,691) (3,960,050) (6,611,302)
Basic and diluted earnings per share:
Net loss attributable to common stockholders (0.44) (0.67) (0.42) (0.71)
September 30, 1999 December 31, 1998
As previously As As previously As
reported restated reported restated
Preferred stock, Series D voting $ - $ - $ 33,333 $ 4,487,575
Additional paid-in capital 31,285,739 33,547,343 15,780,049 11,561,044
Accumulated deficit (19,106,639) (21,368,243) (14,628,196) (14,863,433)
Total stockholders' equity (deficit) 12,039,606 12,039,606 995,783 (3,491,792)
</TABLE>
NOTE 2 - The results of operations for the three months and nine months ended
September 30, 1999 are not necessarily indicative of the results to be expected
for the entire year ending December 31, 1999.
NOTE 3 - On July 7, 1999, the Financial Accounting Standards Board issued
Statement of Accounting Standards No. 137 ("SFAS 137"), "Accounting for
Derivative Instruments and Hedging Activities Deferral of the Effective Date of
FASB Statement No. 133 - an amendment of FASB Statement No. 133." SFAS 137
defers the implementation of SFAS 133 by one year. SFAS 133, as amended by SFAS
137, is effective for fiscal quarters beginning after January 1, 2000 for the
Company, and its adoption is not expected to have a material effect on the
Company's financial position or results of operations.
NOTE 4 -The Company has adopted AICPA Statement of Position 97-2 "Software
Revenue Recognition." Adoption of this pronouncement did not have a material
effect on the revenue recognition practices of the Company. Effective December
15, 1998, SOP 98-9 amended SOP 98-4, Deferral of the Effective Date of a
Provision of SOP 97-2, Software Revenue Recognition, to extend the deferral of
the application of certain passages of SOP 97-2 provided by SOP 98-4 to fiscal
quarters beginning after January 1, 2000 for the Company.
NOTE 5 - On February 8, 1999, the Company entered into a Stock Purchase
Agreement (the "Stock Purchase Agreement") with an institutional investor, the
Pequot Entities and the parties named therein. Pursuant to the terms of the
Stock Purchase Agreement, the Company sold 795,651 shares of Common Stock at
$5.75 per share for total gross proceeds of $4,574,993 and subsequently filed a
registration statement on Form S-3.
NOTE 6 - Certain 1998 information has been reclassified to conform with 1999
financial statement presentation. Such reclassifications have no impact on the
results of operations in 1998.
NOTE 7 - On September 9, 1999, the Company sold 534,242 shares of common stock
to certain investors in a private placement at a price of $20.59 per share. The
Company received net proceeds of approximately $10.3 million from the private
placement, after deducting the placement agent's fee and the Company's estimated
expenses.
NOTE 8 - In September 1999 the holders of all of the Company's outstanding
preferred stock surrendered their shares for conversion into common stock. On
October 7, 1999, the stockholders of the Company approved and the Company filed
an amendment to the Company's certificate of incorporation increasing the number
of authorized shares of the Company's common stock to 55,000,000.
NOTE 9 - On June 4, 1999, a suit was brought in the Delaware Court of Chancery,
purportedly on behalf of the Company's common stockholders, alleging that
certain amendments to the Company's certificate of incorporation previously
adopted by the Company's stockholders increasing the authorized shares of
various classes of stock were invalid because the Company did not obtain the
required statutory votes. On August 5, 1999, the parties entered into a
settlement agreement, subject to court approval and approval from the holders of
the Company's preferred stock and common stock, in separate class votes, of the
previously adopted amendments. The settlement was approved by the Court of
Chancery at a hearing held on September 24, 1999. The appeal period for this
approval will expire on October 25, 1999. The holders of the Company's preferred
and common stock approved the previously adopted amendments at a meeting of the
Company's stockholders held on October 7, 1999. The Company believes that the
costs associated with this settlement will not have a material effect on the
Company's results of operations, assets or financial condition.
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2. Management's Discussion & Analysis of Financial Condition and Results of
Operations
FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This report and the documents incorporated in it by reference contain
forward-looking statements about our plans, objectives, expectations and
intentions. You can identify these statements by words such as "expect,"
"anticipate," "intend," "plan," "believe," "seek," "estimate," "may," "will"
and "continue" or similar words. You should read statements that contain
these words carefully. They discuss our future expectations, contain
projections of our future results of operations or our financial condition
or state other forward-looking information, and may involve known and
unknown risks over which we have no control. You should not place undue
reliance on forward-looking statements. We cannot guarantee any future
results, levels of activity, performance or achievements. Moreover, we
assume no obligation to update forward-looking statements or update the
reasons actual results could differ materially from those anticipated in
forward-looking statements. The factors discussed in the sections captioned
"Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Company Description" in this report and the
documents incorporated in it by reference identify important factors that
may cause our actual results to differ materially from the expectations we
describe in our forward-looking statements. Our forward-looking statements
are based on a number of assumptions, including increasing worldwide
business use of the Internet, the growth in the number of web access devices
per user, the absence of any failure of the Internet, and the continued
improvement of security on the Internet. If any of these assumptions is
incorrect, actual results may differ from the projections based on those
assumptions.
