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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 1-10139
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______TO_______
NETEGRITY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 04-2911320
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
245 WINTER STREET
WALTHAM, MASSACHUSETTS 02451
(Address of principal executive offices, including Zip Code)
</TABLE>
(781) 890-1700
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting Common Stock held by
non-affiliates of the registrant was $1,720,048,859 based on the closing price
of the registrant's Common Stock on March 13, 2000 as reported by the Nasdaq
Over-the-Counter Interdealer Automated Quotation System ($89.50 per share). As
of March 13, 2000, there were 19,218,423 shares of Common Stock outstanding.
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Document incorporated by reference:
Part III incorporates information by reference from the definitive proxy
statement for the registrant's annual meeting to be held on May 18, 2000.
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FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This report and the documents incorporated in it by reference contain
forward-looking statements about our plans, objectives, expectations and
intentions. You can identify these statements by words such as "expect,"
"anticipate," "intend," "plan," "believe," "seek," "estimate," "may," "will"
and "continue" or similar words. You should read statements that contain these
words carefully. They discuss our future expectations, contain projections of
our future results of operations or our financial condition or state other
forward-looking information, and may involve known and unknown risks over which
we have no control. You should not place undue reliance on forward-looking
statements. We cannot guarantee any future results, levels of activity,
performance or achievements. Moreover, we assume no obligation to update
forward-looking statements or update the reasons actual results could differ
materially from those anticipated in forward-looking statements. The factors
discussed in the sections captioned "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business"
in this report and the documents incorporated in it by reference identify
important factors that may cause our actual results to differ materially from
the expectations we describe in our forward-looking statements.
This report and the documents incorporated in it by reference contain
data related to the e-commerce market. These market data have been included in
studies published by the market research firms of Forrester Research and
International Data Corporation. These data include projections that are based
on a number of assumptions, including increasing worldwide business use of the
Internet, the growth in the number of web access devices per user, the absence
of any failure of the Internet, and the continued improvement of security on
the Internet. If any of these assumptions is incorrect, actual results may
differ from the projections based on those assumptions.
RISK FACTORS
The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward-looking statements. In that context, the discussion
in this Item contains forward-looking statements which involve certain degrees
of risk and uncertainties, including statements relating to liquidity and
capital resources. Except for the historical information contained herein,
the matters discussed in this section are such forward-looking statements
that involve risks and uncertainties, including:
WE HAVE INCURRED SUBSTANTIAL LOSSES AND MAY NOT BE PROFITABLE IN THE FUTURE.
In recent years, we have incurred substantial operating losses in every
fiscal period. We cannot predict when we will become profitable, if at all, and
if we do, that we will remain profitable for any substantial period of time.
Failure to achieve profitability within the time frame expected by investors may
adversely affect the market price of our common stock. In the year ended
December 31, 1999, we had a net loss of $9.9 million. As a result of ongoing
operating losses, at December 31, 1999, we had an accumulated deficit of $24.8
million. We have generated relatively small amounts of SiteMinder revenues until
recent fiscal quarters, while increasing expenditures in all areas, particularly
in research and development and sales and marketing, in order to execute our
business plan. Although we have experienced revenue growth in connection with
SiteMinder in recent periods, the growth has been off of a small base, and it is
unlikely that the recent growth rates are sustainable.
DISAPPOINTING QUARTERLY RESULTS COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK
TO FALL SUBSTANTIALLY.
Our quarterly revenues and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter. If our quarterly revenues
or operating results fall below the expectations of investors, the price of our
common stock could fall substantially.
Our quarterly revenues may fluctuate for several reasons, including the
following:
- market acceptance of our SiteMinder products;
- our success in obtaining follow-on sales to existing customers;
- the long sales and deployment cycle for sales of SiteMinder licenses;
- our ability to hire and retain personnel, particularly in services and
sales and marketing;
- the release of new versions of SiteMinder or other products; and
- the development of our direct and indirect sales channels.
In addition, because our revenues from services are largely correlated with
our SiteMinder software revenues, a decline in SiteMinder software revenues
could also cause a decline in our SiteMinder services revenues in the same
quarter or in subsequent quarters. Other factors, many of which are outside our
control, could also cause variations in our quarterly revenues and operating
results.
Most of our expenses, such as employee compensation and rent, are
relatively fixed. Moreover, our expense levels are based, in part, on our
expectations regarding future revenue increases. As a result, any shortfall in
revenues in relation to our expectations could cause significant changes in our
operating results from quarter to quarter and could result in increased
quarterly losses.
OUR FUTURE SUCCESS WILL DEPEND ON OUR ABILITY TO MARKET SITEMINDER AND RELATED
SERVICES SUCCESSFULLY.
The sale of SiteMinder licenses and related services provides a substantial
majority of our total revenues. These sales accounted for 76% of our total
revenues for the year ended December 31, 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 portal
management, including usage of
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SiteMinder for business-to-consumer applications, and customer demand for the
specific functionality of SiteMinder. We cannot be sure that either will occur.
Like most technology products at an early stage of development, SiteMinder may
require extensive reengineering or upgrading if it fails to meet the performance
needs or expectations of our customers when shipped or contains significant
software defects or bugs. If we fail in marketing SiteMinder products and
services, for whatever reason, our business would be harmed.
OUR SUCCESS IS DEPENDENT ON OUR ABILITY TO ENHANCE OUR SITEMINDER PRODUCT LINE
AND DEVELOP NEW PRODUCTS.
We believe our success is dependent, in large part, on our ability to
enhance and broaden our SiteMinder product line to meet the evolving needs of
both the business-to-business and business-to-consumer market. We cannot be sure
that we will be able to respond effectively to technological changes or new
industry standards or developments. In the past, we have been forced to delay
introduction of several new product versions. In the future, we could be
adversely affected if we incur significant delays or are unsuccessful in
enhancing our SiteMinder product line or developing new products, or if any of
our enhancements or new products do not gain market acceptance.
OUR PERFORMANCE DEPENDS ON OUR ABILITY TO OBTAIN FOLLOW-ON SALES.
Customers typically place small initial orders for SiteMinder installations
to allow them to evaluate its performance. Our strategy is to pursue more
significant follow-on sales after these initial installations. Our financial
performance depends on successful initial deployments of SiteMinder that, in
turn, lead to follow-on sales. We cannot be sure that initial deployments of
SiteMinder by our customers will be successful, or that we will be able to
obtain follow-on sales.
WE FACE SIGNIFICANT COMPETITION FROM THE INTERNAL EFFORTS OF POTENTIAL CUSTOMERS
AND FROM OTHER TECHNOLOGY COMPANIES AND WE MAY NOT BE ABLE TO COMPETE
EFFECTIVELY.
The market for secure user management products and services is relatively
immature and highly competitive. We expect the level of competition to increase
as a result of the anticipated growth of e-commerce. Until recently, our primary
source of competition was from secure user management software developed
in-house. Many of our potential customers have the resources to establish
in-house software development capabilities, and some of them, from time to time,
may choose to develop their own secure user management technology that is
competitive with ours. In addition, we have faced competition from web
development professional services organizations. Today our primary competitors
include enCommerce and the partnership between IBM and DASCOM. In addition, a
number of other security and software companies have indicated that they offer
products which may compete with ours. We expect that additional competitors will
emerge in the future. Current and potential competitors have established, or may
in the future establish, cooperative relationships with third parties to
increase the availability of their products to the marketplace. It is possible
that new competitors or alliances may emerge and rapidly acquire significant
market share. Potential competitors may have significantly greater financial,
marketing, technical and other competitive resources than we have. If, in the
future, a competitor chooses to bundle a competing secure user management
product with other e-commerce applications, the demand for our products might be
substantially reduced. Many of these factors are out of our control, and there
can be no assurance that we can maintain or enhance our competitive position
against current and future competitors.
THE DEVELOPMENT OF A MARKET FOR SITEMINDER IS UNCERTAIN.
We provide secure user management solutions for web-based e-commerce
applications. Our market is new and rapidly evolving. If the market for secure
user management solutions does not grow at a significant rate, this will have a
material adverse effect on our business, operating results and financial
condition. As is typical for new and rapidly evolving industries, customer
demand for recently introduced secure user management products is highly
uncertain.
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OUR BUSINESS WILL BE ADVERSELY AFFECTED IF THE INTERNET DOES NOT BECOME A VIABLE
AND SUBSTANTIAL COMMERCIAL MEDIUM.
Our future success depends heavily on the acceptance and wide use of the
Internet for e-commerce. If e-commerce does not continue to grow or grows more
slowly than expected, significant demand for SiteMinder and related services may
fail to develop. Consumers and businesses may reject the Internet as a viable
commercial medium for a number of reasons, including potentially inadequate
network infrastructure, slow development of enabling technologies, insufficient
commercial support or privacy concerns. In addition, delays in the development
or adoption of new standards and protocols required to handle increased levels
of e-commerce, or increased government regulation or taxation, could cause the
Internet to lose its viability as a commercial medium.
REGULATIONS OR CONSUMER CONCERNS REGARDING THE USE OF "COOKIES" ON THE INTERNET
COULD REDUCE THE FUNCTIONALITY OF SITEMINDER.
