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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934, FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 2000.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934, FOR THE TRANSITION
PERIOD FROM TO
COMMISSION FILE NUMBER 1-10139
NETEGRITY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-2911320
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
245 WINTER STREET
WALTHAM, MA 02451
(Address of principal executive offices) (Zip Code)
(781) 890-1700
(Registrant's Telephone Number)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such other shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days [X] Yes No [ ]
As of May 5, 2000 there were 19,327,655 shares of Common Stock outstanding,
exclusive of Treasury stock.
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FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Facing Sheet.................................................................................. 1
Table of Contents............................................................................. 2
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999................................................... 3
Consolidated Statements of Operations for the three
months ended March 31, 2000 and 1999................................ 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 2000 and 1999................................ 5
Notes to Consolidated Financial Statements............................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................ 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................... 18
Item 2. Changes in Securities................................................. 18
Item 3. Defaults upon Senior Securities....................................... 18
Item 4. Submission of Matters to a Vote of Security Holders................... 18
Item 5. Other Information..................................................... 19
Item 6. Exhibits and Reports on Form 8-K...................................... 19
SIGNATURES.................................................................................... 19
Exhibit 27.................................................................................... 20
</TABLE>
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PART I. - FINANCIAL INFORMATION
NETEGRITY, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
2000 December 31,
(unaudited) 1999
-------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ......................................... $103,215,704 $102,878,564
Accounts receivable-trade, net of allowance for doubtful
accounts of $483,973 at March 31, 2000 and December 31, 1999 .... 6,278,656 4,730,626
Prepaid expenses and other current assets ......................... 2,236,274 1,361,568
------------ ------------
Total current assets ........................................... 111,730,634 108,970,758
Property and equipment, net ......................................... 2,902,839 1,884,749
Other assets ........................................................ 149,445 114,118
------------ ------------
Total Assets ................................................... $114,782,918 $110,969,625
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable-trade ............................................... 400,647 1,090,747
Accrued compensation and benefits .................................... 1,457,610 1,420,119
Other accrued expenses ............................................... 614,731 675,913
Deferred revenue ..................................................... 2,468,203 1,349,232
------------- -------------
Total current liabilities ......................................... 4,941,191 4,536,011
------------- -------------
Stockholders' Equity:
Common stock, voting, $.01 par value; 55,000,000 shares
authorized; 19,250,174 shares issued and 19,225,073 shares
outstanding at March 31, 2000; 17,114,962 shares
issued and 17,089,861 shares outstanding at December 31,
1999 ............................................................... 192,502 171,150
Additional paid-in capital ........................................... 130,530,908 126,562,147
Accumulated deficit .................................................. (20,668,026) (20,086,026)
Loan to officer ...................................................... (130,000) (130,000)
------------- -------------
109,925,384 106,517,271
Less -- Treasury Stock, at cost: 25,101 shares ......................... (83,657) (83,657)
------------- -------------
Total stockholders' equity ........................................ 109,841,727 106,433,614
------------- -------------
Total liabilities and stockholders' equity ........................ $ 114,782,918 $ 110,969,625
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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NETEGRITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended March 31,
2000 1999
---- ----
<S> <C> <C>
Revenues:
SiteMinder software ................................ $ 4,762,630 $ 994,935
SiteMinder services ................................ 1,253,817 358,310
Other .............................................. 729,645 706,789
------------ ------------
Total revenues ..................................... 6,746,092 2,060,034
------------ ------------
Cost of SiteMinder software .......................... 349,310 114,440
Cost of SiteMinder services .......................... 759,766 204,247
Cost of other ........................................ 379,144 396,284
------------ ------------
Total cost of revenues ............................. 1,488,220 714,971
------------ ------------
Gross profit ......................................... 5,257,872 1,345,063
------------ ------------