RISK FACTORS
The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward-looking statements. In that context, the discussion in
this Item contains forward-looking statements which involve certain degrees of
risk and uncertainties, including statements relating to liquidity and capital
resources. Except for the historical information contained herein, the matters
discussed in this section are such forward-looking statements that involve risks
and uncertainties. Risk factors which may impact on our results include the
following:
WE HAVE INCURRED SUBSTANTIAL LOSSES AND MAY NOT BE PROFITABLE IN THE FUTURE.
In recent years, we have incurred substantial operating losses in every fiscal
period. We cannot predict when we will become profitable, if at all, and if we
do, that we will remain profitable for any substantial period of time. Failure
to achieve profitability within the time frame expected by investors may
adversely affect the market price of our common stock. In the nine months ended
September 30, 1999, we had a net loss of $6.5 million. As a result of ongoing
operating losses, at September 30, 1999, we had an accumulated deficit of $21.4
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.
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OUR FUTURE SUCCESS WILL DEPEND ON OUR ABILITY TO MARKET SITEMINDER AND RELATED
SERVICES SUCCESSFULLY.
The sale of SiteMinder licenses and related services provides a substantial
majority of our total revenues. These sales accounted for 73% of our total
revenues in the nine months ended September 30, 1999. We expect that our future
financial performance will depend on SiteMinder sales. Prior to the release of
SiteMinder 3.0 in June 1998, there had been very few commercial installations of
SiteMinder. Since June 1998, all commercial deployments of SiteMinder have
supported business-to-business web applications. Broad market acceptance of
SiteMinder will depend on the development of the market for secure user
management, including usage of SiteMinder for business-to-consumer applications,
and customer demand for the specific functionality of SiteMinder. We cannot be
sure that either will occur. Like most technology products at an early stage of
development, SiteMinder may require extensive reengineering or upgrading if it
fails to meet the performance needs or expectations of our customers when
shipped or contains significant software defects or bugs. If we fail in
marketing SiteMinder products and services, for whatever reason, our business
would be harmed.
OUR SUCCESS IS DEPENDENT ON OUR ABILITY TO ENHANCE OUR SITEMINDER PRODUCT LINE
AND DEVELOP NEW PRODUCTS.
We believe our success is dependent, in large part, on our ability to enhance
and broaden our SiteMinder product line to meet the evolving needs of both the
business-to-business and business-to-consumer market. We cannot be sure that we
will be able to respond effectively to technological changes or new industry
standards or developments. In the past, we have been forced to delay
introduction of several new product versions. In the future, we could be
adversely affected if we incur significant delays or are unsuccessful in
enhancing our SiteMinder product line or developing new products, or if any of
our enhancements or new products do not gain market acceptance.
OUR PERFORMANCE DEPENDS ON OUR ABILITY TO OBTAIN FOLLOW-ON SALES.
Customers typically place small initial orders for SiteMinder installations to
allow them to evaluate its performance. Our strategy is to pursue more
significant follow-on sales after these initial installations. Our financial
performance depends on successful initial deployments of SiteMinder that, in
turn, lead to follow-on sales. We cannot be sure that initial deployments of
SiteMinder by our customers will be successful, or that we will be able to
obtain follow-on sales.
WE FACE SIGNIFICANT COMPETITION FROM THE INTERNAL EFFORTS OF POTENTIAL CUSTOMERS
AND FROM OTHER TECHNOLOGY COMPANIES AND WE MAY NOT BE ABLE TO COMPETE
EFFECTIVELY.
The market for secure user management products and services is relatively
immature and highly competitive. We expect the level of competition to increase
as a result of the anticipated growth of e-commerce. Until recently, our primary
source of competition was from secure user management software developed
in-house. Many of our potential customers have the resources to establish
in-house software development capabilities, and some of them, from time to time,
may choose to develop their own secure user management technology that is
competitive with ours. In addition, we have faced competition from web
development professional services organizations. Today our primary competitors
include e-Commerce and the partnership between IBM and DASCOM. In addition, a
number of other security and software companies have indicated that they offer
products which may compete with ours. We expect that additional competitors will
emerge in the future. Current and potential competitors have established, or may
in the future establish, cooperative relationships with third parties to
increase the availability of their products to the marketplace. It is possible
that new competitors or alliances may emerge and rapidly acquire significant
market share. Potential competitors may have significantly greater financial,
marketing, technical and other competitive resources than we have. If, in the
future, a competitor chooses to bundle a competing secure user management
product with other e-commerce applications, the demand for our products might be
substantially reduced. Many of these factors are out of our control, and there
can be no assurance that we can maintain or enhance our competitive position
against current and future competitors.
THE DEVELOPMENT OF A MARKET FOR SITEMINDER IS UNCERTAIN.
We provide secure user management solutions for web-based e-commerce
applications. Our market is new and rapidly evolving. If the market for secure
user management solutions does not grow at a significant rate, this will have a
material adverse effect on our business, operating results and financial
condition. As is typical for new and rapidly evolving industries, customer
demand for recently introduced secure user management products is highly
uncertain.
