SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934, FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, FOR THE TRANSITION PERIOD FROM_______ TO_______
COMMISSION FILE NUMBER 1-10139
NETEGRITY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-2911320
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
52 SECOND AVENUE WALTHAM, MA 02451
(Address of principal executive offices) (Zip Code)
(781) 890-1700
(Registrant's Telephone Number)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such other shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days Yes [X] No [ ]
As of November 12, 2001 there were 31,324,276 shares of Common Stock
outstanding, exclusive of Treasury stock.
Netegrity, Inc.
The Registrant's 10-Q for the quarter ended September 30, 2001 filed with the
Securities Exchange Commission on November 14, 2001 is amended as indicated on
the following pages to correct certain clerical errors on the September 30, 2001
Consolidated Condensed Balance Sheet in the line items related to "Marketable
securities" and "Other comprehensive income" and to make related corrections to
Footnotes 1(b), 1(d) and the Liquidity And Capital Resources section of
Management's Discussion.
PART I. - FINANCIAL INFORMATION
NETEGRITY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30,
DECEMBER 31, 2001
2000 (UNAUDITED)
----------- -----------
ASSETS
CURRENT ASSETS:
Cash, cash equivalents and marketable securities ........................................... $ 115,747 $ 51,202
Marketable securities ...................................................................... -- 55,019
Accounts receivable-trade, net of allowances of $951 and $1,853 at December 31, 2000 and
September 30, 2001, respectively ........................................................ 15,758 15,984
Prepaid expenses and other current assets .................................................. 1,305 1,918
--------- ---------
Total current assets .................................................................... 132,810 124,123
Property and equipment, net .................................................................. 4,528 6,821
Long-term marketable securities .............................................................. -- 20,298
Restricted cash .............................................................................. 942 626
Other assets ................................................................................. 99 219
--------- ---------
Total Assets ............................................................................ $ 138,379 $ 152,087
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable-trade ..................................................................... 1,698 1,210
Accrued compensation and benefits .......................................................... 7,695 4,723
Other accrued expenses ..................................................................... 2,608 6,461
Deferred revenue ........................................................................... 8,479 11,190
--------- ---------
Total Current Liabilities ............................................................... 20,480 23,584
STOCKHOLDERS' EQUITY:
Common stock, voting, $.01 par value; 135,000 shares authorized;
30,184 shares issued and 30,146 shares outstanding at December 31, 2000;
31,267 shares issued and 31,229 outstanding at September 30, 2001 .......................... 302 312
Additional paid-in capital ................................................................. 139,886 146,442
Accumulated other comprehensive income ..................................................... -- (20)
Accumulated deficit ........................................................................ (22,075) (18,017)
Loan to officer ............................................................................ (130) (130)
--------- ---------
117,983 128,587
Less -- Treasury stock, at cost: 38 shares ................................................... (84) (84)
--------- ---------
Total Stockholders' Equity .............................................................. 117,899 128,503
--------- ---------
Total Liabilities and Stockholders' Equity .............................................. $ 138,379 $ 152,087
========= =========
The accompanying notes are an integral part of the consolidated
condensed financial statements.
3
NETEGRITY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2000 2001
----------------- -------------
Revenues:
License software ............................................. $ 10,586 $ 9,016
Services ..................................................... 3,922 6,780
Other ........................................................ 825 908
-------- --------
Total revenues ............................................... 15,333 16,704
Cost of license software ....................................... 695 136
Cost of services ............................................... 2,259 3,027
Cost of other .................................................. 513 522
-------- --------
Total cost of revenues ....................................... 3,467 3,685
-------- --------
Gross profit ................................................... 11,866 13,019
Selling, general and administrative expenses ................... 9,956 12,275
Research and development costs ................................. 2,788 3,857
Non-recurring expenses ......................................... -- 603
-------- --------
Loss from operations............................................ (878) (3,716)
Interest income ................................................ 1,789 1,324
-------- --------
Income (loss) before provision for income taxes ................ 911 (2,392)
Provision for income taxes ..................................... -- --
-------- --------
Net income (loss) .............................................. $ 911 $ (2,392)
======== ========
Net income (loss) per share attributable to common stockholders:
Basic ........................................................ $ 0.03 $ (0.08)
Diluted ...................................................... $ 0.03 $ (0.08)
Weighted average shares outstanding:
Basic ........................................................ 29,652 31,203
Diluted ...................................................... 34,008 31,203
The accompanying notes are an integral part of the consolidated
condensed financial statements.
