Back to GetFilings.com
1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
[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)
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)
(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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
2
PART I
ITEM 1. BUSINESS
INTRODUCTION
We are a leading provider of software and services that manage and control
user access to web-based e-commerce applications. Our SiteMinder product is part
of the software infrastructure that is used to build and manage an e-commerce
web site commonly known as a portal. SiteMinder manages the complex process of
identifying users and assigning those users entitlements to multiple e-commerce
applications on a company's portal. These assigned entitlements determine what
information a user can see and what transactions a user can perform on the web
site. SiteMinder enables our customers to centrally control access to e-commerce
portals requiring secure log-in, while distributing the administrative
responsibilities to the most appropriate parties. SiteMinder is designed to be
scalable and reliable, to integrate with our customers' existing systems and to
accommodate emerging Internet technology. We offer a wide range of support
services that enable our customers to successfully implement SiteMinder into
their organizations. As of December 31, 1999 we had 133 customers. We sell our
products through a direct sales force and through our distribution partners. To
date, most of our customers' deployments of SiteMinder have supported
business-to-business e-commerce applications. However, we are now expanding our
markets with new product initiatives and customers in the business to consumer
and service provider markets.
INDUSTRY BACKGROUND
The growth in e-commerce is driving companies to develop a new set of
web-based applications accessed by a large and diverse range of corporate users,
including customers, business partners and employees. In many cases, these new
applications are becoming the principal business processes of an organization.
These include online retail, customer service, supply chain procurement, and
delivery of operational and transactional data. This new generation of
applications has created a demand for new Internet security and user management
solutions to handle the size and scope of these applications.
Before the advent of e-commerce and the transition to web-based computing,
most large businesses deployed client/server architectures to support enterprise
computing. In the client/server model, applications are generally limited to
traditional enterprise resource planning functions such as accounting, human
resources and material resource planning. Defined groups, limited to selected
employees, access these applications through a company's internal computing
resources or dedicated remote access solutions. As a result of this limited
usage, controlling and securing access to these applications and administering
the associated users and their rights of usage, or privileges, can be adequately
handled by the organization's information technology, or IT, department. With
only a limited number of applications and a small number of defined users, the
assignment of entitlements to these users is accomplished by embedding the
security and entitlement functions into each application.
E-commerce, however, is fundamentally changing traditional business
processes because companies now need to conduct business online with their
customers and business partners. According to Forrester Research,
business-to-business e-commerce is expected to grow from $43 billion in 1998 to
$1.3 trillion in 2003. Forrester also estimates that business-to-consumer
e-commerce will grow from $8 billion in 1998 to $108 billion in 2003. Companies
are developing new web-based applications that support key revenue and
relationship management aspects of the companies' business processes. Companies
are delivering these new services through portals which are becoming the new
customer's gateway. International Data Corporation estimates that the global
e-commerce application market will grow from $444 million in 1998 to over $13
billion in 2003. Companies are also attempting to leverage their existing
investments in traditional enterprise applications by integrating them into
their web sites. In this new e-commerce business model, applications accessed
through the portal are not just supporting business operations, but, in many
instances, become the focal point for companies' interactions with their
constituencies, including remote and mobile employees, existing and potential
customers, suppliers, vendors, distributors and other business partners.
As larger and more diverse constituencies access wider ranges of
applications, the management and security of users become increasingly important
and complex. The software infrastructure required to support
1
3
these applications, developed in different languages, running on different web
servers and operating on different hardware platforms, dramatically adds to this
complexity. Traditional security and management software solutions, whether
developed in house or provided by a third party, face significant difficulties
in meeting these challenges effectively. Most e-commerce portals have continued
the practice of embedding security in each application. This requires users to
provide a password to access each application, resulting in a cumbersome and
time-consuming user experience. Lack of centralized user management also creates
security issues. Companies cannot take corrective actions in a timely fashion
because the security and privileges must be modified in each application. In
addition, many companies find it difficult to accommodate relationships with
business customers and partners because the companies' IT departments do not
have the information necessary to manage the entitlements of individual customer
and partner users.
Even organizations that have achieved early success with web-based
e-commerce business models face challenges as their models evolve. For example,
many e-commerce businesses initially focused on a direct sales relationship with
their customers and therefore only needed to manage this single application. As
their operations have matured, however, they have needed to deploy additional
applications, such as customer service. These early e-commerce businesses had no
alternative but to build their own security and user management infrastructure
to manage the increased number of applications. Today, the software
infrastructure that was built faces scalability and user-management issues,
resulting in mounting development and support costs.
In order for e-commerce to be successful, companies require a secure and
scalable portal management infrastructure for conducting business. Portal sites
must be capable of managing the large numbers of users and multiple user
transactions without jeopardizing the integrity of the site's security policies.
As companies seek to attract customers and partners to their portal sites, and
to increase the efficiency of their employees, they require a solution providing
a seamless and integrated view of the applications on their web sites. The
solution must provide single sign-on to personalized information based on the
profile of the particular user. As the number of applications proliferates and
the complexity of data increases, the solution must reduce the burden of
managing these applications. Companies require a solution that easily and
seamlessly integrates with their existing investments in information technology
infrastructure, including web servers, application servers, directory servers
and various forms of user identification. Finally, companies require an open and
extensible architecture in order to accommodate the introduction of new,
evolving web technologies.
THE NETEGRITY SOLUTION
We are a leading provider of software and services for secure portal
management for e-commerce applications. Key benefits of our solution include:
Centralized entitlement management. SiteMinder provides centralized
control of users and entitlements that extends across multiple web-based
applications on a company's web site. SiteMinder manages the entitlements of
customers, business partners and employees accessing applications on a company's
portal. Our solution provides this centralized entitlement management as a
shared service that includes all of the e-commerce applications deployed by our
customers. This approach provides many benefits. Security changes can be
effected swiftly and efficiently across all of a company's e-commerce
applications. Moreover, it makes application developers much more productive
because they are free to focus on business processes and leave security,
privilege management and personalization to SiteMinder.