SiteMinder uses cookies to support its single sign-on functionality. A
cookie is information keyed to a specific user that is stored on the hard drive
of the user's computer, typically without the user's knowledge. Cookies are
generally removable by the user, and can be refused by the user at the point at
which the information would be stored on the user's hard drive. A number of
governmental bodies and commentators in the United States and abroad have urged
passage of laws limiting or abolishing the use of cookies. The passage of laws
limiting or abolishing the use of cookies, or the widespread deletion or refusal
of cookies by web site users, could reduce or eliminate the effectiveness of
single sign-on and could reduce market demand for SiteMinder.
WE MUST HIRE AND RETAIN SKILLED PERSONNEL IN A TIGHT LABOR MARKET.
Qualified personnel are in great demand throughout the software industry.
Our success depends, in large part, upon our ability to attract, train, motivate
and retain highly skilled employees, particularly software engineers,
professional services personnel, sales and marketing personnel, and other senior
personnel. Our failure to attract and retain the highly trained technical
personnel that are integral to our product development, professional services
and direct sales teams may limit the rate at which we can generate sales and
develop new products or product enhancements. This could have a material adverse
effect on our business, operating results and financial condition.
OUR SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP OUR DIRECT SALES AND INDIRECT
DISTRIBUTION CHANNELS.
To increase our revenues, we must develop our direct sales channel and
increase the number of our indirect channel partners. A failure to do so could
have a material adverse effect on our business, operating results and financial
condition. There is intense competition for sales personnel in our business, and
we cannot be sure that we will be successful in attracting, integrating,
motivating and retaining sales personnel. In addition, we must increase the
number of strategic partnerships and other third-party relationships with
vendors of Internet-related systems and application software, resellers and
systems integrators. Our existing or future channel partners may choose to
devote greater resources to marketing and supporting the products of other
companies. In addition, we will need to resolve potential conflicts among our
sales force and channel partners.
OUR FAILURE TO EXPAND OUR PROFESSIONAL SERVICES RESOURCES COULD LIMIT THE
SUCCESS OF SITEMINDER.
Our professional services organization provides critical support to our
customers' installation and deployment of SiteMinder. If we fail to expand our
professional services resources, our ability to increase sales of SiteMinder may
be limited. In addition, if we cannot adequately support SiteMinder
installations, our customers' use of our products may fail, which could harm our
reputation and hurt our business.
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OUR LENGTHY SALES CYCLE MAKES IT DIFFICULT TO PREDICT OUR QUARTERLY OPERATING
RESULTS.
We have a long sales cycle because we generally need to educate potential
customers regarding the use and benefits of SiteMinder. Our sales cycle varies
depending on the size and type of customer contemplating a purchase and whether
we have conducted business with a potential customer in the past. These
potential customers frequently need to obtain approvals from multiple decision
makers prior to making purchase decisions. Our long sales cycle, which can range
from several weeks to several months or more, makes it difficult to predict the
quarter in which sales will occur. Delays in sales could cause significant
variability in our revenues and operating results for any particular period.
OUR FAILURE TO MANAGE OUR RAPID GROWTH EFFECTIVELY COULD HURT OUR BUSINESS.
Our failure to manage our rapid growth effectively could have a material
adverse effect on the quality of our products, our ability to retain key
personnel and our business, operating results and financial condition. We have
been experiencing a period of rapid growth that has been placing a significant
strain on all of our resources. From December 31, 1998 to December 31, 1999, the
number of our employees increased from 64 to 138. To manage future growth
effectively we must maintain and enhance our financial and accounting systems
and controls, integrate new personnel and manage expanded operations.
IF WE LOSE THE SERVICES OF BARRY BYCOFF OR ANY OTHER MEMBER OF OUR MANAGEMENT
TEAM, OUR BUSINESS COULD SUFFER.
Our future success depends, to a significant degree, on the skill,
experience and efforts of Barry Bycoff, our chief executive officer, and the
rest of our management team. The loss of any member of our management team could
have a material adverse effect on our business, operating results and financial
condition. We also depend on the ability of our officers and key employees to
work effectively as a team.
AS WE EXPAND OUR INTERNATIONAL OPERATIONS, WE WILL FACE NEW RISKS TO OUR
SUCCESS.
Historically, we have not derived a significant portion of our total
revenues from sales to customers outside the United States. However, we intend
to expand our international operations in the future. This expansion will
require additional resources and management attention, and will subject us to
new regulatory, economic and political risks. We have very little experience in
international markets. As a result, we cannot be sure that our expansion into
global markets will be successful. In addition, we will face new risks in doing
business internationally. These risks could reduce demand for our products and
services, increase the prices at which we can sell our products and services, or
otherwise have an adverse effect on our operating results. Among the risks we
believe are most likely to affect us are:
- longer payment cycles and problems in collecting accounts receivable;
- adverse changes in trade and tax regulations, including restrictions on
the import and export of sensitive technologies, such as encryption
technologies, that we use or may wish to use in our software products;
- the absence or significant lack of legal protection for intellectual
property rights;
- difficulties in managing an organization spread over several countries,
including complications arising from cultural, language and time
differences that may lengthen sales and implementation cycles;
- currency risks, including fluctuations in exchange rates; and
- political and economic instability.
OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR PROPRIETARY RIGHTS.
Our success depends to a significant degree upon the protection of our
software and other proprietary technology. The unauthorized reproduction or
other misappropriation of our proprietary technology could enable third parties
to benefit from our technology without paying us for it. This could have a
material adverse effect on our business, operating results and financial
condition. We depend upon a combination of
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trademark, trade secret and copyright laws, license agreements and
non-disclosure and other contractual provisions to protect proprietary and
distribution rights in our products. In addition, we attempt to protect our
proprietary information and the proprietary information of our vendors and
partners through confidentiality and/or license agreements with our employees
and others. Although we have taken steps to protect our proprietary technology,
they may be inadequate. Existing trade secret, copyright and trademark laws
offer only limited protection. Moreover, the laws of other countries in which we
market our products may afford little or no effective protection of our
intellectual property. If we resort to legal proceedings to enforce our
intellectual property rights, the proceedings could be burdensome and expensive,
even if we were to prevail.
CLAIMS BY OTHER COMPANIES THAT WE INFRINGE THEIR PROPRIETARY TECHNOLOGY COULD
HURT OUR FINANCIAL CONDITION.
If we discover that any of our products violated third party proprietary
rights, there can be no assurance that we would be able to reengineer our
product or to obtain a license on commercially reasonable terms to continue
offering the product without substantial reengineering. We do not conduct
comprehensive patent searches to determine whether the technology used in our
products infringes patents held by third parties. In addition, product
development is inherently uncertain in a rapidly evolving technology environment
in which there may be numerous patent applications pending, many of which are
confidential when filed, with regard to similar technologies. Any claim of
infringement could cause us to incur substantial costs defending against the
claim, even if the claim is invalid, and could distract our management from our
business. Furthermore, a party making such a claim could secure a judgment that
requires us to pay substantial damages. A judgment could also include an
injunction or other court order that could prevent us from selling our products.
Any of these events could have a material adverse effect on our business,
operating results and financial condition.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF OUR PRODUCTS CONTAIN ERRORS.
Software products as complex as ours may contain undetected errors or
"bugs" that result in product failures. The occurrence of errors could result in
loss of or delay in revenues, loss of market share, failure to achieve market
acceptance, diversion of development resources, injury to our reputation, or
damage to our efforts to build brand awareness, any of which could have a
material adverse effect on our business, operating results and financial
condition.
WE COULD INCUR SUBSTANTIAL COSTS RESULTING FROM PRODUCT LIABILITY CLAIMS
RELATING TO OUR CUSTOMERS' USE OF OUR PRODUCTS.
Many of the e-commerce applications supported by our products are critical
to the operations of our customers' businesses. Any failure in a customer's web
site or application caused or allegedly caused by our products could result in a
claim for substantial damages against us, regardless of our responsibility for
the failure. Although we maintain general liability insurance, including
coverage for errors and omissions, there can be no assurance that our existing
coverage will continue to be available on reasonable terms or will be available
in amounts sufficient to cover one or more large claims, or that the insurer
will not disclaim coverage as to any future claim.
IF WE ACQUIRE OTHER COMPANIES OR BUSINESSES, WE WILL BE SUBJECT TO RISKS THAT
COULD HURT OUR COMPANY.
In the future, we may pursue acquisitions to obtain complementary products,
services and technologies. An acquisition may not produce the revenues, earnings
or business synergies that we anticipated, and an acquired product, service or
technology might not perform as we expected. If we pursue any acquisition, our
management could spend a significant amount of time and effort in identifying
and completing the acquisition. If we complete an acquisition, we would probably
have to devote a significant amount of management resources to integrate the
acquired business with our existing business.
To pay for an acquisition, we might use our stock or cash. Alternatively,
we might borrow money from a bank or other lender. If we use our stock, our
stockholders would experience dilution of their ownership interests. If we use
cash or debt financing, our financial liquidity will be reduced.
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THE MARKET PRICE OF OUR COMMON STOCK HAS BEEN AND MAY CONTINUE TO BE VOLATILE.