4
NETEGRITY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2000 2001
----------------- ----------------
Revenues:
License software ............................................. $ 22,198 $43,842
Services ..................................................... 7,873 20,887
Other ........................................................ 2,503 2,772
-------- -------
Total revenues ............................................... 32,574 67,501
Cost of license software ....................................... 1,528 1,503
Cost of services ............................................... 4,581 10,675
Cost of other .................................................. 1,497 1,671
-------- -------
Total cost of revenues ....................................... 7,606 13,849
-------- -------
Gross profit ................................................... 24,968 53,652
Selling, general and administrative expenses ................... 23,283 40,617
Research and development costs ................................. 6,136 11,865
Non-recurring expenses ......................................... -- 603
-------- -------
Income (loss) from operations .................................. (4,451) 567
Interest income ................................................ 4,321 4,098
-------- -------
Income (loss) before provision for income taxes ................ (130) 4,665
Provision for income taxes ..................................... -- 607
-------- -------
Net income (loss) .............................................. $ (130) $ 4,058
======== =======
Net income (loss) per share attributable to common stockholders:
Basic ........................................................ $ 0.00 $ 0.13
Diluted ...................................................... $ 0.00 $ 0.12
Weighted average shares outstanding:
Basic ........................................................ 28,676 30,850
Diluted ...................................................... 28,676 32,962
The accompanying notes are an integral part of the consolidated
condensed financial statements
5
NETEGRITY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2000 2001
----------------- ----------------
OPERATING ACTIVITIES:
Net income (loss) ........................................................................ $ (130) $ 4,058
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization ......................................................... 668 1,936
Provision for doubtful accounts receivable ............................................ 717 902
Compensation expense related to warrant ............................................... 292 --
Changes in operating assets and liabilities:
Accounts receivable ................................................................... (7,981) (1,128)
Prepaid expenses and other current assets ............................................. (748) (613)
Other assets .......................................................................... (57) (120)
Accounts payable-trade ................................................................ 395 (488)
Accrued compensation and benefits ..................................................... 3,059 (2,972)
Other accrued expenses ................................................................ 2,252 3,853
Deferred revenue ...................................................................... 4,604 2,711
--------- ---------
Net cash provided by operating activities ................................................ 3,071 8,139
--------- ---------
INVESTING ACTIVITIES:
Restricted cash .......................................................................... (942) 316
Purchases of property and equipment ...................................................... (3,044) (4,223)
Purchases of marketable securities ....................................................... -- (75,317)
--------- ---------
Net cash used for investing activities ................................................... (3,986) (79,224)
--------- ---------
FINANCING ACTIVITIES:
Issuance of common stock under stock plans ............................................... 6,105 6,566
--------- ---------
Net cash provided by financing activities ................................................ 6,105 6,566
Effect of exchange rate changes on cash and cash equivalents ............................. -- (26)
--------- ---------
Net increase (decrease) in cash and cash equivalents ..................................... 5,190 (64,545)
Cash and cash equivalents at beginning of period ......................................... 102,878 115,747
--------- ---------
Cash and cash equivalents at end of period ............................................... $ 108,068 $ 51,202
========= =========
The accompanying notes are an integral part of the consolidated
condensed financial statements
6
NETEGRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The unaudited financial information furnished herein reflects all adjustments
which are of a normal recurring nature, which in the opinion of management are
necessary to fairly state the Company's financial position, cash flows and
results of operations for the periods presented. Certain information and
footnote disclosure normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. The results of operations for the nine months ended September 30, 2001
are not necessarily indicative of the results to be expected for the remainder
of the year ending December 31, 2001. This information should be read in
conjunction with the Company's audited financial statements for the fiscal year
ended December 31, 2000, included in Form 10-K filed on February 28, 2001.
(b) CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash equivalents are stated at cost plus accrued interest, which approximates
market value and have maturities of three months or less at the date of
purchase. All investments-with a maturity greater than three months, which
primarily consists of government securities and corporate debt, are accounted
for under Financial Accounting Standards Board (FASB) No. 115, Accounting for
certain investments in Debt and Equity Securities (SFAS 115). In accordance
with SFAS 115, investments are classified as held to maturity, available for
sale or trading securities. The Company determines the appropriate
classification at the time of purchase. As of September 30, 2001, all
investments in marketable securities are classified as trading securities.
Investments that are bought and held principally for the purposes of selling
them in the near term are designated as trading securities. Trading securities
are measured at fair value in the Company's balance sheet. Changes in fair
value of trading securities are reflected in interest income in the statement
of operations. The net change in unrealized gains included in the statement of
operations for the three and nine months ended September 30, 2001 was $170,000.