Superior user experience through single sign-on and personalized
content. With SiteMinder, users sign-on to a web site once and gain access to
all relevant information as defined by their user entitlements. Single sign- on
provides access to a personalized view of content drawn from multiple
applications which run on multiple servers, multiple operating systems, and
across multiple Internet domains. This benefits end users by providing them with
a high-quality user experience, personalized to meet their individual needs. By
providing a superior user experience on its web site, a company is able to
protect its brand and build customer loyalty.
Distributed and delegated administration. SiteMinder provides policy-based
administration of security policies, so that administrative responsibilities can
be easily delegated to individual business units, remote
2
4
trading partners or other administrators without jeopardizing control. Delegated
administrators control only the users and policies for which they have been
granted explicit responsibility. SiteMinder assigns administrative
responsibility where the knowledge resides, while still maintaining the overall
security of a site. As a result, a company's administrative burdens and
associated costs are dramatically reduced.
Leverages existing investments in technology infrastructure. SiteMinder
has been designed to support the existing systems currently employed by
companies and to easily accommodate emerging Internet technologies. SiteMinder
integrates with leading user directories, web servers, application servers and
authentication technologies. SiteMinder also provides support for multiple web
servers and operating platforms involving Microsoft and Netscape Web servers,
and Windows NT and UNIX platforms, which facilitates cross-platform development,
deployment and migration.
Scalability and high-availability. Our customers require a platform that
scales as they deploy additional applications and as user traffic grows, while
providing the highest level of reliability. SiteMinder provides a scalable
high-availability platform to meet the requirements of demanding portals.
Based on independent third-party testing, published data from other vendors and
feedback from customers, we believe that SiteMinder provides significantly
higher transaction rates than other competing solutions.
STRATEGY
Our objective is to become the market leader in secure portal management
solutions for the business-to-business, business-to-consumer, and application
hosting markets. Key elements of our strategy include:
Extend technology leadership in secure portal management market. We
believe that our technology enables us to offer a complete and cost-effective
secure portal management solution for web-based applications. By building upon
our ability to use a company's existing directories rather than creating another
database, a feature called native integration, single sign-on capabilities and
our ability to scale to support millions of users, we believe we can extend our
leadership in the secure portal management market by adding new features and
capabilities. Specifically, we plan to offer additional platform support for our
SiteMinder solution and integration with non-web-based, legacy applications. In
addition, we intend to continue to incorporate industry-leading technologies
such as support for eXtensible Markup Language, or XML, and Wireless Access
Protocol, or WAP, protocols, into SiteMinder.
Expand applications of SiteMinder into new markets. While most of our
customers' deployments have been in the business-to-business e-commerce market,
our customers are beginning to deploy SiteMinder in the business-to-consumer and
service provider markets. We believe that our capabilities will enable us to
offer solutions that support portal and targeted community applications in the
business-to-consumer market. We will continue to expand and tailor SiteMinder as
necessary to meet the requirements of our customers for new e-commerce
applications.
Expand strategic partnerships: We have developed strategic relationships
in order to significantly increase market awareness and distribution for
SiteMinder. To date we have focused primarily on key technology providers like
Sun, iPlanet, and TIBCO. In addition to building strong partnerships with the
technology providers we have worked with historically we are building
partnerships with leading service and technology companies that provide critical
infrastructure and online services for our expanded market focus on portal
management for business to business, and business to consumer, and application
hosting markets Service Providers.
Pursue international expansion: Although we principally focus our
marketing efforts in the United States, we have begun to expand our sales force
and support organizations with the objective of gaining broad international
market acceptance of SiteMinder through adoption into strategic accounts. In
addition, we are developing products intended to address the specific needs of
international markets, with an initial focus on Europe and Asia. These include
developing localized versions of our products and local consulting services.
Expand service resources: We have learned that a customer's decision to
purchase our product is based, in part, on our ability to provide a high level
of customer service and implementation support. As the world wide demand for
our product grows, it is critical for us to build these capabilities
accordingly. We have a two pronged strategy to meet this demand. First, we
continue to grow our internal resources. Second, we are aggressively recruiting
the industry's leading internet system integrators. We are building cooperative
relationships with these companies to insure they have the product knowledge
and access to Netegrity resources to enable them to easily build SiteMinder
into their client's applications.
Strategic acquisitions: We believe that there are significant market
opportunities that leverage our market position that can best be met through a
strategic acquisition program. Our intention is to leverage Netegrity's
valuation as well as our successful fund raising in 1999 to support these
activities.
3
5
PRODUCTS AND SERVICES
SiteMinder Product
SiteMinder 3.6 was released in August 1999. SiteMinder interacts with the
four main components of an e-commerce web site:
- Web Servers: SiteMinder is designed to support all major web servers and
provide access control to content distributed through these servers.
- Application Servers: SiteMinder is designed to support all major
application servers and provide generalized entitlement management to the
content and transactions delivered through these servers.
- Authentication Services: SiteMinder provides broad support for
authentication methods that enable web sites to authenticate users
through a variety of methods that meet the unique security requirements
of each application.
- Directory Servers: SiteMinder integrates with all industry leading
directory servers and utilizes them as repositories for all user and
entitlement data.
The SiteMinder product consists of three key components: Policy Servers,
Agents and an Administration Console. Additionally, SiteMinder is delivered with
a developer kit, which allows developers to construct web sites in both C++ and
Java applications. The following briefly describes each of the primary
components:
- Policy Server: The Policy Server is a generalized security policy
engine, which includes processes for authentication, authorization,
session management, administration and auditing. The Policy Server, which
handles all requests for managing, and enforcing user entitlements, runs
on Windows NT and UNIX platforms.
