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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, 2000
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.)
52 SECOND AVENUE
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 $1,737,777,751 based on the closing price
of the registrant's Common Stock on February 2, 2001 as reported by the Nasdaq
Over-the-Counter Interdealer Automated Quotation System ($57.047 per share). As
of February 2, 2001, there were 30,462,211 shares of Common Stock outstanding.
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Document incorporated by reference:
Part III incorporates information by reference from the definitive proxy
statement for the registrant's annual meeting to be held on May 17, 2001.
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ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
Part I
Item 1. Business................................................... 1
Item 2. Properties................................................. 18
Item 3. Legal Proceedings.......................................... 18
Item 4. Submission of Matters to a Vote of Security Holders........ 18
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters...................................... 18
Item 6. Selected Financial Data.................................... 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 21
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.. 24
Item 8. Financial Statements and Supplementary Data................ 28
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................. 44
Part III
Item 10. Directors and Executive Officers of the Registrant......... 44
Item 11. Executive Compensation..................................... 44
Item 12. Security Ownership of Certain Beneficial Owners
and Management........................................... 44
Item 13. Certain Relationships and Related Transactions............. 44
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.............................................. 45
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PART I
ITEM 1. BUSINESS
INTRODUCTION
We are a leading provider of solutions for securely managing e-business.
Our solutions are used to securely manage and personalize business-to-business,
business-to-consumer, and Intranet portals. Our SiteMinder platform is part of
the software infrastructure that is used to build and manage e-business web
sites. SiteMinder manages the complex process of identifying users and assigning
those users entitlements to multiple e-business 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-business 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 consulting and support services
that enable our customers to successfully implement SiteMinder into their
organizations. As of December 31, 2000 we had 313 customers many of whom are the
leaders in their respective industries. 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 service provider and e-marketplace
sectors.
INDUSTRY BACKGROUND
The growth in e-business 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-business 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, Internet
commerce is expected to grow to $3 trillion 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 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
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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 business applications. Key benefits of our solution include:
Centralized portal access and 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. SiteMinder
provides single sign-on across multiple applications, platforms, and
multiple internet domains. 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.
Delegated Management Services (DMS). SiteMinder provides policy-based
administration of security policies, so that administrative
responsibilities can be easily delegated to individual business units,
remote
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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. DMS delegates user and
management entitlement responsibility to organizational administrators
both within and outside the portal boundaries. As a result, a company's
administrative burdens and associated costs are dramatically reduced.
Leverages existing investments in technology infrastructure. SiteMinder
supports all leading infrastructure components and existing systems
currently employed by companies and has been designed 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.
SiteMinder is the only portal platform that integrates a customer's
existing directories, eliminating the need for duplicate user databases.
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 extranet access 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 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 service
provider e-marketplace sector. 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 iPlanet, Commerce One, Yahoo, I2 and Verisign. 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 Service Providers to
application hosting markets. We believe that building out our system
integrator network will accelerate customer deployments.
Continue international expansion: In 2000, we expanded our marketing
efforts beyond the United States to Europe and Asia. We have begun to
expand our sales force and support organizations with the objective of
gaining broad international market acceptance of Netegrity's solution. In
addition, we are developing products intended to address the specific
needs of our international markets. 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 worldwide
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 systems integrators. We
are building cooperative relationships with these companies to ensure
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 strong balance sheet position.
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PRODUCTS AND SERVICES
SiteMinder Product
SiteMinder 4.5 was released in Q3 2000. SiteMinder interacts with the
four main components of an e-business 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 provides native integration 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.
Q3 saw the release of SiteMinder 4.5, as well as a new product named
Delegated Management Services (DMS). Key features of these products include:
- SITEMINDER 4.5
SiteMinder V4.5 provides a number of capabilities for a variety of
customer environments.
Specifically V4.5 provides new Application Server Agents for Java-based
applications, establishing SiteMinder as the leading solution in the
area of Java application server user access management.
SiteMinder V4.5 also adds expanded platform support and directory
support, support for Password Services for ODBC databases, and a number
of other enhancements.
- DELEGATED MANAGEMENT SERVICES
As sites continue to grow, DELEGATED MANAGEMENT SERVICES (DMS) by
Netegrity provides site administrators with an efficient and highly
scalable solution for securely managing user profiles. With DMS, key
administrators can centrally define and manage security policies, while
delegating the user management to other individuals or partners most
capable of managing the users.
With Netegrity DMS administrators can establish a super administrator who
can delegate administration privileges to distributed organizations and
organization administrators. Super administrators can enable, disable,
modify and move users anywhere within the e-business environment and can
also create organizations and organization administrators for internal
departments or external partners and business affiliates. Organization
administrators can be granted full administration permission to enable
and disable users, and modify user attributes within the organizations
they are responsible for, or they can be given more constrained access
such as to only modify user attributes for example. It is left to the
discretion of the administrator as to what permissions are granted to the
organization administrators. Users in all organizations can be given
administration permission to modify all or a select set of their user
attributes. The particular set of attributes is left to the
administrators managing the organization the user belongs to.
DMS also provides event-driven workflow for pre-process and post-process
administration and registration events.
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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.
Netegrity also offers three special pricing programs to meet the needs of
specialized web focused companies.
- Start up.com programs targeting business to consumer focused start up and
private companies. Pricing is based on a three year annuity to match
venture funding timelines for these companies.
- The e-market program offers special pricing and licensing to e-market
providers and hosting companies to match their unique business models.
Pricing is divided into wide user tiers from 25,000 to 1 million users.
- The service provider program offers subscription based pricing and
licensing based on service provider subscriber numbers. Payment terms are
monthly or quarterly to better match the service provider business model.
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.
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SiteMinder Products in Development (as of February 1, 2001)
In Q4-2000, we announced that we created the framework for the first
standard security language that will enable the next generation of e-business to
be securely transacted -- called S2ML, or Security Services Mock-up Language. We
are collaborating with other technology industry leaders to define the XML-based
standard. Today, over 200 technology companies are supporting the S2ML standards
proposal, and the specification is being driven by the largest working group
within the Oasis Standards Committee. S2ML is the standard on which Netegrity's
next generation B2B secure transaction products are being built.
Additional versions of SiteMinder, DMS and B2B transaction products are
currently under development for scheduled release in the next twelve months.
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, 2000,
our sales and marketing organization consisted of 139 individuals.
Direct Sales Force. As of December 31, 2000, our direct sales force
consisted of 77 individuals, 36 of whom were field sales representatives
covering six domestic regions and six 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
internationally and domestically.
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.
- Hosted Services Partners. We have licensed our products to be offered as
a service to several major providers of hosted transaction services or
other value added hosting services.
- 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
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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
presentations and seminar content online 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.
CUSTOMERS
As of December 31, 2000, we licensed SiteMinder software to 313 end-user
customers. Our customer base spans multiple industry segments, including
financial services, manufacturing, health care, high tech, government, banking
and 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, 2000,
1999 and 1998.
As of December 31, 2000, we sold Check Point Software Technologies'
Firewall-1 to over 100 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 one to three days 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
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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.
Initially, 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
IBM, Entrust and Securant as well as many smaller players. 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, 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 Symantec 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 years ended December
31, 1998, 1999 and 2000, we spent approximately $2.0, $3.7 and $9.1 million, or
42%, 29%, and 17% of
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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,
2000, we had 72 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
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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, 2000, we had a total of 292 full-time employees, of
which 72 were involved in research and development, 158 in sales, marketing and
customer support, 34 in consulting and 28 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.
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FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This report and the documents incorporated in it by reference contain
forward-looking statements about our plans, objectives, expectations and
intentions. You can identify these statements by words such as "expect,"
"anticipate," "intend," "plan," "believe," "seek," "estimate," "may," "will"
and "continue" or similar words. You should read statements that contain these
words carefully. They discuss our future expectations, contain projections of
our future results of operations or our financial condition or state other
forward-looking information, and may involve known and unknown risks over which
we have no control. You should not place undue reliance on forward-looking
statements. We cannot guarantee any future results, levels of activity,
performance or achievements. Moreover, we assume no obligation to update
forward-looking statements or update the reasons actual results could differ
materially from those anticipated in forward-looking statements. The factors
discussed in the sections captioned "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business"
in this report and the documents incorporated in it by reference identify
important factors that may cause our actual results to differ materially from
the expectations we describe in our forward-looking statements.