(c) 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. (Such Checkpoint revenue is included in "other" revenue in the
accompanying statement of operations.) 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 may include
multiple software products and services sold together; these are allocated to
each element based on the residual method in accordance with Statement of
Position No. 98-9, SOFTWARE REVENUE RECOGNITION, WITH RESPECT TO CERTAIN
TRANSACTIONS. Under the residual method, the fair value of the undelivered
elements is deferred and subsequently recognized when earned. The Company has
established sufficient vendor specific objective evidence for professional
services, training and maintenance and support services based on the price when
these elements are sold separately. Accordingly, software license revenue is
recognized under the residual method in arrangements in which software is
licensed with professional services, training and maintenance and support
services. 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.
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 summarizes the staff's views
in applying generally accepted accounting principles to selected revenue
recognition issues. The Company adopted SAB 101 in fiscal year 2000 without a
material impact on it's financial position or results of operations.
7
(d) COMPREHENSIVE INCOME (LOSS)
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources, including foreign currency translation adjustments and
unrealized gains and losses on marketable securities. For the three and nine
months ended September 30, 2000, the comprehensive loss does not differ from the
reported loss. For the three and nine months ended September 30, 2001, the
difference between the comprehensive income (loss) of ($2.4 million) and $4.0
million, respectively, and the net income (loss) is due to the effect of the
Company's cumulative translation adjustment.
(e) NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed using the weighted average number
of shares of common stock outstanding. Diluted Earnings Per Share (EPS) is based
upon the weighted average number of common and common equivalent shares
outstanding during the period.
The following table sets forth basic and diluted income (loss) per share
computational data for the periods presented (in thousands, except per share
data):
(IN THOUSANDS)
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
2000 2001
----------- -----------
Net income (loss) attributable to common stockholders ................................. $ 911 $ (2,392)
------- --------
Weighted average shares outstanding used in computing basic net income (loss)
per share ........................................................................... 29,652 31,203
Weighted average common equivalent shares outstanding:
employee stock options and warrants ................................................. 4,356 --
------- --------
Total weighted average common and common equivalent shares outstanding used
in computing diluted net income (loss) per share .................................... 34,008 31,203
------- --------
Basic net income (loss) per share ..................................................... $ 0.03 $ (0.08)
======= ========
Diluted net income (loss) per share ................................................... $ 0.03 $ (0.08)
======= ========
8
(IN THOUSANDS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
2000 2001
------------ -----------
Net income (loss) attributable to common stockholders ........................ $ (130) $ 4,058
-------- -------
Weighted average shares outstanding used in computing basic net income (loss)
per share ................................................................. 28,676 30,850
Weighted average common equivalent shares outstanding:
employee stock options and warrants ....................................... -- 2,112
-------- -------
Total weighted average common and common equivalent shares outstanding used in
computing diluted net income (loss) per share .............................. 28,676 32,962
-------- -------
Basic net income (loss) per share ............................................ $ 0.00 $ 0.13
======== =======
Diluted net income (loss) per share .......................................... $ 0.00 $ 0.12
======== =======
Options to purchase a total of 2.2 million and 4.2 million weighted shares
outstanding for the three months ended September 30, 2000 and 2001,
respectively, and 1.5 million and 2.5 million weighted shares outstanding for
the nine months ended September 30, 2000 and 2001, respectively, were
outstanding but were not included in the computation of diluted EPS because the
options are anti-dilutive.
(f) RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No.
142, Goodwill and Other Intangible Assets. Statement No. 141 requires that all
business combinations initiated after June 30, 2001, be accounted for using the
purchase method of accounting. Statement No. 142 discusses how intangible assets
that are acquired should be accounted for in financial statements upon their
acquisition and also how goodwill and other intangible assets should be
accounted for after they have been initially recognized in the financial
statements. Beginning on January 1, 2002, with the adoption of Statement No.
142, goodwill and certain purchased intangibles existing on June 30, 2001, will
no longer be subject to amortization over their estimated useful life. Rather
the goodwill and certain purchased intangibles will be subject to an annual
assessment for impairment. The provisions of Statement No. 142 are required to
be applied starting with fiscal years beginning after December 15, 2001. The
adoption of SFAS No. 142 will not have a material impact on the Company's
financial statements. The Company will apply SFAS 142 to the transaction
discussed in Note 6.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and
the accounting and reporting provisions of APB No. 30, SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and is effective for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. The Company is currently reviewing
this statement to determine its effect on the Company's financial statements.
NOTE 2: RESTRUCTURING CHARGES AND NON-RECURRING EXPENSES
The Company recorded a non-recurring expense of $603,000 during the third
quarter of 2001. These costs are associated with the Company's restructuring
plan and other non-recurring expenses.