- Agents: Agents are distributed components deployed on web servers,
application servers, or as part of an application itself. Agents
communicate policies to the application governing user entitlements.
SiteMinder ships with web Agents compatible with most popular web
servers, including Microsoft IIS, Netscape Enterprise Server and Apache.
SiteMinder also supports application server Agents compatible with most
popular application servers, including those from Allaire, Bluestone,
Microsoft, Oracle and the Sun-Netscape Alliance.
- Administration Console: The Administration Console is a secure Java
applet that allows administrators to create and manage user entitlement
policies from any Java-enabled web browser.
SiteMinder 3.6 provides the following services:
- Entitlement management infrastructure: SiteMinder provides a single
location for defining the policies that specify which users may access
particular e-commerce applications and content. By providing a single
location for these policies, SiteMinder enables web sites to apply
consistent personalized content and application access for users
throughout the site.
- Single sign-on: SiteMinder provides robust single sign-on services
across e-commerce sites spanning web servers and application environments
running on multiple operating systems and spanning multiple Internet
domains. Using encrypted cookies, SiteMinder is able to recognize a
previously authenticated and authorized user and allow the user to access
applications and content without being prompted repeatedly for new
passwords.
- Policy-based authentication services: SiteMinder manages the entire
authentication process. It supports all leading authentication
technologies including basic name-password, forms based authentication,
digital certificates, two-factor authentication, and method chaining.
SiteMinder's policy-based approach enables customers to apply different
authentication technologies depending on the value
4
6
and risk of the application being accessed. For example, companies can
easily use name-passwords for most applications while requiring a
digital certificate for an on-line trading system.
- Distributed administration: Using any Java-enabled browser, web
administrators are able to access SiteMinder and modify user entitlement
policies from anywhere on the network. The user interface supports
multiple levels of delegation among administrators.
SiteMinder is the only secure portal management system on the market that
provides native integration with industry-standard Lightweight Directory Access
Protocol, or LDAP, Windows NT directory services, and SQL databases. As a
result, customers do not need to install and manage separate and redundant user
directories, which are expensive to maintain, unnecessarily complex, and
therefore prone to failure. SiteMinder's native directory support works with
multiple directory services from multiple vendors to provide our customers with
the freedom to deploy on their preferred platforms.
SiteMinder has been developed with a scalable, highly available
architecture. Key features of this robust architecture include:
- Load balancing: SiteMinder Agents can easily be configured to balance
loads across multiple policy servers, as well as across multiple user
directories. The result is nearly linear scaling as additional servers
are deployed.
- Automatic fail-over: SiteMinder Agents can easily be configured to
automatically communicate with a new Policy Server should their primary
Policy Server be taken off line or fail. Likewise, SiteMinder Policy
Servers can easily be configured to automatically utilize a new user
directory should their primary user directory be taken off line or fail.
The result is a fully redundant architecture that provides high
availability.
- Local caching: Both Policy Servers and Agents can be configured to cache
appropriate data thereby minimizing unnecessary traffic and processing
requirements. SiteMinder's session management will automatically update
cached information should policies or user profiles change.
We typically license SiteMinder based on the following categories:
- Intranets, in which all the users are employees or contractors working
for our customer. Prices start at approximately $40 per user for small
sites and are discounted as volumes grow.
- Extranets, in which our customers conduct transactions with their
corporate customers, suppliers and partners. Prices start at
approximately $30 per user for small sites and are discounted as volumes
grow.
- Internet sites, in which users are consumers seeking products or
information from our customers. Prices start at less than $2 per user for
volumes greater than 250,000 users and are discounted as volumes grow. A
multi year subscription model for an unlimited number of users in year
one has been introduced in January 1, 2000.
- Service providers where our customers host applications for their
customers.
Standard SiteMinder licenses include a web Agent site license and Policy
Server licenses. Essentially, our customers pay us for the size of the web site
they are building, as measured by the number of users of that site. Our standard
product license gives the customer the right to replicate and install our
SiteMinder software components throughout its web site infrastructure as needed
to meet scalability and redundancy requirements.
SiteMinder Services
Our professional services organization provides consulting and integration
services that aid our customers in successfully implementing SiteMinder within
their organizations. Our professional services include application
infrastructure planning, application prototyping and integration, SiteMinder
deployment, SiteMinder extensions and custom agents, and training for developers
and solutions architects.
The Netegrity Technical Services group is headquartered in Waltham,
Massachusetts. We provide many Services as well as a selectable level of Support
for all customer environments. Prompt response and a quality resolution are the
hallmarks of our service. The Netegrity Technical Service Center is a
centralized operation, offering email, fax, World Wide Web (www) or telephone
access for our customers. We provide technical assistance for all Netegrity
products and offer three levels of Service to meet our customer needs. Netegrity
Customer Services also offers extended services such as on-site training,
installations, and customized service offerings. Netegrity Technical Services is
committed to resolving customer problems in a timely manner.
5
7
SiteMinder Products in Development (as of February 15, 2000)
SiteMinder 4.0 or the Portal Edition, is currently in beta and expected to
be released later in Q1 2000. SiteMinder 4.0 will provide additional support
for e-commerce portals and new services that enable partnerships for affiliated
companies. Additional versions of SiteMinder and complimentary products are
currently under development for scheduled release in the next twelve months.
These will include additional support for integration with legacy applications;
web and application servers; and delegating management of users and policies to
trusted partners.
Other Products and Services
In addition to the sales and marketing of SiteMinder, we are a
non-exclusive distributor of Check Point Software Technologies' FireWall-1
product, complementary products from other vendors and related maintenance,
consulting and training services. We sell these products and services directly
to end users through a small, dedicated sales organization throughout the United
States.