This report and the documents incorporated in it by reference contain
data related to the e-commerce market. These market data have been included in
studies published by the market research firms of Forrester Research and
International Data Corporation. These data include projections that are based
on a number of assumptions, including increasing worldwide business use of the
Internet, the growth in the number of web access devices per user, the absence
of any failure of the Internet, and the continued improvement of security on
the Internet. If any of these assumptions is incorrect, actual results may
differ from the projections based on those assumptions.
RISK FACTORS
The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward-looking statements. In that context, the discussion
in this Item contains forward-looking statements which involve certain degrees
of risk and uncertainty, 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.
Until recently, we have incurred substantial losses. We cannot predict if
we will remain profitable for any substantial period of time. Failure to
maintain levels of profitability as expected by investors may adversely affect
the market price of our common stock. In the year ended December 31, 2000, we
had net income of $2.7 million. As a result of historical operating losses, at
December 31, 2000, we had an accumulated deficit of $22.1 million. We have
continued to invest 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:
- customers choosing to push out their purchase commitment or purchase in
smaller than expected quantities due to a general slow down in the
economy;
- market acceptance of our SiteMinder products;
- our success in obtaining follow-on sales to existing customers;
- the long sales and deployment cycle of SiteMinder;
- our ability to hire and retain personnel, particularly in development,
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 future 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 93% of our total
revenues for the year ended December 31, 2000. We expect that our future
financial performance will depend on SiteMinder sales. Prior to the release of
SiteMinder 3.0 in June 1998, there had been very few commercial installations of
SiteMinder. Since June 1998, commercial deployments of SiteMinder have grown to
include not only business-to-business, e-business applications, but large
intranet and multi-million user business-to-consumer deployments, as well. Broad
market acceptance of SiteMinder will depend on the development of the market for
secure portal management, including usage of
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SiteMinder for business-to-consumer applications, and customer demand for the
specific functionality of SiteMinder. We cannot be sure that either will occur.
Like most technology products at an early stage of development, SiteMinder may
require extensive reengineering or upgrading if it fails to meet the performance
needs or expectations of our customers when shipped or contains significant
software defects or bugs. If we fail in marketing SiteMinder products and
services, for whatever reason, our business would be harmed.
OUR SUCCESS IS DEPENDENT ON OUR ABILITY TO ENHANCE OUR SITEMINDER PRODUCT LINE
AND DEVELOP NEW PRODUCTS.
We believe our success is dependent, in large part, on our ability to
enhance and broaden our SiteMinder product line to meet the evolving needs of
both the business-to-business and business-to-consumer market. We cannot be sure
that we will be able to respond effectively to technological changes or new
industry standards or developments. In the past, we have been forced to delay
introduction of several new product versions. In the future, we could be
adversely affected if we incur significant delays or are unsuccessful in
enhancing our SiteMinder product line or developing new products, or if any of
our enhancements or new products do not gain market acceptance.
OUR PERFORMANCE DEPENDS ON OUR ABILITY TO OBTAIN FOLLOW-ON SALES.
Customers typically place small initial orders for SiteMinder installations
to allow them to evaluate its performance. Our strategy is to pursue more
significant follow-on sales after these initial installations. Our financial
performance depends on successful initial deployments of SiteMinder that, in
turn, lead to follow-on sales. We cannot be sure that initial deployments of
SiteMinder by our customers will be successful, or that we will be able to
obtain follow-on sales.
WE FACE SIGNIFICANT COMPETITION FROM 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. In addition, we have faced competition from web development
professional services organizations. Today our primary competitors include IBM,
Securant, Entrust, and many early-stage companies. 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.
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OUR BUSINESS WILL BE ADVERSELY AFFECTED IF THE INTERNET DOES NOT BECOME A VIABLE
AND SUBSTANTIAL COMMERCIAL MEDIUM.
Our future success depends heavily on the acceptance and wide use of the
Internet for e-commerce. If e-commerce does not continue to grow or grows more
slowly than expected, significant demand for SiteMinder and related services may
fail to develop. Consumers and businesses may reject the Internet as a viable
commercial medium for a number of reasons, including potentially inadequate
network infrastructure, slow development of enabling technologies, insufficient
commercial support or privacy concerns. In addition, delays in the development
or adoption of new standards and protocols required to handle increased levels
of e-commerce, or increased government regulation or taxation, could cause the
Internet to lose its viability as a commercial medium.
REGULATIONS OR CONSUMER CONCERNS REGARDING THE USE OF "COOKIES" ON THE INTERNET
COULD REDUCE THE FUNCTIONALITY OF SITEMINDER.
SiteMinder uses cookies to support its single sign-on functionality. A
cookie is information keyed to a specific user that is stored on the hard drive
of the user's computer, typically without the user's knowledge. Cookies are
generally removable by the user, and can be refused by the user at the point at
which the information would be stored on the user's hard drive. A number of
governmental bodies and commentators in the United States and abroad have urged
passage of laws limiting or abolishing the use of cookies. The passage of laws
limiting or abolishing the use of cookies, or the widespread deletion or refusal
of cookies by web site users, could reduce or eliminate the effectiveness of
single sign-on and could reduce market demand for SiteMinder.
WE MUST HIRE AND RETAIN SKILLED PERSONNEL IN A TIGHT LABOR MARKET.
Qualified personnel are in great demand throughout the software industry.
Our success depends, in large part, upon our ability to attract, train, motivate
and retain highly skilled employees, particularly software engineers,
professional services personnel, sales and marketing personnel, and other senior
personnel. Our failure to attract and retain the highly trained technical
personnel that are integral to our product development, professional services
and direct sales teams may limit the rate at which we can generate sales and
develop new products or product enhancements. This could have a material adverse
effect on our business, operating results and financial condition.
OUR SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP OUR DIRECT SALES AND INDIRECT
DISTRIBUTION CHANNELS.
To increase our revenues, we must develop our direct sales channel and
increase the number of our indirect channel partners. A failure to do so could
have a material adverse effect on our business, operating results and financial
condition. There is intense competition for sales personnel in our business, and
we cannot be sure that we will be successful in attracting, integrating,
motivating and retaining sales personnel. In addition, we must increase the
number of strategic partnerships and other third-party relationships with system
integrators, vendors of Internet-related systems and application software and
resellers. 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. If we fail to develop these relationships, our revenue
could suffer.
OUR FAILURE TO EXPAND OUR PROFESSIONAL SERVICES RESOURCES COULD LIMIT THE
SUCCESS OF SITEMINDER.
Our professional services organization and our system integrators provide
critical support to our customers' installation and deployment of SiteMinder. If
we fail to expand our professional services resources and or adequately develop
our system integrator relationships, our ability to increase sales of SiteMinder
may be limited. In addition, if we cannot adequately support SiteMinder
installations, our customers' use of our products may fail, which could harm our
reputation and hurt our business.
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OUR LENGTHY SALES CYCLE MAKES IT DIFFICULT TO PREDICT OUR QUARTERLY OPERATING
RESULTS.
We have a long sales cycle because we generally need to educate potential
customers regarding the use and benefits of SiteMinder. Our sales cycle varies
depending on the size and type of customer contemplating a purchase and whether
we have conducted business with a potential customer in the past. These
potential customers frequently need to obtain approvals from multiple decision
makers prior to making purchase decisions. Our long sales cycle, which can range
from several weeks to several months or more, makes it difficult to predict the
quarter in which sales will occur. Delays in sales could cause significant
variability in our revenues and operating results for any particular period.
OUR FAILURE TO MANAGE OUR RAPID GROWTH EFFECTIVELY COULD HURT OUR BUSINESS.