A) RESTRUCTURING PLAN
On September 28, 2001, the Company announced a restructuring plan designed to
reduce expenses and align its cost structure with its revised business outlook.
The restructuring plan included a worldwide workforce reduction, and the
consolidation of excess facilities.
The restructuring plan resulted in the reduction of the worldwide workforce by
approximately 33 people, or 8%. Approximately 60%, 24% and 16% of the headcount
reduction related to selling, general and administrative, development and other
areas respectively. The affected employees are entitled to severance and other
benefits for which the Company recorded a charge of $342,000 in the third
quarter of 2001. The Company recorded a charge of $25,000 for consolidation of
excess facilities.
The following table summarizes the activity in the restructuring accruals for
the period ended September 30, 2001.
Beginning
Accrual Amounts Accrual As of
Balance Paid September 30, 2001
Workforce reduction $342,000 -- $342,000
Consolidation of facilities 25,000 -- 25,000
------- ------- --------
Total $367,000 -- $367,000
B) OTHER NON-RECURRING EXPENSES
The Company recorded a non-recurring charge in the third quarter of 2001 of
$236,000 which is included in accrued expenses. The other non-recurring charges
include a contribution to the James Hayden Memorial Fund and the acceleration of
his options.
9
Remaining cash expenditures relating to the workforce reductions will be
substantially paid in the fourth quarter of fiscal 2001. Amounts related to the
net lease expense due to the consolidation of facilities will be paid over the
respective lease terms through May 31, 2002. The Company expects to
substantially complete its restructuring plan during the first half of fiscal
2002.
NOTE 3: SEGMENT REPORTING
(a) 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. The Company evaluates the performance of
each reportable segment based on gross margins. Summarized unaudited financial
information is as follows (in thousands):
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2000 2001
---------------------- ----------------------
GROSS GROSS
REVENUE MARGIN REVENUE MARGIN
------- ------ ------- ------
Operating Segments:
License software..................................... $ 10,586 $ 9,891 $ 9,016 $ 8,881
-------- ------- -------- --------
Services:
Maintenance........................................ 1,402 1,402 3,503 2,927
Training and consulting............................ 2,520 260 3,277 826
-------- ------- -------- --------
3,922 1,662 6,780 3,753
-------- ------- -------- --------
Other
Software and related products...................... 425 92 505 158
Services........................................... 400 221 403 227
-------- ------- -------- --------
825 313 908 385
-------- ------- -------- --------
Totals............................................. $ 15,333 $11,866 $ 16,704 $ 13,019
======== ======= ======== ========
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2000 2001
--------------------- ---------------------
GROSS GROSS
REVENUE MARGIN REVENUE MARGIN
------- ------ ------- ------
Operating Segments:
License software..................................... $ 22,198 $ 20,670 $ 43,842 $ 42,339
-------- -------- -------- --------
Services:
Maintenance........................................ 2,363 2,363 9,335 7,632
Training and consulting............................ 5,511 929 11,552 2,580
-------- -------- -------- --------
7,874 3,292 20,887 10,212
-------- -------- -------- --------
Other
Software and related products...................... 1,287 337 1,079 415
Services........................................... 1,215 669 1,693 686
-------- -------- -------- --------
2,502 1,006 2,772 1,101
-------- -------- -------- --------
Totals............................................. $ 32,574 $ 24,968 $ 67,501 $ 53,652
======== ======== ======== ========
(B) GEOGRAPHIC INFORMATION
The geographic distribution of the Company's revenues are summarized in the
following tables.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(unaudited) (unaudited)
2000 2001 2000 2001
Revenues:
North America 13,935 12,391 29,886 55,496
Europe 1,005 3,265 2,090 8,626
Asia Pacific 393 1,048 598 3,379
------ ------ ------ ------
Total 15,333 16,704 32,574 67,501
Long-Lived Assets:
North America 5,569 27,168
Europe -- 187
Asia Pacific -- 609
------ ------
Total 5,569 27,964
10
NOTE 4: STOCKHOLDERS' EQUITY
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-Q have been adjusted for the stock split.
NOTE 5: RELATED-PARTY TRANSACTIONS
On August 2, 2001, the Company entered into an agreement with Broadview
International LLC ("Broadview"). The Managing Director of Broadview is a member
of the Company's board of directors. Broadview will assist the Company in
negotiating and structuring the acquisition from a defined set of companies with
portal service products. For each acquisition transaction Broadview
participates, it will be entitled to a transaction fee equal to $750,000 for
which a definitive agreement is executed or a transaction is consummated within
a twelve-month period.