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
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existence of these provisions could limit the price that investors might be
willing to pay in the future for shares of our common stock.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with our consolidated financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEARS ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
MARCH 31, ------------ ---------------------------
1996 1996 1997 1998 1999
Restated Restated
----------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
SiteMinder software............. -- -- $ 237 $ 1,483 $ 7,527
SiteMinder services............. -- -- 12 468 2,211
Other........................... $3,725 $ 3,637 4,484 2,840 3,008
------ ------- ------- ------- -------
Total revenues.................. 3,725 3,637 4,733 4,791 12,746
Cost of SiteMinder software....... -- -- 47 203 631
Cost of SiteMinder services....... -- -- -- 110 1,227
Cost of other..................... 2,173 2,176 2,423 1,451 1,620
------ ------- ------- ------- -------
Total cost of revenues.......... 2,173 2,176 2,470 1,764 3,478
------ ------- ------- ------- -------
Gross profit...................... 1,552 1,461 2,263 3,027 9,268
Selling, general and
administrative expenses......... 1,178 2,303 5,509 6,395 11,806
Research and development costs.... -- 705 1,028 1,991 3,744
Non-cash stock compensation
expense......................... -- -- -- 235 4,488
------ ------- ------- ------- -------
Income (loss) from operations..... 374 (1,547) (4,274) (5,594) (10,770)
Interest income (expense), net.... 20 181 203 130 824
Share of loss from investment in
Encotone, Inc. ................. -- (40) (132) -- --
Write off of investment in
Encotone LTD.................... -- -- (1,049) -- --
------ ------- ------- ------- -------
Income (loss) from continuing
operations...................... 394 (1,406) (5,252) (5,464) (9,946)
Income (loss) from discontinued
operations...................... (240) (520) -- -- --
Gain on sale of assets of
discontinued operations......... -- 6,000 -- -- --
------ ------- ------- ------- -------
Income (loss) before provision for
income taxes.................... 154 4,074 (5,252) (5,464) (9,946)
Provision for income taxes........ 25 (74) -- -- --
------ ------- ------- ------- -------
Net income (loss)................. $ 129 $ 4,000 $(5,252) $(5,464) $(9,946)
Recognition of beneficial
conversion feature and
accretion of preferred stock.... -- -- -- (2,784) (413)
------ ------- ------- ------- -------
Net loss attributable to common
stockholders ................... 129 4,000 (5,252) (8,248) (10,359)
====== ======= ======= ======= =======
Basic and diluted earnings per
share:
From continuing operations...... $ 0.05 $ (0.16) $ (0.57) $ (0.88) $ (0.89)
From operation of discontinued
operations.................... (0.03) (0.06) -- -- --
Gain on sale of assets.......... -- 0.67 -- -- --
------ ------- ------- ------- -------
Net income (loss) attributable
to common stockholders......... $ 0.02 $ 0.45 $ (0.57) $ (0.88) $ (0.89)
====== ======= ======= ======= =======
Weighted average shares
outstanding..................... 8,835 8,944 9,279 9,362 11,648
</TABLE>
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<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ---------------------------------------
1996 1996 1997 1998 1999
Restated Restated
------- ------- ------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 1,410 $ 6,791 $2,134 $1,175 $102,879
Working capital................................... 401 4,629 9 47 104,435
Total assets...................................... 10,456 10,259 4,849 4,225 110,970
Total stockholders' equity (deficit).............. 1,903 6,149 1,016 (3,492) 106,434
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Financial
Data" appearing in Item 6 of this report and our consolidated financial
statements and related notes appearing under Item 8 of this report. This
discussion and analysis contains forward-looking statements that involve risks
and uncertainties. Our actual results may differ materially from those
anticipated in these forward-looking statements, as described under
"Forward-Looking Statements and Industry Data" under Item 1 of this report.
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-K/A reflect all such revisions through December 31, 1999. The
adjustments to the financial statements had no impact on the Company's total
assets, total revenues or cash flows. See Note A to the consolidated financial
statements.
OVERVIEW
We are a leading provider of software and services for managing and
controlling user access to web-based e-commerce applications. We introduced our
flagship product, SiteMinder, with the first commercial release of SiteMinder
2.0 in November 1997. In June 1998, we began shipment of SiteMinder 3.0, the
first commercially available directory-enabled secure user management solution
for web-based e-commerce applications. We changed our fiscal year end from March
31 to December 31, effective with the fiscal period ending December 31, 1996.
We derive our revenues from the sale of SiteMinder software and services
and from revenues related to the resale of Check Point Software Technologies'
FireWall-1 software product. SiteMinder software revenues are derived from the
sale of SiteMinder product licenses. SiteMinder service revenues are derived
from fees related to the implementation and maintenance of SiteMinder and
training on the SiteMinder product. Other revenues are derived from the resale,
through a dedicated sales organization, of FireWall-1, complementary products
from other vendors and related maintenance, consulting and training services.
SiteMinder software revenues accounted for 59% of total revenues in the year
ended December 31, 1999 and 31% of total revenues in the year ended December 31,
1998. SiteMinder services revenues accounted for 17% of total revenues in the
year ended December 31, 1999 and 10% of total revenues in the year ended
December 31, 1998. Other revenues accounted for 24% of total revenues in the
year ended December 31, 1999 and 59% of total revenues in the year ended
December 31, 1998. We expect SiteMinder software and services revenues to
increase as a percentage of total revenues.
We currently sell our SiteMinder products through a combination of our
direct sales force, worldwide resellers and licensees. We anticipate that the
percentage of our revenues derived outside of North America will increase.
Increasing our international sales may subject us to risks, many of which are
outside
10
<PAGE> 12
our control, including economic uncertainties, currency fluctuations, political
instability and uncertain cultural and regulatory environments.
Our cost of sales includes, among other things, royalties due to third
parties for technology included in our products, product fulfillment costs, and
salaries and related expenses for our consulting, education and technical
support services organizations, and the associated cost of training facilities.
Our operating expenses are classified into two general categories: selling,
general and administrative and research and development. Selling, general and
administrative expenses consist primarily of salaries and other related costs
for selling, administrative and marketing personnel, sales commissions, travel,
legal and accounting services, public relations, marketing materials, trade
shows and certain facilities-related expenses. Research and development expenses
consist primarily of personnel costs to support product development.
Since 1996, we have incurred substantial costs to develop our technology
and products, to recruit and train personnel for our research and development,
sales, marketing and professional services departments, and to establish an
administrative organization. We have incurred net losses in each fiscal quarter
since 1996 and had an accumulated deficit of $24.8 million as of December 31,
1999. We anticipate that our operating expenses will increase substantially in
future quarters as we increase sales and marketing operations, expand
distribution channels, increase research and development, broaden professional
services, expand facilities and support, and improve operational and financial
systems. Accordingly, we expect to incur additional losses through at least
2000.
Although we have experienced significant growth in revenues in recent
periods, that growth has been from a relatively small base, and there can be no
assurance that those growth rates are sustainable. Therefore, historical growth
rates should not be considered indicative of future operating results. There can
also be no assurance that we will be able to continue to increase our revenues
or attain profitability or, if increases in revenue and profitability are
achieved, that they can be sustained. We believe that the period-to-period
comparisons of our historical operating results are not meaningful and should
not be relied upon as an indication of future performance.
11
<PAGE> 13
RESULTS OF OPERATIONS
The following table presents statement of operations data as percentages of
total revenues for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------------
1997 1998 1999
---- ---- ----
Restated Restated
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
SiteMinder software......................... 5% 31% 59%
SiteMinder services......................... -- 10 17
Other....................................... 95 59 24
---- ---- ----
Total revenues.............................. 100 100 100
Cost of SiteMinder software................... 1 4 4
Cost of SiteMinder services................... -- 2 10
Cost of other................................. 51 31 13
---- ---- ----
Total cost of revenues...................... 52 37 27
---- ---- ----
Gross profit.................................. 48 63 73
Selling, general and administrative
expenses.................................... 116 133 93
Research and development costs................ 22 42 29
Non-cash stock compensation expense........... -- 5 35
---- ---- ----
Loss from operations.......................... (90) (117) (84)
Interest income (expense), net................ 4 3 6
Share of loss from investment in Encotone,
Inc......................................... (3) -- --
Write off of investment in Encotone LTD....... (22) -- --
---- ---- ----
Loss from operations.......................... (111) (114) (78)
---- ---- ----
Income (loss) before provision for income
taxes....................................... (111) (114) (78)
Provision for income taxes.................... -- -- --
---- ---- ----
Net income (loss)............................. (111)% (114)% (78)%
==== ==== ====
</TABLE>
12
<PAGE> 14
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues. Total revenues increased by $8.0 million, or 166%, to $12.7
million in the year ended December 31, 1999, from $4.8 million in the year ended
December 31, 1998.
SiteMinder software revenues increased by $6.0 million, or 407%, to $7.5
million in the year ended December 31, 1999, from $1.5 million in the year ended
December 31, 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 $1.7 million, or 373%, to $2.2
million in the year ended December 31, 1999, from $468,000 in the year ended
December 31, 1998. This increase reflected the continued growth in the installed
base of SiteMinder software licenses and the increasing demand to provide
installation and integration services for customers.