Our failure to manage our rapid growth effectively could have a material
adverse effect on the quality of our products, our ability to retain key
personnel and our business, operating results and financial condition. We have
been experiencing a period of rapid growth that has been placing a significant
strain on all of our resources. From December 31, 1999 to December 31, 2000, the
number of our employees increased from 138 to 292. 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 CONTINUE TO EXPAND OUR INTERNATIONAL OPERATIONS, WE WILL FACE CONTINUED
RISKS TO OUR SUCCESS.
We intend to continue to expand our international operations in the future. This
expansion will require additional resources and management attention, and will
subject us to increased regulatory, economic and political risks. We have very
little experience in international markets. As a result, we cannot be sure that
our continued expansion into global markets will be successful. In addition, we
will face increased risks in doing business internationally. These risks could
reduce demand for our products and services, increase the prices at which we can
sell our products and services, or otherwise have an adverse effect on our
operating results. Among the risks we believe are most likely to affect us are:
- longer payment cycles and problems in collecting accounts receivable;
- adverse changes in trade and tax regulations, including restrictions on
the import and export of sensitive technologies, such as encryption
technologies, that we use or may wish to use in our software products;
- the absence or significant lack of legal protection for intellectual
property rights;
- difficulties in managing an organization spread over several countries,
including complications arising from cultural, language and time
differences that may lengthen sales and implementation cycles;
- currency risks, including fluctuations in exchange rates; and
- political and economic instability.
OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR PROPRIETARY RIGHTS.
Our success depends to a significant degree upon the protection of our
software and other proprietary technology. The unauthorized reproduction or
other misappropriation of our proprietary technology could enable third parties
to benefit from our technology without paying us for it. This could have a
material adverse effect on our business, operating results and financial
condition. We depend upon a combination of
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trademark, trade secret and copyright laws, license agreements and
non-disclosure and other contractual provisions to protect proprietary and
distribution rights in our products. In addition, we attempt to protect our
proprietary information and the proprietary information of our vendors and
partners through confidentiality and/or license agreements with our employees
and others. Although we have taken steps to protect our proprietary technology,
they may be inadequate. Existing trade secret, copyright and trademark laws
offer only limited protection. Moreover, the laws of other countries in which we
market our products may afford little or no effective protection of our
intellectual property. If we resort to legal proceedings to enforce our
intellectual property rights, the proceedings could be burdensome and expensive,
even if we were to prevail.
CLAIMS BY OTHER COMPANIES THAT WE INFRINGE THEIR PROPRIETARY TECHNOLOGY COULD
HURT OUR FINANCIAL CONDITION.
If we discover that any of our products violated third party proprietary
rights, there can be no assurance that we would be able to reengineer our
product or to obtain a license on commercially reasonable terms to continue
offering the product without substantial reengineering. We do not conduct
comprehensive patent searches to determine whether the technology used in our
products infringes patents held by third parties. In addition, product
development is inherently uncertain in a rapidly evolving technology environment
in which there may be numerous patent applications pending, many of which are
confidential when filed, with regard to similar technologies. Any claim of
infringement could cause us to incur substantial costs defending against the
claim, even if the claim is invalid, and could distract our management from our
business. Furthermore, a party making such a claim could secure a judgment that
requires us to pay substantial damages. A judgment could also include an
injunction or other court order that could prevent us from selling our products.
Any of these events could have a material adverse effect on our business,
operating results and financial condition.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF OUR PRODUCTS CONTAIN ERRORS.
Software products as complex as ours may contain undetected errors or
"bugs" that result in product failures. The occurrence of errors could result in
loss of, or delay in, revenues, loss of market share, failure to achieve market
acceptance, diversion of development resources, injury to our reputation, or
damage to our efforts to build brand awareness, any of which could have a
material adverse effect on our business, operating results and financial
condition.
WE COULD INCUR SUBSTANTIAL COSTS RESULTING FROM PRODUCT LIABILITY CLAIMS
RELATING TO OUR CUSTOMERS' USE OF OUR PRODUCTS.
Many of the e-commerce applications supported by our products are critical
to the operations of our customers' businesses. Any failure in a customer's web
site or application caused or allegedly caused by our products could result in a
claim for substantial damages against us, regardless of our responsibility for
the failure. Although we maintain general liability insurance, including
coverage for errors and omissions, there can be no assurance that our existing
coverage will continue to be available on reasonable terms or will be available
in amounts sufficient to cover one or more large claims, or that the insurer
will not disclaim coverage as to any future claim.
IF WE ACQUIRE OTHER COMPANIES OR BUSINESSES, WE WILL BE SUBJECT TO RISKS THAT
COULD HURT OUR COMPANY.
In the future, we may pursue acquisitions to obtain complementary products,
services and technologies. An acquisition may not produce the revenues, earnings
or business synergies that we anticipated, and an acquired product, service or
technology might not perform as we expected. If we pursue any acquisition, our
management could spend a significant amount of time and effort in identifying
and completing the acquisition. If we complete an acquisition, we would probably
have to devote a significant amount of management resources to integrate the
acquired business with our existing business.
To pay for an acquisition, we might use our stock or cash. Alternatively,
we might borrow money from a bank or other lender. If we use our stock, our
stockholders would experience dilution of their ownership interests. If we use
cash or debt financing, our financial liquidity will be reduced.
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THE MARKET PRICE OF OUR COMMON STOCK HAS BEEN AND MAY CONTINUE TO BE VOLATILE.
Our stock price, like that of other technology companies, has been
extremely volatile. The announcement of new products, services, technological
innovations or distribution partners by us or our competitors, quarterly
variations in our operating results, changes in revenues or earnings estimates
by securities analysts and speculation in the press or investment community are
among the factors affecting our stock price.
The stock market in general, and the market prices for Internet-related
companies in particular, have experienced extreme volatility that often has been
unrelated to the operating performance of these companies. These broad market
and industry fluctuations may adversely affect the market price of our common
stock, regardless of our operating performance. Recently, when the market price
of a stock has been volatile, holders of that stock have often instituted
securities class action litigation against the company that issued the stock. If
any of our stockholders brought a lawsuit against us, we could incur substantial
costs defending the lawsuit. The lawsuit could also divert the time and
attention of our management.
WE MAY LOSE MONEY ON FIXED-PRICE CONSULTING CONTRACTS.
In the future, an increased portion of our SiteMinder services revenues may
be derived from fixed-price contracts. We work with complex technologies in
compressed time frames and it can be difficult to judge the time and resources
necessary to complete a project. If we miscalculate the resources or time we
need to complete work under fixed-price contracts, our operating results could
be materially harmed.
CERTAIN PROVISIONS OF OUR CHARTER AND OF DELAWARE LAW MAKE A TAKEOVER OF OUR
COMPANY MORE DIFFICULT.
Our corporate documents and Delaware law contain provisions that might
enable our management to resist a takeover of our company. These provisions
might discourage, delay or prevent a change in the control of Netegrity or a
change in our management. These provisions could also discourage proxy contests
and make it more difficult for you and other stockholders to elect directors and
take other corporate actions. The
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existence of these provisions could limit the price that investors might be
willing to pay in the future for shares of our common stock.
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ITEM 2. PROPERTIES
The Company's headquarters consist of a leased office suite located at 52
Second Ave in Waltham, Massachusetts. We occupy 50,345 square feet of space
under a lease expiring in March 2003.
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; Toronto, Canada; Frankfurt, Germany; and Sydney,
Australia.
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,
2000.
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 close 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,
2000.
Price Range of
Common Stock
---------------------
High Low
-------- -------
1999 FISCAL YEAR
First Quarter ................................ $11.500 $ 2.667
Second Quarter ............................... $13.333 $ 6.167
Third Quarter ................................ $20.000 $10.583
Fourth Quarter ............................... $43.333 $14.209
2000 FISCAL YEAR
First Quarter ................................ $62.000 $30.042
Second Quarter ............................... $50.209 $18.000
Third Quarter ................................ $72.500 $49.209
Fourth Quarter ............................... $79.375 $40.000
In September 2000, the Company effected a three-for-two stock split in the
form of a stock dividend. All share and per share data has been adjusted to
reflect the split.
As of December 31, 2000, there were 176 holders of record of common stock.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with our consolidated financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere herein.