SALES, MARKETING AND DISTRIBUTION
We directly market our SiteMinder software and services domestically
through a field sales organization supported by inside sales representatives. We
also indirectly market through strategic partnerships and other third-party
relationships with vendors of Internet-related systems and application software
as well as through resellers and systems integrators. As of December 31, 1999,
our sales and marketing organization consisted of 56 individuals.
Direct Sales Force. As of December 31, 1999, our direct sales force
consisted of 32 individuals, 15 of whom were field sales representatives
covering six domestic regions and three international regions. Our sales
organization identifies prospects that have e-commerce plans and requirements,
and deploys a solution-selling approach once customers are qualified. Our inside
sales representatives qualify, develop and pursue leads generated through a
variety of sources. Our field sales group conducts on-site meetings with
accounts that have substantial product and service requirements. We target
SiteMinder software and services to large, corporate customers and smaller firms
that need to protect access to mission-critical information while providing the
users of their applications with a personalized, seamless experience. We
generally sell to e-commerce business managers, product managers, web
application development managers, Internet architects, security administrators,
network/systems administrators and other people responsible for analyzing and
selecting e-commerce solutions. We plan to continue to focus on building our
direct sales force, especially our field sales representatives, both
domestically and internationally.
Indirect Distribution. We have signed partnership agreements with several
leading technology providers and systems integrators. We classify our partner
companies as follows:
- Alliance partners. Through our alliance partners, we license restricted
use of our versions of our SiteMinder product to sell with their
platforms or applications.
- Systems integrators. We continue to develop partnerships with leading
systems integrators to aid in the integration and systems design of our
software at customer sites. We plan to utilize systems integrators as
well as our internal service and support personnel to provide superior
customer installation and support.
- Resellers. We enter into agreements with selected resellers of our
product.
- ISV/Co-marketing partners. We also actively seek partnerships with
companies that provide products to our customers which are complementary
to SiteMinder. We work together with these vendors
6
8
to provide technical integration of our product. In many cases we also
work together on sales and marketing initiatives.
Product Marketing Programs. We engage in a broad range of product
marketing activities, including sponsoring seminars for prospective customers,
exhibiting at targeted conferences for both the technology and financial
communities, as well as providing paper and e-mail based direct mailings. We
also maintain an active public relations program. This program issues press
releases highlighting major customer additions, strategic partnerships and new
product releases, manages relations with industry analysts and promotes coverage
of the firm in the trade and business press. We devote significant resources to
our web site to provide product and company information as well as customer
profiles. We continue to enhance our web site with features, including
interactive tours, streaming demos, presentations and seminar content online,
customer and developer chat rooms and more customer application stories. In
addition, we plan to launch a series of banner campaigns on leading Internet
portal sites.
Our product marketing programs are aimed at informing customers of the
capabilities and benefits of the SiteMinder solution and increasing demand
across all industry segments. We plan to continue to devote significant
resources to marketing our product and brand.
In addition to the sales and marketing of SiteMinder, we are also a
non-exclusive distributor of Check Point Software Technologies' FireWall-1
product, complementary products from other vendors and related maintenance,
consulting and training services. We sell these products and services directly
to end-users through a small, dedicated sales organization in the United States.
We also benefit from marketing programs conducted by Check Point Software
Technologies.
CUSTOMERS
As of December 31, 1999, we licensed SiteMinder software to 133 end-user
customers. Our customer base spans multiple industry segments, focusing
primarily on financial services, high tech, government, insurance, retail and
telephone companies and internet service providers.
No single customer, including direct end users or resellers, accounted for
more than 10% of our total revenues during the years ended December 31, 1999,
1998 and 1997.
We also sold Check Point Software Technologies' FireWall-1 to over 300
customers and continue to provide support to most of them.
PURCHASING
The Company purchases 100% of its FireWall-1 product directly through Check
Point Software Technologies, Ltd. The Company also purchases firewall-related
accessory products through various third-party vendors. The Company has not
experienced any material difficulties or delays in acquiring any of the products
that it distributes.
DISTRIBUTION AND BACKLOG
The Company generally ships product within 24 hours of the receipt of an
order from a customer. Consequently, backlog is currently not a material factor.
COMPETITION
The market for secure portal management products and sources is new,
rapidly evolving and highly competitive. We expect competition to continue to
increase both from existing competitors and new market
7
9
entrants. We believe that our ability to compete depends on many factors both
within and beyond our control, including:
- the performance, reliability, features, price and ease of use of our
SiteMinder product line as compared to those of our competitors;
- our ability to secure and maintain key strategic relationships with
distributors, resellers and other partners;
- our ability to expand both our domestic and international sales
operations; and
- the timing and market acceptance of new solutions and enhancements to
existing solutions developed by us and our competitors.
Until recently, our primary source of competition was from custom-built
secure portal 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 portal management technology competitive with ours. Our primary
competitors now include enCommerce and IBM/DASCOM. We also have faced
competition from web development professional services organizations. In
addition, a number of other security and software companies have indicated that
they offer products which may compete with ours. Additional competition may
develop as the market matures and other companies begin to offer similar
products, and as our product offerings expand to other segments of the
marketplace. Current and potential competitors have established, or may in the
future establish, cooperative selling relationships with third parties to
increase the distribution of their products to the marketplace. Accordingly, it
is possible that new competitors may emerge and rapidly acquire significant
market share.
We face a number of competitors in this market area. Many of our
competitors have shorter operating histories, and less financial and technical
resources than we have. In addition, these smaller competitors have smaller
customer bases than we currently do. Some of our newer competitors, however, are
larger companies who have large financial reserves, and well-established
development and support teams, and large customer bases. These larger
competitors may initiate pricing policies which would make it more difficult for
us to maintain our competitive position against these companies.
As new participants enter the secure user management market, we will face
increased competition. Potential competitors may bundle their products in a
manner that discourages users from purchasing our products. It is also possible
that current and potential competitors may be able to respond more quickly to
new or emerging technologies or customer requirements, resulting in the
acquisition of market share.