OUR BUSINESS WILL BE ADVERSELY AFFECTED IF THE INTERNET DOES NOT BECOME A VIABLE
AND SUBSTANTIAL COMMERCIAL MEDIUM.
Our future success depends heavily on the acceptance and wide use of the
Internet for e-commerce. If e-commerce does not continue to grow or grows more
slowly than expected, significant demand for SiteMinder and related services may
fail to develop. Consumers and businesses may reject the Internet as a viable
commercial medium for a number of reasons, including potentially inadequate
network infrastructure, slow development of enabling technologies, insufficient
commercial support or privacy concerns. In addition, delays in the development
or adoption of new standards and protocols required to handle increased levels
of e-commerce, or increased government regulation or taxation, could cause the
Internet to lose its viability as a commercial medium.
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REGULATIONS OR CONSUMER CONCERNS REGARDING THE USE OF "COOKIES" ON THE INTERNET
COULD REDUCE THE FUNCTIONALITY OF SITEMINDER.
SiteMinder uses cookies to support its single sign-on functionality. A cookie is
information keyed to a specific user that is stored on the hard drive of the
user's computer, typically without the user's knowledge. Cookies are generally
removable by the user, and can be refused by the user at the point at which the
information would be stored on the user's hard drive. A number of governmental
bodies and commentators in the United States and abroad have urged passage of
laws limiting or abolishing the use of cookies. The passage of laws limiting or
abolishing the use of cookies, or the widespread deletion or refusal of cookies
by web site users, could reduce or eliminate the effectiveness of single sign-on
and could reduce market demand for SiteMinder.
WE MUST HIRE AND RETAIN SKILLED PERSONNEL IN A TIGHT LABOR MARKET.
Qualified personnel are in great demand throughout the software industry. Our
success depends, in large part, upon our ability to attract, train, motivate and
retain highly skilled employees, particularly software engineers, professional
services personnel, sales and marketing personnel, and other senior personnel.
Our failure to attract and retain the highly trained technical personnel that
are integral to our product development, professional services and direct sales
teams may limit the rate at which we can generate sales and develop new products
or product enhancements. This could have a material adverse effect on our
business, operating results and financial condition.
OUR SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP OUR DIRECT SALES AND INDIRECT
DISTRIBUTION CHANNELS.
To increase our revenues, we must develop our direct sales channel and increase
the number of our indirect channel partners. A failure to do so could have a
material adverse effect on our business, operating results and financial
condition. There is intense competition for sales personnel in our business, and
we cannot be sure that we will be successful in attracting, integrating,
motivating and retaining sales personnel. In addition, we must increase the
number of strategic partnerships and other third-party relationships with
vendors of Internet-related systems and application software, resellers and
systems integrators. Our existing or future channel partners may choose to
devote greater resources to marketing and supporting the products of other
companies. In addition, we will need to resolve potential conflicts among our
sales force and channel partners.
OUR FAILURE TO EXPAND OUR PROFESSIONAL SERVICES RESOURCES COULD LIMIT THE
SUCCESS OF SITEMINDER.
Our professional services organization provides critical support to our
customers' installation and deployment of SiteMinder. If we fail to expand our
professional services resources, our ability to increase sales of SiteMinder may
be limited. In addition, if we cannot adequately support SiteMinder
installations, our customers' use of our products may fail, which could harm our
reputation and hurt our business.
OUR LENGTHY SALES CYCLE MAKES IT DIFFICULT TO PREDICT OUR QUARTERLY OPERATING
RESULTS.
We have a long sales cycle because we generally need to educate potential
customers regarding the use and benefits of SiteMinder. Our sales cycle varies
depending on the size and type of customer contemplating a purchase and whether
we have conducted business with a potential customer in the past. These
potential customers frequently need to obtain approvals from multiple decision
makers prior to making purchase decisions. Our long sales cycle, which can range
from several weeks to several months or more, makes it difficult to predict the
quarter in which sales will occur. Delays in sales could cause significant
variability in our revenues and operating results for any particular period.
OUR FAILURE TO MANAGE OUR RAPID GROWTH EFFECTIVELY COULD HURT OUR BUSINESS.
Our failure to manage our rapid growth effectively could have a material adverse
effect on the quality of our products, our ability to retain key personnel and
our business, operating results and financial condition. We have been
experiencing a period of rapid growth that has been placing a significant strain
on all of our resources. From December 31, 1997 to September 30, 1999, the
number of our employees increased from 40 to 109. To manage future growth
effectively we must maintain and enhance our financial and accounting systems
and controls, integrate new personnel and manage expanded operations.
IF WE LOSE THE SERVICES OF BARRY BYCOFF OR ANY OTHER MEMBER OF OUR MANAGEMENT
TEAM, OUR BUSINESS COULD SUFFER.
Our future success depends, to a significant degree, on the skill, experience
and efforts of Barry Bycoff, our chief executive officer, and the rest of our
management team. The loss of any member of our management team could have a
material adverse effect on our business, operating results and financial
condition. We also depend on the ability of our officers and key employees to
work effectively as a team.
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AS WE EXPAND OUR INTERNATIONAL OPERATIONS, WE WILL FACE NEW RISKS TO OUR
SUCCESS.