Selling, general and administrative expenses.......... 5,569,488 2,101,119
Research and development costs ....................... 1,486,118 699,399
------------ ------------
Loss from operations ................................. (1,797,734) (1,455,455)
Interest income (expense), net ....................... 1,215,734 19,708
------------ ------------
Net loss ............................................. $ (582,000) $ (1,435,747)
============ ============
Basic and diluted earnings per share:
Net loss ............................................. $ (0.03) $ (0.14)
============ ============
Weighted average shares outstanding .................. 18,116,000 9,910,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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NETEGRITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (582,000) $(1,435,747)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 170,891 157,755
Provision for doubtful accounts receivable -- (8,500)
Changes in operating assets and liabilities:
Accounts receivable (1,548,030) (32,473)
Prepaid expenses and other current assets (874,706) 24,984
Other assets (35,327) (11,515)
Accounts payable-trade (690,100) 329,355
Accrued compensation and benefits 37,491 73,460
Other accrued expenses (61,182) 60,473
Deferred revenue 1,118,971 67,790
------------ --------------
Net cash used for operating activities (2,463,992) (774,418)
INVESTING ACTIVITIES:
Capital expenditures for equipment and
leasehold improvements (1,188,981) (104,947)
------------ --------------
FINANCING ACTIVITITES:
Net proceeds from issuance of common stock 3,990,113 4,647,254
------------ --------------
Net increase in cash and cash equivalents 337,140 3,767,889
Cash and cash equivalents at beginning of period 102,878,564 1,174,625
------------ --------------
Cash and cash equivalents at end of period $103,215,704 $ 4,942,514
============ ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
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NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - The unaudited financial information furnished herein reflects all
adjustments which are of a normal recurring nature, which in the opinion of
management are necessary to fairly state the Company's financial position, cash
flows and results of operations for the periods presented. Certain information
and footnote disclosure normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. This information should be read in conjunction with the Company's
audited financial statements for the fiscal year ended December 31, 1999,
included in Form 10-K filed on March 20, 2000.
NOTE 2 - Certain 1999 information has been reclassified to conform with the 2000
financial statement presentation.
NOTE 3 - The results of operations for the three months ended March 31, 2000 are
not necessarily indicative of the results to be expected for the remainder of
the year ending December 31, 2000.
NOTE 4 - 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.
NOTE 5 - 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 three months
ended March 31, 2000 and 1999, comprehensive income (loss) was not materially
different from net income (loss).
NOTE 6 - 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.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 to certain issues including: the
definition of an employee for purposes of applying APB Opinion No. 25; the
criteria for determining whether a plan qualifies as a noncompensatory plan; the
accounting consequences of various modification to the terms of previously fixed
stock options or awards; and the accounting for the exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1, 2000,
but certain conclusions in FIN 44 are applicable retroactively to specific
events occurring after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on the
Company's financial position or results of operations.
NOTE 7 - 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.
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 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 1,500,786 shares of common stock exercisable at $2.00 were
issued to Pequot expiring on January 7, 2003. The warrants were exercised in
February 2000.
NOTE 8 - 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 9 - In September 1999 the holders of all of the Company's outstanding
preferred stock surrendered their shares for conversion into common stock. On
October 7, 1999, the stockholders of the Company approved and the Company filed
an amendment to the Company's certificate of incorporation increasing the number
of authorized shares of the Company's common stock to 55,000,000.
NOTE 10 - 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>
For the three months ended March 31,
------------------------------------------
2000 1999
------------------- ------------------
Gross Gross
Revenue Margin Revenue Margin
------- ------ ------- ------
<S> <C> <C> <C> <C>
Operating Segments:
SiteMinder software .......... $4,762,630 $4,413,320 $ 994,935 $ 880,495
---------- ---------- ---------- ----------
SiteMinder services:
Maintenance.................. 325,617 325,617 95,710 95,710
Training and consulting...... 928,200 168,434 262,600 58,353
---------- ---------- ---------- ----------
1,253,817 494,051 358,310 154,063
---------- ---------- ---------- ----------
Other
Software and related
products..................... 304,834 112,120 382,327 131,254
Services...................... 424,811 238,381 324,462 179,251
---------- ---------- ---------- ----------
729,645 350,501 706,789 310,505
---------- ---------- ---------- ----------
Totals........................ $6,746,092 $5,257,872 $2,060,034 $1,345,063
========== ========== ========== ==========
</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.