Our FireWall-1 reseller business experiences competition from companies
that offer products competing with Check Point Software Technologies' FireWall-1
product, including Axent Technologies, Cisco Systems and Trusted Information
Systems. We also compete with other resellers of FireWall-1.
PRODUCT RESEARCH AND DEVELOPMENT
The market for e-commerce security products is characterized by rapid
technological change, changes in customer requirements, new product
introductions and enhancements, and emerging industry standards. We devote
significant time and resources to analyzing and responding to changes in the
industry, such as changes in operating systems, application software, security
standards and networking software and evolving customer requirements.
E-commerce applications have significant requirements for scalability,
reliability, sophisticated security and ease of administration. These increased
demands drive the need for a centralized access control model for administrators
and a single point of access for end-users. With the growing implementation of
standards-based user directories, such as LDAP, and the proliferation of
flexible and easy-to-use security products, businesses are able to take
advantage of best-of-breed solutions as they deploy e-commerce applications
across heterogeneous networks. We have made, and expect to continue to make, a
substantial investment in research and development. In the year ended December
31, 1999, we spent approximately $3.7 million, or 29% of
8
10
total revenues, on research and development of our SiteMinder product. We will
continue our product development efforts for our current product, as well as
developing next generation versions of our product line. As of December 31,
1999, we had 42 employees engaged in research and development activities.
We believe our future success depends largely on our ability to enhance and
broaden our existing product line to meet the evolving needs of the market.
There can be no assurance that we will be able to respond effectively to
technological changes or new industry standards or developments. Our operating
results and business could be adversely affected if we were to incur significant
delays or be unsuccessful in developing new products or enhancing our existing
products, or if any such enhancements or new products do not gain market
acceptance. In addition, a number of factors may cause variations in our future
operating results. These include the timing of product introductions and
enhancements by us or our competitors, market acceptance of new products, or
customer order deferrals in anticipation of new products.
PROPRIETARY RIGHTS
Our success and ability to compete are dependent to a significant degree on
our ability to develop and maintain the proprietary aspects of our technology
and operate without infringing on the proprietary rights of others. We rely on a
combination of trademark, trade secret and copyright laws and licenses and
contractual restrictions to protect the proprietary aspects of our technology.
These legal protections afford only limited protection for our technology. We
seek to protect our source code for our software, documentation and other
written materials under trade secret and copyright laws. We license our software
pursuant to signed license agreements, which impose restrictions on the
licensee's ability to utilize the software. Finally, we seek to limit disclosure
of our intellectual property by requiring employees and consultants with access
to our proprietary information to execute confidentiality agreements with us and
by restricting access to our source code. Due to rapid technological change, we
believe that factors such as the technological and creative skills of our
personnel, new product developments and enhancements to existing products are
more important than the various legal protections of our technology to
establishing and maintaining a technology leadership position.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult and while we are unable to determine the extent to which piracy of our
software exists, software piracy can be expected to be a persistent problem. In
addition, the laws of many countries do not protect our proprietary rights to as
great an extent as do the laws of the United States. Litigation may be necessary
in the future to enforce our intellectual property rights, to protect our trade
secrets, to determine the validity and scope of the proprietary rights of others
or to defend against claims of infringement or invalidity. Any such resulting
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on our business, operating results and
financial condition. There can be no assurance that our means of protecting our
proprietary rights will be adequate or that our competitors will not
independently develop similar technology. Any failure by us to meaningfully
protect our property could have a material adverse effect on our business,
operating results and financial condition.
There can be no assurance that third parties will not claim infringement
with respect to our current or future products. We expect that developers of
web-based application software products will increasingly be subject to
infringement claims as the number of products and competitors in our industry
segment grows and as the functionality of products in different segments of the
software industry increasingly overlaps. Any such claims, with or without merit,
could be time consuming to defend, result in costly litigation, divert
management's attention and resources, cause product shipment delays or require
us to enter into terms acceptable to us or at all. A successful infringement
claim against us and our failure or inability to license the infringed rights or
develop or license technology with comparable functionality could have a
material adverse effect on our business, financial condition and operating
results.
We integrate third-party software into our products. This third-party
software may not continue to be available on commercially reasonable terms. We
believe, however, there are alternative sources for such
9
11
technology. If we could not maintain licenses to the third-party software
included in our products, however, distribution of our products could be delayed
until equivalent software could be developed or licensed and integrated into our
products, which could materially adversely affect our business, operating
results and financial condition.
EMPLOYEES
As of December 31, 1999, we had a total of 138 full-time employees, of
which 42 were involved in research and development, 72 in sales, marketing and
customer support, 10 in consulting and 14 in administration and finance. None of
our employees are represented by a labor union. We have not experienced any work
stoppages and believe that our relationships with employees are good. Our future
success will depend in part on our ability to attract, retain and motivate
highly qualified technical and management personnel, for whom competition is
intense.
10
12
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 $5.5 million. As a result of ongoing
operating losses, at December 31, 1999, we had an accumulated deficit of $20.1
million. We have generated relatively small amounts of SiteMinder revenues until
recent fiscal quarters, while increasing expenditures in all areas, particularly
in research and development and sales and marketing, in order to execute our
business plan. Although we have experienced revenue growth in connection with
SiteMinder in recent periods, the growth has been off of a small base, and it is
unlikely that the recent growth rates are sustainable.
DISAPPOINTING QUARTERLY RESULTS COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK
TO FALL SUBSTANTIALLY.
Our quarterly revenues and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter. If our quarterly revenues
or operating results fall below the expectations of investors, the price of our
common stock could fall substantially.