NOTE 6: SUBSEQUENT EVENTS
On October 24, 2001, the Company signed a definitive agreement to acquire the
stock of privately-held DataChannel, Incorporated, headquartered in Bellevue,
Washington. DataChannel, a leading provider of enterprise portal solutions,
delivers a standards based platform with robust administration, scalability and
development capabilities. The consideration for the acquisition is $15 million
in cash and 2.5 million in common shares.
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This report and the documents incorporated in it by reference contain
forward-looking statements about our plans, objectives, expectations and
intentions. You can identify these statements by words such as "expect,"
"anticipate," "intend," "plan," "believe," "seek," "estimate," "may," "will" and
"continue" or similar words. You should read statements that contain these words
carefully. They discuss our future expectations, contain projections of our
future results of operations or our financial condition or state other
forward-looking information, and may involve known and unknown risks over which
we have no control. You should not place undue reliance on forward-looking
statements. We cannot guarantee any future results, levels of activity,
performance or achievements. Moreover, we assume no obligation to update
forward-looking statements or update the reasons actual results could differ
materially from those anticipated in forward-looking statements. The factors
discussed in the sections captioned "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" in
this report and the documents incorporated in it by reference identify important
factors that may cause our actual results to differ materially from the
expectations we describe in our forward-looking statements.
This report and the documents incorporated in it by reference contain data
related to the e-commerce market. These market data have been included in
studies published by the market research firms of Forrester Research and
International Data Corporation. These data include projections that are based on
a number of assumptions, including increasing worldwide business use of the
Internet, the growth in the number of web access devices per user, the absence
of any failure of the Internet, and the continued improvement of security on the
Internet. If any of these assumptions is incorrect, actual results may differ
from the projections based on those assumptions.
RISK FACTORS
The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward-looking statements. In that context, the discussion in
this Item contains forward-looking statements which involve certain degrees of
risk and uncertainty,
11
including statements relating to liquidity and capital resources. Except for the
historical information contained herein, the matters discussed in this section
are such forward-looking statements that involve risks and uncertainties,
including:
WE HAVE INCURRED SUBSTANTIAL LOSSES AND MAY NOT BE PROFITABLE IN THE FUTURE.
In recent years, we have incurred substantial losses. We cannot predict if
we will achieve profitability 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 three months ended September 31,
2001, we had net loss of $2.4 million; in the nine months ended September 30,
2001, we had net income of $4.1 million. As a result of historical operating
losses, at September 30, 2001, we had an accumulated deficit of $18.0 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.
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 slowdown in the
economy and/or the uncertainties associated with the events of
September 11, 2001 and their aftermath;
- market acceptance of our SiteMinder and related 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 65% of our total
revenues for the nine months ended September 30, 2001. 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
access control and identity management, including usage of SiteMinder for
business-
12
to-consumer applications, and customer demand for the specific functionality of
SiteMinder. We cannot be sure that either will occur. 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 intranet 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 access control and intranet management products and services
is highly competitive. We expect the level of competition to increase as a
result of the anticipated growth of e-business. Until recently, our primary
source of competition was from software developed in-house. In addition, we have
faced competition from web development professional services organizations.
Today our primary competitors include IBM, RSA/Securant, Entrust, Open Network
Technology, Baltimore Technologies, Oblix 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.
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
13
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.
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.
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, 2000 to September 30, 2001,
the number of our employees increased from 292 to 404. 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
14
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 decision making cycles
- longer payment cycles and problems in collecting accounts receivable;
- adverse changes in trade and tax regulations, including restrictions
on the import and export of sensitive technologies, such as encryption
technologies, that we use or may wish to use in our software products;
- the absence or significant lack of legal protection for intellectual
property rights;
- difficulties in managing an organization spread over several
countries, including complications arising from cultural, language and
time differences that may lengthen sales and implementation cycles;
- currency risks, including fluctuations in exchange rates; and
- political and economic instability.
OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR PROPRIETARY RIGHTS.
Our success depends to a significant degree upon the protection of our
software and other proprietary technology. The unauthorized reproduction or
other misappropriation of our proprietary technology could enable third parties
to benefit from our technology without paying us for it. This could have a
material adverse effect on our business, operating results and financial
condition. We depend upon a combination of trademark, trade secret and copyright
laws, license agreements and non-disclosure and other contractual provisions to
protect proprietary and distribution rights in our products. In addition, we
attempt to protect our proprietary information and the proprietary information
of our vendors and partners through confidentiality and/or license agreements
with our employees and others. Although we have taken steps to protect our
proprietary technology, they may be inadequate. Existing trade secret, copyright
and trademark laws offer only limited protection. Moreover, the laws of other
countries in which we market our products may afford little or no effective
protection of our intellectual property. If we resort to legal proceedings to
enforce our intellectual property rights, the proceedings could be burdensome
and expensive, even if we were to prevail.
