<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1999
REGISTRATION NO. 333-71893
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
NETOBJECTS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7372 94-3233791
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification
organization) No.)
</TABLE>
301 GALVESTON DRIVE
REDWOOD CITY, CALIFORNIA 94063
(650) 482-3200
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
------------------
SAMIR ARORA, CHIEF EXECUTIVE OFFICER
301 GALVESTON DRIVE
REDWOOD CITY, CALIFORNIA 94063
(650) 482-3200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------
COPIES TO:
<TABLE>
<S> <C> <C>
ALAN B. KALIN LAURA T. PUCKETT JOHN W. WHITE
MCCUTCHEN, DOYLE, BROWN & ENERSEN, MARK F. HOFFMAN CRAVATH, SWAINE & MOORE
LLP KATHI A. RAWNSLEY WORLDWIDE PLAZA
3150 PORTER DRIVE GRAHAM & JAMES LLP 825 EIGHTH AVENUE
PALO ALTO, CALIFORNIA 94304-1212 600 HANSEN WAY NEW YORK, NEW YORK 10019-7475
PALO ALTO, CALIFORNIA 94304-1043
</TABLE>
------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION
APRIL 30, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
6,000,000 SHARES
[LOGO]
COMMON STOCK
---------
This is the initial public offering of NetObjects, Inc., and we are offering
6,000,000 shares of our common stock. No public market currently exists for our
shares. We anticipate that the initial public offering price will be between
$11.00 and $13.00 per share.
We have applied to list the common stock on the Nasdaq National Market under the
symbol "NETO."
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
<TABLE>
<CAPTION>
PER SHARE TOTAL
----------- --------------
<S> <C> <C>
Public offering price............................................... $ $
Underwriting discounts.............................................. $ $
Proceeds to NetObjects.............................................. $ $
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
NetObjects has granted the underwriters the right to purchase up to 900,000
additional shares of common stock at the initial public offering price to cover
over-allotments.
BT ALEX. BROWN
BANCBOSTON ROBERTSON STEPHENS
U.S. BANCORP PIPER JAFFRAY
, 1999
<PAGE>
DESCRIPTION OF ARTWORK
OUTSIDE PORTION OF GATEFOLD:
GRAPHIC DEPICTING: e-publishing, e-applications, and e-commerce, with arrows
pointing to e-business
INTRODUCTORY TEXT:
The web is changing the world. It's changing the way companies communicate,
do business, and grow. To reap the benefits of improved efficiency, businesses
need a presence on the web. They need an e-business site. One that builds
relationships with employees, partners and customers. One that lets companies
implement e-publishing, e-applications and e-commerce. NetObjects software,
professional services and online resources make it possible for businesses,
large or small, to easily build e-business sites or intranets that let them
leverage the power of the web.
HEADLINE COPY: Software Professional Services Online Resources
GRAPHICS OF PRODUCTS, PROFESSIONAL SERVICES and ONLINE RESOURCES:
(1) two overlapping product boxes: NetObjects Fusion 4.0 for Windows and
NetObjects Authoring Server 3.0
(2) photo of service people
(3) graphic showing overlapping screen shots of four web sites (left to right):
eScriptZone.com, NetObjects corporate site, eSiteStore.com, and eFuse.com
GRAPHICS OF LOGOS:
(1) NetObjects corporate logo
(2) IBM e-business logo
LEFT-HAND PAGE OF GATEFOLD:
TITLE: Enabling e-business
INTRODUCTORY TEXT:
More than 300,000 copies of NetObjects Fusion have been delivered to date,
and more than 1 million web pages or web sites have been built using NetObjects
Fusion. In addition, over 500 businesses worldwide have deployed NetObjects
Authoring Server. Take a look at how some of our customers are using NetObjects
applications to build e-business web sites that sell products, provide virtual
tours, build online catalogs, auction collectible goods, and more.
FOUR GRAPHICS DEPICTING SCREEN SHOTS OF CUSTOMER WEB SITES
CAPTIONS (ONE FOR EACH SCREEN SHOT, LEFT TO RIGHT, TOP TO BOTTOM):
(1) www.christmas.com
(2) www.leasesource.com
(3) www.northstarnursery.com
(4) www.shell-lubricants.com
RIGHT-HAND PAGE OF GATEFOLD:
FOUR GRAPHICS DEPICTING SCREEN SHOTS OF CUSTOMER WEB SITES
CAPTIONS (ONE FOR EACH SCREEN SHOT, LEFT TO RIGHT, TOP TO BOTTOM):
(1) www.cellone-sf.com
<PAGE>
(2) www.collectit.net
(3) www.krause.com
(4) www.justforfeet.com
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION REGARDING NETOBJECTS AND THE COMMON STOCK BEING SOLD IN THE
OFFERING, AS WELL AS OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS.
The terms "NetObjects," "we," "us," and "our" refer to NetObjects, Inc. and
our subsidiary, NetObjects Ltd.
NETOBJECTS
We are a leading provider of software and solutions that enable small
businesses and large enterprises to build, deploy and maintain web sites on the
Internet and corporate intranets. Our solutions address the growing challenges
faced by businesses in capturing the explosive growth of the Internet as a
medium for conducting business online, or e-business. We help companies build
web sites that can publish content, conduct electronic commerce, or e-commerce,
and run web applications. With the introduction in 1996 of our award-winning
flagship product, NetObjects Fusion, we pioneered software for building entire
web sites rather than simple web pages. Since 1996, we have released enhanced
versions of NetObjects Fusion. We have introduced other products, including
NetObjects Authoring Server, a client-server application for large-scale
enterprises and corporate departments, which facilitates collaborative building
of intranet sites. We have also built popular online resources, including
eFuse.com, launched in December 1998, that target communities of business users
and provide sources of information, products and services for building business
web sites. In addition, in October 1998 we began offering professional services
to help our business customers plan, build and maintain their web sites. We have
established a premier Internet brand and estimate that over 300,000 copies of
NetObjects Fusion have been delivered to date, and more than 1,000,000 web pages
or web sites have been built using NetObjects Fusion.
We have experienced rapid growth since the launch of the first commercial
version of NetObjects Fusion in October 1996. Our total revenues have grown from
a base of $0 for fiscal year 1996 to $7.6 million for fiscal year 1997 and to
$15.3 million for fiscal year 1998. As of March 31, 1999, we had an accumulated
deficit of approximately $63.6 million, $51.1 million of which has been incurred
since April 1997. Revenues from IBM have represented a substantial percentage of
our total revenues, representing approximately 36% and 45% of our total revenues
in fiscal year 1998 and in the first six months of fiscal year 1999,
respectively. Almost all of our revenues from IBM in fiscal year 1998 resulted
from two sources. The first comprised royalties paid by Lotus Development
Corporation, an IBM subsidiary, to bundle NetObjects Fusion with Lotus products.
The second consisted of services related to integrating our software with IBM's
WebSphere software products, under a contract that expired on February 28, 1999.
We have no further commitments from IBM to pay us software license fees or
revenues from services. Our software license fees from IBM in the remaining
quarters of fiscal year 1999 are likely to decline, perhaps substantially, from
the level in the first half of fiscal year 1999. We are not expecting to receive
any service revenues from IBM going forward.
We incorporated in Delaware in November 1995 and have a limited operating
history. On April 11, 1997, IBM acquired approximately 80% of our stock. IBM did
not provide us with equity financing in that transaction. Subsequently, through
March 31, 1999, IBM has provided us with approximately $43.0 million of
financing through debt financing and cash prepayments of future royalties and
charges for services.
Since March 31, 1999, IBM has provided an additional $2.0 million of
financing to us. After the offering, IBM will have only limited commitments to
provide additional revenues and will have no obligation to provide additional
financing.
3
<PAGE>
IBM will retain control of NetObjects after the offering and may continue to
cooperate with us in a number of areas, including product bundling and sales and
marketing. The interests of IBM could conflict with our interests, however, and
IBM is free to compete with us. IBM's controlling interest in us, our dependence
on IBM and the conflicts of interests and potential competition associated with
IBM's relationship with us represent significant risks for an investor acquiring
our stock.
NEITHER IBM'S OWNERSHIP OF OUR SECURITIES NOR IBM'S RELATIONSHIP AND
AGREEMENTS WITH US IS A RECOMMENDATION BY IBM THAT INVESTORS SHOULD ACQUIRE OR
HOLD OUR STOCK. IBM WILL HAVE THE UNRESTRICTED ABILITY TO SELL ALL OR PART OF
ITS NETOBJECTS STOCK WHEN PERMISSIBLE UNDER APPLICABLE SECURITIES LAWS AND
AGREEMENTS WITH THE UNDERWRITERS. IBM HAS NO OBLIGATION TO RESELL OUR PRODUCTS
BEYOND THE LIMITED AMOUNT REQUIRED BY EXISTING AGREEMENTS. AFTER THE OFFERING,
IBM WILL HAVE NO OBLIGATION TO PROVIDE US WITH ADDITIONAL FINANCING. FOR MORE
INFORMATION ABOUT THESE RISKS, SEE "RISK FACTORS--OUR RELATIONSHIP WITH IBM WILL
CHANGE SUBSTANTIALLY AFTER THE OFFERING, WHICH COULD HARM OUR BUSINESS AND COULD
CAUSE OUR REVENUES IN FISCAL YEAR 1999 TO FALL BELOW THOSE OF FISCAL YEAR 1998.
WHILE IBM WILL STILL CONTINUE TO CONTROL US, IT HAS NO FURTHER OBLIGATIONS TO
PROVIDE FINANCING, KEY CONTRACTS WITH IBM HAVE EXPIRED, AND IBM IS EXPRESSLY
ALLOWED TO COMPETE WITH US OR ACT IN A MANNER THAT IS DISADVANTAGEOUS TO US,"
"CERTAIN TRANSACTIONS," "PRINCIPAL STOCKHOLDERS" AND "SHARES ELIGIBLE FOR FUTURE
SALE."
Our principal executive offices are located at 301 Galveston Drive, Redwood
City, CA 94063, and our telephone number is (650) 482-3200. Our web site can be
found at www.netobjects.com. Information contained on any of our web sites does
not constitute part of this prospectus.
NetObjects-Registered Trademark-, NetObjects Fusion-TM-, NetObjects
Authoring Server-TM-, NetObjects TeamFusion-TM-, NetObjects Fusion Personal
Edition-TM-, SiteStructure Editor-TM-, PageDraw-Registered Trademark-,
SiteStyles-Registered Trademark-, SiteStyles Manager-TM-, SiteProducer-TM-,
StyleObject-TM-, WebDraw-TM-, PublishSet-TM-, AutoSites-TM- and The Web Needs
You-TM- are our registered and unregistered trademarks, service marks and trade
names. The e-business logo is a trademark of International Business Machines
Corporation. This prospectus also includes trademarks, service marks and trade
names other than those identified in this paragraph, each of which is the
property of its respective holder.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by NetObjects.............. 6,000,000 shares
Common stock to be outstanding after the
offering...................................... 26,112,862 shares
Use of proceeds................................. Repayment of approximately $19.0 million of secured debt owed
to IBM Credit Corporation, a subsidiary of IBM, debt of
approximately $5.4 million plus accrued interest owed to IBM
under notes issued prior to the closing of the offering,
working capital requirements and other general corporate
purposes.