Our quarterly revenues may fluctuate for several reasons, including the
following:
- market acceptance of our SiteMinder products;
- our success in obtaining follow-on sales to existing customers;
- the long sales and deployment cycle for sales of SiteMinder licenses;
- our ability to hire and retain personnel, particularly in services and
sales and marketing;
- the release of new versions of SiteMinder or other products; and
- the development of our direct and indirect sales channels.
In addition, because our revenues from services are largely correlated with
our SiteMinder software revenues, a decline in SiteMinder software revenues
could also cause a decline in our SiteMinder services revenues in the same
quarter or in subsequent quarters. Other factors, many of which are outside our
control, could also cause variations in our quarterly revenues and operating
results.
Most of our expenses, such as employee compensation and rent, are
relatively fixed. Moreover, our expense levels are based, in part, on our
expectations regarding future revenue increases. As a result, any shortfall in
revenues in relation to our expectations could cause significant changes in our
operating results from quarter to quarter and could result in increased
quarterly losses.
OUR FUTURE SUCCESS WILL DEPEND ON OUR ABILITY TO MARKET SITEMINDER AND RELATED
SERVICES SUCCESSFULLY.
The sale of SiteMinder licenses and related services provides a substantial
majority of our total revenues. These sales accounted for 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
11
13
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.
12
14
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.
13
15
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
14
16
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.
15
17
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
16
18
existence of these provisions could limit the price that investors might be
willing to pay in the future for shares of our common stock.
17
19
ITEM 2. PROPERTIES
The Company's headquarters consist of two separate leased office suites
located at 245 Winter Street and 200 West Street in Waltham, Massachusetts. We
occupy 5,760 square feet of space for current monthly payments of $8,400 under
a lease expiring in May 2001 and 12,600 square feet of space for current
monthly payments of $30,450 under a lease expiring in December 2001. We
anticipate that in the near future we will lease office space that will house
our new headquarters.
In order to support our field sales and consulting staff, we lease office
space in Los Angeles and San Jose, California; New York, New York; Chicago,
Illinois; Reston, Virginia; Atlanta, Georgia; Paris, France; London, England;
Ngee Ann City, Singapore.
ITEM 3. 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 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 December 31,
1999 except for a special meeting of stockholders held October 7, 1999 which is
described in Item 3 in the Company's Form 10-Q for the period ending September
30, 1999.
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"NETE." It was traded on the Nasdaq SmallCap Market prior to September 28, 1999.
The following table sets forth, for the periods indicated, the range of high and
low sales prices per share of our common stock, as reported on the Nasdaq
SmallCap Market for the period prior to September 28, 1999 and on the Nasdaq
National Market for the time period from September 28, 1999 through December 31,
1999.
Price Range of
Common Stock
---------------------
High Low
-------- -------
1998 FISCAL YEAR
First Quarter ................................ $ 2.344 $ 1.406
Second Quarter ............................... $ 3.000 $ 1.625
Third Quarter ................................ $ 4.125 $ 1.500
Fourth Quarter ............................... $ 4.531 $ 1.063
1999 FISCAL YEAR
First Quarter ................................ $17.250 $ 4.000
Second Quarter ............................... $20.000 $ 9.250
Third Quarter ................................ $30.000 $15.875
Fourth Quarter ............................... $65.000 $21.313
As of December 31, 1999, there were 162 holders of record of common stock.
18
20
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.
NINE MONTHS
ENDED YEARS ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
MARCH 31, ------------ ---------------------------
1996 1996 1997 1998 1999
----------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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
------ ------- ------- ------- -------
Income (loss) from operations..... 374 (1,547) (4,274) (5,359) (6,282)
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) (5,229) (5,458)
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) (5,229) (5,458)
Provision for income taxes........ 25 (74) -- -- --
------ ------- ------- ------- -------
Net income (loss)................. $ 129 $ 4,000 $(5,252) $(5,229) $(5,458)
====== ======= ======= ======= =======
Basic and diluted earnings per
share:
From continuing operations...... $ 0.05 $ (0.16) $ (0.57) $ (0.56) $ (0.47)
From operation of discontinued
operations.................... (0.03) (0.06) -- -- --
Gain on sale of assets.......... -- 0.67 -- -- --
------ ------- ------- ------- -------
Net income (loss)............... $ 0.02 $ 0.45 $ (0.57) $ (0.56) $ (0.47)
====== ======= ======= ======= =======
Weighted average shares
outstanding..................... 8,835 8,944 9,279 9,362 11,648
19
21
DECEMBER 31,
MARCH 31, ---------------------------------------
1996 1996 1997 1998 1999
------- ------- ------ ------ --------
(IN THOUSANDS)
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........................ 1,903 6,149 1,016 996 106,434
20
22
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.
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
21
23
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 $20.1 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.
22
24
RESULTS OF OPERATIONS
The following table presents statement of operations data as percentages of
total revenues for the periods indicated:
YEARS ENDED
DECEMBER 31,
--------------------
1997 1998 1999
---- ---- ----
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
---- ---- ----
Loss from operations.......................... (90) (112) (49)
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) (109) (43)
---- ---- ----
Income (loss) before provision for income
taxes....................................... (111) (109) (43)
Provision for income taxes.................... -- -- --
---- ---- ----
Net income (loss)............................. (111)% (109)% (43)%
==== ==== ====
23
25
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.
24
26
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.
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.
25
27
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.
28
28
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.