NINE MONTHS
ENDED YEARS ENDED
DECEMBER 31, DECEMBER 31,
------------ ----------------------------------------------
1996 1997 1998 1999 2000
------- ------- -------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
SiteMinder software............. -- $ 237 $ 1,483 $ 7,527 $ 37,688
SiteMinder services............. -- 12 468 2,211 12,693
Other........................... $ 3,637 4,484 2,840 3,008 3,655
------- ------- ------- -------- -----------
Total revenues.................. 3,637 4,733 4,791 12,746 54,036
Cost of SiteMinder software....... -- 47 203 631 2,549
Cost of SiteMinder services....... -- -- 110 1,227 7,415
Cost of other..................... 2,176 2,423 1,451 1,620 2,169
------- ------- ------- -------- -----------
Total cost of revenues.......... 2,176 2,470 1,764 3,478 12,133
------- ------- ------- -------- -----------
Gross profit...................... 1,461 2,263 3,027 9,268 41,903
Selling, general and
administrative expenses
(including non-cash stock
compensation expense of $235,
$4,488, and $292 for the years
ending December 31, 1998, 1999,
and 2000, respectively.......... 2,303 5,509 6,630 16,294 36,094
Research and development costs.... 705 1,028 1,991 3,744 9,103
------- ------- ------- -------- -----------
Income (loss) from operations..... (1,547) (4,274) (5,594) (10,770) (3,294)
Interest income .................. 181 203 130 824 6,103
Share of loss from investment in
Encotone, Inc. ................. (40) (132) -- -- --
Write off of investment in
Encotone LTD.................... -- (1,049) -- -- --
------- ------- ------- -------- -----------
Income (loss) from continuing
operations...................... (1,406) (5,252) (5,464) (9,946) 2,809
Income (loss) from discontinued
operation....................... (520) -- -- -- --
Gain on sale of assets of
discontinued operations......... 6,000 -- -- -- --
------- ------- ------- -------- -----------
Income (loss) before provision for
income taxes.................... 4,074 (5,252) (5,464) (9,946) 2,809
Provision for income taxes........ 74 -- -- -- 75
------- ------- ------- -------- -----------
Net income (loss)................. 4,000 (5,252) (5,464) (9,946) 2,734
Recognition of beneficial
conversion feature and
accretion of preferred stock.... -- -- 2,784 413 --
------- ------- ------- -------- -----------
Net income (loss) attributable to
common stockholders ............ $ 4,000 $(5,252) $(8,248) $(10,359) $ 2,734
======= ======= ======= ======== ===========
Earnings per share:
From continuing operations
Basic......................... $ (0.10) $ (0.38) $ (0.59) $ (0.59) $ 0.09
Diluted....................... (0.10) (0.38) (0.59) (0.59) 0.08
From discontinued operations.... (0.04) -- -- -- --
Gain on Sale of Assets.......... 0.44 -- -- -- --
------- ------- -------- -------- -----------
Net income (loss) attributable
to common stockholders
Basic.......................... $ 0.30 $ (0.38) $ (0.59) $ (0.59) $ 0.09
Diluted........................ $ 0.30 $ (0.38) $ (0.59) $ (0.59) $ 0.08
======= ======= ======== ======== ===========
Weighted average shares
outstanding
Basic........................... 13,416 13,919 14,043 17,472 29,010
Diluted......................... 13,416 13,919 14,043 17,472 33,407
19
22
DECEMBER 31,
----------------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 6,791 $2,134 $1,175 $102,879 $115,747
Working capital................................... 4,629 9 47 104,435 112,330
Total assets...................................... 10,259 4,849 4,225 110,970 138,379
Total stockholders' equity (deficit).............. 6,149 1,016 (3,492) 106,434 117,899
20
23
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.
In 1999, the Company delivered two major SiteMinder releases - Release 3.5
which featured UNIX support, and significant improvements in scalability and
performance, and; Release 3.6 that contained expanded single sign-on
capabilities across multiple domains.
In 2000, the Company shipped SiteMinder Release 4.0 in the first quarter of
2000 which included a broad range of new technologies to securely manage and
personalize business-to-business and business-to-consumer portals. Along with
Release 4.0, Netegrity shipped its Affiliate Services product to enable
e-business web sites to securely manage inter-site users. SiteMinder 4.5 shipped
in the third quarter of 2000, as did our new Delegated Management Services
product (DMS). DMS enables organizations to delegate user administration to
business partners, remote business units, and employees and customers,
satisfying a critical need of enterprises, service providers, and
e-marketplaces.
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 70% of total revenues in the year
ended December 31, 2000 and 59% of total revenues in the year ended December 31,
1999. SiteMinder services revenues accounted for 23% of total revenues in the
year ended December 31, 2000 and 17% of total revenues in the year ended
December 31, 1999. Other revenues accounted for 7% of total revenues in the
year ended December 31, 2000 and 24% of total revenues in the year ended
December 31, 1999. 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
24
our control, including economic uncertainties, currency fluctuations, political
instability and uncertain cultural and regulatory environments.
Our cost of revenues 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 and outside contractor 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. Prior to Q3 2000, we incurred substantial losses
and we had an accumulated deficit of $22.1 million as of December 31, 2000. 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, in order to maintain and enhance our profitability, it will be
necessary to achieve continued growth in revenues.
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 sustain profitability.
22
25
RESULTS OF OPERATIONS
The following table presents statement of operations data as percentages of
total revenues for the periods indicated:
YEARS ENDED
DECEMBER 31,
------------------------
1998 1999 2000
---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenues:
SiteMinder software......................... 31% 59% 70%
SiteMinder services......................... 10 17 23
Other....................................... 59 24 7
---- ---- ----
Total revenues.............................. 100 100 100
Cost of SiteMinder software................... 4 4 5
Cost of SiteMinder services................... 2 10 14
Cost of other................................. 31 13 3
---- ---- ----
Total cost of revenues...................... 37 27 22
---- ---- ----
Gross profit.................................. 63 73 78
Selling, general and administrative
expenses (including non-cash stock
compensation of 5%, 35% and 1% of revenue
for the years ended December 31, 1998,
1999 and 2000, respectively)............... 138 128 67
Research and development costs................ 42 29 17
---- ---- ----
Loss from operations.......................... (117) (84) (6)
Interest income .............................. 3 6 11
---- ---- ----
Income (loss) from operations................. (114) (78) 5
---- ---- ----
Income (loss) before provision for income
taxes....................................... (114) (78) 5
Provision for income taxes.................... -- -- --
---- ---- ----
Net income (loss)............................. (114)% (78)% 5%
==== ==== ====
23
26
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenues. Total revenues increased by approximately $41.3 million, or 325%,
to $54.0 million in the year ended December 31, 2000, from $12.7 million in the
year ended December 31, 1999.
SiteMinder software revenues increased by approximately $30.2 million, or
403%, to $37.7 million in the year ended December 31, 2000, from $7.5 million in
the year ended December 31, 1999. This increase is due to the continued increase
in market awareness and the acceptance of the SiteMinder product together with
the expansion of our sales organization.
SiteMinder services revenues increased by approximately $10.5 million, or
477%, to $12.7 million in the year ended December 31, 2000, from $2.2 million in
the year ended December 31, 1999. 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 approximately $700,000, or 23%, to $3.7 million
in the year ended December 31, 2000, from $3.0 million in the year ended
December 31, 1999. This increase is due to existing customer upgrades.
Cost of revenues. Total cost of revenues increased by approximately $8.6
million or 246%, to $12.1 million in the year ended December 31, 2000, from $3.5
million in the year ended December 31, 1999.
Cost of SiteMinder software increased by approximately $1.9 million, or
317%, to $2.5 million in the year ended December 31, 2000 from $600,000 in
the year ended December 31, 1999. The increase is primarily due to increases in
royalties due to third parties for technology included in our product as
SiteMinder software revenues continue to increase.
Cost of SiteMinder services increased by approximately $6.2 million or
517%, to $7.4 million in the year ended December 31, 2000 from $1.2 million in
the year ended December 31, 1999. The increase is due to increases in salaries
and related personnel expenses for our consulting and training organizations as
a result of increased SiteMinder service revenues.