Proposed Nasdaq National Market
symbol........................................ NETO
</TABLE>
The foregoing information is based on the shares outstanding as of March 31,
1999. The total number of shares that we assume will be outstanding after the
offering excludes (a) 2,900,087 shares of common stock issuable at a weighted
average exercise price of $3.13 per share upon exercise of stock options
outstanding at March 31, 1999; (b) 266,615 shares of common stock reserved for
future issuance under our stock option plan; and (c) 300,000 shares of common
stock reserved for issuance under our 1999 Employee Stock Purchase Plan. See
"Capitalization" for information with respect to our capitalization as of March
31, 1999, our pro forma financial information and our pro forma financial
information as adjusted to reflect the capitalization after the offering.
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 21, 1995 YEAR ENDED SIX MONTHS ENDED
(INCEPTION) TO SEPTEMBER 30, MARCH 31,
SEPTEMBER 30, -------------------- --------------------
1996 1997 1998 1998 1999
------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Total revenues....................................... $ -- $ 7,567 $ 15,270 $ 5,992 $ 11,243
Cost of revenues..................................... -- 772 5,093 1,166 3,764
Gross profit......................................... -- 6,795 10,177 4,826 7,479
Operating loss....................................... (6,741) (17,564) (20,970) (11,241) (7,668)
Nonrecurring interest charge on beneficial conversion
feature of convertible debt(1)..................... -- -- -- -- (7,457)
Net loss............................................. (6,695) (17,799) (22,224) (11,719) (16,850)
Basic and diluted net loss per share applicable to
common stockholders(2)............................. $ (4.10) $ (10.45) $ (12.26) $ (6.63) $ (8.33)
Shares used to compute basic and diluted net loss per
share applicable to common stockholders(2)......... 1,634 1,703 1,812 1,768 2,023
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
MARCH 31, 1999
-------------------------
ACTUAL AS ADJUSTED(3)
--------- --------------
<S> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash..................................................................................... $ 1,816 $ 44,867
Working capital (deficit)................................................................ (22,962) 42,671
Total assets............................................................................. 9,158 52,209
Short-term borrowings from IBM and IBM Credit Corp....................................... (22,165) --
Long-term obligations, less current portion.............................................. 10,323 212
Accumulated deficit...................................................................... (63,568) (63,824)
Stockholders' equity (deficit)........................................................... (31,038) 44,706
</TABLE>
- ------------------------
(1) Nonrecurring non-cash interest charge based on the difference between the
price per share for Series F-2 preferred stock issued to Novell, Inc. and MC
Silicon Valley, Inc. and for Series E-2 preferred stock issuable to IBM and
another investor upon conversion of convertible notes in accordance with
EITF Topic D-60. See note 8 of notes to consolidated financial statements.
Under the terms of an April 1997 contract with IBM, we agreed that any funds
provided by IBM for our operations during 1997 and 1998 through the sale of
equity securities to IBM would have a per share price not higher than $6.68.
Each share of Series E-2 preferred stock automatically converts into common
stock upon the effectiveness of the offering and due to an adjustment
triggered by our failure to complete this or a similar offering or repay the
convertible notes prior to specific dates, the earliest of which was April
8, 1999, the conversion ratio has increased from 1:1 to 1.25:1. In October
and November 1998, we issued preferred stock to Novell, Inc. and MC Silicon
Valley, Inc. at a price per share of $9.00. See "Certain Transactions--IBM
Relationship."
(2) Does not include the effect of outstanding shares of convertible preferred
stock, shares from the assumed conversion of convertible notes and shares
issuable upon the exercise of stock options and warrants that are considered
anti-dilutive pursuant to Statement of Financial Accounting Standards (SFAS)
No. 128. For an explanation of basic and diluted net loss per share
applicable to common stockholders and the number of shares used to compute
basic and diluted net loss per share applicable to common stockholders, see
note 1 of notes to consolidated financial statements.
(3) As adjusted to give effect to
- the pro forma capitalization set forth in "Capitalization";
- our sale of 6,000,000 shares to be sold in the offering at the initial
public offering price of $12.00 per share, less the underwriters' discount
and commissions and estimated expenses of the offering; and
- repayment of short-term borrowings and accretion of related interest.
The information set forth above is unaudited and should be read in
conjunction with our consolidated financial statements and notes to consolidated
financial statements.
6
<PAGE>
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE
DECIDING TO INVEST IN OUR STOCK.
WE HAVE A HISTORY OF SUBSTANTIAL LOSSES AND EXPECT SUBSTANTIAL LOSSES IN THE
FUTURE.
We were incorporated in November 1995 and first recognized revenues in
October 1996. As of March 31, 1999, we had an accumulated deficit of
approximately $63.6 million, $51.1 million of which has been incurred since
April 1997. We expect to sustain significant losses for the foreseeable future,
which could harm our business and decrease the market price of our stock.
To achieve and sustain profitability, we must, among other things, increase
substantially our revenues from our two principal products, NetObjects Fusion,
which in fiscal year 1998 accounted for most of our total revenues, and
NetObjects Authoring Server, and our related professional services, which have
generated insubstantial revenues to date.
OUR AUDITORS HAVE SUBSTANTIAL DOUBT ABOUT OUR VIABILITY AS A BUSINESS.
KPMG LLP, in their independent auditors' report, has expressed "substantial
doubt" as to our ability to remain in business. This doubt, which is based on
our significant operating losses since we were formed and our significant debt
and capital deficit as of September 30, 1998, is also described in note 1(d) of
the notes to our consolidated financial statements.
OUR ABILITY TO CONTINUE AS A GOING CONCERN IS DEPENDENT ON THE NET PROCEEDS OF
THIS OFFERING.
Without the net proceeds from the offering we will not have enough cash to
remain in business. We believe the net proceeds from this offering and current
cash will be sufficient to fund our operations to September 30, 2000. We have no
plans other than the receipt of the offering proceeds and our intention to
increase our revenues to address our liquidity problems.
A SUBSTANTIAL PORTION OF THE NET OFFERING PROCEEDS WILL BE USED TO REPAY DEBT
OWED TO IBM AND NOT TO IMPLEMENT OUR BUSINESS MODEL.
The remaining net proceeds from the offering are estimated to be
approximately $41.0 million, after the repayment of a $19.0 million secured
credit facility with IBM Credit Corp. and approximately $5.4 million that we owe
to IBM under notes issued prior to the closing of the offering, and after
deducting underwriting discounts and commissions of approximately $5.0 million
and estimated expenses of approximately $1.5 million. Accordingly, a substantial
portion of the net offering proceeds will not be available for our business. In
addition, our credit facility will terminate upon repayment and will thus not be
available to us for future borrowings.
OUR RELATIONSHIP WITH IBM WILL CHANGE SUBSTANTIALLY AFTER THE OFFERING, WHICH
COULD HARM OUR BUSINESS AND COULD CAUSE OUR REVENUES IN FISCAL YEAR 1999 TO
FALL BELOW THOSE OF FISCAL YEAR 1998. WHILE IBM WILL STILL CONTINUE TO CONTROL
US, IT HAS NO FURTHER OBLIGATIONS TO PROVIDE FINANCING, KEY CONTRACTS WITH IBM
HAVE EXPIRED, AND IBM IS EXPRESSLY ALLOWED TO COMPETE WITH US OR ACT IN A
MANNER THAT IS DISADVANTAGEOUS TO US.
WE HAVE DEPENDED HEAVILY ON IBM FOR FINANCING BUT IBM HAS NO OBLIGATIONS TO
PROVIDE US WITH FINANCING AFTER THIS OFFERING. Since IBM's acquisition of
approximately 80% of our stock, IBM has provided us with approximately $43.0
million of financing through March 31, 1999. Since March 31, 1999, IBM has
provided an additional $2.0 million of financing. After the offering, IBM will
have no obligation to provide us with additional financing. Between April 11,
1997 and April 30, 1999, IBM provided us with:
7
<PAGE>
- $10.5 million of cash prepayments against future royalties for IBM's
licensing of our products and our charges for services. Approximately half
of the recorded prepayments had not been recognized as revenues by the end
of fiscal year 1998;
- $10.1 million through our sale to IBM of convertible debt securities and
warrants for the purchase of convertible preferred stock;
- a $19.0 million secured credit facility with IBM Credit Corp. that has
been guaranteed by IBM. We would not have been able to obtain a $19.0
million loan from an independent third party without the guarantee by IBM.
We were not in compliance with a financial covenant in the credit facility
as of December 31, 1998, but on February 3, 1999, IBM Credit Corp. waived
our compliance through December 31, 1998 and has since agreed to take no
action with respect to our noncompliance through May 31, 1999;
- $3.4 million through the sale of notes and warrants; and
- $2.0 million under a demand note.
KEY CONTRACTS WITH IBM ARE EXPIRING AND WE HAVE NO COMMITMENTS FOR FUTURE
REVENUES FROM IBM, OR FROM OTHER THIRD PARTIES, THAT WOULD REPLACE REVENUES
ASSOCIATED WITH EXPIRING IBM CONTRACTS. Revenues from IBM have represented a
substantial portion of our total revenues--approximately 36% and 45% of our
total revenues in fiscal year 1998 and in the first six months of fiscal year
1999, respectively. All but approximately $400,000 of our revenues from IBM to
date have been offset against the $10.5 million prepayment. Our agreement with
IBM for services associated with IBM's WebSphere project ended on February 28,
1999. In addition, by March 31, 1999 we had recognized the minimum royalties
that Lotus was obligated to pay us under our contract with Lotus that obligates
Lotus to pay us for bundling NetObjects Fusion with Designer for Domino 4.0 that
expires in June 1999, and we have no other contract with Lotus that provides
commitments for future revenues. Lotus also currently markets, bundles and sells
our products and has created foreign language, or "localized," versions of our
software, for which IBM pays us reduced royalties on products that it sells
outside the U.S. Lotus' obligation to create localized versions of our software
expires on December 31, 1999. After that date, we may need to incur substantial
additional expense to obtain localized versions of new products or product
upgrades from Lotus or other vendors if necessary to satisfy the requirements of
key customers like IBM, Lotus and Novell.
All of the remaining $53,000 of deferred revenues at March 31, 1999 will
have been recognized as software license fees and service revenues by June 30,
1999. We have no commitments from IBM to pay us software license fees or
revenues from services after June 1999. Our software license fees from IBM in
the remaining quarters of fiscal year 1999 are likely to decline, perhaps
substantially, from the level in the first quarter of fiscal year 1999. We are
not expecting to receive any service revenues from IBM going forward. We
currently have no revenue commitments from IBM or other third parties that will
replace the revenues associated with these terminating contracts. If we are
unable to replace the revenue stream associated with these IBM agreements with
new revenues, our losses will increase and our stock price may fall.
WE DEPEND ON IBM PERSONNEL ON OUR BOARD OF DIRECTORS TO MAINTAIN AND PROMOTE
OUR RELATIONSHIP WITH IBM. Our ability to work effectively with IBM and to
maintain our strategic relationship with IBM depends to a significant extent on
the efforts of IBM's representatives on our board of directors and other senior
management personnel in Lotus and other IBM software organizations. If they
cease to be involved in our business, we may experience difficulties in
leveraging our strategic relationship with IBM.