29
29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
30
30
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 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.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 14, 2000
31
31
NETEGRITY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
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 AND STOCKHOLDERS' EQUITY
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)
STOCKHOLDERS' EQUITY:
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........................ 33,333 --
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................................ 15,780,049 126,562,147
Accumulated deficit....................................... (14,628,196) (20,086,026)
Loan to officer .......................................... (200,000) (130,000)
------------ ------------
1,079,440 106,517,271
Less -- Treasury Stock, at cost: 25,101 shares.............. (83,657) (83,657)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY.................................. 995,783 106,433,614
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $ 4,225,291 $110,969,625
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
32
32
NETEGRITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
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
----------- ----------- -----------
Loss from operations................ (4,274,149) (5,358,865) (6,282,001)
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) (5,228,750) (5,457,830)
Provision for income taxes.......... -- -- --
----------- ----------- -----------
Net income (loss)................... $(5,251,896) $(5,228,750) $(5,457,830)
=========== =========== ===========
Basic and diluted earnings per
share:
Net income (loss)................. $ (0.57) $ (0.56) $ (0.47)
=========== =========== ===========
Weighted average shares
outstanding....................... 9,279,000 9,362,000 11,648,000
The accompanying notes are an integral part of the consolidated financial
statements.
33
33
NETEGRITY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
ADDITIONAL OTHER TOTAL
PREFERRED COMMON PAID-IN COMPREHENSIVE ACCUMULATED LOAN TO TREASURY STOCKHOLDERS'
STOCK STOCK CAPITAL INCOME DEFICIT OFFICER STOCK EQUITY
--------- -------- ------------ ------------- ------------ --------- -------- -------------
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)............ -- -- -- -- (5,228,750) -- -- (5,228,750)
Issuance of preferred stock
(3,333,334 shares) --
Series D.................. 33,333 -- 4,916,668 -- -- -- -- 4,950,001
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...................... 33,333 94,254 15,780,049 -- (14,628,196) (200,000) (83,657) 995,783
------- -------- ------------ -------- ------------ --------- -------- ------------
Net income (loss)........... (5,457,830) (5,457,830)
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
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) 33,333 -- -- -- -- -- --
Repayment of Loan
to officer................ 70,000 70,000
------- -------- ------------ -------- ------------ --------- -------- ------------
BALANCE AT DECEMBER 31,
1999...................... $ -- $171,150 $126,562,147 $ -- $(20,086,026) $(130,000) $(83,657) $106,433,614
======= ======== ============ ======== ============ ========= ======== ============
The accompanying notes are an integral part of the consolidated financial
statements.
34
34
NETEGRITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
----------- ----------- ----------
OPERATING ACTIVITIES:
Net loss ................................................ $(5,251,896) $(5,228,750) $ (5,457,830)
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
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 -- --
The accompanying notes are an integral part of the consolidated financial
statements.
35
35
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.
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.
36
36
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.
37
37
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.
38
38
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.
39
39
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:
DECEMBER 31,
-----------------------
1998 1999
--------- ----------
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
========== ==========
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
40
40
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:
YEARS ENDING DECEMBER 31,
- -------------------------
2000.................................................. $555,362
2001.................................................. 376,950
--------
$932,312
========
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.
41
41
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F: INCOME TAXES
Significant components of the deferred tax assets and liabilities are as
follows:
DECEMBER 31,
----------------------------
1998 1999
----------- ------------
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)
----------- ------------
$ -- $ --
=========== ============
The provision for income taxes differs from the federal statutory rate of
34% as follows:
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
Federal tax provision (benefit)........... $(1,785,645) $(1,777,775) $(1,855,662)
Non deductible costs...................... 9,962 13,829 29,498
Valuation allowance....................... 1,775,683 1,763,946 1,826,164
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
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 $10,262,000 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.
42
42
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 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.
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 warrants for the purchase of 100,000
shares exercisable at $1.50 expiring on January 7, 2003 for his services as a
director.
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.
43
43
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:
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
------------- ----------- ------------- ----------- ------------- -----------
As reported............... $(5,251,896) $(0.57) $(5,228,750) $(0.56) $(5,457,830) $(0.47)
Pro-Forma................. (5,500,386) (0.59) (5,661,325) (0.60) (8,049,750) (0.69)
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:
DECEMBER 31
---------------------------------
1997 1998 1999
---------- --------- --------
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............ -- -- --
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:
EXERCISEABLE OPTIONS
OPTIONS OUTSTANDING --------------------
-------------------------- WEIGHTED
WEIGHTED WEIGHTED AVERAGE
SHARES AVERAGE AVERAGE EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE(a) EXERCISE PRICE SHARES PRICE
- ------------------------ ----------- -------- -------------- ----------- ------
$.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
========= =========
- ------------
(a) Average contractual life remaining in years.
44
44
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:
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------------------------------------------------------------------
1997 1998 1999
----------------------------- -------------------------- ---------------------------
Weighted Weighted Weighted
Average Exercise Average Exercise Average Exercise
Shares Price Shares Price Shares Price
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
- ------------
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.
1997 1998 1999
Gross Gross Gross
Revenue Margin Revenue Margin Revenue Margin
------- ------ ------- ------ ------- ------
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
========== ========== ========== ========== =========== ==========
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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item is incorporated by reference to the
information under the caption "Election of Directors" contained in the
Company's Definitive Proxy Statement for the annual meeting of stockholders to
be held in 2000.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information under the caption "Executive Compensation and Other Information
Concerning Directors and Officers" contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information under the caption "Management and Principal Holders of Voting
Securities" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information under the caption "Certain Relationships and Related Transactions"
contained in the Proxy Statement.
45
45
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(D):
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.
3. List of Exhibits
The following exhibits, required by Item 601 of Regulation S-K, are filed
as a part of this Annual Report on Form 10-K. Exhibit numbers, where applicable,
in the left column correspond to those of Item 601 of Regulation S-K.
Exhibit
Item No. Item and Reference
- -------- --------------------------------------------------------------------
3.01 Restated Certificate of Incorporation, as amended, of the Registrant
(filed as Exhibit 3.01 to Registrant's Registration Statement of
Form S-18, No. 33-24446-B, and incorporated by reference).
3.02 Amended and Restated By-Laws of the Registrant (filed as exhibit
3.03 to the Registrant's annual report on form 10-K for the year
ended December 31, 1998, and incorporated by reference).