Cost of other increased by approximately $600,000 or 38%, to $2.2 million
in the year ended December 31, 2000 from $1.6 million in the year ended December
31, 1999. 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 approximately $19.8 million, or 121%, to
$36.1 million in the year ended December 31, 2000, from $16.3 million in the
year ended December 31, 1999. This increase was primarily a result of the
continued development of our sales and marketing infrastructure to support
continued growth in sales of our SiteMinder product and services. Included
within selling, general, and administrative expenses is a non-cash stock
compensation expense, which decreased by approximately $4.2 million to $292,000
in the year ended December 31, 2000 from $4.5 million in the year ended December
31, 1999. This expense represents the compensation charge for a common stock
warrant for 150,000 shares issued to a director in connection with the January
1998 preferred stock financing. The warrant was accounted for as a variable
award, and as a result, the expense primarily relates to the increase in the
fair market value of the Company's common stock during the respective periods.
The expense was recognized over the vesting period until the warrant was
exercised. As of June 30, 2000, these warrants were fully exercised.
Research and development costs. Research and development costs increased by
approximately $5.4 million, or 146%, to $9.1 million in the year ended December
31, 2000, from $3.7 million in the year ended December 31, 1999. The increase
was primarily due to our continued development of SiteMinder and other related
products, 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
27
Interest income. Interest income increased by approximately $5.3 million,
or 640%, to $6.1 million in the year ended December 31, 2000, from $824,000 in
the year ended December 31, 1999. This increase was mainly attributable to a
higher average cash balance in the year ended December 31, 2000.
Provision for income taxes. Provision for income taxes for the year ended
December 31, 2000 was $75,000. For the year ended December 31, 1999 we had no
provision for income taxes due to the Company's loss position for the year. As
of December 31, 2000, we had net operating loss carryforwards of $83.7 million,
against which a full valuation allowance has been provided, available for
federal purposes to reduce future taxable income expiring on various dates
through 2020. Of the $83.7 million of net operating loss carry forwards, $59.4
million is attributable to tax deductions relating to stock options. The benefit
of these deductions included in net operating loss carryforwards will be
credited to additional paid-in capital when realized. 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, 1999 Compared to Year Ended December 31, 1998
Revenues. Total revenues increased by approximately $7.9 million, or 165%,
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 approximately $6.0 million, or
400%, 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 approximately $1.7 million, or
340% to $2.2 million in the year ended December 31, 1999, from $500,000 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 approximately $200,000, or 7%, 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 revenues increased by approximately $1.7
million, or 94%, 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 approximately $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 due to increases in royalties due to third
parties for technology included in our product as SiteMinder software revenue
continue to increase.
Cost of SiteMinder services increased by approximately $1.1 million 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
personnel expenses for our consulting and training organizations as a result of
increased SiteMinder service revenues.
Cost of other increased by approximately $100,000, or 7%, 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 approximately $9.7 million, or 147%,
to $16.3 million in the year ended December 31, 1999, from $6.6 million in the
year ended December 31, 1998. This increase was primarily a result of our
continued development of our sales and marketing infrastructure to support
planned growth in sales of our SiteMinder product and services. Included within
selling, general, and administrative expenses is a non-cash stock compensation
expense, which increased by approximately $4.3 million, to $4.5 million in the
year ended December 31, 1999 from $235,000 in the year ended December 31, 1998.
This expense represents the compensation charge for a common stock warrant for
150,000 shares issued to a director in connection with the January 1998
preferred stock financing. The warrant was accounted for as a variable award,
and as a result, the expense primarily relates to the increase in the fair
market value of the Company's common stock during the respective periods. The
expense was recognized over the vesting period until the warrant was exercised.
Approximately 105,000 shares of common stock were exercised under this warrant
during the fourth quarter of 1999.
Research and development costs. Research and development costs increased by
approximately $1.7 million, or 85%, 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.
Interest income. Interest income increased by approximately $694,000, or
534%, 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
average cash balance in the year ended December 31, 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.
25
28
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities in the year ended December 31, 2000
was $9.2 million, primarily due to net income of $2.7 million and an increase in
accrued compensation and benefits and deferred revenue, partially offset by an
increase in accounts receivable.
Cash used for investing activities was $4.8 million in the year ended
December 31, 2000. Investing activities for the period consisted primarily of
the purchases of equipment, consisting largely of computer servers,
workstations, and networking equipment.
Cash provided by financing activities in the year ended December 31, 2000
was approximately $8.4 million, primarily related to the exercise of warrants
and stock options.
As of December 31, 2000, our primary financial commitments consisted of
obligations outstanding under operating leases.
As of December 31, 2000, we had cash and cash equivalents totaling $115.7
million and working capital of $112.3 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.
26
29
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101") as amended by SAB 101A and SAB 101B. SAB 101 summarize the staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. The Company adopted SAB 101 in fiscal 2000 without a
significant impact on our financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
27
30
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 2000
- Consolidated Statements of Operations for the years ended December 31,
1998, 1999 and 2000
- Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1998, 1999 and 2000
- Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1999 and 2000
- Notes to Consolidated Financial Statements
28
31
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, stockholders' equity (deficit) and cash
flows present fairly, in all material respects, the financial position of
Netegrity, Inc. and its subsidiaries at December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. 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 of America, 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 our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 25, 2001
29
32
NETEGRITY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, DECEMBER 31,
1999 2000
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $102,879 $115,747
Accounts receivable-trade, net of allowances of $484 at
December 31, 1999; $951 at December 31, 2000............ 4,731 15,758
Prepaid expenses and other current assets................. 1,361 1,305
-------- --------
TOTAL CURRENT ASSETS.................................... 108,971 132,810
Property and equipment, net................................. 1,885 4,528
Restricted cash............................................. -- 942
Other assets................................................ 114 99
-------- --------
TOTAL ASSETS................................................ $110,970 $138,379
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable-trade.................................... 1,091 1,698
Accrued compensation and benefits......................... 1,420 7,695
Other accrued expenses.................................... 676 2,608
Deferred revenue.......................................... 1,349 8,479
-------- --------
TOTAL CURRENT LIABILITIES............................... 4,536 20,480
COMMITMENTS AND CONTINGENCIES (NOTE C)
STOCKHOLDERS' EQUITY:
Common stock, voting, $.01 par value; 55,000 shares
authorized; 25,672 shares issued and
25,634 shares outstanding at December 31, 1999;
30,184 issued and 30,147 outstanding at
December 31, 2000....................................... 257 302
Additional paid-in capital................................ 131,200 139,886
Accumulated deficit....................................... (24,809) (22,075)
Loan to officer .......................................... (130) (130)
-------- --------
106,518 117,983
Less -- Treasury Stock, at cost: 38 shares.................. (84) (84)
-------- --------
TOTAL STOCKHOLDERS' EQUITY ................................. 106,434 117,899
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................. $110,970 $138,379
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
30
33
NETEGRITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
-----------------------------------
1998 1999 2000
------- ------- -------
Revenues:
SiteMinder software............... $ 1,483 $ 7,527 $37,688
SiteMinder services............... 468 2,211 12,693
Other............................. 2,840 3,008 3,655
------- ------- -------
Total revenues.................... 4,791 12,746 54,036
Cost of SiteMinder software......... 203 631 2,549
Cost of SiteMinder services......... 110 1,227 7,415
Cost of other....................... 1,451 1,620 2,169
------- ------- -------
Total cost of revenues............ 1,764 3,478 12,133
------- ------- -------
Gross profit........................ 3,027 9,268 41,903
Selling, general and administrative
expenses (including non-cash stock
compensation of $235, $4,488, and
$292 for the years ended December
31, 1998, 1999 and 2000,
respectively)..................... 6,630 16,294 36,094
Research and development costs...... 1,991 3,744 9,103
------- ------- -------
Loss from operations................ (5,594) (10,770) (3,294)
Interest income .................... 130 824 6,103
------- ------- -------
Income (loss) before provision for
income taxes...................... (5,464) (9,946) 2,809
Provision for income taxes.......... -- -- 75
------- ------- -------
Net income (loss)................... (5,464) (9,946) 2,734
Accretion of preferred stock........ (2,784) (413) --
------- ------- -------
Net income (loss) attributable to
common stockholders $(8,248) $(10,359) $ 2,734
======= ======= =======
Net income (loss) per share
attributable to common
stockholders:
Basic........................... $ (0.59) $ (0.59) $ 0.09
Diluted......................... $ (0.59) $ (0.59) $ 0.08
Weighted average shares
outstanding.......................