Other revenues increased by $167,000, or 6%, to $3.0 million in the year
ended December 31, 1999, from $2.8 million in the year ended December 31, 1998.
Cost of revenues. Total cost of revenue increased by $1.7 million or 97%,
to $3.5 million in the year ended December 31, 1999, from $1.8 million in the
year ended December 31, 1998.
Cost of SiteMinder software increased by $428,000, or 211%, to $631,000 in
the year ended December 31, 1999 from $203,000 in the year ended December 31,
1998. The increase is primarily due to increases in royalties due to third
parties for technology included in our product as SiteMinder software revenues
continue to increase.
Cost of SiteMinder services increased by $1.1 million or 1,020%, to $1.2
million in the year ended December 31, 1999 from $110,000 in the year ended
December 31, 1998. The increase is due to increases in salaries and related
expenses for our consulting and education organizations as a result of increased
SiteMinder service revenues.
Cost of other increased by $169,000 or 12%, to $1.6 million in the year
ended December 31, 1999 from $1.5 million in the year ended December 31, 1998.
The increase is due to increases in product fulfillment costs principally as a
result of increased other revenues.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $5.4 million, or 85%, to $11.8 million in
the year ended December 31, 1999, from $6.4 million in the year ended December
31, 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
$1.8 million, or 88%, to $3.7 million in the year ended December 31, 1999, from
$2.0 million in the year ended December 31, 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.
Non-cash stock compensation expense. The non-cash stock compensation
expense increased by $4.3 million to $4.5 million in the year ended December 31,
1999 from $235,000 in the year ended December 31, 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 market value of the Company's
common stock during the respective periods. The expense is recognized over the
vesting period until the warrant is exercised. Approximately 70,000 shares of
common stock were exercised under this warrant during the fourth quarter of
1999.
13
<PAGE> 15
Interest income (expense), net. Net interest income increased by $694,000,
or 533%, to $824,000 in the year ended December 31, 1999, from $130,000 in the
year ended December 31, 1998. This increase was mainly attributable to a higher
cash balance in the year ended December 31, 1999. There were no borrowings
outstanding during the years ended December 31, 1998 or 1999.
Provision for income taxes. For the years ended December 31, 1999 and 1998
we had no provision for income taxes due to the net losses incurred. As of
December 31, 1999, we had net operating loss carryforwards of $28 million
available for federal purposes to reduce future taxable income expiring on
various dates through 2019. Provisions of the Internal Revenue Code may limit
the net operating loss available for use in any given year, based upon
significant past or future changes of our ownership.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues. Total revenues increased by $58,000, or 1%, to $4.8 million in
the year ended December 31, 1998, from $4.7 million in the year ended December
31, 1997.
SiteMinder software revenues increased by $1.2 million, or 525%, to $1.5
million in the year ended December 31, 1998, from $237,000 in the year ended
December 31, 1997. The first commercial release of SiteMinder was version 2.0 in
November 1997. SiteMinder 3.0 was released in June 1998, after which revenues
increased each quarter.
SiteMinder services revenues increased by $456,000, 3793% to $468,000 in
the year ended December 31, 1998, from $12,000 in the year ended December 31,
1997. As the number of SiteMinder software customers grew in 1998, support and
consulting services grew accordingly.
Other revenues decreased by $1.6 million, or 37%, to $2.8 million in the
year ended December 31, 1998, from $4.5 million in the year ended December 31,
1997. This decrease is a result of our de-emphasis on the FireWall-1 related
products and services as we shifted resources to SiteMinder products and
services.
Cost of revenues. Total cost of revenues decreased by $706,000 or 29%, to
$1.8 million in the year ended December 31, 1998, from $2.5 million in the year
ended December 31, 1997.
Cost of Siteminder software increased by $156,000, or 333%, to $203,000 in
the year ended December 31, 1998 from $47,000 in the year ended December 31,
1997. The increase is due to increases in royalties due to third parties for
technology included in our product, fulfillment costs, and amortization of
software development costs as Siteminder software revenue increased.
Cost of Siteminder services increased by $110,000 to $110,000 in the year
ended December 31, 1998 from the year ended December 31, 1997. The increase is
due to salaries and related expenses for our consulting and education
organizations as a result of increased SiteMinder service revenues.
Cost of other decreased by $972,000, or 40%, to $1.5 million in the year
ended December 31, 1998 from $2.4 million in the year ended December 31, 1997.
The decrease is due to decreases in product fulfillment costs principally as a
result of decreased other revenues noted above.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $886,000, or 16%, to $6.4 million in the
year ended December 31, 1998, from $5.5 million in the year ended December 31,
1997. This increase was primarily a result of our continuing to build our sales
and marketing infrastructure to support planned growth in sales of our
SiteMinder product and services.
Research and development costs. Research and development costs increased by
$963,000, or 94%, to $2.0 million in the year ended December 31, 1998, from $1.0
million in the year ended December 31, 1997.
Non-cash stock compensation expense. The non-cash stock compensation
expense was $235,000 in the year ended December 31, 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 market value
of the Company's common stock during the respective periods. The expense is
recognized over the vesting period until the warrant is exercised. No shares
were exercised during 1998.
Interest income (expense), net. Net interest income decreased $73,000, or
36%, to $130,000 in the year ended December 31, 1998, from $203,000 in the year
ended December 31, 1997. This decrease was mainly attributable to a lower
average cash balance in 1998.
14
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
In recent years, we have funded our operations primarily from sales of
securities.
Cash used for operating activities in the year ended December 31, 1999 was
$7.7 million, primarily due to a net loss of $5.5 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 $1.5 million in the year ended
December 31, 1999. Investing activities for the period consisted primarily of
the purchases of equipment, consisting largely of office furniture and
equipment, telephone and computer equipment.
Cash provided by financing activities in the year ended December 31,
1999 was approximately $110.9 million, primarily as a result of the sale of
2,500,000 shares of Common Stock at a price of $40.00 per share in a follow-on
public offering on November 10, 1999. On December 9, 1999 the Company sold an
additional 12,500 shares of Common Stock at a price of $40.00 per share
pursuant to the exercise of the underwriter overallotment option. We received
net proceeds of approximately $94.3 million from this follow-on offering. In
addition, we received net proceeds of $10.3 million from the sale of 534,242
shares of common stock at a price of $20.59 per share to certain investors in a
private placement on September 9, 1999 and net proceeds of $4.6 million from
the sale of 795,651 shares of common stock to certain investors from a private
placement on February 8, 1999.
As of December 31, 1999, our primary financial commitments consisted of
obligations outstanding under operating leases.
As of December 31, 1999, we had cash and cash equivalents totaling $102.9
million.
In recent years, we have significantly increased our operating expenses. We
anticipate that we will continue to experience significant growth in our
operating expenses for the foreseeable future and that our operating expenses
and capital expenditures will constitute a material use of our cash resources.
In addition, we may utilize cash resources to fund acquisitions or investments
in businesses, technologies, products or services that are complementary to our
business. We believe that our existing cash and cash equivalent balances will
be sufficient to meet our anticipated cash requirements for working capital and
capital expenditures for at least the next twelve months.
15
<PAGE> 17
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. The statement initially was to be effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. In July 1999, the Financial
Accounting Standards Board issued SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities Deferral of the Effective Date of FASB
Statement No. 133 -- An amendment of FASB Statement No. 133." SFAS 137 defers
the implementation of SFAS 133 by one year. SFAS 133, as amended by SFAS 137, is
effective for our fiscal quarters beginning after January 1, 2000. We do not
expect our adoption of SFAS 133 to have a material effect on our financial
position or results of operations.
In December 1998, the Accounting Standards Executive Committee, or AcSEC,
issued SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions." SOP 98-9 amends SOP 97-2 to require that an
entity recognize revenue for multiple element arrangements by means of the
"residual method" when (1) there is vendor-specific objective evidence of the
fair values of all the undelivered elements that are not accounted for by means
of long-term contract accounting and (2) vendor-specific objective evidence of
fair value does not exist for one or more of the delivered elements. We do not
expect SOP 98-9 to have a material effect on our financial position or results
of operations.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." This bulletin summarizes certain views of the staff on applying
generally accepted accounting principles to revenue recognition in financial
statements. The Company is currently determining the impact that SAB 101 will
have on our financial position or results of operations.
YEAR 2000 UPDATE
We have not experienced any disruptions related to the "Year 2000" issue.
Nevertheless, we are continuing to evaluate risks associated with a potential
delayed impact of Year 2000 related failures. Any such failure could result in
an interruption in, or a failure of, normal business activities which could
materially and adversely affect our 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 party vendors, we are unable to predict whether any future failure
related to the Year 2000 issue will have a material adverse impact on our
results of operations, liquidity or financial position. We believe that our
efforts to identify and resolve issues related to the Year 2000 problem have
reduced, but not eliminated, the possibility that we will in the future
encounter any significant interruptions to normal operations related to the
Year 2000 issue.