4.01 Specimen certificate for shares of Common Stock of the Registrant
(filed as Exhibit 4.01 to the Registrant's Registration Statement on
Form S-18, No. 33-24446-B, and incorporated by reference).
46
46
10.01 1986 Nonstatutory Stock Option Plan of the Registrant (filed as
Exhibit 10.01 to the Registrant's Registration Statement on Form
S-18, No. 33-24446-B, and incorporated by reference).
10.02 Form of Nonstatutory Stock Option Agreement under the Registrant's
1986 Nonstatutory Stock Option Plan (filed as Exhibit 10.02 to the
Registrant's Registration Statement on Form S-18, No. 33-24446-B,
and incorporated by reference).
10.03 1987 Amended Stock Plan of the Registrant (filed as Exhibit 4.1 to
Registration Statement on Form S-18, No. 33-24446-B, and
incorporated by reference).
10.04 Form of Incentive Stock Option Agreement under the Registrant's
1987 Amended Stock Plan (filed as Exhibit 10.04 to Annual Report on
Form 10-K for the fiscal year ended March 31, 1991, and
incorporated by reference).
10.05 Form of Non-Qualified Stock Option Agreement under the Registrant's
1987 Amended Stock Plan (filed as Exhibit 10.05 to Annual Report on
Form 10-K for the fiscal year ended March 31, 1991, and
incorporated by reference).
10.06 1988 Amended Non-Employee Director Stock Option Plan (filed as
Exhibit 10.22 to Annual Report on Form 10-K for the fiscal year
ended March 31, 1990, and incorporated by reference).
10.07 Form of Non-Qualified Stock Option Agreement for the Registrant's
1988 Amended Non-Employee Director Stock Option Plan (filed as
Exhibit 10.07 to Annual Report on Form 10-K for the fiscal year
ended March 31, 1991, and incorporated by reference).
10.08 1990 Employee Stock Purchase Plan of the Registrant (filed as
Exhibit 4.1 to Registration Statement No. 33-35225, and
incorporated by reference).
10.10 1991 Director Stock Plan (filed as Exhibit 10.10 to Annual Report
on Form 10-K for the fiscal year ended March 31, 1991, and
incorporated by reference).
10.11 1993 Non-Employee Director Stock Option Plan (filed as Exhibit
10.11 to Annual Report on Form 10-K for the fiscal year ended
March 31, 1993, and incorporated by reference).
10.12 Form of Non-Qualified Stock Option Agreement for the Registrant's
1993 Non-Employee Director Stock Option Plan (filed as Exhibit
10.12 to Annual Report on Form 10-K for the fiscal year ended
March 31, 1993, and incorporated by reference).
10.13 1994 Stock Plan (filed as Exhibit 4 to Registration Statement
on Form S-8, filed on January 26, 1998, and incorporated by
reference).
10.14 1994 Non-Employee Director Plan (filed as Exhibit 10.14 to Annual
Report on Form 10-K for the fiscal year ended March 31, 1994, and
incorporated by reference).
10.15 1997 Stock Option Plan (filed with the Definitive Proxy Statement
filed on March 19, 1999, and incorporated herein by reference
January 26, 1998, and incorporated by reference).
10.16 1997 Non-Employee Director Stock Option Plan (filed as Exhibit
10.16 to Annual Report on Form 10-K for the fiscal year ended
December 1977, and incorporated by reference).
10.17 Commercial Lease dated as of June 1, 1996 between the Registrant
and K/B Fund c/o Koll Management Services, Inc. (filed as Exhibit
10.15 to Annual Report on Form 10-K for the fiscal year ended March
31, 1996, and incorporated by reference).
47
47
10.30 Preferred Stock and Warrant Purchase Agreement among the Company,
Pequot Private Equity Fund L.P. and Pequot Offshore Private Equity
Fund, Inc. (filed as Exhibit 4 to Report on Form 8-K filed on
January 15, 1998, and incorporated by reference).
10.31 Employment Agreement between Netegrity, Inc. and Barry Bycoff
dated as of May 31, 1996 (filed as Exhibit 10.1 to Annual Report on
Form 10-K/A for the year ended December 31, 1998, and incorporated
by reference).
21.1 Subsidiaries of the Registrant (filed herewith).
23.1 Consent of PricewaterhouseCoopers LLP (filed herewith).
27.0 Financial Data Schedule (filed herewith).
B. REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the fourth quarter ended
December 31, 1999.
C. EXHIBITS:
The Company hereby files as part of this Form 10-K the exhibits listed in
14 (A)(3) above.
D. FINANCIAL STATEMENT SCHEDULES:
The Company hereby files as part of this Form 10-K in Item 14(A) attached
hereto the financial statement schedule listed in Item 14 (A)(2) above.
48
48
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 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
March 17, 2000 Officer) and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K 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 March 17, 2000
- ------------------------- Officer, Director and
Barry N. Bycoff Chairman of the Board
/s/ James E. Hayden Chief Financial Officer, March 17, 2000
- ------------------------- Vice President of Finance
James E. Hayden and Administration and
Treasurer
Director March 17, 2000
- -------------------------
Paul F. Deninger
/s/ Eric R. Giler Director March 17, 2000
- -------------------------
Eric R. Giler
/s/ Michael L. Mark Director March 17, 2000
- -------------------------
Michael L. Mark
/s/ James P. McNiel Director March 17, 2000
- -------------------------
James P. McNiel
/s/ Ralph B. Wagner Director March 17, 2000
- -------------------------
Ralph B. Wagner
49
49
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 appearing in this Annual Report on Form 10-K of Netegrity,
Inc. also included an audit of the financial statement schedule listed in Item
14(A)(2) of this Form 10-K. 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
50
NETEGRITY, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS & OTHER END
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
---------- ---------- ---------- ---------- ----------
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
- -----------------
(1) Uncollectible accounts written off, net of recoveries.
S-1