Basic........................... 14,043 17,472 29,010
Diluted......................... 14,043 17,472 33,407
The accompanying notes are an integral part of the consolidated financial
statements.
31
34
NETEGRITY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN COMPREHENSIVE ACCUMULATED LOAN TO TREASURY STOCKHOLDERS'
STOCK CAPITAL INCOME DEFICIT OFFICER STOCK EQUITY (DEFICIT)
-------- ------------ ------------- ------------ --------- -------- -------------
BALANCE AT DECEMBER 31,
1997...................... $ 139 $ 10,532 $ 28 $ (9,399) $ (200) $ (84) $ 1,016
-------- ------------ -------- ------------ --------- -------- -----------
Net income(loss)............ -- -- -- (5,464) -- -- (5,464)
Recognition of beneficial
conversion feature on
preferred stock........... -- 2,369 -- -- -- -- 2,369
Accretion of beneficial
conversion feature on
preferred stock........... -- (2,369) -- -- -- -- (2,369)
Recognition of compensation
expense on warrant........ -- 235 -- -- -- -- 235
Issuance of warrant in
connection with preferred
stock financing........... -- 878 -- -- -- -- 878
Accrual of dividends on
preferred stock and
accretion to redemption
value..................... -- (415) -- -- -- -- (415)
Issuance of common stock
under stock plans
(219 shares).............. 2 256 -- -- -- -- 258
Other comprehensive
income -- translation
adjustment ............... -- 28 (28) -- -- -- --
-------- ------------ -------- ------------ --------- -------- ------------
BALANCE AT DECEMBER 31,
1998 ..................... 141 11,514 -- (14,863) (200) (84) (3,492)
-------- ------------ -------- ------------ --------- -------- ------------
Net income (loss)........... -- -- -- (9,946) -- -- (9,946)
Issuance of common stock
(5,764 shares,
$116,075, net of
issuance costs of
$6,857)................... 58 109,161 -- -- -- -- 109,219
Recognition of compensation
expense on warrant........ -- 4,488 -- -- -- -- 4,488
Accrual of dividends on
preferred stock and
accretion to redemption
value..................... -- (413) -- -- -- -- (413)
Issuance of common stock
under stock plans (771
shares)................... 8 1,600 -- -- -- -- 1,608
Conversion of preferred
stock (5,000 shares)...... 50 4,850 -- -- -- -- 4,900
Repayment of loan
to officer................ -- -- -- -- 70 -- 70
-------- ------------ -------- ------------ --------- -------- ------------
BALANCE AT DECEMBER 31, 1999 257 131,200 -- (24,809) (130) (84) 106,434
-------- ------------ -------- ------------ --------- -------- ------------
Net income ................. -- -- -- 2,734 -- -- 2,734
Issuance of common stock
(2,251 shares)............ 22 2,980 -- -- -- -- 3,002
Issuance of common stock
under stock plans
(2,294 shares)............ 23 5,414 -- -- -- -- 5,437
Recognition of compensation
expense on warrant........ -- 292 -- -- -- -- 292
-------- ------------ -------- ------------ --------- -------- ------------
BALANCE AT DECEMBER 31, 2000 $ 302 $ 139,886 $ -- $ (22,075) $ (130) $ (84) $ 117,899
======== ============ ======== ============ ========= ======== ============
The accompanying notes are an integral part of the consolidated financial
statements.
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35
NETEGRITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
--------------------------------------------
1998 1999 2000
----------- ------------ ------------
OPERATING ACTIVITIES:
Net income (loss) ....................................... $(5,464) $ (9,946) $ 2,734
Adjustments to reconcile net loss to net cash provided
by (used for)
operating activities:
Depreciation and amortization.......................... 366 490 1,124
Provision for doubtful accounts receivable............. 237 291 1,409
Compensation expense related to warrant................ 235 4,488 292
Loss on disposal of property and equipment............. -- -- 46
Changes in operating assets and liabilities:
Accounts receivable.................................... (1,192) (3,275) (12,436)
Prepaid expenses and other current assets.............. (42) (1,007) 56
Other assets........................................... -- (77) 15
Accounts payable-trade................................. (609) 193 607
Accrued compensation and benefits...................... 141 837 6,275
Other accrued expenses................................. (672) 151 1,932
Deferred revenue....................................... 556 124 7,130
----------- ------------ ------------
Net cash (used for) provided by operating activities... (6,444) (7,731) 9,184
INVESTING ACTIVITIES:
Proceeds from sale of certain assets................... 26 -- --
Escrow receivable related to 1996 asset sale........... 600 -- --
Capital expenditures for equipment and leasehold
improvements......................................... (375) (1,462) (3,813)
Additions to capitalized software costs................ (34) -- --
Investment in Encotone, Inc. .......................... 82 -- --
Increase in restricted cash............................ -- -- (942)
----------- ------------ ------------
Net cash (used for) provided by investing activities... 299 (1,462) (4,755)
----------- ------------ ------------
FINANCING ACTIVITIES:
Net proceeds from issuance of preferred stock.......... 4,950 -- --
Net proceeds from issuance of common stock............. -- 109,219 3,002
Issuance of common stock under stock plans............. 258 1,608 5,437
Repayment of loan to officer........................... -- 70 --
Principal payments under capital leases................ (22) -- --
----------- ------------ ------------
Net cash provided by financing activities.............. 5,186 110,897 8,439
----------- ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS.................. (959) 101,704 12,868
Cash and cash equivalents at beginning of year........... 2,134 1,175 102,879
----------- ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR................. $ 1,175 $102,879 $ 115,747
=========== ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
33
36
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 wholly owned subsidiaries. All intercompany accounts and
transactions have been eliminated in these consolidated financial statements.
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.
Cash and Cash Equivalents
Cash and cash equivalents include time deposits and funds held at
reputable financial institutions, and highly liquid investments with an original
maturity of three months or less at the date of purchase.
The Company invests its excess cash in overnight repurchase agreements and
highly liquid commercial paper which generally mature within one to two months
of the initial investment. Accordingly, these investments are subject to
minimal credit and market risk. In accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," the Company has classified its investments as
held-to-maturity which have been recorded at amortized cost on the Company's
balance sheet, which approximates fair value. Dividends and interest income are
recorded when earned on all cash and cash equivalents.
Restricted Cash
Restricted cash represents a time deposit held at a financial institution
in connection with the Company's lease of office space. As of December 31,
2000, the restricted cash is offset by a outstanding letter of credit expiring
in 2002.
Concentration of Credit Risk and Fair Value of Financial Instruments
The amounts reflected in the consolidated balance sheets for cash and cash
equivalents, restricted cash, 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.
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 reasonably assured. The Company does
not offer a right of return on its products.
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.
34
37
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, 1998, 1999 and 2000, the Company
amortized $134,000, $176,000 and $0 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 year ended
December 31, 1998, comprehensive income (loss) was not materially
different from net income (loss). For the years ended December 31, 1999 and
2000, there was no difference between comprehensive income (loss) and net
income (loss).
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation is provided using the straight-line method, based
upon the following asset lives:
Computer equipment and purchased software 3-5 years
Furniture office equipment 5-7 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
in accordance with Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes", 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.
Advertising Expenses
Advertising expenses are charged to selling, general and administrative
expenses as incurred. Advertising expenses were immaterial for all periods
presented.
35
38
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Earnings Per Share
Basic earnings per share ("EPS") is calculated by dividing net income
(loss) by the weighted average number of shares outstanding during the period.