CLAIMS BY OTHER COMPANIES THAT WE INFRINGE THEIR PROPRIETARY TECHNOLOGY COULD
HURT OUR FINANCIAL CONDITION.
If we discover that any of our products violated third party proprietary
rights, there can be no assurance that we would be able to reengineer our
product or to obtain a license on commercially reasonable terms to continue
offering the product without substantial reengineering. We do not conduct
comprehensive patent searches to determine whether the technology used in our
products infringes patents held by third parties. In addition, product
development is inherently uncertain in a rapidly evolving technology environment
in which there may be numerous patent applications pending, many of which are
confidential when filed, with regard to similar technologies. Any claim of
infringement could cause us to incur substantial costs defending against the
claim, even if the claim is invalid, and could distract our management from our
business. Furthermore, a party making such a claim could secure a judgment that
requires us to pay substantial damages. A judgment could also include an
injunction or other court order that could prevent us from
15
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.
ACQUISITIONS MAY INCREASE RISKS
On October 24, 2001, the Company signed a definitive agreement to acquire
the stock of privately-held DataChannel, Incorporated. (See Note 6 of Notes to
the Company's Consolidated Financial Statements). In the future, we may pursue
other acquisitions to obtain complementary products, services and technologies.
Any such 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. In pursuing any acquisition, our management
could spend a significant amount of time and effort in identifying and
completing the acquisition. If we complete an acquisition, we would probably
have to devote a significant amount of management resources to integrate the
acquired business with our existing business.
To pay for an acquisition, we might use our stock or cash. Alternatively,
we might borrow money from a bank or other lender. If we use our stock, our
stockholders would experience dilution of their ownership interests. If we use
cash or debt financing, our financial liquidity will be reduced.
THE MARKET PRICE OF OUR COMMON STOCK HAS BEEN AND MAY CONTINUE TO BE VOLATILE.
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.
The events of September 11, 2001 and their aftermath have also caused
significant volatility in the stock markets. The continued threat of terrorism
in the United States and abroad, the resulting military action and heightened
security measures undertaken in response to that threat can be expected to cause
continued volatility in securities markets.
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.
16
CERTAIN PROVISIONS OF OUR CHARTER AND OF DELAWARE LAW MAKE A TAKEOVER OF OUR
COMPANY MORE DIFFICULT.
Our corporate documents and Delaware law contain provisions that might
enable our management to resist a takeover of our company. These provisions
might discourage, delay or prevent a change in the control of Netegrity or a
change in our management. These provisions could also discourage proxy contests
and make it more difficult for you and other stockholders to elect directors and
take other corporate actions. The existence of these provisions could limit the
price that investors might be willing to pay in the future for shares of our
common stock.
RESULTS OF OPERATIONS
The following information should be read in conjunction with the consolidated
financial statements and notes thereto:
% OF TOTAL REVENUES
------------------------------------------ PERIOD TO PERIOD %
INCREASE (DECREASE)
THREE MONTHS ENDED
FOR THE THREE MONTHS SEPTEMBER 30,
ENDED SEPTEMBER 30, 2001 2000 2001 2000 VS. 2001
-------------------------- -------------------- -------------------- --------------------
Revenues:
License software............................................. 69% 54% (15)%
Services..................................................... 26 41 73
Other........................................................ 5 5 10
--- --- ----
Total revenues............................................ 100 100 9
--- --- ----
Cost of Revenues:
Cost of license software..................................... 5 1 (80)
Cost of services............................................. 15 18 34
Cost of other................................................ 3 3 2
--- --- ----
Total cost of revenues.................................... 23 22 6
--- --- ----
Gross profit................................................... 77 78 10
Selling, general and administrative expenses................... 65 73 23
Research and development costs................................. 18 23 38
Non-recurring expenses......................................... -- 4 --
--- --- ----
Loss from operations........................................... (6) (22) (323)
Interest income................................................ 12 8 (26)
--- --- ----
Income (loss) before provision for income taxes................ 6 (14) (363)
--- --- ----
Provision for income taxes..................................... -- -- --
--- --- ----
Net income (loss).............................................. 6% (14)% (363)%
=== === ====
Revenues. Total revenues increased by $1.4 million, or 9%, to $16.7 million
in the three months ended September 30, 2001, from $15.3 million in the three
months ended September 30, 2000.