Historically, we have not derived a significant portion of our total revenues
from sales to customers outside the United States. However, we intend to expand
our international operations in the future. This expansion will require
additional resources and management attention, and will subject us to new
regulatory, economic and political risks. We have very little experience in
international markets. As a result, we cannot be sure that our expansion into
global markets will be successful. In addition, we will face new risks in doing
business internationally. These risks could reduce demand for our products and
services, increase the prices at which we can sell our products and services, or
otherwise have an adverse effect on our operating results. Among the risks we
believe are most likely to affect us are:
- longer payment cycles and problems in collecting accounts receivable;
- adverse changes in trade and tax regulations, including restrictions on
the import and export of sensitive technologies, such as encryption
technologies, that we use or may wish to use in our software products;
- the absence or significant lack of legal protection for intellectual
property rights;
- difficulties in managing an organization spread over several countries,
including complications arising from cultural, language and time
differences that may lengthen sales and implementation cycles;
- currency risks, including fluctuations in exchange rates; and
- political and economic instability.
OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR PROPRIETARY RIGHTS.
Our success depends to a significant degree upon the protection of our software
and other proprietary technology. The unauthorized reproduction or other
misappropriation of our proprietary technology could enable third parties to
benefit from our technology without paying us for it. This could have a material
adverse effect on our business, operating results and financial condition. We
depend upon a combination of trademark, trade secret and copyright laws, license
agreements and non-disclosure and other contractual provisions to protect
proprietary and distribution rights in our products. In addition, we attempt to
protect our proprietary information and the proprietary information of our
vendors and partners through confidentiality and/or license agreements with our
employees and others. Although we have taken steps to protect our proprietary
technology, they may be inadequate. Existing trade secret, copyright and
trademark laws offer only limited protection. Moreover, the laws of other
countries in which we market our products may afford little or no effective
protection of our intellectual property. If we resort to legal proceedings to
enforce our intellectual property rights, the proceedings could be burdensome
and expensive, even if we were to prevail.
CLAIMS BY OTHER COMPANIES THAT WE INFRINGE THEIR PROPRIETARY TECHNOLOGY COULD
HURT OUR FINANCIAL CONDITION.
If we discover that any of our products violated third party proprietary rights,
there can be no assurance that we would be able to reengineer our product or to
obtain a license on commercially reasonable terms to continue offering the
product without substantial reengineering. We do not conduct comprehensive
patent searches to determine whether the technology used in our products
infringes patents held by third parties. In addition, product development is
inherently uncertain in a rapidly evolving technology environment in which there
may be numerous patent applications pending, many of which are confidential when
filed, with regard to similar technologies. Any claim of infringement could
cause us to incur substantial costs defending against the claim, even if the
claim is invalid, and could distract our management from our business.
Furthermore, a party making such a claim could secure a judgment that requires
us to pay substantial damages. A judgment could also include an injunction or
other court order that could prevent us from selling our products. Any of these
events could have a material adverse effect on our business, operating results
and financial condition.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF OUR PRODUCTS CONTAIN ERRORS.
Software products as complex as ours may contain undetected errors or "bugs"
that result in product failures. The occurrence of errors could result in loss
of or delay in revenues, loss of market share, failure to achieve market
acceptance, diversion of development resources, injury to our reputation, or
damage to our efforts to build brand awareness, any of which could have a
material adverse effect on our business, operating results and financial
condition.
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WE COULD INCUR SUBSTANTIAL COSTS RESULTING FROM PRODUCT LIABILITY CLAIMS
RELATING TO OUR CUSTOMERS' USE OF OUR PRODUCTS.
Many of the e-commerce applications supported by our products are critical to
the operations of our customers' businesses. Any failure in a customer's web
site or application caused or allegedly caused by our products could result in a
claim for substantial damages against us, regardless of our responsibility for
the failure. Although we maintain general liability insurance, including
coverage for errors and omissions, there can be no assurance that our existing
coverage will continue to be available on reasonable terms or will be available
in amounts sufficient to cover one or more large claims, or that the insurer
will not disclaim coverage as to any future claim.
IF WE ACQUIRE OTHER COMPANIES OR BUSINESSES, WE WILL BE SUBJECT TO RISKS THAT
COULD HURT OUR COMPANY.
In the future, we may pursue acquisitions to obtain complementary products,
services and technologies. An acquisition may not produce the revenues, earnings
or business synergies that we anticipated, and an acquired product, service or
technology might not perform as we expected. If we pursue any acquisition, our
management could spend a significant amount of time and effort in identifying
and completing the acquisition. If we complete an acquisition, we would probably
have to devote a significant amount of management resources to integrate the
acquired business with our existing business.
To pay for an acquisition, we might use our stock or cash. Alternatively, we
might borrow money from a bank or other lender. If we use our stock, our
stockholders would experience dilution of their ownership interests. If we use
cash or debt financing, our financial liquidity will be reduced.
THE MARKET PRICE OF OUR COMMON STOCK HAS BEEN AND MAY CONTINUE TO BE VOLATILE
AND YOU MAY NOT BE ABLE TO SELL YOUR SHARES AT OR ABOVE THE PUBLIC OFFERING
PRICE.