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2. Management's Discussion & Analysis of Financial Condition and Results of
Operations
FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This report and the documents incorporated in it by reference contain
forward-looking statements about our plans, objectives, expectations and
intentions. You can identify these statements by words such as "expect,"
"anticipate," "intend," "plan," "believe," "seek," "estimate," "may," "will" and
"continue" or similar words. You should read statements that contain these words
carefully. They discuss our future expectations, contain projections of our
future results of operations or our financial condition or state other
forward-looking information, and may involve known and unknown risks over which
we have no control. You should not place undue reliance on forward-looking
statements. We cannot guarantee any future results, levels of activity,
performance or achievements. Moreover, we assume no obligation to update
forward-looking statements or update the reasons actual results could differ
materially from those anticipated in forward-looking statements. The factors
discussed in the sections captioned "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "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 three months ended
March 31, 2000, we had a net loss of $582,000. As a result of ongoing operating
losses, at March 31, 2000, we had an accumulated deficit of $20.7 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.
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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 89% of our total
revenues for the three months ended March 31, 2000. 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, 1999 to March 31, 2000, the number of
our employees increased from 138 to 159. 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
11
<PAGE> 12
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.
12
<PAGE> 13
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 existence of these provisions could limit the price
that investors might be willing to pay in the future for shares of our common
stock.
13
<PAGE> 14
RESULTS OF OPERATIONS
The following information should be read in conjunction with the consolidated
financial statements and notes thereto:
<TABLE>
<CAPTION>
Period to Period %
Increase/(Decrease)
% of Total Revenues Three Months Ended
For the three months March 30,
Ended March 31, 2000 1999 2000 vs. 1999
---- ---- -------------------
<S> <C> <C> <C>
Revenues:
SiteMinder software 71% 48% 379%
SiteMinder services 18 18 250
Other 11 34 3
---- ---- ----
Total revenues 100 100 227
---- ---- ----
Cost of SiteMinder software 5 6 205
Cost of SiteMinder services 11 10 272
Cost of other 6 19 (4)
---- ---- ----
Total cost of revenues 22 35 108
---- ---- ----
Gross profit 78 65 291
Selling, general and administrative
expenses 83 102 165
Research and development costs 22 34 112
---- ---- ----
Loss from operations (27) (71) 24
Interest income (expense), net 18 1 6069
---- ---- ----
Net loss (9)% (70)% (59)%
==== ==== ====
</TABLE>
Revenues. Total revenues increased by $4.7 million, or 227%, to $6.7 million in
the three months ended March 31, 2000, from $2.1 million in the three months
ended March 31, 1999.
SiteMinder software revenues increased by $3.8 million, or 379%, to $4.8 million
in the three months ended March 31, 2000, from $995,000 in the three months
ended March 31, 1999. This increase is due to the continued increase in market
awareness and the acceptance of the SiteMinder product and expansion of our
sales organization.
SiteMinder services revenues increased by $896,000, or 250%, to $1.3 million in
the three months ended March 31, 2000, from $358,000 in the three months ended
March 31, 1999. This increase reflects 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 $23,000, or 3%, to $730,000 in the three months
ended March 31, 2000, from $707,000 in the three months ended March 31, 1999.
Cost of revenues. Total cost of revenue increased by $773,000 or 108%, to $1.5
million in three months ended March 31, 2000, from $715,000 in the three months
ended March 31, 1999.
Cost of SiteMinder software increased by $235,000, or 205%, to $349,000 in the
three months ended March 31, 2000 from $144,000 in the three months ended March
31, 1999. 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 $556,000 or 272%, to $760,000 in the
three months ended March 31, 2000 from $204,000 in the three months ended March
31, 1999. 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 decreased by $17,000 or 4%, to $379,000 in the three months ended
March 31, 2000 from $396,000 in the three months ended March 31, 1999.
Gross profit. Gross profit increased by $3.9 million, or 291%, to $5.3 million
in the three months ended March 31, 2000, from $1.3 million in the three months
ended March 31, 1999. The increase in SiteMinder software revenues resulted in
higher gross profit due to lower costs associated with SiteMinder software
revenues.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $3.5 million, or 165%, to $5.6 million in
the three months ended March 31, 2000, from $2.1 million in the three months
ended March 31, 1999. This increase is primarily a result of our continuing to
build our sales and marketing infrastructure to support planned growth in sales
of our SiteMinder product and services.