8
<PAGE>
WE HAVE BUSINESS CONFLICTS WITH IBM. IBM HAS CHOSEN IN THE PAST AND IS FREE
IN THE FUTURE TO PROMOTE AND BUNDLE COMPETITORS' PRODUCTS OVER OUR
PRODUCTS. Although we have been dependent on IBM, and IBM has provided
substantial support to us, IBM makes independent business and product decisions
that present conflicts with our business objectives. For example, after
initially contracting to provide license fees for our WebSphere products, IBM
decided to bundle a competitor's product. Although this did not materially
affect our results of operations for the period, we expect to earn less revenues
from the WebSphere project than we had anticipated based on our initial contract
with IBM. In addition, IBM developed in Japan TopPage, a web page software
product, which could compete with NetObjects Fusion.
IBM CONTROLS US AND IS FREE TO SELL ITS CONTROLLING INTEREST IN US. Before
the offering, IBM owned approximately 71% of our common stock, assuming no
exercise of outstanding options and warrants and no conversion of convertible
notes, and after the offering IBM will own approximately 54% of our common stock
assuming the cashless exercise of all warrants by surrender of shares of common
stock as payment of the exercise price and assuming no exercise of outstanding
options. This percentage will decrease to 52% if the underwriters'
over-allotment option is exercised in full. As our majority stockholder, IBM
will have the power to determine matters submitted to a vote of our stockholders
without the consent of other stockholders, will have the power to prevent or
cause a change in control of us and could take other actions that might be
favorable to IBM and potentially harmful to us. IBM is under no obligation to
provide us with financial or other support after the offering.
IBM CAN ACT IN WAYS THAT MAY BE DISADVANTAGEOUS TO US, SUCH AS COMPETING
WITH US, INVESTING IN OUR COMPETITORS AND TAKING ADVANTAGE OF CORPORATE
OPPORTUNITIES. IBM is contractually or otherwise free to act in ways that may
harm our business. Our restated certificate of incorporation contains provisions
expressly acknowledging that:
- IBM retains "freedom of action" to conduct its business and pursue other
business opportunities, even in competition with us;
- IBM has no obligation to refrain from investing in our competitors, doing
business with our customers or hiring away our key personnel;
- no director appointed by IBM is prohibited from taking actions or from
voting on any action because of any actual or apparent conflict of
interest between that director and us; and
- no action taken by our board of directors will be void or voidable, or
give rise to liability for breach of fiduciary duty or otherwise, solely
because a majority of the directors are affiliated with IBM, or because
the action is, or is deemed to be by law, beneficial to IBM.
These provisions materially limit the liability of IBM and its affiliates,
including IBM's representatives on our board of directors and Lotus, from
conduct and actions taken by IBM or its affiliates, even if the conduct or
actions are beneficial to IBM and harmful to us.
Furthermore:
- when IBM becomes eligible to sell its stock subject to applicable
securities laws, contractual arrangements with the underwriters and the
terms of a registration rights agreement, if applicable, IBM will be able
to transfer some or all of its stock, including to our competitors. Such a
transfer could result in a transfer of IBM's controlling interest in us,
which could cause our revenues to decrease and our stock price to fall;
and
- IBM is under no obligation to inform us of any corporate opportunity and
is free to avail itself of any opportunity or to transfer the opportunity
to a third party.
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Any of IBM's rights could give rise to conflicts of interests, and we cannot
be certain that any conflicts would be resolved in our favor. Any of the risks
arising from our relationship with IBM could harm our business and cause our
stock price to fall.
IBM COULD OBTAIN AND USE OUR SOURCE CODE IF WE DEFAULT ON OUR OBLIGATIONS
UNDER LICENSE AGREEMENTS WITH IBM. Although our license agreements with IBM
contain restrictions on IBM's use and transfer of our software and intellectual
property, these restrictions are subject to exceptions. Under a software license
agreement with IBM, we have placed our key source code in escrow for IBM's
benefit. In the event of our default under the contract, IBM will have access
rights to this source code and will be free to use it to maintain our products
and create derivative works for the benefit of IBM and its customers.
OUR LICENSING ARRANGEMENTS WITH IBM ARE NOT EXCLUSIVE AND IBM IS FREE TO
ENTER INTO SIMILAR ARRANGEMENTS WITH OUR COMPETITORS. All of our licensing
arrangements with IBM are non-exclusive. IBM has the right to cease promoting
and distributing our software at any time. IBM may license its name, logo and
technology to, or invest in, other web site building companies, and it may more
actively promote the services of our competitors. For example, IBM is currently
selling HomePage Builder, an IBM-developed web page building software product,
in Japan, and HomePage Creator, an IBM web-based service that allows users to
build web pages online.
WE ARE A SUBSIDIARY OF IBM AND ARE SUBJECT TO IBM POLICIES AND IBM CONTRACTS
WITH THIRD PARTIES, WHICH MAY CAUSE US TO INCUR ADDITIONAL EXPENSES AND SUBJECT
US TO OBLIGATIONS TO THIRD PARTIES. As an IBM subsidiary, we are subject to IBM
policies that may not apply to most small public companies, and we may incur
additional expenses in complying with these policies. We also are subject to
many IBM contracts with third parties. These contracts include patent
cross-license agreements between IBM and other companies that provide us with
immunity from suit for patent infringement claims by those companies as long as
we remain an IBM subsidiary. Under those agreements, we have effectively granted
those companies freedom from patent infringement claims that we might make
against them. Contractual obligations to third parties which arise because we
are an IBM subsidiary may have future adverse consequences that are currently
unforeseeable. If we cease to be an IBM subsidiary, we may face material
litigation risks associated with patent infringement claims that IBM's patent
cross-licensees cannot currently assert against us. In addition, we may be
unable to assert patent claims of our own against an IBM cross-licensee, which
may remain free of liability for claims under the terms of the cross-license
agreement even after we cease to be an IBM subsidiary.
MOST OF OUR REVENUES ARE DERIVED FROM SALES OF A SINGLE PRODUCT, AND A DECLINE
IN DEMAND OR THE SALE PRICE OF THAT PRODUCT WOULD HARM OUR BUSINESS AND CAUSE
OUR STOCK PRICE TO FALL.
Most of our revenues from software license fees in fiscal year 1998 were
derived from versions of one of our products, NetObjects Fusion, and we expect
that this single product will continue to account for the substantial majority
of our total revenues in the near-term. To remain competitive, software products
typically require frequent updates that add new features. There can be no
assurance that we will succeed in creating and selling updated or new versions
of NetObjects Fusion. A decline in demand for, or in the average selling price
of, NetObjects Fusion, whether as a result of new product introductions or price
competition from competitors, technological change or otherwise, would hurt our
business or cause our stock price to fall.
WE HAVE MANY ESTABLISHED COMPETITORS, INCLUDING MICROSOFT, AND MAY BE UNABLE TO
COMPETE EFFECTIVELY AGAINST THEM.
The market for web site building software and services for the Internet and
corporate intranets is relatively new, constantly evolving and intensely
competitive. We expect competition to intensify
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in the future. Many of our current and potential competitors have longer
operating histories, greater name recognition and significantly greater
financial, technical and marketing resources, and we may be unable to compete
effectively against them. Our principal competitors in web site building
software include Microsoft Corporation, Adobe Systems Incorporated and
Macromedia, Inc. Microsoft's FrontPage, a web site building software product,
has a dominant market share. Microsoft has announced but not shipped FrontPage
2000, which may become one of the products in at least one version of
Microsoft's Office product suite that dominates the market for desktop business
application software.
WE MAY NOT BE ABLE TO ACCURATELY FORECAST REVENUE AND ADJUST SPENDING.
Because our business is evolving rapidly and we have a very limited
operating history, we have little experience in forecasting our revenues. Our
expense levels are based in part on our expectations of future revenues, and to
a large extent those expenses are fixed, particularly in the short-term. We
cannot be certain that our revenue expectations will be accurate or that we will
be able to adjust spending in a timely manner to compensate for any unexpected
revenue shortfall.
OUR QUARTERLY OPERATING RESULTS WILL PROBABLY FLUCTUATE.
We believe that period-to-period comparisons of our financial results are
not necessarily meaningful, and you should not rely upon them as an indication
of our future performance. In addition, IBM's commitments for software license
fees, which provided quarterly earnings stability, expire in June 1999 and for
service revenues expired in February 1999. Furthermore, the $10.5 million of
cash prepayments under our license agreement with IBM have provided some revenue
certainty for us since April 1997, and we expect to have recognized all of the
prepayments as revenues by June 30, 1999. Thereafter, our revenues from IBM, if
any, are likely to become more variable. The promptness with which sales data,
used for recognizing product royalties, are reported to us from third parties,
including IBM, may cause quarterly results to be more volatile. For example,
approximately half of our software license fees from IBM in the second quarter
of fiscal 1999 were attributable to Lotus Designer for Domino 4.0 bundle license
fees that had not been reported to us over the term of our contract which
commenced in February 1998.
WE ALLOW PRODUCT RETURNS AND PROVIDE PRICE PROTECTION TO SOME PURCHASERS AND
RESELLERS OF OUR PRODUCTS AND OUR ALLOWANCES FOR PRODUCT RETURNS MAY BE
INADEQUATE.
We have stock-balancing programs for our software products that under
specified circumstances allow for the return of software by resellers. These
programs also provide for price protection for our software for some of our
direct and indirect channel resellers that, under specified conditions, entitle
the reseller to a credit if we reduce our price to similar channel resellers. In
August 1997, for example, our price reduction for NetObjects Fusion triggered
price protection obligations resulting in the need to record an additional
allowance in the three months ended September 30, 1997, which reduced our
revenues for that quarter. There can be no assurance that actual returns or
price protection will not exceed our estimates, and our estimation policy may
cause significant quarterly fluctuations.
OUR FINANCIAL PERFORMANCE DEPENDS SUBSTANTIALLY ON MARKET ACCEPTANCE AND GROWTH
OF NETOBJECTS AUTHORING SERVER AND PROFESSIONAL AND ONLINE SERVICES.
WE INCREASINGLY DEPEND ON NETOBJECTS AUTHORING SERVER TO PROVIDE US WITH
REVENUES, WHICH WILL NOT MATERIALIZE IF NETOBJECTS AUTHORING SERVER IS NOT
SUCCESSFUL. We formally announced and shipped NetObjects Authoring Server in
September 1998 as a successor to our original NetObjects TeamFusion product
released in December 1997. We depend on increasing
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revenues from NetObjects Authoring Server, and we may not receive these revenues
for the following reasons:
- the success of NetObjects Authoring Server will depend on the rapid
emergence of a market for large-scale enterprise web site and intranet
building products and services;
- information services departments of large enterprises may choose to create
and maintain their web and intranet sites internally or may use
third-party professional developers to create and maintain their sites;
- NetObjects Authoring Server may not meet customer performance needs or be
free of significant software defects or bugs;
- NetObjects Authoring Server will have a longer sales cycle than NetObjects
Fusion due to higher pricing and different marketing and distribution
characteristics;
- there are no product bundles of NetObjects Authoring Server with IBM or
Lotus; and
- we may not be able to recruit and retain the additional sales personnel
needed to effectively market NetObjects Authoring Server.