Our stock price, like that of other technology companies, has been extremely
volatile. The announcement of new products, services, technological innovations
or distribution partners by us or our competitors, quarterly variations in our
operating results, changes in revenues or earnings estimates by securities
analysts and speculation in the press or investment community are among the
factors affecting our stock price.
The stock market in general, and the market prices for Internet-related
companies in particular, have experienced extreme volatility that often has been
unrelated to the operating performance of these companies. These broad market
and industry fluctuations may adversely affect the market price of our common
stock, regardless of our operating performance. Recently, when the market price
of a stock has been volatile, holders of that stock have often instituted
securities class action litigation against the company that issued the stock. If
any of our stockholders brought a lawsuit against us, we could incur substantial
costs defending the lawsuit. The lawsuit could also divert the time and
attention of our management.
WE MAY LOSE MONEY ON FIXED-PRICE CONSULTING CONTRACTS.
In the future, an increased portion of our SiteMinder services revenues may be
derived from fixed-price contracts. We work with complex technologies in
compressed time frames and it can be difficult to judge the time and resources
necessary to complete a project. If we miscalculate the resources or time we
need to complete work under fixed-price contracts, our operating results could
be materially harmed.
LOSS OF OUR FIREWALL-1 RESELLER BUSINESS WOULD ADVERSELY AFFECT OUR OPERATING
RESULTS.
While we recently have focused our resources on developing and marketing our
SiteMinder software and services, we continue to generate a significant portion
of our revenues from our sales of Check Point Software Technologies' FireWall-1
product. Our FireWall-1 reseller business experiences competition from companies
that compete with FireWall-1, including Axent Technologies, Cisco Systems and
Trusted Information Systems, as well as from other resellers of FireWall-1. As a
result, we may not be able to maintain the current revenue levels generated by
our FireWall-1 reseller business.
CERTAIN PROVISIONS OF OUR CHARTER AND OF DELAWARE LAW MAKE A TAKEOVER OF OUR
COMPANY MORE DIFFICULT.
Our corporate documents and Delaware law contain provisions that might enable
our management to resist a takeover of our company. These provisions might
discourage, delay or prevent a change in the control of Netegrity or a change in
our management. These provisions could also discourage proxy contests and make
it more difficult for you and other stockholders to elect directors and take
other corporate actions. The existence of these provisions could limit the price
that investors might be willing to pay in the future for shares of our common
stock.
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WE MAY BE ADVERSELY IMPACTED BY UNEXPECTED YEAR 2000 ISSUES.
Computer systems and software must accept four digit entries to distinguish
twenty-first century dates from twentieth century dates. As a result, many
software and computer systems may need to be upgraded in order to be Year 2000
compliant. Significant uncertainties exist in the software industry concerning
the potential effects associated with such compliance. We have assessed the
impact of Year 2000 compliance on our products and systems. We cannot, however,
be certain that we have identified all of the potential risks to our business
that could result from matters related to the Year 2000. We have identified the
following risks that you should be aware of:
- Undetected Year 2000 problems that could affect our products. We
believe that all of our versions of our SiteMinder software products were
Year 2000 compliant at the time of installation. Although we have tested
these products for Year 2000 compliance, we cannot be certain that these
tests have detected all potential Year 2000 problems. The failure of our
currently supported products to be fully Year 2000 compliant could result
in claims by or liability to our customers, which could have a material
adverse effect on our business and operating results. In addition, we
have relied on representations of Check Point as to the Year 2000
readiness of FireWall-1. Any failure of FireWall-1 to be Year 2000
compliant may have a material adverse affect on our FireWall-1 reseller
business, our customer relationships and our operating results.
- Year 2000 problems that affect our internal systems. We believe that
our internal software systems are Year 2000 compliant. Although we have
tested these systems for Year 2000 compliance, we cannot be certain that
these tests have detected all potential Year 2000 problems. It is
possible that these systems could contain undetected problems that could
cause serious and costly disruptions which would have a material adverse
effect on our business and operating results.
- Year 2000 problems that affect products and services provided to us by
third parties. We have relied on certifications from our software
vendors and suppliers regarding the Year 2000 readiness of products and
services they provide to us. We have not conducted independent tests of
these products and services. It is possible that these systems could
contain undetected problems that could cause serious and costly
delivery delays which would have a material adverse effect on our
business and operating results.
THE YEAR 2000 ISSUE MAY CAUSE OUR CURRENT AND POTENTIAL CUSTOMERS TO DELAY
IMPLEMENTING OUR SOFTWARE.
Some of our customers and potential customers have implemented policies that
prohibit or discourage changing their internal computer systems until after
January 1, 2000. Our revenues may suffer if potential customers delay the
purchase of our products until after January 1, 2000. Purchasing decisions may
be delayed as potential customers halt development of their internal computer
systems or use their information technology budgets to address Year 2000 issues.
If our potential customers delay purchasing or implementing our products in
preparation for the Year 2000 problem, our business could be seriously harmed.