Diluted EPS is calculated by dividing net income (loss) by the weighted average
number of shares outstanding plus the dilutive effect, if any, of outstanding
stock options and warrants using the "treasury stock" method. In loss making
periods, diluted net loss per share does not differ from basic net loss per
share since potential common shares from stock options and warrants are
anti-dilutive. The following table presents the calculation for both basic and
diluted EPS (in thousands, except per share data):
Year Ended
------------------------------
1998 1999 2000
------ ------ ------
Net income (loss) attributable to common
stockholders $(8,248) $(10,359) $ 2,734
Basic weighted average shares outstanding 14,043 17,472 29,010
Dilutive effect of stock options and
warrants -- -- 4,397
Diluted shares outstanding 14,043 17,472 33,407
Basic EPS $ (0.59) $ (0.59) $ 0.09
Diluted EPS $ (0.59) $ (0.59) $ 0.08
- -------------------------------------------------------------------------------
Options to purchase 275,000 shares for the year ended December 31, 2000,
were outstanding but were not included in the computations of diluted EPS
because the price of the options was greater than the average market price of
the common stock for the period reported.
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion 25, Accounting for
Stock Issued to Employees (APB 25), and related interpretations. Under APB 25,
no compensation cost is recognized when the option price is equal to the market
price of the underlying stock on the date of grant. An alternative method of
accounting is SFAS 123, Accounting for Stock-Based Compensation. Under SFAS 123,
employee stock options are valued at the grant date using a valuation model, and
compensation cost is recognized ratably over the vesting period. The impact of
recording stock-based compensation under the provisions of SFAS 123 is disclosed
in Note G.
Export Sales
The Company generates revenues from international business. For the year
ended December 31, 2000, export sales accounted for approximately $10.0 million,
or 18%, of total revenue. Export sales for prior periods presented are
immaterial. Mostly all export sales are billed in U.S. dollars.
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.
36
39
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reclassifications
Certain items in the prior year financial statements have been
reclassified to conform to the current year presentation.
New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101") as amended by SAB 101A and SAB 101B. SAB 101 summarize the staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. The Company adopted SAB 101 in fiscal 2000 without a
significant impact on our financial position or results of operations.
37
40
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 (in
thousands):
DECEMBER 31,
----------------
1999 2000
------ ------
Computer equipment and purchased software................. $2,220 $4,819
Leasehold improvements.................................... 97 201
Furniture and office equipment............................ 261 1,274
------ ------
2,578 6,294
Less accumulated depreciation............................. (693) (1,766)
------ ------
$1,885 $4,528
====== ======
Depreciation expense for the years ended December 31, 1998, 1999 and
2000, was $232,000, $314,000 and $1,124,000, respectively.
NOTE C: COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities under noncancellable operating
leases. For the years ended December 31, 1998, 1999 and 2000 the Company
incurred total operating
38
41
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
lease expense of $300,000, $549,000 and $2,239,000, respectively. Future minimum
lease payments under these leases are as follows:
YEARS ENDING DECEMBER 31, (IN THOUSANDS)
- ----------------------------------------
2001.................................................. $2,053
2002.................................................. 1,758
2003.................................................. 421
------
$4,232
======
NOTE D: LOAN TO OFFICER
In May, 1996, an Officer of the Company exercised an option to purchase
300,000 shares of the Company's common stock at a price of $0.67 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 300,000 shares of common stock. This note has an interest rate of
7% per annum.
39
42
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE E: INCOME TAXES
Significant components of the deferred tax assets and liabilities are as
follows (in thousands):
DECEMBER 31,
--------------------
1999 2000
-------- --------
Net operating loss carryforwards................... $ 11,304 $ 33,531
Loss on investment................................. 908 908
Accruals and reserves.............................. 537 733
Research and development tax credits............... 128 1,363
Other.............................................. 123 50
Valuation allowance................................ (13,000) (36,585)
-------- --------
$ -- $ --
======== ========
The provision for income taxes differs from the federal statutory rate of
34% as follows (in thousands):
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
1998 1999 2000
------- -------- -------
Federal tax provision (benefit)........... $(1,858) $(3,382) $ 955
Other..................................... 14 30 81
Valuation allowance....................... 1,844 3,352 (961)
------- ------- -------
$ -- $ -- $ 75
======= ======= =======
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, 2000, the Company has available for federal and state
income tax purposes net operating loss carryforwards of approximately
$83,725,000 and $80,577,000, respectively, expiring at various dates through
fiscal 2020 and 2005, respectively. 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 $83,725,000 include $59,369,000 of
tax deductions relating to stock options. The benefit of these deductions
included in net operating loss carryforwards will be credited to additional
paid-in capital when realized.
NOTE F: CAPITAL STOCK AND CAPITAL STOCK WARRANTS
40
43
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Between January 6, 1998 and June 30, 1998, the Company sold various amounts
of Series D Preferred stock to an institutional investor under an original, and
later amended, Preferred Stock and Warrant Purchase Agreement.
When issued, each share of Series D Preferred Stock in 1998 was convertible
into one share of common stock, which represented a discount from the fair value
of common stock on the date of issuance. The value attributable to this
conversion feature represented a beneficial conversion feature which was
recognized as a return to preferred stockholders. This amount, which equaled
$2,369,000, has been recorded as accretion of preferred stock to redemption
value in the year ended December 31, 1998, and represents a non-cash charge in
the determination of net loss attributable to common stockholders. The Series D
Preferred Stock converted one for one to common stock in September 1999.
In conjunction with the Agreement as described above, warrants to purchase
a total of 2,251,000 shares of common stock exercisable at $1.33 were issued to
an institutional investor expiring on January 7, 2003. The fair value of these
warrants was determined using the Black-Scholes option pricing model based on
the following assumptions: 100% volatility, terms of up to five years and
risk-free interest rates of approximately 5.5%. The value of the warrants
totaled $878,000 and has been recorded in additional paid-in capital.
As part of the Agreement with the institutional investor described above,
James McNiel joined the Board of Directors of the Company, as designee of the
Pequot Entities and the Company granted Mr. McNiel a warrant for the purchase of
150,000 shares of common stock exercisable at $1.00 expiring on January 7, 2003
for his services as a director. Due to certain terms of the warrant, the warrant
was accounted for as a variable award. As a result, a non-cash compensation
charge was recorded for the increase in the fair market value of the Company's
common stock compared to the exercise price since the warrant was issued. The
expense was recognized over the two year vesting period of the warrant and
through the date of exercise. During the years ended December 31, 1998, 1999,
and 2000 compensation expense of $235,000, $4,488,000, and $292,000,
respectively was recorded related to this warrant. As of December 31, 2000, all
warrants have been exercised.
As of December 31, 1999 and 2000, the Company has authorized 5 million
shares of preferred stock, $0.01 par value, with none issued and outstanding for
both years.
Common Stock: On February 8, 1999 the Company sold 1,194,000 shares of common
stock at $3.83 per share. On September 9, 1999, the Company sold 801,000 shares
of common stock to certain investors in a private placement at a price of
$13.73 per share. On November 10, 1999, the Company sold 3,750,000 shares of
common stock at a price of $26.67 per share in a follow on public offering. On
December 9, 1999 the Company sold an additional 19,000 shares of common stock
at a price of $26.67 per share pursuant to the exercise of the underwriter
overallotment option.
In July 2000, the Board of Directors approved a three for two stock split of the
Company's common stock in the form of a stock dividend which was effective
September 1, 2000 for all holders of record as of August 18, 2000. All common
share data presented in this 10-K have been adjusted for the stock split.
NOTE G: 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, 2000, options for 28,000 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, 2000, options for 1,620,000 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, prior to the start of the period, are eligible to
participate in the Stock Purchase Plan. Under the terms of the plan employees
may elect to set aside a portion of their after-tax income for automatic
purchase of the company stock.
41
44
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Stock Purchase Plan originally authorized the issuance of 150,000
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, 1998, 1999 and 2000 are $0.48, $4.43 and $15.33, respectively.