We depend heavily on bundling arrangements with third parties to sell our
products. We currently do not have any arrangements for bundling NetObjects
Authoring Server. If NetObjects Authoring Server does not meet customer needs or
expectations, for whatever reason, upgrades or enhancements could be costly,
time-consuming or ultimately unsuccessful.
OUR RECENTLY LAUNCHED PROFESSIONAL SERVICES BUSINESS, THROUGH WHICH WE
PROVIDE TRAINING AND OTHER SUPPORT FOR OUR PRODUCTS, MAY NOT GENERATE SUFFICIENT
REVENUES. In October 1998, we formed a new professional services organization
to assist our customers with training, consulting and implementation. We cannot
be certain that our professional services business will generate significant
revenues or achieve profitability. We believe that software license fees growth
will depend on our ability to provide our customers with these services and to
educate third-party resellers about how to use our products. We currently
outsource much of our customers' services needs, but we plan to increase the
number of our services personnel to meet the needs of our customers. Competition
for qualified services personnel is intense, and we cannot be certain that we
can attract or retain a sufficient number of highly qualified services personnel
to meet our business needs.
POSSIBLE MARKET REJECTION OF OUR ONLINE SERVICES COULD IMPEDE MARKET
ACCEPTANCE OF OUR PRODUCTS. Since inception, we have invested, and we continue
to invest, resources to create and enhance our online services, which we believe
support and add to market acceptance of our products. The failure of the market
to accept our online services could cause our stock price to fall.
WE MAY NOT BE ABLE TO EXPAND OUR DISTRIBUTION CHANNELS OR SALES FORCE.
WE NEED TO MAINTAIN OUR THIRD-PARTY DISTRIBUTION CHANNEL BECAUSE OUR DIRECT
SALES TO THIRD PARTIES WOULD BE INSUFFICIENT TO SUPPORT OUR OPERATING
BASE. While we derive some of our revenues from selling our products directly
to third parties, most of our revenues are derived from the sale of our products
through third-party distributors and resellers. There can be no assurance that
third parties will be willing or able to carry our products in the future. If
third parties were to reduce or cease carrying our products, our direct sales to
third parties would be insufficient to support our operating expense base.
WE NEED TO MAINTAIN AND ESTABLISH NEW BUNDLING ARRANGEMENTS BECAUSE WE MAY
BE LESS SUCCESSFUL AT SELLING OUR PRODUCTS ON A STAND-ALONE BASIS. We believe
that products that are not sold in a "suite" containing software products or
components that perform different functions are less likely to be commercially
successful. For example, NetObjects Fusion 4.0 includes software products or
components from different vendors such as Allaire Corporation, IBM, iCat, Lotus
and NetStudio. IBM also bundles our products with some of its software products,
such as the bundling of NetObjects Fusion with WebSphere Studio and NetObjects
Fusion with Lotus Designer for Domino. NetObjects Fusion is also bundled with
Novell's NetWare for Small Business. We cannot be assured of maintaining or
obtaining suitable product or component bundling arrangements with third
parties. Failure to maintain and expand our distribution channels or conclude
suitable software product bundling arrangements could hurt our business, cause
our revenues to decrease and our stock price to fall.
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OUR PRODUCTS MAY CONTAIN DEFECTS THAT COULD SUBJECT US TO LIABILITY IN EXCESS OF
INSURANCE LIMITATIONS.
Our software products are complex and may contain undetected errors or
result in system failures. Despite extensive testing, errors could occur in any
of our current or future product offerings after commencement of commercial
shipments. Any 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. We cannot be certain that the contractual limitations of liability
will be enforceable, or that our insurance coverage will continue to be
available on reasonable terms or will be available in amounts to cover one or
more large claims, or that the insurer will not disclaim coverage as to any
future claim. The successful assertion of one or more large claims that exceed
available insurance coverage or changes in our insurance policies, including
premium increases or the imposition of large deductible or co-insurance
requirements, could cause our revenues to decrease and our stock price to fall.
IF WE FAIL TO RESPOND ADEQUATELY TO RAPID TECHNOLOGICAL CHANGES, OUR EXISTING
PRODUCTS AND SERVICES WILL BECOME OBSOLETE OR UNMARKETABLE.
The market for our products is marked by rapid technological change, which
leads to frequent new product introductions and enhancements, uncertain product
life cycles, changes in customer demands and evolving industry standards. New
web site building products and services based on new technologies or new
industry standards could render our existing products obsolete and unmarketable.
We believe that to succeed, we must enhance our current products and develop new
products on a timely basis to keep pace with technological developments and to
satisfy the increasingly sophisticated requirements of our customers.
OUR PRODUCT AND SOFTWARE DEVELOPMENT EFFORTS ARE INHERENTLY DIFFICULT TO MANAGE
AND KEEP ON SCHEDULE, SO DEVELOPMENT DELAYS MAY INCREASE OUR COSTS.
On occasion, we have experienced development delays and related cost
overruns, which to date have not materially affected our business, and we cannot
be certain that we will not encounter these problems in the future. Any delays
in developing and releasing enhanced or new products could cause our revenues to
decrease. In addition, we cannot be certain that we will successfully develop
and market new products or product enhancements that respond to technological
change, evolving industry standards or customer requirements, or that any
product innovations will achieve the market penetration or price stability
necessary for profitability.
THE LOSS OF OUR KEY PERSONNEL, OR FAILURE TO HIRE ADDITIONAL PERSONNEL, COULD
HARM OUR BUSINESS BECAUSE WE WOULD LOSE EXPERIENCED PERSONNEL AND NEW SKILLED
PERSONNEL ARE IN SHORT SUPPLY AND COMMAND HIGH SALARIES.
We depend on the continued service of our key personnel, and we expect that
we will need to hire additional personnel in all areas. The competition for
personnel throughout our industry is intense, particularly in the San Francisco
Bay Area, where our headquarters are located. We have experienced difficulties
in attracting new personnel, and all of our personnel, including our management,
may terminate their employment at any time for any reason. Currently, we are
dependent upon the services of Samir Arora, our President, Chief Executive
Officer, Chairman of the Board and one of our founders. The loss of Mr. Arora's
services would materially impede the operation and growth of our business at
this time. Michael Shannahan, our former Chief Financial Officer, resigned as of
April 5, 1999. Russell F. Surmanek, Executive Vice President, Finance and
Operations and Chief Financial Officer commenced his employment with us on April
5, 1999. Mr. Surmanek has no prior experience with us. If Mr. Surmanek fails to
quickly become an effective chief financial officer, or if he ceases to remain
in our employ, our business could be harmed and our stock price could fall. We
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do not maintain key person life insurance for any of our personnel. Furthermore,
our failure to attract new personnel or retain and motivate our current
personnel could hurt our business. For a discussion of our employees and
management, see "Business--Employees" and "Management-- Executive Compensation
and Management Changes."
A THIRD PARTY COULD BE PREVENTED FROM ACQUIRING YOUR SHARES OF STOCK AT A
PREMIUM TO THE MARKET PRICE BECAUSE OF OUR ANTI-TAKEOVER PROVISIONS.
IBM will own approximately 54% of our outstanding stock immediately
following the offering, assuming the cashless exercise of all outstanding
warrants by surrender of shares of common stock as payment of the exercise
price, conversion of the convertible notes and no exercise of outstanding
options. That ownership interest and provisions of our restated certificate of
incorporation, bylaws, a voting agreement between us and IBM and Delaware law
could make it more difficult for a third party to acquire us, even if a change
in control would result in the purchase of your shares of common stock at a
premium to the market price. The anti-takeover provisions are further described
in "Certain Transactions" and "Description of Capital Stock."
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OR FACE A
CLAIM OF INTELLECTUAL PROPERTY INFRINGEMENT BY A THIRD PARTY, WE COULD LOSE
OUR INTELLECTUAL PROPERTY RIGHTS OR BE LIABLE FOR SIGNIFICANT DAMAGES.
Trademarks and other proprietary rights are important to our success and our
competitive position. We seek to protect our trademarks and other proprietary
rights, but our actions may be inadequate to prevent misappropriation or
infringement of our technology, trademarks and other proprietary rights or to
prevent others from claiming violations of their trademarks and other
proprietary rights. Although we have obtained federal registration of the
trademark NetObjects Fusion-Registered Trademark-, we know that other businesses
use the word "Fusion" in their marks alone or in combination with other words.
We do not believe that we will be able to prevent others from using the word
"Fusion" for competing goods and services. For example, Allaire markets its
application development and server software for web development, including
applications for e-commerce, under the federally registered trademark
"ColdFusion." Under an agreement with Allaire Corporation, we have agreed that
neither company will identify its products and services with the single word
"Fusion," unless otherwise agreed as in the case of our co-bundled product
"Fusion2Fusion." Business customers may confuse our products and services with
similarly named brands, which could dilute our brand names or limit our ability
to build market share. To license many of our products, we rely in part on
"shrinkwrap" and "clickwrap" licenses that are not signed by the end user and,
therefore may be unenforceable under the laws of certain jurisdictions. In
addition, we may license content from third parties. We could become subject to
infringement actions based upon these third-party licenses, and we could be
required to obtain licenses from other third parties to continue offering our
products.
We cannot be certain that we will be able to avoid significant expenditures
to protect our intellectual property rights, to defend against third-party
infringement or other claims or to license content from third parties alleging
that our products infringe their intellectual property rights. Incurring
significant expenditures to protect our intellectual property rights or to
defend against claims or to license content could decrease our revenues and
cause our stock price to fall. Our intellectual property is further described in
"Business--Intellectual Property."
OUR INTERNATIONAL OPERATIONS ARE NEW AND MAY NOT BE SUCCESSFUL.
International sales represented approximately 15% and 16% of our total
revenues in fiscal 1997 and 1998, respectively. We intend to expand the scope of
our international operations and currently
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have a subsidiary in the United Kingdom. Our continued growth and profitability
will require continued expansion of our international operations, particularly
in Europe, and in Japan, where Mitsubishi Corporation acts as our master
distributor and Lotus is a reseller of NetObjects Fusion.
Our international operations are, and any expanded international operations
will be, subject to a variety of risks associated with conducting business
internationally that could materially adversely affect our business, including
the following:
- difficulties in staffing and managing international operations;
- lower gross margins than in the United States;
- slower adoption of the Internet;
- longer payment cycles;
- fluctuations in currency exchange rates;
- seasonal reductions in business activity during the summer months in
Europe and other parts of the world;
- recessionary environments in foreign economies; and
- increases in tariffs, duties, price controls or other restrictions on
foreign currencies or trade barriers imposed by foreign countries.
Furthermore, the laws of foreign countries may provide little or no
protection of our intellectual property rights.
WE MAY BE UNABLE TO MANAGE OUR RAPID GROWTH.
We have expanded our operations rapidly since inception, and we intend to
continue to expand them in the foreseeable future. This rapid growth places a
significant demand on our managerial and operational resources. To manage growth
effectively, we must:
- implement and improve our operational systems, procedures and controls on
a timely basis;
- expand, train and manage our workforce and, in particular, our sales and
marketing and support organizations in light of our recent decision to
offer online and professional services;
- implement and manage new distribution channels to penetrate different and
broader markets, including the market for intranet software products; and
- manage an increasing number of complex relationships with customers,
co-marketers and other third parties.