16
<PAGE> 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements and the related
auditors' report are presented in the following pages. The consolidated
financial statements filed in this Item 8 are as follows:
- Report of Independent Accountants
- Consolidated Balance Sheets--December 31, 1999 and 1998
- Consolidated Statements of Operations for the years ended December 31,
1999, 1998, and 1997
- Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, 1998, and 1997
- Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997
- Notes to Consolidated Financial Statements
17
<PAGE> 19
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of Netegrity, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity (deficit)
and of cash flows present fairly, in all material respects, the financial
position of Netegrity, Inc. and its subsidiaries at December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note A, the accompanying consolidated financial statements for
the years ended December 31, 1999 and 1998 have been revised to record a
non-cash compensation charge for a warrant for common stock and to reclassify
the presentation of preferred stock (together with a related beneficial
conversion feature).
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 14, 2000, except as to the information
presented in Note A,
which is as of July 25, 2000
18
<PAGE> 20
NETEGRITY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
Restated Restated
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,174,625 $102,878,564
Accounts receivable-trade, net of allowance for doubtful
accounts of $247,063 at December 31, 1998; $483,973 at
December 31, 1999....................................... 1,746,645 4,730,626
Prepaid expenses and other current assets................. 354,937 1,361,568
------------ ------------
TOTAL CURRENT ASSETS.................................... 3,276,207 108,970,758
Property and equipment, net................................. 736,341 1,884,749
Capitalized software costs, net............................. 175,629 --
Other assets................................................ 37,114 114,118
------------ ------------
TOTAL ASSETS................................................ $ 4,225,291 $110,969,625
============ ============
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable-trade.................................... 897,734 1,090,747
Accrued compensation and benefits......................... 583,059 1,420,119
Other accrued expenses.................................... 524,854 675,913
Deferred revenue.......................................... 1,223,861 1,349,232
------------ ------------
TOTAL CURRENT LIABILITIES............................... 3,229,508 4,536,011
COMMITMENTS AND CONTINGENCIES (NOTE D)
REDEEMABLE CONVERTIBLE PREFERRED STOCK
Preferred stock, Series D voting; $.01 par value;
5,000,000 shares authorized; 3,333,334 issued and
outstanding at December 31, 1998; none issued and
outstanding at December 31, 1999 (redemption
value $5,284,632)....................................... 4,487,575 --
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, voting, $.01 par value; 55,000,000 shares
authorized; 9,425,446 shares issued and 9,400,345 shares
outstanding at December 31, 1998; 17,114,962 shares
issued and 17,089,861 shares outstanding at December 31,
1999.................................................... 94,254 171,150
Additional paid-in capital................................ 11,561,044 131,285,569
Accumulated deficit....................................... (14,863,433) (24,809,448)
Loan to officer .......................................... (200,000) (130,000)
------------ ------------
(3,408,135) 106,517,271
Less -- Treasury Stock, at cost: 25,101 shares.............. (83,657) (83,657)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)........................ (3,491,792) 106,433,614
------------ ------------
TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)........................ $ 4,225,291 $110,969,625
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
19
<PAGE> 21
NETEGRITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
Restated Restated
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
SiteMinder software............... $ 237,217 $ 1,483,296 $ 7,527,419
SiteMinder services............... 12,012 467,568 2,211,016
Other............................. 4,483,420 2,840,253 3,007,560
----------- ----------- -----------
Total revenues.................... 4,732,649 4,791,117 12,745,995
Cost of SiteMinder software......... 46,835 202,755 630,861
Cost of SiteMinder services......... -- 109,572 1,226,671
Cost of other....................... 2,423,056 1,451,498 1,620,492
----------- ----------- -----------
Total cost of revenues............ 2,469,891 1,763,825 3,478,024
----------- ----------- -----------
Gross profit........................ 2,262,758 3,027,292 9,267,971
Selling, general and administrative
expenses.......................... 5,508,813 6,394,918 11,805,667
Research and development costs...... 1,028,094 1,991,239 3,744,305
Non-cash stock compensation
expense........................... -- 235,237 4,488,185
----------- ----------- -----------
Loss from operations................ (4,274,149) (5,594,102) (10,770,186)
Interest income (expense), net...... 203,205 130,115 824,171
Share of loss from investment in
Encotone, Inc..................... (131,801) -- --
Write off of investment in Encotone
LTD............................... (1,049,151) -- --
----------- ----------- -----------
Income (loss) before provision for
income taxes...................... (5,251,896) (5,463,987) (9,946,015)
Provision for income taxes.......... -- -- --
----------- ----------- -----------
Net income (loss)................... $(5,251,896) $(5,463,987) $(9,946,015)
Recognition of beneficial conversion
feature and accretion of
preferred stock................... -- (2,784,279) (412,881)
----------- ----------- -----------
Net loss attributable to common
stockholders (5,251,896) (8,248,266) (10,358,896)
=========== =========== ===========
Basic and diluted earnings per
share:
Net income (loss) attributable to
common stockholders............... $ (0.57) $ (0.88) $ (0.89)
=========== =========== ===========
Weighted average shares
outstanding....................... 9,279,000 9,362,000 11,648,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
20
<PAGE> 22
NETEGRITY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN COMPREHENSIVE ACCUMULATED LOAN TO TREASURY STOCKHOLDERS'
STOCK CAPITAL INCOME DEFICIT OFFICER STOCK EQUITY (DEFICIT)
-------- ------------ ------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1996...................... $ 92,049 $ 10,460,554 $ 28,028 $ (4,147,550) $(200,000) $(83,657) $ 6,149,424
-------- ------------ -------- ------------ --------- -------- ------------
Net income(loss)............ -- -- -- (5,251,896) -- -- (5,251,896)
Issuance of common stock
under stock plans
(74,400 shares)........... 744 117,776 -- -- -- -- 118,520
-------- ------------ -------- ------------ --------- -------- ------------
BALANCE AT DECEMBER 31,
1997...................... 92,793 10,578,330 28,028 (9,399,446) (200,000) (83,657) 1,016,048
-------- ------------ -------- ------------ --------- -------- -----------
Net income(loss)............ -- -- -- (5,463,987) -- -- (5,463,987)
Recognition of beneficial
conversion feature on
preferred stock........... -- 2,369,167 -- -- -- -- 2,369,167
Accretion of beneficial
conversion feature on
preferred stock........... -- (2,369,167) -- -- -- -- (2,369,167)
Recognition of compensation
expense on warrant........ -- 235,237 -- -- -- -- 235,237
Issuance of warrant in
connection with preferred
stock financing........... -- 877,538 -- -- -- -- 877,538
Accrual of dividends on
preferred stock and
accretion to redemption
value..................... -- (415,112) -- -- -- -- (415,112)
Issuance of common stock
under stock plans
(146,100 shares).......... 1,461 257,023 -- -- -- -- 258,484
Other comprehensive
income -- translation
adjustment ............... -- 28,028 (28,028) -- -- -- --
-------- ------------ -------- ------------ --------- -------- ------------
BALANCE AT DECEMBER 31,
1998 (restated)........... 94,254 11,561,044 -- (14,863,433) (200,000) (83,657) (3,491,792)
-------- ------------ -------- ------------ --------- -------- ------------
Net income (loss)........... -- -- -- (9,946,015) -- -- (9,946,015)
Issuance of common stock
(3,842,393 shares,
$116,075,036, net of
issuance costs of
$6,856,874)............... 38,425 109,179,737 -- -- -- -- 109,218,162
Recognition of compensation
expense on warrant........ 4,488,185 4,488,185
Accrual of dividends on
preferred stock and
accretion to redemption
value..................... -- (412,881) -- -- -- -- (412,881)
Issuance of common stock
under stock plans (513,789
shares)................... 5,138 1,602,361 -- -- -- -- 1,607,499
Conversion of preferred
stock (3,333,334 shares).. 33,333 4,867,123 -- -- -- -- 4,900,456
Repayment of loan
to officer................ 70,000 70,000
-------- ------------ -------- ------------ --------- -------- ------------
BALANCE AT DECEMBER 31,
1999 (restated)........... $171,150 $131,285,569 $ -- $(24,809,448) $(130,000) $(83,657) $106,433,614
======== ============ ======== ============ ========= ======== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
21
<PAGE> 23
NETEGRITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
Restated Restated
----------- --------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss ................................................ $(5,251,896) $(5,463,987) $ (9,946,015)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization.......................... 116,187 365,975 489,536
Provision for doubtful accounts receivable............. -- 237,051 291,342
Compensation expense related to warrant................ -- 235,237 4,488,185
Share of loss from investment.......................... 131,801 -- --
Write off of investment in Encotone, LTD............... 1,049,151 -- --
Changes in operating assets and liabilities:
Accounts receivable.................................... (3,589) (1,192,327) (3,275,323)
Prepaid expenses and other current assets.............. 246,259 (41,966) (1,006,631)
Other assets........................................... (14,078) 324 (77,004)
Accounts payable-trade................................. (592,364) (609,337) 193,013
Accrued compensation and benefits...................... 243,923 141,063 837,060
Other accrued expenses................................. (69,315) (671,862) 151,059
Deferred revenue....................................... 118,173 556,445 125,371
Other.................................................. (46,241) -- --
----------- ----------- -------------
Net cash used for operating activities.................. (4,071,989) (6,443,384) (7,729,407)
INVESTING ACTIVITIES:
Proceeds from sale of certain assets................... -- 25,863 --
Escrow receivable related to 1996 asset sale........... -- 600,000 --
Capital expenditures for equipment and leasehold
improvements......................................... (384,458) (374,562) (1,462,315)
Additions to capitalized software costs................ (309,891) (34,298) --
Investment in Encotone, Inc. .......................... -- 81,656 --
----------- ----------- -------------
Net cash (used for) provided by investing activities... (694,349) 298,659 (1,462,315)
----------- ----------- -------------
FINANCING ACTIVITIES:
Net proceeds from issuance of preferred stock.......... -- 4,950,001 --
Net proceeds from issuance of common stock............. -- -- 109,218,162
Issuance of common stock under stock plans............. 118,520 258,484 1,607,499
Repayment of loan to officer........................... -- -- 70,000
Principal payments under capital leases................ (9,653) (22,721) --
----------- ----------- ------------
Net cash provided by financing activities.............. 108,867 5,185,764 110,895,661
----------- ----------- ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS.................. (4,657,471) (958,961) 101,703,939
Cash and cash equivalents at beginning of year........... 6,791,057 2,133,586 1,174,625
----------- ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR................. $ 2,133,586 $ 1,174,625 $102,878,564
=========== =========== ============
Supplemental Disclosures of Cash Flow Information:
Interest paid.......................................... $ 3,143 $ 872 --
Income taxes paid...................................... 63,557 -- --
Supplemental Disclosure of Non-Cash Activities:
Property acquired under capital leases................. 32,374 -- --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
22
<PAGE> 24
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: NATURE OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
The Company currently operates in the secure user management market.