License software revenues decreased by $1.6 million, or 15%, to $9.0
million in the three months ended September 30, 2001, from $10.6 million in the
three months ended September 30, 2000. This decrease is due to the difficult
economic environment, exacerbated by the events of September 11, 2001, which
led deals to be reduced in size or deferred.
Services revenues increased by $2.9 million, or 73%, to $6.8 million in the
three months ended September 30, 2001, from $3.9 million in the three months
ended September 30, 2000. This increase reflects the continued growth in the
installed base of SiteMinder software licenses and the increasing demand to
provide installation and integration services for customers.
Other revenues increased by $83,000 or 10%, to $908,000 in the three months
ended September 30, 2001, from $825,000 in the three months ended September 30,
2000.
Cost of revenues. Total cost of revenues increased by $218,000 or 6%, to
$3.7 million in three months ended September 30, 2001, from $3.5 million in the
three months ended September 30, 2000.
17
Cost of license software decreased by $559,000 to $136,000, or 80%, in
the three months ended September 30, 2001 from $695,000 in the three months
ended September 30, 2000. This variance is primarily due to the proportional
decrease in software revenues for the same period in addition to lower royalty
and production costs.
Cost of services increased by $768,000 or 34%, to $3.0 million in the three
months ended September 30, 2001 from $2.3 million in the three months ended
September 30, 2000. The increase is primarily due to growth in personnel related
expenses for our consulting and education organizations as a result of increased
SiteMinder service revenues.
Cost of other increased by $9,000 or 2%, to $522,000 in the three months
ended September 30, 2001 from $513,000 in the three months ended September 30,
2000.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $2.3 million, or 23%, to $12.3 million in
the three months ended September 30, 2001, from $10.0 million in the three
months ended September 30, 2000. This increase is primarily a result of our
continuing to build our sales and marketing infrastructure to support planned
growth in sales of our SiteMinder products and related services.
Research and development costs. Research and development costs increased by
$1.1 million, or 38%, to $3.9 million in the three months ended September 30,
2001, from $2.8 million in the three months ended September 30, 2000. The
increase was primarily due to our continued development of SiteMinder, Secure
Reverse Proxy, TransactionMinder and AffiliateMinder and our increase in
research and development personnel.
Interest income. Interest income decreased by $465,000, or 26%, to
$1.3 million in the three months ended September 30, 2001, from $1.8 million, in
the three months ended September 30, 2000. This decrease is mainly attributable
to a lower average interest rate in the three months ended September 30, 2001.
Provision for income taxes. For the three months ended September 30,
2001 and September 30, 2000 there was no provision for income taxes due to the
Company's loss position for the period in 2001 and a reduction of the valuation
allowance in 2000.
RESULTS OF OPERATIONS
The following information should be read in conjunction with the consolidated
financial statements and notes thereto:
% OF TOTAL REVENUES
--------------------------------------- PERIOD TO PERIOD %
INCREASE (DECREASE)
NINE MONTHS ENDED
FOR THE NINE MONTHS SEPTEMBER 30,
ENDED SEPTEMBER 30, 2001 2000 2001 2000 VS. 2001
------------------------- ------------------ ------------------ -------------------
Revenues:
License software.......................................... 68% 65% 98%
Services.................................................. 24 31 165
Other..................................................... 8 4 11
--- --- ------
Total revenues......................................... 100 100 107
--- --- ------
Cost of Revenues:
Cost of license software.................................. 5 2 (2)
Cost of services.......................................... 14 16 133
Cost of other............................................. 4 2 12
--- --- ------
Total cost of revenues................................. 23 21 82
--- --- ------
Gross profit................................................ 77 79 115
Selling, general and administrative expenses (including
non-cash stock compensation of 1% and 0% of revenue for the
three months ended September 30, 2000 and 2001, respectively 72 60 74
Research and development costs.............................. 19 18 93
Non-recurring expenses -- 1 --
--- --- ------
Income (loss) from operations............................... (14) 1 113
Interest income............................................. 13 6 (5)
--- --- ------
Income (loss) before provision for income taxes............. (1) 7 (N/A)
--- --- ------
Provision for income taxes.................................. -- 1 --
--- --- ------
Net income (loss)........................................... (1)% 6% (N/A)
=== === ======
18
Revenues. Total revenues increased by $34.9 million, or 107%, to $67.5
million in the nine months ended September 30, 2001, from $32.6 million in the
nine months ended September 30, 2000.
License software revenues increased by $21.6 million, or 98%, to $43.8
million in the nine months ended September 30, 2001, from $22.2 million in the
nine months ended September 30, 2000. This increase is due to the continued
increase in market awareness and the acceptance of the SiteMinder product and
expansion of our sales organization.