We cannot be certain that our systems, procedures or controls will be
adequate to support our current or future operations or that our management will
be able to manage the expansion and still achieve the rapid execution necessary
to exploit fully the market for our products and services. Failure to manage our
growth effectively could harm our business.
IF INTERNET AND INTRANET USAGE DOES NOT CONTINUE TO GROW, WE WILL NOT BE
SUCCESSFUL.
Sales of our products and services depend in large part on the emergence of
the Internet as a viable commercial marketplace with a strong and reliable
infrastructure and on the growth of corporate intranets. Critical issues
concerning use of the Internet and intranets, including security, reliability,
cost, ease of use and quality of service, remain unresolved and may inhibit the
growth of, and the degree to which business is conducted over, the Internet and
intranets. Failure of the Internet
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and intranets to develop into viable commercial mediums would harm our business
and cause our revenues to decrease and our stock price to fall.
YEAR 2000 PROBLEMS MAY DISRUPT OUR INTERNAL OPERATIONS.
We have made a preliminary assessment of our Year 2000 readiness. We are
also in the process of contacting our third-party vendors, licensors and
providers of software, hardware and services regarding their Year 2000
readiness. Following this testing and after contacting these vendors and
licensors, we will be better able to make a complete evaluation of our Year 2000
readiness to determine what costs will be necessary to be Year 2000 ready, and
to determine whether contingency plans need to be developed. Our inability to
correct a significant Year 2000 problem, if one exists, could result in an
interruption in, or a failure of, certain of our normal business activities and
operations. Furthermore, because NetObjects Fusion and NetObjects Authoring
Server may interact with external databases for purposes of data storage, the
ability of applications integrated with a web site built using NetObjects Fusion
or NetObjects Authoring Server to comply with Year 2000 requirements is largely
dependent on whether the databases underlying the application are Year 2000
ready. If NetObjects Fusion or NetObjects Authoring Server is connected to a
database that is not Year 2000 ready, a web application created or developed for
a web site using NetObjects Fusion or NetObjects Authoring Server could work
incorrectly and could result in unanticipated expenses to address problems or
claims raised by customers that we cannot presently foresee. Any significant
Year 2000 problem in our internal systems or in our products could require us to
incur significant unanticipated expenses to remedy these problems and could
divert management's time and attention, either of which could harm our business
or increase our losses, and cause our stock price to fall.
DUE TO OUR SMALL SIZE, LIMITED OPERATIONS AND THE DIFFICULTY OF HIRING PERSONNEL
IN OUR INDUSTRY, ANY FUTURE ACQUISITIONS COULD STRAIN OUR MANAGERIAL,
OPERATIONAL AND FINANCIAL RESOURCES.
In the future we may make acquisitions of, or large investments in,
businesses that offer products, services and technologies that we believe would
help us better provide e-business web site and intranet site building software
and services to businesses. Although historically we have not made acquisitions
of, or investments in, other companies, this may become an important part of our
strategy. Any future acquisitions or investments would present risks such as
difficulty in combining the technology, operations or workforce of the acquired
business with our own, disruption of our ongoing businesses and difficulty in
realizing the anticipated financial or strategic benefits of the transaction.
To make these acquisitions or large investments we might use cash, common
stock or a combination of cash and common stock. If we use common stock, these
acquisitions could further dilute existing stockholders. Amortization of
goodwill or other intangible assets resulting from acquisitions could materially
impair our operating results and financial condition. Furthermore, there can be
no assurance that we would be able to obtain acquisition financing, or that any
acquisition, if consummated, would be smoothly integrated into our business. If
we make acquisitions or large investments and are unable to surmount these
risks, our business could be harmed, our revenues could decrease and our stock
price could fall.
WE MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATION AND LEGAL
UNCERTAINTIES IN AREAS INCLUDING NETWORK SECURITY, ENCRYPTION AND PRIVACY,
AMONG OTHERS, BECAUSE WE CONDUCT ELECTRONIC COMMERCE AND PROVIDE INFORMATION
AND SERVICES OVER THE INTERNET.
We are not currently subject to direct regulation by any governmental
agency, other than laws and regulations generally applicable to businesses,
although specific U.S. export controls and import
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controls of other countries, including controls on the use of encryption
technologies, may apply to our products. Due to the increasing popularity and
use of the Internet, it is possible that a number of laws and regulations may be
adopted in the United States and abroad with particular applicability to the
Internet. It is possible that governments will enact legislation that may apply
to us in areas such as network security, encryption, the use of key escrow, data
and privacy protection, electronic authentication or "digital" signatures,
illegal and harmful content, access charges and retransmission activities.
Moreover, the applicability to the Internet of existing laws governing issues
such as property ownership, content, taxation, defamation and personal privacy
is uncertain. Any new legislation or regulation or governmental enforcement of
existing regulations may limit the growth of the Internet, increase our cost of
doing business or increase our legal exposure, any of which could cause our
revenues to decrease and our stock price to fall.
A GOVERNMENTAL BODY COULD IMPOSE SALES AND OTHER TAXES ON THE SALE OF OUR
PRODUCTS, LICENSE OF OUR TECHNOLOGY OR PROVISION OF SERVICES, WHICH WOULD HARM
OUR FINANCIAL CONDITION.
We currently do not collect sales or similar taxes with respect to the sale
of products, license of technology or provision of services in states and
countries other than states in which we have offices. In October 1998, the
Internet Tax Freedom Act, or ITFA, was signed into law. Among other things, the
ITFA imposes a three-year moratorium on discriminatory taxes on e-commerce.
Nonetheless, foreign countries, or, following the moratorium, one or more
states, may seek to impose sales or other tax obligations on companies that
engage in online commerce within their jurisdictions. A successful assertion by
one or more states or any foreign country that we should collect sales or other
taxes on the sale of products, license of technology or provision of services or
remit payment of sales or other taxes for prior periods, could hurt our
business.
WE MAY SPEND A SUBSTANTIAL PORTION OF THE NET PROCEEDS IN WAYS WITH WHICH YOU
MAY NOT AGREE.
We have not designated any specific use for a significant amount of net
proceeds from the sale of the common stock offered under this prospectus, other
than the repayment of debt to IBM Credit Corp. and IBM. We intend to use the
remaining net proceeds primarily for general corporate purposes, including
working capital to fund anticipated operating losses and capital expenditures.
Accordingly, management will have significant flexibility in applying the
remaining net proceeds of the offering. The failure of management to apply the
remaining net proceeds effectively could cause our revenues to decrease and our
stock price to fall.
THE FUTURE SALE OF COMMON STOCK MAY NEGATIVELY AFFECT OUR STOCK PRICE.
If our stockholders sell substantial amounts of our stock, including shares
issued upon the exercise of outstanding options and warrants, in the public
market following the offering, then the market price of our stock could fall.
These sales also might make it more difficult for us to sell equity securities
in the future at a time and price that we deem appropriate. After the offering,
26,112,862 shares of our stock will be outstanding, assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options or
warrants. Of those shares, the 6,000,000 shares sold in the offering will be
freely tradeable except for any shares purchased by our "affiliates," as defined
in Rule 144 under the Securities Act. The remaining 20,112,862 shares are
"restricted securities," as that term is defined in Rule 144, and may be sold in
the public market only if registered or if they qualify for an exemption from
registration under Rule 144 or Rule 701 under the Securities Act. All officers,
directors and a substantial majority of our stockholders have agreed not to sell
any shares of common stock, or any securities convertible into or exercisable or
exchangeable for common stock, for 180 days after the offering without the prior
written consent of BT Alex. Brown. BT Alex. Brown may, in its sole discretion,
release all or any portion of the shares
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subject to lock-up agreements. A more detailed description of shares that may be
sold following the offering is contained in "Shares Eligible for Future Sale."
INVESTORS IN THE OFFERING WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION.
Investors purchasing shares in the offering will incur immediate and
substantial dilution in net tangible book value per share. To the extent
outstanding options and warrants to purchase common stock are exercised, there
will be further dilution.
FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements." These forward-looking
statements include, without limitation, statements about the market opportunity
for web site building software and services, our strategy, competition and
expected expense levels, and the adequacy of our available cash resources. Our
actual results could differ materially from those expressed or implied by these
forward-looking statements as a result of various factors, including the risk
factors described above and elsewhere in this prospectus. We undertake no
obligation to update publicly any forward-looking statements for any reason,
even if new information becomes available or other events occur in the future.
USE OF PROCEEDS
The net proceeds to our Company from the sale of the 6,000,000 shares of
common stock, assuming an initial public offering price of $12.00 per share,
less underwriting discount and estimated offering expenses, are estimated to be
$65.5 million ($75.5 million if the underwriters' over-allotment option is
exercised in full).
The principal purposes of the offering are to repay $19 million of secured
debt principal to IBM Credit Corp. that will become due and payable upon the
closing of the offering, to repay debt of approximately $5.4 million under notes
that we owe to IBM, to increase our working capital, to create a public market
for our common stock, to increase our visibility in the marketplace and to
facilitate our future access to public equity markets. The net proceeds that
will be left after repaying the debt owed to IBM are $41.0 million. The debt to
IBM Credit Corp. has an interest rate of LIBOR plus 1.5%, was incurred to fund
working capital, and matures on the earlier of the closing of the offering,
termination upon 30 days' advance notice from us to IBM Credit Corp. and
December 23, 1999. The debt under the notes has an interest rate of 10% and
comes due upon the closing of the offering and was incurred to fund working
capital. We have no specific plans for the remaining net proceeds, which we
intend to use primarily for general corporate purposes, including working
capital to fund anticipated operating losses and capital expenditures. We have
no definite capital expenditure plans. We may, when and if the opportunity
arises, use an unspecified portion of the net proceeds to acquire or invest in
complementary businesses, products and technologies. We have no present
understandings, commitments or agreements with respect to any material
acquisition or investment in third parties. Pending use of the net proceeds for
the above purposes, we intend to invest such funds in interest-bearing,
investment-grade securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our stock. We currently
anticipate that we will retain all of our future earnings, if any, for use in
the expansion and operations of our business and, therefore, do not anticipate
paying any cash dividends in the foreseeable future.
18
<PAGE>
CAPITALIZATION
The following table sets forth our cash, short-term borrowings and
capitalization
- at March 31, 1999;
- pro forma to reflect
-- the cash payment from IBM of approximately $2.0 million in April 1999
for the purchase of promissory notes;
-- the conversion of all outstanding shares of preferred stock into
common stock, including 2,118,789 shares of common stock issuable on
automatic conversion of $10,910,000, net of a discount of $799,000, in
convertible notes and $417,060 of related interest accrued in the six
months ended March 31, 1999, respectively, at a conversion price of
$6.68 per share, and as adjusted to reflect a change in the conversion
ratio to approximately 1.25 shares of common stock for each share of
Series E-2 preferred stock;
-- issuance of 3,110,924 shares of common stock, reflecting issuance of
1,598,277, 3,482,838, 215,050 and 916,668 shares of common stock
through a "cashless exercise" of Series C, Series E, Series E-2 and
Series F warrants, respectively, in which shares of common stock are
surrendered in payment of the exercise price to purchase convertible
preferred stock at a weighted average exercise price of $6.04 per
share, assuming a fair market value per share of common stock in the
offering of $12.00, and as adjusted to reflect a conversion of
approximately 1.25 shares of common stock for each share of Series E-2
preferred stock;
-- accretion of discount on short term borrowings of $256,000;
- as adjusted to reflect
-- our sale of 6,000,000 shares to be sold in the offering at the initial
public offering price of $12.00 per share, less the underwriters'
discount and commissions and estimated expenses of the offering; and
-- repayment of short-term borrowings.