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-K/A reflect all such revisions through December 31, 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 years ended December 31, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
1999 10K For the years ended December 31,
1998 1999
---------------------- ----------------------
As As
previously As previously As
reported restated reported restated
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Non-cash stock compensation
expense $ - $ 235,237 $ - $ 4,488,185
Loss from operations (5,358,865) (5,594,102) (6,282,001) (10,770,186)
Net loss (5,228,750) (5,463,987) (5,457,830) (9,946,015)
Recognition of beneficial
conversion feature and
accretion of preferred stock - (2,784,279) - (412,881)
Net loss attributable to
common stockholders (5,228,750) (8,248,266) (5,457,830) (10,358,896)
Basic and diluted earnings
per share:
Net loss attributable to
common stockholders (0.56) (0.88) (0.47) (0.89)
<CAPTION>
December 31, 1998 December 31, 1999
---------------------- ----------------------
As As
previously As previously As
reported restated reported restated
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Preferred stock, Series D
voting $ 33,333 $ 4,487,575 $ - $ -
Additional paid-in capital 15,780,049 11,561,044 126,562,147 131,285,569
Accumulated deficit (14,628,196) (14,863,433) (20,086,026) (24,809,448)
Total stockholders'
equity (deficit) 995,783 (3,491,792) 106,433,614 106,433,614
---------------------------------------------------------------------------------------
</TABLE>
Principles of Consolidation
The financial statements of the Company also include the accounts and
operations of its subsidiaries, Netegrity Europe SLR and Netegrity Asia, Pte
Ltd. From the effective date of their formation all significant intercompany
accounts and transactions have been eliminated in these consolidated financial
statements.
Cash and Cash Equivalents
Cash and cash equivalents include time deposits and highly liquid
investments with a maturity of three months or less at the date of purchase.
Concentration of Credit Risk and Fair Value of Financial Instruments
The amounts reflected in the consolidated balance sheets for cash and cash
equivalents, accounts receivable and accounts payable approximate their fair
value due to their short maturities. Our cash and cash equivalents are held with
financial institutions with high credit standings. Financial instruments that
potentially subject us to concentration of credit risk consist primarily of
trade receivables. Our customer base consists of large numbers of customers
dispersed across many industries. As a result, concentration of credit risk with
respect to trade receivables is not significant except for one receivable which
accounted for 17% of total receivables as of December 31, 1999.
Revenue Recognition
The Company's revenues are primarily generated from the sale of its
proprietary SiteMinder products and services and from licensing the rights to
use software products developed by Checkpoint Software Technologies, Ltd. to
end users and resellers. The Company generates its services revenue from
consulting and training services performed for customers and from support
(i.e., maintenance). Revenues from software license agreements are recognized
upon contract execution, provided all shipment obligations have been met, fees
are fixed or determinable and collection is probable. Revenue derived from
arrangements with resellers of our product are not recognized until the
software is shipped to the end user.
Revenues for maintenance are recognized ratably over the term of
the support period. Revenues from consulting and training services are
recognized as the services are performed. If such services are included in a
license agreement, such amounts are unbundled from the license fee based on the
value established by independent sale of such service to customers.
23
<PAGE> 25
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Research and Development and Software Development Costs
Research and development expenditures are charged to operations as
incurred. Software development costs subsequent to the establishment of
technological feasibility are capitalized and amortized to cost of software.
Based on the Company's product development process, technological feasibility is
established upon completion of a working model. Such costs are amortized over
the estimated economic life of the product. Costs incurred by the Company
between completion of the working model and the point at which the product is
ready for general release have been insignificant. The Company regularly
compares the unamortized costs of capitalized software to the expected future
net realizable value of the products. If the unamortized costs exceed the
expected future net realizable value of the products, the excess amount is
written off. For the years ended December 31, 1997, 1998 and 1999, the Company
amortized $0, $134,262 and $175,629 of software development costs.
Comprehensive Income
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources, including foreign currency translation adjustments and
unrealized gains and losses on marketable securities. For the years ended
December 31, 1999, 1998 and 1997, comprehensive income (loss) was not materially
different from net income (loss).
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation is provided using straight-line method, based
upon the following asset lives:
Computer equipment and purchased software 3-5 years
Furniture office equipment 5 years
Leasehold improvements Shorter of lease term or useful
life of asset
Maintenance and repairs are charged to operations as incurred. Renewals and
betterments which materially extend the life of assets are capitalized and
depreciated. Upon disposal, the asset cost and related accumulated depreciation
are removed from their respective accounts. Any resulting gain or loss is
reflected in earnings.
Income Taxes
The Company accounts for income taxes using the asset and liability method,
pursuant to which deferred income taxes are recognized based on temporary
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
temporary differences are expected to reverse. Valuation allowances are provided
if, based upon the weight of available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized.
Marketing Expenses
Marketing expenses are charged to selling, general and administrative
expenses as incurred.
24
<PAGE> 26
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net Loss Per Share
Basic net loss per share is computed using the weighted average number of
shares of common stock outstanding. Diluted EPS is based upon the weighted
average number of common and common equivalent shares outstanding during the
period. Diluted net loss per share does not differ from basic net loss per share
since potential common shares from stock options and warrants and convertible
preferred stock which are convertible into common stock are anti-dilutive for
all periods presented.
Export Sales
The Company generates revenues from international business. For all periods
reported herein, the Company's export sales were immaterial.
401(k) Plan
The Company maintains a 401(k) Plan for its employees. The Plan is intended
as a retirement and tax deferred savings vehicle. The Company has made no
matching contributions to date.
25
<PAGE> 27
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Reclassifications
Certain items in the prior year financial statements have been
reclassified to conform to the current year presentation.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, or SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities. The statement
initially was to be effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. In July 1999, the Financial Accounting Standards Board
issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities
Deferral of the Effective Date of FASB Statement No. 133 -- An amendment of
FASB Statement No. 133." SFAS 137 defers the implementation of SFAS 133 by one
year to June 15, 2000. The Company does not expect the adoption of SFAS 133 to
have a material effect on its financial position or results of operations.
In December 1998, the Accounting Standards Executive Committee, or AcSEC,
issued SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions." SOP 98-9 amends SOP 97-2 to require that an
entity recognize revenue for multiple element arrangements by means of the
"residual method" when (1) there is vendor-specific objective evidence of the
fair values of all the undelivered elements that are not accounted for by means
of long-term contract accounting and (2) vendor-specific objective evidence of
fair value does not exist for one or more of the delivered elements. All revenue
recognition criteria of SOP 97-2 and SOP 98-9 will be effective for our
transactions entered into beginning in our year ending December 31, 2000. We do
not expect SOP 98-9 to have a material effect on our financial position or
results of operations.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." This bulletin summarizes certain views of the staff on applying
generally accepted accounting principles to revenue recognition in financial
statements. The Company is currently determining the impact that SAB 101 will
have on our financial position or results of operations.
26
<PAGE> 28
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B: PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
--------- ----------
<S> <C> <C>
Computer equipment and purchased software....... $ 944,555 $2,220,420
Leasehold improvements.......................... 73,557 97,029
Furniture and office equipment.................. 97,577 260,555
---------- ----------
1,115,689 2,578,004
Less accumulated depreciation................... (379,348) (693,255)
---------- ----------
$ 736,341 $1,884,749
========== ==========
</TABLE>
The depreciation expense for the years ended December 31, 1997, 1998 and
1999, was $116,187, $231,713 and $313,907, respectively.