Company Description
We are a leading provider of software and services that manage and control user
access to web-based e-commerce applications. Our SiteMinder product is part of
the software infrastructure that is used to build and manage an e-commerce web
site. SiteMinder manages the complex process of identifying users and assigning
those users privileges to multiple e-commerce applications on a company's web
site. These assigned privileges determine what information a user can see and
what transactions a user can perform on the web site. SiteMinder enables our
customers to centrally control access to e-commerce web sites requiring secure
log-in, while distributing the administrative responsibilities to the most
appropriate parties. SiteMinder is designed to be scalable and reliable, to
integrate with our customers' existing systems and to accommodate emerging
Internet technology. We offer a wide range of support services that enable our
customers to successfully implement SiteMinder into their organizations. As of
September 30, 1999 we had 109 customers. We sell our products through a direct
sales force and through our distribution partners. To date, most of our
customers' deployments of SiteMinder have supported business-to-business
e-commerce applications, but our customers are beginning to deploy SiteMinder
for business-to-consumer applications.
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RESULTS OF OPERATIONS
The following information should be read in conjunction with the consolidated
financial statements and notes thereto:
Period to Period %
Increase (Decrease)
% of Total Revenues Three Months Ended
September 30,
For the three months 1998 1999 1998 vs. 1999
ended September 30 , Restated Restated Restated
------------------- -------- -------- -------------
Revenues:
SiteMinder software 33% 60% 389%
SiteMinder services 9 18 447
Other 58 22 (2)
--- --- ---
Total revenues 100 100 165
Gross profit 66 75 202
Selling, general and
administrative expenses 120 97 114
Research and development costs 40 30 102
Non-cash stock compensation
expense (income) (4%) 25% N/A
--- --- ---
Loss from operations (90%) (77%) 128%
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Revenues. Total revenues increased by $2.0 million, or 165%, to $3.3 million in
the three months ended September 30, 1999, from $1.3 million in the three months
ended September 30, 1998.
SiteMinder software revenues increased by $1.6 million, or 389%, to $2.0 million
in the three months ended September 30, 1999, from $411,000 in the three months
ended September 30, 1998. This increase is due to the continued increase in
market awareness and the acceptance of the SiteMinder product and expansion of
our sales organization. There were no significant revenues from SiteMinder prior
to the release of SiteMinder 3.0 in June 1998.
SiteMinder services revenues increased by $491,000, or 447%, to $601,000 in the
three months ended September 30, 1999, from $110,000 in the three months ended
September 30, 1998. This increase reflects the continued growth in the installed
base of SiteMinder software licenses and the increasing requirement to provide
installation and integration services for customers.
Other revenues decreased by $17,000, or 2%, to $719,000 in the three months
ended September 30, 1999, from $736,000 in the three months ended September 30,
1998.
Gross profit. Gross profit increased by $1.7 million, or 202%, to $2.5 million
in the three months ended September 30, 1999, from $826,000 in the three months
ended September 30, 1998. The increase in SiteMinder software revenues resulted
in higher gross profit due to lower costs associated with SiteMinder software
revenues.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $1.7 million, or 114%, to $3.2 million in
the three months ended September 30, 1999, from $1.5 million in the three months
ended September 30, 1998. This increase is primarily a result of our continuing
to build our sales and marketing infrastructure to support planned growth in
sales of our SiteMinder product and services.
Research and development costs. Research and development costs increased by
$511,000, or 102%, to $1.0 million in the three months ended September 30, 1999,
from $500,000 in the three months ended September 30, 1998. The increase was
primarily due to our continued development of SiteMinder and our increase in
research and development personnel. We expect to increase the amount spent on
research and development in the foreseeable future as we continue to develop and
enhance our product line to address the evolving needs of customers deploying
large-scale and transaction-based e-commence applications. Research and
development costs may be incurred substantially in advance of the related
revenues and in some cases may not generate revenues. We did not capitalize any
research and development costs in the three months ended September 30, 1998 or
the three months ended September 30, 1999. There was no capitalized software as
of September 30, 1999.
Non-cash stock compensation expense. The non-cash stock compensation expense
increased by $876,658 to $821,278 in the three months ended September 30, 1999
from a credit of $55,380 in the three months ended September 30, 1998. This
expense represents the compensation charge for a common stock warrant for
100,000 shares issued to a director in connection with the January 1998
preferred stock financing. The warrant is being accounted for as a variable
award and as a result, the expense primarily relates to the increase in the fair
value of the Company's common stock during the respective periods. The expense
is recognized over the vesting period until the warrant is exercised.
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Interest income (expense), net. Net interest income increased by $21,000, or
66%, to $52,000 in the three months ended September 30, 1999, from $31,000 in
the three months ended September 30, 1998. This increase is mainly attributable
to a higher average cash balance in the three months ended September 30, 1999.
There were no borrowings outstanding during the three months ended September 30,
1998 or the three months ended September 30, 1999.
Period to Period %
Increase (Decrease)
% of Total Revenues Nine Months Ended
For the nine months September 30,
ended September 30, 1998 1999 1998 vs. 1999
---- ---- -------------
Revenues:
SiteMinder software 25% 56% 471%
SiteMinder services 8 17 495
Other 67 27 2
--- --- ---
Total revenues 100 100 157
Gross profit 56 71 228
Selling, general and
administrative expenses 142 97 76
Research and development costs 44 31 81
Non-cash stock compensation
expense (income) 0% 25% N/A
--- --- ---
Loss from operations (130%) (82%) (63%)
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Revenues. Total revenues increased by $4.9 million, or 157%, to $8.0 million in
the nine months ended September 30, 1999, from $3.1 million in the nine months
ended September 30, 1998.