The table excludes (a) 2,900,087 shares of common stock issuable at a
weighted average exercise price of $3.13 per share upon exercise of stock
options outstanding at March 31, 1999; (b) 266,615 shares of common stock
reserved for future issuance under our stock option plan; and (c) 300,000 shares
of common stock reserved for issuance under our 1999 Employee Stock Purchase
Plan.
The table assumes no exercise of the underwriters' over-allotment option.
Exercise of the over-allotment option in full would (a) reduce the proportion of
shares held by existing stockholders to 74.5% of the total number of shares
outstanding after the offering; and (b) increase the number of shares purchased
by investors in the offering to 6,900,000 shares, or 25.5% of the resulting
total number of shares.
19
<PAGE>
The information set forth below is unaudited and should be read in
conjunction with our consolidated financial statements and notes to consolidated
financial statements.
<TABLE>
<CAPTION>
MARCH 31, 1999
-------------------------------------------------
PRO FORMA PRO AS
ACTUAL ADJUSTMENTS FORMA ADJUSTED
-------- ------------------ -------- --------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Cash........................................................ $ 1,816 $ 2,000 $ 3,816 $ 44,867
-------- -------- -------- --------
-------- -------- -------- --------
Short-term borrowings from IBM Credit Corp.................. $ 22,165 $ 2,256 $ 24,421 --
-------- -------- -------- --------
-------- -------- -------- --------
Other accrued liabilities................................... 1,778 417 1,361 1,361
-------- -------- -------- --------
-------- -------- -------- --------
Capital lease obligations, less current portion............. 212 -- 212 212
Convertible notes from IBM and related party................ 10,111 (10,111) -- --
-------- -------- -------- --------
Total long-term obligations............................. 10,323 (10,111) 212 212
-------- -------- -------- --------
Preferred stock, $0.01 par value;
12,700,399 issued and outstanding, actual; none issued and
outstanding, pro forma; none issued and outstanding, as
adjusted................................................ 121 (121) -- --
Common stock, $0.01 par value;
2,182,750 shares issued and outstanding, actual;
20,112,862 shares issued and outstanding, pro forma;
26,112,862 shares issued and outstanding, as adjusted... 21 180 201 261
Additional paid-in capital.................................. 34,252 10,469 44,721 110,133
Deferred stock-based compensation........................... (1,838) -- (1,838) (1,838)
Stockholders' notes receivable.............................. (23) -- (23) (23)
Accumulated other comprehensive losses...................... (3) -- (3) (3)
Accumulated deficit......................................... (63,568) (256) (63,824) (63,824)
-------- -------- -------- --------
Total stockholders' equity (deficit).................... (31,038) 10,272 (20,766) 44,706
-------- -------- -------- --------
Total capitalization.................................... $(20,715) $ 161 $(20,554) $ 44,918
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
20
<PAGE>
DILUTION
Our pro forma net tangible book deficit at March 31, 1999 was $20,766,000,
or ($1.03) per share, as adjusted to give effect to
- the pro forma capitalization;
- our sale of 6,000,000 shares to be sold in the offering at the initial
public offering price of $12.00 per share, less the underwriters' discount
and commissions and estimated expenses of the offering; and
- repayment of short-term borrowings.
Pro forma net tangible book deficit per share represents the amount of our
total pro forma tangible assets less pro forma total liabilities divided by the
aggregate pro forma number of shares of common stock outstanding. After giving
effect to the application of the estimated net proceeds of the offering, which
reflect an estimate of underwriting discounts and commissions and an estimate of
offering expenses from the sale of 6,000,000 shares of common stock to be sold
in the offering at the initial public offering price of $12.00 per share, our
adjusted pro forma net tangible book value at March 31, 1999 would have been
approximately $45 million or $1.71 per share of common stock. This represents an
immediate increase in the pro forma net tangible total book value of $2.74 per
share of common stock to existing stockholders and an immediate dilution of
$10.29 per share to new investors. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share........................... $ 12.00
---------
Pro forma net tangible book deficit per share at March 31, 1999......... $ (1.03)
Increase in pro forma net tangible book value per share attributable to
new investors......................................................... 2.74
---------
Adjusted pro forma net tangible book value per share after the offering... 1.71
---------
Dilution per share to new investors....................................... $ 10.29
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis at March 31, 1999,
after giving effect to the offering, the differences between existing
stockholders and investors in the offering with respect to the number of shares
of common stock purchased from us, the total consideration paid and the average
price paid per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------------- --------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------- ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders......................... 20,112,862 77.0% $ 20,455,000 22.1% $ 1.02
New investors................................. 6,000,000 23.0 72,000,000 77.9 $ 12.00
------------- ----- -------------- -----
Total..................................... 26,112,862 100.0% $ 92,455,000 100.0%
------------- ----- -------------- -----
------------- ----- -------------- -----
</TABLE>
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data presented below are
derived from our consolidated financial statements. The financial statements for
the period from November 21, 1995 (inception) to September 30, 1996, and as of
and for the fiscal years ended September 30, 1997 and 1998, have been audited by
KPMG LLP, independent auditors, and are included elsewhere in this prospectus.
The balance sheet data as of September 30, 1996 is derived from audited
consolidated financial statements of NetObjects that are not included in this
prospectus. The selected historical consolidated financial data as of March 31,
1999 and for the six months ended March 31, 1998 and 1999 have been derived from
unaudited consolidated financial statements included elsewhere in this
prospectus, that include, in the opinion of management, all adjustments,
consisting only of normal recurring adjustments, that we consider necessary for
a fair presentation of our financial position and results of operations for
those periods. The selected consolidated financial data set forth below is
qualified in its entirety by, and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," our consolidated financial statements, the related notes and the
independent auditor's report, which contains an explanatory paragraph that
states that our recurring losses from operations and net capital deficiency
raise substantial doubt about our ability to continue as a going concern,
included elsewhere in this prospectus. The consolidated financial statements and
the selected consolidated financial data do not include any adjustments that
might result from the outcome of that uncertainty. The operating results for the
periods presented are not necessarily indicative of the results to be expected
for the full fiscal year or any other period:
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 21, YEAR ENDED SIX MONTHS ENDED
1995 (INCEPTION) SEPTEMBER 30, MARCH 31,
TO SEPTEMBER 30, -------------------- --------------------
1996 1997 1998 1998 1999
--------------------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software license fees....................... $ -- $ 7,392 $ 9,703 $ 4,571 $ 5,545
Service revenues............................ -- -- -- -- 630
Software license fees from IBM.............. -- 175 2,700 1,215 2,335
Service revenues from IBM................... -- -- 2,867 206 2,733
------- --------- --------- --------- ---------
Total revenues............................ -- 7,567 15,270 5,992 11,243
------- --------- --------- --------- ---------
Cost of revenues:
Software license fees....................... -- 772 2,531 982 948
Service revenues............................ -- -- -- -- 724
IBM service revenues........................ -- -- 2,562 184 2,092
------- --------- --------- --------- ---------
Total cost of revenues.................... -- 772 5,093 1,166 3,764
------- --------- --------- --------- ---------
Gross profit.............................. -- 6,795 10,177 4,826 7,479
--------- --------- --------- ---------
Operating expenses:
Research and development.................... 2,765 8,436 10,231 5,855 3,985
Sales and marketing......................... 2,998 12,161 17,114 8,413 9,026
General and administrative.................. 978 3,762 3,575 1,746 1,966
Stock-based compensation.................... -- -- 227 53 170
------- --------- --------- --------- ---------
Total operating expenses.................. 6,741 24,359 31,147 16,067 15,147
------- --------- --------- --------- ---------
Operating loss............................ (6,741) (17,564) (20,970) (11,241) (7,668)
Interest income (expense)..................... 46 (234) (1,194) (441) (1,723)
Nonrecurring interest charge on beneficial
conversion feature of convertible debt
(1)......................................... -- -- -- -- (7,457)
------- --------- --------- --------- ---------
Loss before income taxes.................. (6,695) (17,798) (22,164) (11,682) (16,848)
Income taxes.................................. -- 1 60 (37) 2
------- --------- --------- --------- ---------
Net loss...................................... $ (6,695) $ (17,799) $ (22,224) $ (11,719) $ (16,850)
------- --------- --------- --------- ---------
------- --------- --------- --------- ---------
Basic and diluted net loss per share
applicable to common stockholders (2)....... $ (4.10) $ (10.45) $ (12.26) $ (6.63) $ (8.33)
------- --------- --------- --------- ---------
------- --------- --------- --------- ---------
Shares used to compute basic and diluted net
loss per share applicable to common
stockholders (2)............................ 1,634 1,703 1,812 1,768 2,023
------- --------- --------- --------- ---------
------- --------- --------- --------- ---------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------
1996 1997 1998 MARCH 31, 1999
--------- --------- --------- ---------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash................................................................. $ 1,090 $ 303 $ 459 $ 1,816
Working capital (deficit)............................................ (1,749) (10,116) (30,229) (22,962)
Short-term borrowings from IBM and IBM Credit Corp................... -- -- 20,666 22,165
Long-term obligations, less current portion.......................... 173 633 336 10,111
Total assets......................................................... 2,129 4,605 5,145 9,158
Accumulated deficit.................................................. (6,695) (24,494) (46,718) (63,568)
Stockholders' deficit................................................ (1,357) (8,913) (28,925) (31,038)
</TABLE>
- ------------------------
(1) Nonrecurring non-cash interest charge based on the difference between the
price per share for Series F-2 preferred stock issued to Novell, Inc. and MC
Silicon Valley, Inc. and for Series E-2 preferred stock issuable to IBM and
another investor upon conversion of convertible notes in accordance with
EITF Topic D-60. See note 8 of notes to consolidated financial statements.
Under the terms of an April 1997 contract with IBM, we agreed that any funds
provided by IBM for our operations during 1997 and 1998 through the sale of
equity securities to IBM would have a per share price not higher than $6.68.
Each share of Series E-2 preferred stock automatically converts into common
stock upon the effectiveness of the offering and due to an adjustment
triggered by our failure to complete this or a similar offering or repay the
convertible notes prior to specific dates, the earliest of which was April
8, 1999, the conversion ratio has increased from 1:1 to 1.25:1. In October
and November 1998, we issued preferred stock to Novell, Inc. and MC Silicon
Valley, Inc. at a price per share of $9.00. See "Certain Transactions--IBM
Relationship."