Research and development costs. Research and development costs increased by
$787,000, or 112%, to $1.5 million in the three months ended March 31, 2000,
from $699,000 in the three months ended March 31, 1999. The increase was
primarily due to our continued development of SiteMinder and our increase in
research and development personnel. We expect to increase the amount spent on
research and development in the foreseeable future as we continue to develop and
enhance our product line to address the evolving needs of customers deploying
large-scale and transaction-based e-commerce applications.
14
<PAGE> 15
Interest income (expense), net. Net interest income increased by $1.2 million,
or 6069%, to $1.2 million in the three months ended March 31, 2000, from $20,000
in the three months ended March 31, 1999. This increase is mainly attributable
to a higher average cash balance in the three months ended March 31, 2000.
Provision for income taxes. For the three months ended March 31, 2000 and 1999
we had no provision for income taxes due to the net losses incurred.
15
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
(in thousands, except ratios)
<TABLE>
<CAPTION>
March 31, December 31,
Financial Condition as of 2000 1999
--------- ------------
<S> <C> <C>
Cash and cash equivalents $103,216 $102,879
Working capital 106,789 104,435
Current ratio 22.61 24.02
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
In recent years, we have funded our operations primarily from sales of
securities.
Cash used for operating activities in the three months ended March 31, 2000 was
$2.5 million, primarily due to a net loss of $582,000 and an increase in
accounts receivable and prepaid expenses, partially offset by increases in
deferred revenue.
Cash used for investing activities was $1.2 million in the three months ended
March 31, 2000. Investing activities for the period consisted primarily of the
purchases of equipment, consisting largely of computer servers, workstations and
networking equipment.
Cash provided by financing activities in the three months ended March 31, 2000
was $4.0 million, primarily as a result of the warrant exercise by the Pequot
Entities in February 2000.
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 equivalents will be
sufficient to meet our anticipated cash requirements for working capital and
capital expenditures for at least the next twelve months.
16
<PAGE> 17
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.
3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
17
<PAGE> 18
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. The Company is
not presently a party to any legal proceedings, the adverse outcome of which, in
management's opinion, would have a material adverse effect on the Company's
results of operations or financial position.
ITEM 2. CHANGES IN SECURITIES
On February 17, 2000, the Company issued 1,500,786 shares of its common stock
to Pequot Entities upon the exercise of warrants at an exercise price of $2.00
per share. The proceeds to the Company were $3,001,572. The issuance of the
shares was exempt from registration pursuant to section 4(2) of the Securities
Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, whether through the
solicitation of proxies or otherwise, during the quarter ended March 31, 2000.
<PAGE> 19
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
27. Financial Data Schedule
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NETEGRITY, INC.
Date: May 15, 2000 By: /s/ Barry N. Bycoff
-----------------------
Barry N. Bycoff President,
Chief Executive Officer,
Director and Chairman of the
Board
Date: May 15, 2000 By: /s/ James E. Hayden
-----------------------
James E. Hayden Vice
President, Finance and
Administration, and Chief
Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 103,215,704
<SECURITIES> 0
<RECEIVABLES> 6,278,656
<ALLOWANCES> 483,973
<INVENTORY> 0
<CURRENT-ASSETS> 111,730,634
<PP&E> 2,902,839
<DEPRECIATION> 170,891
<TOTAL-ASSETS> 114,782,918
<CURRENT-LIABILITIES> 4,941,191
<BONDS> 0
0
0
<COMMON> 192,502
<OTHER-SE> 109,649,225
<TOTAL-LIABILITY-AND-EQUITY> 114,782,918
<SALES> 6,746,092
<TOTAL-REVENUES> 6,746,092
<CGS> 1,488,220
<TOTAL-COSTS> 1,488,220
<OTHER-EXPENSES> 7,055,606
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,215,734
<INCOME-PRETAX> (582,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (582,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (582,000)
<EPS-BASIC> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