SiteMinder software revenues increased by $3.7 million, or 471%, to $4.5 million
in the nine months ended September 30, 1999, from $784,000 in the nine months
ended September 30, 1998. This increase is due to the continued increase in
market awareness and the acceptance of the SiteMinder product and expansion of
our sales organization. There were no significant revenues from SiteMinder prior
to the release of SiteMinder 3.0 in June 1998.
SiteMinder services revenues increased by $1.2 million, or 495%, to $1.4 million
in the nine months ended September 30, 1999, from $236,000 in the nine months
ended September 30, 1998. This increase reflects the continued growth in the
installed base of SiteMinder software licenses and the increasing requirement to
provide installation and integration services for customers.
Other revenues increased by $44,000, or 2%, to $2.1 million in the nine months
ended September 30, 1999, from $2.1 million in the nine months ended September
30, 1998.
Gross profit. Gross profit increased by $4.0 million, or 228%, to $5.7 million
in the nine months ended September 30, 1999, from $1.7 million in the nine
months ended September 30, 1998. The increase in SiteMinder software revenues
resulted in higher gross profit due to lower costs associated with SiteMinder
software revenues.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $3.4 million, or 76%, to $7.8 million in
the nine months ended September 30, 1999, from $4.4 million in the nine months
ended September 30, 1998. This increase was primarily a result of the continued
development of our sales and marketing infrastructure to support planned growth
in sales of our SiteMinder product and services.
Research and development costs. Research and development costs increased by $1.1
million, or 81%, to $2.5 million in the nine months ended September 30, 1999,
from $1.4 million in the nine months ended September 30, 1998. The increase was
primarily due to our continued development of SiteMinder and our increase in
research and development personnel. We expect to continue to increase the amount
spent on research and development in the foreseeable future as we continue to
develop and enhance our product line to address the evolving needs of customers
deploying large-scale and transaction-based e-commerce applications. Research
and development costs may be incurred substantially in advance of the related
revenues and in some cases may not generate revenues. In the nine months ended
September 30, 1998, we capitalized $249,000 of research and development costs,
net of amortization, as a result of our realizing technological feasibility. We
did not capitalize any research and development costs in the nine months ended
September 30, 1999. There was no capitalized software as of September 30, 1999.
Non-cash stock compensation expense. The non-cash stock compensation expense
increased by $2,021,767 to $2,026,367 in the nine months ended September 30,
1999 from $4,600 in the nine months ended September 30, 1998. This expense
represents the compensation charge for a common stock warrant for 100,000 shares
issued to a director in connection with the January 1998 preferred stock
financing. The warrant is being accounted for as a variable award and as a
result, the expense primarily relates to the increase in the fair value of the
Company's common stock during the respective periods. The expense is recognized
over the vesting period until the warrant is exercised.
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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.
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LIQUIDITY AND CAPITAL RESOURCES
(in thousands, except ratios)
September 30, December 31,
Financial Condition as of 1999 1998
---- ----
Cash and cash equivalents $11,212 $1,175
Working capital 10,986 47
Current ratio 4.09 1.01
Cash Flow Activity Summary for September 30, September 30,
the Nine Months Ended 1999 1998
---- ----
Net cash used for operating activities $(5,151) $(4,428)
Net cash used for investing activities (334) (196)
Net cash provided by
financing activities 15,522 5,121
LIQUIDITY AND CAPITAL RESOURCES
In recent years, we have funded our operations primarily from sales of
securities.
Cash used for operating activities in the nine months ended September 30, 1999
was $5.2 million, primarily due to a net loss of $4.5 million and an increase in
accounts receivable, partially offset by increases in accounts payable and
accrued expenses. Cash used for operating activities in the year ended December
31, 1998 was $5.8 million, primarily due to a net loss of $5.2 million and an
increase in accounts receivable, partially offset by increases in accounts
payable, accrued expenses and deferred revenue.
Cash used for investing activities was $334,000 in the nine months ended
September 30, 1999, and $167,000 in the year ended December 31, 1998. Investing
activities for the periods consisted primarily of the purchases of equipment,
consisting largely of computer servers, workstations and networking equipment.
Cash provided by financing activities in the nine months ended September 30,
1999 was $15.5 million, primarily as a result of our sale of 795,651 shares of
common stock to certain investors in a private placement on February 8, 1999 at
a price of $5.75 per share and 534,242 shares of common stock to certain
investors in a private placement on September 9, 1999 at a price of $20.59 per
share. Cash provided by financing activities in the year ended December 31, 1998
was $5.2 million, primarily due to our issuance of preferred stock and warrants
for net proceeds totaling $5.0 million.
As of September 30, 1999, our primary financial commitments consisted of
obligations outstanding under operating leases.
In recent years, we have significantly increased our operating expenses. We
anticipate that we will continue to experience significant growth in our
operating expenses for the foreseeable future and that our operating expenses
and capital expenditures will constitute a material use of our cash resources.