(2) Does not include the effect of outstanding shares of convertible preferred
stock, shares from the assumed conversion of convertible notes and shares
issuable upon the exercise of stock options and warrants that are considered
anti-dilutive pursuant to SFAS No. 128. For an explanation of basic and
diluted net loss per share applicable to common stockholders and the number
of shares used to compute basic and diluted net loss per share applicable to
common stockholders, see note 1 of notes to consolidated financial
statements.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We provide software and solutions that enable small businesses and large
enterprises to build, deploy and maintain Internet and intranet web sites and
applications. We pioneered the web site building products category with the
introduction of NetObjects Fusion in October 1996, and we have released several
other award-winning software products, including NetObjects Authoring Server, a
successor to NetObjects TeamFusion. In October 1998, we began offering online
and professional services to serve the site building and maintenance needs of
our customers. We were incorporated in November 1995 and first recognized
revenues in October 1996, when we provided our first commercial version of
NetObjects Fusion.
We recognize revenues from software license fees upon delivery of our
software products to our customers, net of allowances for estimated returns and
price protection, as long as we have no significant obligations remaining and we
believe that collection of the resulting receivable is probable. Software
license fees earned from products bundled with OEM resellers, including IBM, are
generally recognized upon the OEM resellers shipping the bundled products to
their customers. We recognize service revenues from IBM in connection with the
integration of our software with IBM's WebSphere software products using the
percentage-of-completion method. We are deferring the recognition of profit on
this arrangement until the amount of profit can be reasonably estimated. We
defer recognition of maintenance revenues, paid primarily for support and
upgrades, upon receipt of payment and recognize the related revenues ratably
over the term of the contract, which typically is 12 months. These payments
generally are made in advance and are nonrefundable. For a description of
reserve policy risks, see "Risk Factors--We allow product returns and provide
price protection to some purchasers and resellers of our products, and our
allowances for product returns may be inadequate."
Through September 30, 1998, we recognized revenues in accordance with
American Institute of Certified Public Accountants (AICPA) Statement of Position
(SOP) 91-1, SOFTWARE REVENUE RECOGNITION. On October 1, 1998, we adopted the
provisions of SOP 97-2 and SOP 98-9, which supersede SOP 91-1. See note 1 of
notes to consolidated financial statements.
We earn revenues from software license fees primarily through indirect sales
of our products by resellers, through direct sales of our products by NetObjects
salespersons and through important strategic relationships such as our
relationship with IBM. Sales of our products by resellers include sales by
distributors, direct and original equipment manufacturer resellers, value-added
resellers and online sales. During fiscal year 1997, our total revenues from
software license fees rose from $0 to $7.6 million, and again grew significantly
in fiscal year 1998, to $12.4 million, as a result of our introduction of new
versions of our main product NetObjects Fusion and, secondarily, the release of
other related products. In fiscal year 1998, our total revenues from IBM grew to
approximately $5.6 million from approximately $175,000 in fiscal year 1997. Our
total revenues from IBM in fiscal year 1998 and for the six months ended March
31, 1999 included revenues of $2.9 million and $2.7 million, respectively, for
our charges for services under the WebSphere agreement.
We initiated relationships with our primary distributors in North America,
Europe and Asia Pacific in fiscal year 1997. Revenues generated by sales of our
products by resellers accounted for substantially all of our revenues from
sources other than IBM for fiscal years 1997 and 1998. We anticipate that
revenues derived from sales of our products by resellers will decrease as a
percentage of our total revenues. We anticipate that revenues derived from our
direct sales will continue to increase as a percentage of our total revenues. We
derive our non-North American revenues through sales of our products by
resellers and distributors.
24
<PAGE>
In April 1997, when IBM acquired approximately 80% of our outstanding stock
from existing investors, we agreed to grant IBM the right to market and sell
some of our products to its customers for 10 years under an agreement that
allowed us to receive nonrefundable cash prepayments totaling $10.5 million
between April 1997 and December 31, 1998. We requested and received the full
amount of these prepayments between April and December 1997. These prepayments
have been reflected as deferred revenues from IBM on our balance sheet until
recognized. In the three months ended December 31, 1997, IBM began reselling our
products, and in the three months ended March 31, 1998, we began providing
services under the WebSphere agreement that ended on February 28, 1999. As IBM
reports sales of our products, and as we have performed services for IBM, we
recognize revenues and the deferred revenue from IBM declines by the same
amount. At March 31, 1999, approximately $53,000 of the prepayments remained as
deferred revenue from IBM. As a result, we will not receive cash on sales by IBM
of our products or for services that we provide to IBM until the prepayment
balance has been reduced to zero. Our dependence on IBM has risks that are
discussed in "Risk Factors--Our relationship with IBM will change substantially
after the offering, which could harm our business and could cause our revenues
in fiscal year 1999 to fall below those of fiscal year 1998. While IBM will
still continue to control us, it has no further obligations to provide
financing, key contracts with IBM have expired, and IBM is expressly allowed to
compete with us or act in a manner that is disadvantageous to us."
From our inception through the end of fiscal year 1996, our operating
activities related primarily to recruiting personnel, raising capital,
purchasing operating assets, conducting research and development, building the
NetObjects brand and establishing the market for our products. During fiscal
year 1997, we continued to invest significantly in research and development,
marketing, building our domestic and international sales channels and general
and administrative infrastructure. During both fiscal years we engaged in many
activities designed to gain corporate brand identity, seed the market with our
product, establish the site building product category and educate the market
about our products and services. In addition, we invested in a broad range of
marketing activities such as advertising, tradeshows, direct mail and public
relations. We also entered into many co-marketing and distribution arrangements
with well-known companies such as AT&T, Apple Computer, Inc., Compaq Computer,
Inc., Microsoft, Netscape Communications Corp. and PeopleSoft that allowed us to
identify our NetObjects Fusion brand with their brands. Most of these
arrangements have not generated revenues for us, and their principal benefit has
been to help us achieve substantial brand recognition in a relatively short
period. The costs of these activities and arrangements, which were not offset by
revenues, have contributed substantially to our significant losses since
inception, and as of March 31, 1999, we had an accumulated deficit of
approximately $63.6 million.
We believe that our success will depend largely on our ability to extend our
technological leadership and to continue to build our brand position.
Accordingly, we intend to continue to invest heavily in research and development
and sales and marketing. As a result, we expect to continue to incur substantial
operating losses for the foreseeable future.
KPMG LLP, in their independent auditors' report, have expressed "substantial
doubt" as to our ability to continue as a going concern based on significant
operating losses since inception and significant debt and capital deficit as of
September 30, 1998. The consolidated financial statements do not include any
adjustments that might result from the outcome of that uncertainty. Our ability
to continue as a going concern is dependent upon the net proceeds from this
offering. The net proceeds from the offering are estimated to be approximately
$41.0 million, after the repayment of a $19.0 million secured credit facility
with IBM Credit Corp. and approximately $5.4 million that we expect to owe to
IBM under notes outstanding as of the closing date of the offering, and after
deducting underwriting discounts and commissions of approximately $5.0 million
and estimated expenses of approximately $1.5 million. The credit facility will
terminate upon repayment.
25
<PAGE>
Our prospects must be considered in light of our limited operating history
and the risks, expenses and difficulties frequently encountered by companies in
early stages of development, particularly companies in rapidly evolving markets
such as the market for web site building software and services. To achieve and
sustain profitability, we must, among other things:
- increase substantially our revenues from our two principal products,
NetObjects Fusion, which in fiscal year 1998 accounted for most of our
total revenues, and NetObjects Authoring Server, and our professional
services, which have generated insubstantial revenues to date;
- continue to develop successfully new versions of our products, such as
NetObjects Fusion 4.0, which was released in December 1998;
- continue to be a leading provider of e-business software for building web
sites and corporate intranet sites;
- respond quickly and effectively to competitive, market and technological
developments;
- expand substantially our sales and marketing operations;
- develop our professional services business, which we launched in October
1998;
- control expenses;
- continue to attract, train and retain qualified personnel in the
competitive software industry; and
- maintain existing relationships and establish new relationships with
leading Internet hardware and software companies.
There can be no assurance that we will achieve or sustain profitability, as
more fully discussed in "Risk Factors--We have a history of substantial losses
and expect substantial losses in the future," "--Our auditors have substantial
doubt about our viability as a business," and "--Our ability to continue as a
going concern is dependent on the net proceeds of this offering."
26
<PAGE>
The following table sets forth financial data for the periods indicated as a
percentage of total revenues:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
SEPTEMBER 30, ENDED
-------------------- MARCH 31,
1997 1998 --------------------
--------- --------- 1998 1999
--------- ---------
% OF % OF
SALES SALES
<S> <C> <C> <C> <C>
Revenues:
Software license fees.................................... 97.7% 63.5% 75.2% 49.3%
Service revenues......................................... -- -- 1.1 5.6
Software license fees from IBM........................... 2.3 17.7 23.7 20.8
Service revenues from IBM................................ -- 18.8 -- 24.3
--------- --------- --------- ---------
Total revenues......................................... 100.0 100.0 100.0 100.0
--------- --------- --------- ---------
Cost of revenues:
Software license fees.................................... 10.2 16.6 16.4 8.4
Service revenues......................................... -- -- -- 6.4
Service revenues from IBM................................ -- 16.8 3.1 18.7
--------- --------- --------- ---------
Total cost of revenues................................. 10.2 33.4 19.5 33.5
--------- --------- --------- ---------
Gross profit............................................... 89.8 66.6 80.5 66.5
--------- --------- --------- ---------
Operating expenses:
Research and development................................. 111.5 67.0 97.7 35.4
Sales and marketing...................................... 160.7 112.0 140.4 80.3
General and administrative............................... 49.7 23.4 29.1 17.5
Stock-based compensation................................. -- 1.5 0.9 1.5
--------- --------- --------- ---------
Total operating expenses............................... 321.9 203.9 268.1 134.7
--------- --------- --------- ---------
Operating loss............................................. (232.1) (137.3) (187.6) (68.2)
Interest expense......................................... (3.1) (7.8) 7.4 15.3
Nonrecurring interest charge on beneficial conversion
feature of convertible debt............................ -- -- -- 66.3
Income taxes............................................. -- 0.4 0.5 0.1
--------- --------- --------- ---------
Net loss................................................... (235.2)% (145.5)% (195.5)% (149.9)%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1998 AND 1999
REVENUES. Total revenues increased from approximately $6.0 million to
approximately $11.2 million for the six months ended March 31, 1998 and 1999,
respectively, primarily because of growing market acceptance of our products
along with approximately $2.5 million attributed to our performance of WebSphere
services and approximately $600,000 related to the introduction of our services
group.
For the six months ended March 31, 1998 and 1999, non-North American
revenues were $1.0 million and $1.8 million or 18% and 17% of total revenues,
respectively. The increased amount in non-North American revenues was due to the
expansion of our indirect sales channel in Europe, services revenues for the
first time and OEM arrangements with Internet service providers in Europe in
December 1998. We sell our products in United States dollars in international
markets. We
27
<PAGE>
invoice professional services in local currency. We do not expect international
sales as a percentage of total revenues to increase significantly during the
balance of fiscal year 1999.
Revenues from IBM increased from approximately 24% to 45% of our total
revenues for the six months ended March 31, 1998 and 1999, respectively. Our
agreement with IBM for WebSphere services ended on February 28, 1999. Software
license fees for the six months ended March 31, 1999 included approximately $2.3
million of royalties from Lotus under our contract for bundling NetObjects
Fusion with Designer for Domino 4.0 that expires in June 1999. We recognized
$500,000 of these royalties in the second fiscal quarter as an adjustment to
reflect our minimum estimated share of Lotus site license fees for the bundle.