NOTE C: INVESTMENT AND JOINT VENTURE
In October of 1996, the Company invested $1,000,000 for a 10% equity
interest in Encotone, LTD., a Jerusalem, Israel high-technology firm which
develops technology and products that provide enhanced security for both voice
and data network transactions. The Company accounted for its investment in
Encotone, LTD. under the cost method. In the quarter ended September 30, 1997,
the Company determined that the value of the investment was permanently impaired
and wrote off the entire amount of $1,049,151.
In October of 1996, the Company and Encotone, LTD. formed a joint venture
in the U.S., Encotone, Inc., which was equally funded by both companies. The
Company accounted for its investment in Encotone, Inc. under the equity method,
and as of December 31, 1997, has reduced its investment by $131,801, its share
of Encotone, Inc.'s operating loss for the initial period ended December 31,
1997.
In January, 1998, the Company sold to Encotone, LTD. its full interest in
Encotone, Inc. In return, the Company received an additional 9.9% of the common
stock of Encotone, LTD., providing the Company with an equity position of 19.9%.
The Company also received $81,656 in cash.
NOTE D: COMMITMENTS AND CONTINGENCIES
On June 4, 1999, a suit was brought in the Delaware Court of Chancery,
purportedly on behalf of the Company's common stockholders, alleging that
certain amendments to the Company's certificate of incorporation previously
adopted by the Company's stockholders increasing the authorized shares of
various classes of stock were invalid because the Company did not obtain the
required statutory votes. On August 5, 1999, the parties entered into a
settlement agreement, subject to court approval and approval from the holders of
the Company's preferred stock and common stock, in separate class votes, of the
previously adopted amendments. The settlement was approved by the Court of
Chancery on September 24, 1999 and the appeal period for this approval expired,
without any appeal being filed, on October 25, 1999. The holders of the
Company's preferred and common stock approved the previously adopted amendments
at a meeting of the Company's stockholders held on October 7, 1999. The effect
of the settlement was not material.
The Company leases certain facilities under noncancellable operating
leases. For the years ended December 31, 1997, 1998 and 1999 the Company
incurred total operating
27
<PAGE> 29
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
lease expense of $173,600, $299,825 and $549,490, respectively. Future minimum
lease payments under these leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
2000.................................................. $555,362
2001.................................................. 376,950
--------
$932,312
========
</TABLE>
NOTE E: LOAN TO OFFICER
In May, 1996, an Officer of the Company exercised an option to purchase
200,000 shares of the Company's common stock at a price of $1.00 per share. The
Company's Board of Directors approved a loan to the Officer as payment for this
transaction. The Officer issued the Company a full recourse note that is also
secured by the 200,000 shares of common stock. This note has an interest rate of
7% per annum.
28
<PAGE> 30
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F: INCOME TAXES
Significant components of the deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1999
----------- ------------
<S> <C> <C>
Net operating loss carryforwards...... $ 5,188,919 $ 11,304,069
Loss on investment.................... 971,562 907,537
Accruals and reserves................. 232,625 537,218
Research and development tax credits.. 318,450 127,742
Depreciation.......................... (25,346) (27,510)
Alternative minimum tax credit........ 74,773 74,773
Other................................. 44,389 75,963
Valuation allowance................... (6,805,372) (12,999,792)
----------- ------------
$ -- $ --
=========== ============
</TABLE>
The provision for income taxes differs from the federal statutory rate of
34% as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------------------
1997 1998 Restated 1999 Restated
----------- ------------- -------------
<S> <C> <C> <C>
Federal tax provision (benefit)........... $(1,785,645) $(1,857,756) $(3,381,645)
Non deductible costs...................... 9,962 13,829 29,498
Valuation allowance....................... 1,775,683 1,843,927 3,352,147
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
</TABLE>
Management of the Company has evaluated the positive and negative evidence
impacting the realizability of its deferred tax assets. Based on the weight of
the available evidence, it is more likely than not that all of the deferred tax
assets will not be realized, and accordingly the deferred tax assets have been
fully reserved. Management re-evaluates the positive and negative evidence on a
quarterly basis.
At December 31, 1999, the Company has available for Federal income tax
purposes net operating loss carryforwards of approximately $28,071,000 that are
available to offset future taxable income, expiring at various dates through
fiscal 2019. Certain provisions in the Internal Revenue Code may limit the net
operating loss available for use in any given year in the event of any
significant change of ownership.
The net operating loss carryforwards of $28,071,000 include $6,955,000 of
tax deductions relating to stock options and warrants. The benefit of these
deductions included in net operating loss carryforwards will be credited to
additional paid in capital when realized.
NOTE G: CAPITAL STOCK AND CAPITAL STOCK WARRANTS
Preferred Stock: On January 6, 1998, the Company, entered into a Preferred
Stock and Warrant Purchase Agreement (the "Agreement") with Pequot Private
Equity Fund, L.P., a Delaware limited partnership ("PPEF") and Pequot Offshore
Private Equity Fund, Inc., a British Virgin Islands corporation (together with
PPEF, the "Pequot Entities"). Pursuant to the terms of the Agreement, on January
7, 1998, the Company sold 1,666,667 shares of Series D preferred stock, at $1.50
per share, and 750,393 warrants to the Pequot Entities for an aggregate purchase
price of $2,500,000.
29
<PAGE> 31
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company entered into an amendment on June 5, 1998 to the Preferred
Stock and Warrant Purchase Agreement with the Pequot Entities. Pursuant to the
terms of the amended Agreement, on June 5, 1998, the Company sold 833,334 shares
of Series D preferred stock, at $1.50 per share, and 375,197 warrants to the
Pequot Entities for an aggregate purchase price of $1,250,001. On June 30, 1998,
the Company sold an additional 833,333 shares of Series D preferred stock, at
$1.50 per share, and 375,197 warrants to the Pequot Entities for an aggregate
purchase price of $1,250,000. The holders of the Series D Preferred Stock had
certain rights to dividends, redemption, liquidation, conversion and voting.
The holders were entitled to receive cumulative dividends accruing at an annual
rate of 7.5%. The dividends were payable upon redemption or liquidation. The
holders were also entitled to redeem the Series D Preferred Stock on the fifth
anniversary of the issue date for a cash payment of $1.50 per share plus all
cumulative and unpaid dividends, whether or not declared by the Board of
Directors. As a result of the contractual terms, the Series D Preferred Stock
was considered redeemable. Cumulative and unpaid dividends on the Series D
Preferred Stock at December 31, 1998 totaled $284,632.
When issued, each share of Series D Preferred Stock in 1998 was convertible
into one share of common stock, which represented a discount from the fair value
of common stock on the date of issuance. The value attributable to this
conversion feature represented a beneficial conversion feature which was
recognized as a return to preferred stockholders. This amount, which equaled
$2,369,167, has been recorded as accretion of preferred stock to redemption
value in the year ended December 31, 1998, and represents a non-cash charge in
the determination of net loss attributable to common stockholders. The Series D
Preferred Stock converted one for one to common stock in September 1999.
In conjunction with the Pequot Agreement as described above, warrants to
purchase a total of 1,500,787 shares of common stock exercisable at $2.00 were
issued to Pequot expiring on January 7, 2003. The fair value of these warrants
was determined using the Black-Scholes option pricing model based on the
following assumptions: 100% volatility, terms of up to five years and risk-free
interest rates of approximately 5.5%. The value of the warrants totaled $877,538
and has been recorded in additional paid-in capital.
As part of the Agreement with the Pequot Entities described above, James
McNiel joined the Board of Directors of the Company, as designee of the Pequot
Entities and the Company granted Mr. McNiel a warrant for the purchase of
100,000 shares of common stock exercisable at $1.50 expiring on January 7, 2003
for his services as a director. Due to certain terms of the warrant, the warrant
is being accounted for as a variable award. As a result, a non-cash compensation
charge is being recorded for the increase in the fair market value of the
Company's common stock compared to the exercise price since the warrant was
issued. The expense is being recognized over the two year vesting period of the
warrant and through the date of exercise. During the years ended December 31,
1999 and 1998, expenses of $4,488,185 and $235,237, respectively were recorded
related to this warrant. During 1999, 69,447 shares were exercised.
Common Stock: On February 8, 1999 the Company sold 795,651 shares of common
stock at $5.75 per share. 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. On November 10, 1999, the Company sold 2,500,000 shares of
common stock at a price of $40.00 per share in a follow on public offering. On
December 9, 1999 the Company sold an additional 12,500 shares of common stock
at a price of $40.00 per share pursuant to the exercise of the underwriter
overallotment option.
NOTE H: STOCK PLANS
The Company has stock option plans as described hereunder. All options
issued under the plans are granted at fair market value at the date of grant,
and become exercisable at varying rates, generally over three or four years, as
determined by the Board of Directors, and generally expire ten years from the
date of grant.
Stock Option Plans for Outside Directors: The Company's stock option plans
for outside directors provide for the granting of options to members of the
Board of Directors who are neither employees nor officers of the Company. The
timing, amounts, recipients and other terms of the option grants are determined
by the provisions of or formulas in, the directors' option plans. At December
31, 1999, options for 45,000 shares were available for future grant.