In addition, we may utilize cash resources to fund acquisitions or investments
in businesses, technologies, products or services that are complementary to our
business. We believe that the net proceeds from our proposed secondary offering
and the existing cash and cash equivalents will be sufficient to meet our
anticipated cash requirements for working capital and capital expenditures for
at least the next twelve months.
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IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. This could result
in a system failure or miscalculations if a computer program recognizes a date
of "00" as the year 1900 instead of 2000. If not corrected, many computer
systems could fail or create erroneous results in 2000.
State of Readiness
We have completed our initial assessment and testing of products, systems and
processes with respect to the "Year 2000" issue. We plan to continue our
assessment and testing of products, systems and processes throughout the
remainder of 1999.
Products
All dates used within our SiteMinder 3.0 product utilize a standard four-digit
year format. SiteMinder 3.0 has been tested by configuring a test environment
with the system dates on the test computers set to various dates in the
twenty-first century. SiteMinder 3.0 was then put through a regression test and
the output verified with previous test runs with no errors. We have verified
that when used properly and in conformity with the product information we
supply, SiteMinder 3.0 will accurately store, display, process, provide and
receive data from, into and between 1999 and 2000, including leap year
calculations, provided that all other technology used in combination with
SiteMinder 3.0 properly exchanges date data with SiteMinder 3.0.
The assessment of whether a complete system or device in which SiteMinder 3.0 is
embedded will operate correctly for an end user depends in large part on the
year 2000 readiness of the system's other components, most of which are supplied
by parties other than our company. Users must test their unique combination of
hardware, system software, and transaction and application software in order to
assess the Year 2000 capability of a user's particular system. In addition, we
have relied on representations of Check Point Software Technologies as to the
Year 2000 readiness of FireWall-1. Any failure of FireWall-1 to be Year 2000
compliant may have a material adverse effect on our FireWall-1 reseller
business, our customer relationships and our operating results.
Internal Systems and Processes
We have completed our assessment of our internal systems and processes,
including computers and related systems, office and facilities equipment,
including fax machines, photocopiers, telephone switches, security systems and
other common devices that may be affected by the Year 2000 problem. In September
1999, we installed a necessary telephone system upgrade. Based on our assessment
to date, we believe that all of our other internal systems and processes are
Year 2000 capable.
Third-Party Vendors and Suppliers
We have reviewed Year 2000 statements provided by our significant vendors. We
have not independently verified Year 2000 statements made by third parties, and
we can express no assurances as to the Year 2000 compliance status of third
parties. We may not be able to know with certainty whether vendors are
compliant. Failure of critical vendors to achieve Year 2000 compliance could
result in delayed deliveries of products and services to us. If those delays are
extensive, they could have a material adverse effect on our business.
Costs of Year 2000 Compliance
All costs related to Year 2000 issues are being expensed as incurred. We do not
expect the total costs of evaluation and testing to be material. Other potential
costs may include updating of computer software and hardware, as well as other
out-of-pocket costs. Costs associated with Year 2000 issues totaled
approximately $100,000 through September 30, 1999. We anticipate that we may
incur up to an additional $100,000 in future costs associated with our Year 2000
readiness.
Risks of Year 2000 Issues
Although we believe we are taking prudent action related to the identification
and resolution of issues related to the Year 2000 problem, our assessment is
still in progress. Our failure to correct a material Year 2000 problem could
result in an interruption in, or a failure of, normal business activities. An
interruption or failure could materially and adversely affect our results of
operations, liquidity and financial condition. Due to
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the general uncertainty of the Year 2000 readiness of third parties, we are
unable to determine at this time whether the consequences of Year 2000 failures
will have a material adverse impact on our results of operations, liquidity or
financial position. Our assessment, testing and contingency planning are
expected to reduce, but not eliminate, our level of uncertainty about the Year
2000 issue and the readiness of third parties. We believe that the completion of
our assessment, testing and contingency planning should reduce the possibility
of significant interruptions to normal operations.
Contingency Plan
Based on our assessments to date, we believe our existing internal systems and
procedures, including our standard redundant systems and servers, will enable us
to continue to deliver our software in 2000 without significant interruption. As
a result, we do not intend to formulate a detailed contingency plan for Year
2000 failures. We do not plan to assess the specific Year 2000 compliance of
external forces such as utility and transportation systems or Year 2000
compliance failures that might generally affect industry and commerce. Any Year
2000 failure of this type, or any other significant unforeseen Year 2000
failure, could have a material adverse effect on our business and operating
results.
3. Quantitative and Qualitative Disclosures About Market Risk
The Company does not believe that it has any material market risk exposure with
respect to derivatives or other financial instruments that would require
disclosure under this item.
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PART II
ITEM 5. EXHIBITS
11. Computation of earnings per share
27. Financial Data Schedule
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: July 25, 2000 By: /s/ Barry N. Bycoff
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Barry N. Bycoff
President and Chief Executive
Officer (Principal Executive
Officer)
Date: July 25, 2000 By: /s/ James E. Hayden
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James E. Hayden
Vice President, Finance and
Administration, and Chief Financial
Officer (Principal Financial and
Chief Accounting Officer)
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