During the years ended December 31, 1998, 1999 and 2000, 21,000, 32,000 and
32,000 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 income (loss) and income (loss) per
share for the years ended December 31, 1998, 1999 and 2000 would have been the
pro-forma amounts indicated below (in thousands, except per share data):
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1999 YEAR ENDED DECEMBER 31, 2000
---------------------------- ----------------------------- ---------------------------------
LOSS PER LOSS PER NET INCOME (LOSS) PER
NET LOSS DILUTED SHARE NET LOSS DILUTED SHARE INCOME (LOSS) DILUTED SHARE
----------- ------------- ------------- ------------- ------------- -----------------
As reported............... $(5,464) $(0.59) $ (9,946) $(0.59) $ 2,734 $ 0.08
Pro-forma................. (5,897) (0.42) (12,443) (0.71) $(20,518) $(0.71)
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
---------------------------------
1998 1999 2000
---------- --------- --------
Expected life (years)..... 5.2 5.0 5.0
Risk free interest rate... 5.09% 5.96% 6.45%
Volality.................. 100% 101% 107%
Dividend yield............ ---- ---- ----
The weighted average of the fair value of stock options for the years ended
December 31, 1998, 1999 and 2000 was $1.27, $17.82 and $34.94, respectively.
Stock options outstanding at December 31, 2000 (in thousands, except per
share data):
EXERCISEABLE OPTIONS
OPTIONS OUTSTANDING ----------------------
-------------------------- WEIGHTED
WEIGHTED WEIGHTED AVERAGE
SHARES AVERAGE AVERAGE EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE(a) EXERCISE PRICE SHARES PRICE
- ------------------------ ----------- -------- -------------- ----------- ---------
$.52-$2.75 ............................... 1,857 6.2 $ 1.40 1,262 $ 1.34
$3.83-$8.92 ............................... 277 8.2 6.26 18 4.84
$14.83-$20.00 ............................... 849 8.7 16.28 139 16.44
$27.17-$47.17 ............................... 2,695 9.4 36.09 295 35.17
$50.21-$78.00 ............................... 705 9.6 58.89 -- --
----- --- ------ ----- ------
$.52-$78.00 ............................... 6,383 8.3 $24.58 1,714 $ 8.42
===== =====
- ------------
(a) Average contractual life remaining in years.
42
45
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's stock option plans as of December
31, 1998, 1999 and 2000 and changes during the periods ending on those dates is
presented below (In thousands, except price and per share data):
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------------------------------------------------------------------
1998 1999 2000
----------------------------- -------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE EXERCISE AVERAGE EXERCISE AVERAGE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ---------------- ------ ---------------- ------ ----------------
Options outstanding at beginning of
year................................ 3,605 $ 1.19 4,655 $ 1.22 6,530 $ 9.98
Option activity during the year:
Granted............................. 1,838 1.67 2,719 22.68 2,310 43.54
Exercised........................... (198) 1.94 (635) 1.15 (2,215) 2.10
Canceled............................ (590) 1.01 (209) 6.68 (242) 25.00
----- ---- ----- ---- ----- -----
Options outstanding at end of year.... 4,655 $ 1.22 6,530 $ 9.98 6,383 $24.58
===== ===== =====
Options exercisable................... 1,676 2,843 1,714
- ------------
NOTE H: 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. Summarized financial information is as
follows (in thousands):
1998 1999 2000
--------------------- --------------------- ----------------------
GROSS GROSS GROSS
REVENUE MARGIN REVENUE MARGIN REVENUE MARGIN
------- ------ ------- ------ ------- ------
Operating Segments:
SiteMinder software $1,483 $1,280 $ 7,527 $6,896 $37,688 $35,139
------ ------ -------- ------ ------- -------
SiteMinder services:
Maintenance 144 144 666 666 4,114 3,656
Training and consulting 324 214 1,545 318 8,579 1,622
------ ------ -------- ------ ------- -------
468 358 2,211 984 12,693 5,278
------ ------ -------- ------ ------- -------
Other:
Software and related products 1,392 602 1,603 613 1,984 528
Services 1,448 787 1,405 775 1,671 958
------ ------ -------- ------ ------- -------
2,840 1,389 3,008 1,388 3,655 1,486
------ ------ -------- ------ ------- -------
Totals $4,791 $3,027 $12,746 $9,268 $54,036 $41,903
------ ------ -------- ------ ------- -------
Prior to fiscal year 2000, certain expenses related to maintenance were
included in operating expenses based upon the Company's management reporting
practice and it was not practical to allocate these expenses to cost of
maintenance.
NOTE I: SUMMARIZED QUARTERLY DATA (UNAUDITED)
The following financial information reflects all normal recurring
adjustments that are, in the opinion of management, necessary for a fair
statement of the results of the interim periods. Summarized quarterly data for
fiscal 2000 and 1999 is as follows (in thousands, except per share data):
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
2000
Revenues $ 6,746 $10,496 $15,333 $21,461
Gross profit 5,258 7,844 11,866 16,935
Operating income (loss) (2,151) (1,422) (878) 1,157
Net income (loss) (935) (106) 911 2,864
Basic net earnings (loss) per common share (0.02) (0.01) 0.03 0.10
Diluted net earnings (loss) per common share (0.02) (0.01) 0.03 0.08
1999
Revenues $ 2,060 $ 2,638 $ 3,328 $ 4,720
Gross profit 1,345 1,860 2,490 3,573
Operating income (loss) (2,103) (1,958) (2,562) (4,147)
Net income (loss) (2,083) (1,911) (2,510) (3,442)
Net income (loss) attributable to common
stockholders (2,220) (2,049) (2,648) (3,442)
Basic net earnings (loss) per common share (0.15) (0.13) (0.16) (0.15)
Diluted net earnings (loss) per common share (0.15) (0.13) (0.16) (0.15)
43
46
NETEGRITY, INC.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 2001.
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.
44
47
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 2000
c. Consolidated Statements of Operations for the years ended
December 31, 1998, 1999 and 2000
d. Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended December 31, 1998, 1999 and 2000
e. Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1999 and 2000
f. Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Included at the end of this report are the following:
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 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 to
Registrant's quarterly report on Form 10-Q for the quarter ending September 30, 1999, 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).
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).
45
48
EXHIBIT
ITEM NO. ITEM AND 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 March 31, 2000 between the Registrant and Renaissance Worldwide,
Inc. (filed herewith).
10.18 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).
10.19 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).
10.20 Netegrity Inc. 2000 Stock Incentive Plan (filed as Exhibit 4.1 to Registration Statement
on Form S-8 filed October 23, 2000 and incorporated by reference.)
21.1 Subsidiaries of the Registrant (filed herewith).
23.1 Consent of PricewaterhouseCoopers LLP (filed herewith).
B. REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the fourth quarter ended
December 31, 2000.
49
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.
50
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
February 15, 2001 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 February 28, 2001
- ------------------------- Officer, Director and
Barry N. Bycoff Chairman of the Board
/s/ James E. Hayden Chief Financial Officer, February 28, 2001
- ------------------------- Vice President of Finance
James E. Hayden and Administration and
Treasurer
/s/ Paul F. Deninger Director February 28, 2001
- -------------------------
Paul F. Deninger
/s/ Eric R. Giler Director February 28, 2001
- -------------------------
Eric R. Giler
/s/ Michael L. Mark Director February 28, 2001
- -------------------------
Michael L. Mark
/s/ Ralph B. Wagner Director February 28, 2001
- -------------------------
Ralph B. Wagner
/s/ Lawrence D. Lenihan Director February 28, 2001
- -------------------------
Lawrence D. Lenihan
51
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Netegrity, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated January 25, 2001, 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
January 25, 2001
52
NETEGRITY, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS & SALES END
OF PERIOD EXPENSES ALLOWANCE DEDUCTIONS OF PERIOD
---------- ---------- ---------- ---------- ----------
Year ended December 31, 2000:
Allowance for doubtful accounts
receivable..................... $484 469 940 (942) $951
Year ended December 31, 1999:
Allowance for doubtful accounts
receivable..................... $247 291 -- (54) $484
Year ended December 31, 1998:
Allowance for doubtful accounts
receivable..................... $ 65 236 -- (54) $247
- -----------------
(1) Uncollectible accounts written off, net of recoveries.
S-1