Stock Option Plans for Employees and Officers: The Company's stock option
plans for employees, consultants and officers provide for the granting of
options as inducement to obtain and retain the services of qualified persons.
Incentive stock options may be granted to officers and employees, and
non-qualified stock options may be granted to directors, officers, employees or
consultants. At December 31, 1999, options for 1,125 shares were available for
grant.
1990 Employee Stock Purchase Plan: The 1990 Employee Stock Purchase Plan
("Stock Purchase Plan") is intended as an incentive to, and to encourage stock
ownership by, all eligible employees of the Company and participating
subsidiaries and to encourage them to remain in the employ of the Company. All
employees of the Company who have completed six months of employment are
eligible to participate in the Stock Purchase Plan.
30
<PAGE> 32
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Stock Purchase Plan presently authorizes the issuance of 100,000 shares
of common stock (subject to adjustment for capital changes) pursuant to the
exercise of nontransferable options granted to participating employees. The
weighted average of the fair value of purchase rights for the years ended
December 31, 1997, 1998, and 1999 are $0.74, $0.72 and $6.64, respectively.
During the years ended December 31, 1997, 1998 and 1999 2,400, 14,100 and 21,282
shares of the company's common Stock were issued under the Stock Purchase Plan.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates as calculated in
accordance with SFAS 123, the Company's net loss and loss per share for the
years ended December 31, 1997, 1998 and 1999 would have been increased to the
pro-forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1999
---------------------------- ---------------------------- ----------------------------
LOSS LOSS LOSS
NET LOSS PER SHARE NET LOSS PER SHARE NET LOSS PER SHARE
------------- ----------- ------------- ----------- ------------- -----------
Restated Restated Restated Restated
<S> <C> <C> <C> <C> <C> <C>
As reported............... $(5,251,896) $(0.57) $(5,463,987) $(0.88) $ (9,946,015) $(0.89)
Pro-Forma................. (5,500,386) (0.59) (5,896,562) (0.92) (10,641,670) (1.11)
</TABLE>
The fair value of each stock option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------
1997 1998 1999
---------- --------- --------
<S> <C> <C> <C>
Expected life (years)..... 4.0 4.0 5.0
Risk free interest rate... 5.70-7.40% 5.10% 5.96%
Volality.................. 80% 100% 101%
Dividend yield............ -- -- --
</TABLE>
The weighted average of the fair value of stock options for the years ended
December 31, 1997, 1998 and 1999 was $1.50, $1.94 and $26.72, respectively.
Stock options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
EXERCISEABLE OPTIONS
OPTIONS OUTSTANDING --------------------
-------------------------- WEIGHTED
WEIGHTED WEIGHTED AVERAGE
SHARES AVERAGE AVERAGE EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE(a) EXERCISE PRICE SHARES PRICE
------------------------ ----------- -------- -------------- ----------- ------
<S> <C> <C> <C> <C>
$.63-$4.13 ............................... 2,631,957 6.7 1.84 1,880,258 1.63
$5.75-$6.56 ............................... 118,000 9.2 6.46 15,000 5.75
$11.19-$13.38 ............................... 151,000 9.3 11.48 -- --
$22.25-$27.00 ............................... 655,000 9.7 24.42 -- --
$40.75-$54.13 ............................... 797,000 9.9 52.50 -- --
--------- --- ----- --------- -------
$.63-$54.13 ............................... 4,352,957 7.9 14.97 1,895,258 1.67
========= =========
</TABLE>
------------
(a) Average contractual life remaining in years.
31
<PAGE> 33
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's stock option plans as of December
31, 1997, 1998 and 1999 and changes during the periods ending on those dates is
presented below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------------------------------------------------------------------
1997 1998 1999
----------------------------- -------------------------- ---------------------------
Weighted Weighted Weighted
Average Exercise Average Exercise Average Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of
year................................ 2,196,095 1.39 2,403,342 1.78 3,103,442 1.83
Option activity during the year:
Granted............................. 640,750 1.64 1,225,700 2.50 1,812,500 34.00
Exercised........................... (72,000) 1.62 (132,000) 1.79 (423,060) 1.72
Canceled............................ (361,503) 2.16 (393,600) 1.52 (139,925) 10.01
---------- ---- ---------- ---- ----------- -----
Options outstanding at end of year.... 2,403,342 1.78 3,103,442 1.83 4,352,957 14.97
========== ========== ===========
Options exercisable..................... 994,759 1,117,427 1,895,258
</TABLE>
------------
Note I: SEGMENT REPORTING
The Company considers that it has the following five reportable operating
segments based on differences in products and services. Operating segments are
defined as components of the enterprise about which separate financial
information is available that is reviewed regularly by the chief operating
decision maker, or decision-making group, in deciding how to allocate resources
and in assessing their performance.
<TABLE>
<CAPTION>
1997 1998 1999
Gross Gross Gross
Revenue Margin Revenue Margin Revenue Margin
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Operating Segments:
SiteMinder software $ 237,217 $ 190,382 $1,483,296 $1,280,541 $ 7,527,419 $6,896,558
---------- ---------- ---------- ---------- ----------- ----------
SiteMinder services:
Maintenance 8,012 8,012 143,575 143,575 666,023 666,023
Training and consulting 4,000 4,000 323,993 214,421 1,544,993 318,322
---------- ---------- ---------- ---------- ----------- ----------
12,012 12,012 467,568 357,996 2,211,016 984,345
---------- ---------- ---------- ---------- ----------- ----------
Other:
Software and related products 3,311,229 1,359,612 1,391,804 602,308 1,602,724 612,063
Services 1,172,191 700,752 1,448,449 786,447 1,404,836 775,005
---------- ---------- ---------- ---------- ----------- ----------
4,483,420 2,060,364 2,840,253 1,388,755 3,007,560 1,387,068
---------- ---------- ---------- ---------- ----------- ----------
Totals $4,732,649 $2,262,758 $4,791,117 $3,027,292 $12,745,995 $9,267,971
========== ========== ========== ========== =========== ==========
</TABLE>
Certain expenses related to maintenance are included in operating expenses
based upon the Company's management reporting practice and it has not been
practical to allocate these expenses to cost of maintenance.
32
<PAGE> 34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
1. Financial Statements
The following financial statements are included in Item 8:
a. Report of Independent Accountants
b. Consolidated Balance Sheets -- December 31, 1999 and 1998
c. Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997
d. Consolidated Statements of Stockholders' Equity for the
fiscal years ended December 31, 1999, 1998 and 1997
e. Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997
f. Notes to Consolidated Financial Statements
2. Financial Statement Schedules
The following financial statement schedules are included in Item 14(C):
a. Report of Independent Accountants
b. Schedule II: Valuation of Qualifying Accounts and Reserves
Schedules other than those listed above have been omitted since they are
either not required or the information is otherwise included.
33
<PAGE> 35
B. FINANCIAL STATEMENT SCHEDULES:
The Company hereby files as part of this Form 10-K/A in Item 14(A) attached
hereto the financial statement schedule listed in Item 14 (A)(2) above.
34
<PAGE> 36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report on Form 10-K/A to be
signed on its behalf by the undersigned, thereunto duly authorized.
NETEGRITY, INC.
By: /s/ Barry N. Bycoff
----------------------------------
Barry N. Bycoff
President, Chief Executive Officer,
Director (Principal Executive
July 25, 2000 Officer) and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
on Form 10-K/A has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Barry N. Bycoff President, Chief Executive July 25, 2000
------------------------- Officer, Director and
Barry N. Bycoff Chairman of the Board
/s/ James E. Hayden Chief Financial Officer, July 25, 2000
------------------------- Vice President of Finance
James E. Hayden and Administration and
Treasurer
Director July 25, 2000
-------------------------
Paul F. Deninger
/s/ Eric R. Giler Director July 25, 2000
-------------------------
Eric R. Giler
/s/ Michael L. Mark Director July 25, 2000
-------------------------
Michael L. Mark
/s/ James P. McNiel Director July 25, 2000
-------------------------
James P. McNiel
/s/ Ralph B. Wagner Director July 25, 2000
-------------------------
Ralph B. Wagner
35
<PAGE> 37
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors
of Netegrity, Inc:
Our audits of the consolidated financial statements referred to in our report
dated March 14, 2000, except as to the information presented in Note A, which is
as of July 25, 2000 appearing in this Annual Report on Form 10-K/A of Netegrity,
Inc. also included an audit of the financial statement schedule listed in Item
14(A)(2) of this Form 10-K/A. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 14, 2000, except as to the information
presented in Note A,
which is as of July 25, 2000
36
<PAGE> 38
NETEGRITY, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS & OTHER END
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Allowance for doubtful accounts
receivable..................... $247,063 291,342 -- (54,432)(1) $483,973
Year ended December 31, 1998:
Allowance for doubtful accounts
receivable..................... $ 64,460 237,051 -- (54,448)(1) $247,063
Year ended December 31, 1997:
Allowance for doubtful accounts
receivable..................... $ 67,797 -- -- (3,337)(1) $ 64,460
</TABLE>
-----------------
(1) Uncollectible accounts written off, net of recoveries.
S-1