Services revenues increased by $13.0 million, or 165%, to $20.9 million in
the nine months ended September 30, 2001, from $7.9 million in the nine months
ended September 30, 2000. This increase reflects the continued growth in the
installed base of SiteMinder software licenses and the increasing demand to
provide installation and integration services for customers.
Other revenues increased by $269,000, or 11%, to $2.8 million in the nine
months ended September 30, 2001, from $2.5 million in the nine months ended
September 30, 2000.
Cost of revenues. Total cost of revenue increased by $6.2 million or 82%,
to $13.8 million in nine months ended September 30, 2001, from $7.6 million in
the nine months ended September 30, 2000.
Cost of license software decreased by $25,000 or 2% to $1.5 million in
the nine months ended September 30, 2001 from $1.5 million in the nine months
ended September 30, 2000.
Cost of services increased by $6.1 million or 133%, to $10.7 million in the
nine months ended September 30, 2001 from $4.6 million in the nine months ended
September 30, 2000. The increase is primarily due to growth in personnel related
expenses for our consulting and education organizations as a result of increased
SiteMinder service revenues.
Cost of other increased by $174,000 or 12%, to $1.7 million in the nine
months ended September 30, 2001 from $1.5 million in the nine months ended
September 30, 2000. This increase is primarily due to the proportional increase
in other revenues for the same period in prior year.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $17.3 million, or 74%, to $40.6 million in
the nine months ended September 30, 2001, from $23.3 million in the nine months
ended September 30, 2000. This increase is primarily a result of our continuing
to build our sales and marketing infrastructure to support planned growth in
sales of our SiteMinder product and services.
Research and development costs. Research and development costs increased by
$5.7 million, or 93%, to $11.9 million in the nine months ended September 30,
2001, from $6.1 million in the nine months ended September 30, 2000. The
increase was primarily due to our continued development of SiteMinder, Secure
Reverse Proxy, TransactionMinder and AffiliateMinder and our increase in
research and development personnel.
Interest income. Interest income decreased by $223,000, or 5%, to $4.1
million in the nine months ended September 30, 2001, from $4.3 million in the
nine months ended September 30, 2000. 1. This decrease is mainly attributable
to a lower average interest rate in the nine months ended September 30, 2001.
Provision for income taxes. Provision for income taxes for the nine months
ended September 30, 2001 was $607,000. The provision is lower than the statutory
rate due to a reduction in the valuation allowance related to federal net
operating loss carryforwards. The resulting provision relates primarily to state
and foreign taxes. For the nine months ended September 30, 2000 we had no
provision for income taxes due to the Company's breakeven position for the
period.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities in the nine months ended September 30,
2001 was $8.1 million, primarily due to net income and increases in other
accrued expenses and deferred revenue, partially offset by an increase in
accounts receivable and a decrease in accrued compensation and benefits.
19
Cash used for investing activities was $79.2 million in the nine months ended
September 30, 2001. Investing activities for the period consisted primarily of
the purchase of marketable securities of $75.3 million. In addition, the Company
purchased $4.2 million of equipment and software, consisting largely of computer
servers, workstations, networking equipment and business application software.
Cash provided by financing activities in the nine months ended September 30,
2001 was $6.6 million which primarily related to the exercise of stock options.
As of September 30, 2001, our primary financial commitments consisted of
obligations outstanding under operating leases.
As of September 30, 2001, we had cash and cash equivalents totaling $51.2
million, short term marketable securities of $55.0 million and working capital
of $100.5 million. The Company also had $20.3 million in long-term marketable
securities.
On October 24, 2001, the Company signed a definitive agreement to acquire
the stock of privately-held DataChannel, Incorporated. The consideration for the
acquisition is $15 million in cash and 2.5 million in common shares. (See Note 6
of Notes to the Company's Consolidated Condensed Financial Statements.)
In recent years, we have significantly increased our operating expenses. In
the foreseeable future, we expect to maintain our current levels of operating
expenses. These operating expenses and capital expenditures will constitute a
material use of our cash resources. In addition, we may utilize cash resources
to fund acquisitions or investments in businesses, technologies, products or
services that are complementary to our business. We believe that our existing
cash and cash equivalents will be sufficient to meet our anticipated cash
requirements for working capital and capital expenditures for at least the next
twelve months.
20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NETEGRITY, INC.
Date: December 4, 2001 By: /s/ Barry N. Bycoff
---------------------------------------
Barry N. Bycoff
President, Chief Executive
Officer, Director and
Chairman of the Board
Date: December 4, 2001 By: /s/ Charles Kroll
---------------------------------------
Charles Kroll
Vice President of Finance
(Chief Accounting Officer)