Lotus had not previously reported these fees to us during the contract term,
which commenced in February 1998.
We believe that all of the IBM deferred revenues, which were approximately
$53,000 at March 31, 1999, will have been recognized as revenues by June 30,
1999. We have no commitments from IBM to pay us software license fees or
services revenues after June 1999. Our software license revenues from IBM in the
remaining quarters of fiscal year 1999 are likely to decline, perhaps
substantially, from the level in the first quarter of fiscal year 1999. We are
not expecting to receive any services revenues from IBM going forward. For a
discussion of the risks associated with the loss of IBM revenues and our ability
to replace those revenues, see "Risk Factors--Our relationship with IBM will
change substantially after the offering, which could harm our business and could
cause our revenues in fiscal year 1999 to fall below those of fiscal year 1998."
COST OF REVENUES. Our cost of software license fees includes the cost of
product media, duplication, manuals, packaging materials, shipping, technology
licensed to us and fees paid to third-party vendors for order fulfillment, and
was approximately $982,000 and $948,000 for the six months ended March 31, 1998
and 1999, respectively, which represented approximately 21% and 17%,
respectively, of non-IBM software license fees. The decrease in percentage terms
arose primarily from economies of scale efficiencies and improved freight
contract terms. Our cost of services consists of personnel costs and related
overhead as well as fees paid to third parties who assist us in providing
services to our customers. Our cost of IBM services revenues consists solely of
personnel costs and related overhead for the services provided.
Gross margins may be affected by the mix of distribution channels we use,
the mix of products sold, the mix of product revenues versus services revenues
and the mix of international versus domestic revenues. We typically realize
higher gross margins on direct channel sales relative to indirect channels and
higher gross margins on domestic indirect channel sales relative to
international indirect sales. If sales through indirect channels increase as a
percentage of total revenues, or if, as we anticipate, services revenues
increase as a percentage of total revenues, our gross margins will be adversely
affected.
RESEARCH AND DEVELOPMENT. Our research and development expenses consist
primarily of salaries and consulting fees to support product development. To
date, we have expensed all research and development costs as we have incurred
them because we generally establish the technological feasibility of our
products upon completion of a working model. We have not yet incurred
significant costs between the date of completion of a working model and the date
of general release of a product. We believe that continued investment in
research and development is critical to attaining our strategic objectives and,
as a result, we expect research and development expenses to continue to
increase. Research and development expenses were approximately $5.9 million and
$4.0 million for the six months ended March 31, 1998 and 1999, respectively, and
98% and 35%, respectively, of total revenues. The decrease in total dollars and
in percentage terms in the six months ended March 31, 1999 occurred primarily
because a number of our development engineers and part-time consultants were
providing services under our WebSphere contract with IBM. The associated
expenses are reflected in our cost of IBM revenues from services instead.
28
<PAGE>
SALES AND MARKETING. Our sales and marketing expenses consist primarily of
salaries, commissions, consulting fees, tradeshow expenses, advertising,
marketing materials and the cost of customer service operations. We intend to
continue to increase staff in our enterprise sales organization and increase our
aggressive brand building and marketing campaign and, therefore, expect sales
and marketing expenses to continue to increase. Sales and marketing expenses
were approximately $8.4 million and $9.0 million for the six months ended March
31, 1998 and 1999, respectively, representing 140% and 80%, respectively, of
total revenues. The increased amount resulted primarily from the growth in our
sales personnel, increased sales commissions and costs related to the continued
development and implementation of our branding and marketing campaigns. As our
total revenues grew at a faster rate than expenses, our sales and marketing
expenses decreased as a percentage of total revenues for the six months ended
March 31, 1999.
GENERAL AND ADMINISTRATIVE. Our general and administrative expenses consist
primarily of salaries and fees for professional services. We expect general and
administrative expenses to increase as we expand our staff, incur additional
costs related to growth of our business and become a publicly traded company.
General and administrative expenses were approximately $1.7 million and $2.0
million for the six months ended March 31, 1998 and 1999, respectively,
representing approximately 29% and 17%, respectively, of total revenues. The
increased amount resulted primarily from additional personnel and facility
expenses related to our growth, while the decrease in percentage terms occurred
because total revenues grew at a faster rate than general and administrative
expenses.
STOCK-BASED COMPENSATION. Beginning with the three months ended March 31,
1998 we have been amortizing aggregate stock-based compensation of $768,000
attributable to the grant of stock options over the 48-month period in which the
options vest in a manner consistent with Financial Accounting Standards Board
(FASB) Interpretation No. 28. For the six months ending March 31, 1999 we
recorded approximately $1.5 million in additional deferred stock-based
compensation that we will amortize over the vesting period in accordance with
FASB Interpretation No. 28. Of the total deferred stock-based compensation
expense, approximately $170,000 was amortized during the six months ended March
31, 1999.
INTEREST EXPENSE, NET. Our interest expense consists primarily of interest
on our borrowings and amounted to approximately $441,000 and $1.7 million for
the six months ended March 31, 1998 and 1999, respectively. The increase was due
primarily to the increase in borrowing over the period. In connection with the
in-the-money convertible notes we issued to IBM and another existing investor
that convert to Series E-2 preferred stock at $6.68 per share we recorded
approximately $3.8 million of interest expense in accordance with EITF Topic
D-60 in the three months ended December 31, 1998. The terms of the Series E-2
preferred stock provide for an increase in the conversion ratio of Series E-2
preferred stock to common stock from 1:1 to 1:1.25 as of April 8, 1999 in the
event we did not complete an initial public offering with proceeds of at least
$30.0 million by that date. This increase in the conversion ratio resulted in an
additional non-recurring, non-cash interest charge of approximately $3.7 million
during the fiscal quarter ended March 31, 1999.
In connection with the revolving loan and security agreement with IBM Credit
Corp., in December 1997, we issued warrants to purchase 83,333 shares of Series
F preferred stock at $10.80 per share. In addition, in connection with the
convertible notes we issued warrants to purchase 163,715 shares of Series E
preferred stock at $6.68 per share. The Series E and Series F preferred stock
warrants were valued based upon the Black-Scholes pricing model which resulted
in approximately $423,000 of additional interest expense in the six-month period
ended March 31, 1999. The remaining discount of approximately $799,000 will be
amortized over the term of the notes. In February and March 1999, we issued
warrants to purchase 51,335 shares of Series E-2 preferred stock at an exercise
price of $6.68 per share. Using the Black-Scholes model, we valued the warrants
at $432,000 which resulted in approximately $176,000 of additional interest
expense in the six-month period ended March 31, 1999. The remaining discount of
$256,000 will be amortized by April 30, 1999.
INCOME TAXES. We had a net operating loss for each period from our
inception through March 31, 1999. We recorded income tax expense relating to
withholding tax on payments made by Mitsubishi, our exclusive master distributor
of our products in Japan and various minimum state taxes.
29
<PAGE>
YEARS ENDED SEPTEMBER 30, 1997 AND 1998
REVENUES. Our total revenues increased from approximately $7.6 million to
$15.3 million for the fiscal years ended September 30, 1997 and 1998,
respectively. The increase was due primarily to growing market acceptance of our
products and $2.9 million of WebSphere services revenues. None of the increase
was due to product price increases, although we introduced NetObjects TeamFusion
in 1998, which had a higher sales price than our previous products. In August
1997, we reduced the price of NetObjects Fusion from a suggested retail price of
$495 to $295, and provided credits for unsold inventory to many of our
distributors and other resellers, thereby reducing revenues from software
license fees for the three months ended September 30, 1997 to a lower amount
than in the preceding quarter. Although the price reduction of NetObjects Fusion
resulted in reduced revenues during the three months ended September 30, 1997,
the increased sales volume in subsequent periods more than offset this price
reduction.
Our non-North American revenues were approximately 15% and 16% of total
revenues for the fiscal years ended September 30, 1997 and 1998, respectively.
The increase in non-North American revenues was due in part to the expansion of
the indirect sales channel in Europe as well as the initiation of our master
distributor agreement with Mitsubishi, which also invested in us in November
1998, to manufacture and sell our products in Japan. We have not been exposed to
significant foreign currency translation and transaction exposure from our
operations in fiscal 1997 and 1998.
Our revenues from IBM were approximately 2% and 36% of total revenues for
the fiscal years ended September 30, 1997 and 1998, respectively. The increased
revenues from IBM were generated primarily from our product bundles with Lotus
Designer for Domino and our provision of WebSphere services beginning in March
1998.
Under our original agreement with IBM with respect to IBM's WebSphere
offerings, we were obligated to deliver modified versions of NetObjects Fusion,
NetObjects ScriptBuilder and NetObjects Authoring Server. We anticipated that
all three products would be bundled with IBM's WebSphere product offerings. In
that event, the agreement provided for IBM to pay us license fees for each of
the listed products with a minimum total amount committed to us. Most of the
license fees would have been due for NetObjects Authoring Server, which is our
highest priced product. In October 1998, however, IBM purchased all rights to
Build IT from Wallop, Inc., and decided to bundle that product instead of
NetObjects Authoring Server. We therefore amended our IBM license agreement to
provide for revenues from charges for our services based on the amount of our
costs and expenses instead of the minimum total amount of license fees. As a
result of the agreement and IBM's decision not to bundle NetObjects Authoring
Server, we expect to earn less revenues from our WebSphere agreement with IBM
than we had expected to earn and will need to find other revenue sources.
COST OF REVENUES. Our cost of software license fees was approximately
$772,000 and $2.5 million for the fiscal years ended September 30, 1997 and
1998, respectively, representing approximately 10% and 26%, respectively, of
total revenues from sources other than IBM. Approximately $1 million of the
increase can be attributed to increased production and freight costs partially
driven by volume increases in 1998 over 1997. In addition, royalty costs grew by
approximately $300,000 due to our increased bundling of third party components
and products within NetObjects Fusion and NetObjects TeamFusion. Finally,
approximately $400,000 of the increase was due to write-offs of product
inventory made obsolete by new product releases. Cost of IBM service revenues
consists solely of the costs of providing WebSphere services.
RESEARCH AND DEVELOPMENT. Our research and development expenses were
approximately $8.4 million and $10.2 million for the fiscal years ended
September 30, 1997 and 1998, respectively, and 111% and 67%, respectively, of
total revenues. The increase in fiscal 1998 resulted primarily
30
<PAGE>
from increases in internal development personnel and independent contractor
expenses. The decrease in percentage terms occurred as revenues grew at a faster
rate than expenses.
SALES AND MARKETING. Our sales and marketing expenses were approximately
$12.2 million and $17.1 million for the fiscal years ended September 30, 1997
and 1998, respectively, representing approximately 161% and 112%, respectively,
of total revenues. Approximately $2.9 million of the increase resulted from
salary and associated overhead expense increases for additional personnel. Most
of the remaining $2.1 million represented additional spending in marketing
communications to increase market awareness of the NetObjects brand and
products. The decrease in percentage terms occurred as revenues grew at a faster
rate than expenses.
GENERAL AND ADMINISTRATIVE. Our general and administrative expenses were
approximately $3.8 million and $3.6 million for the fiscal years ended September
30, 1997 and 1998, respectively, representing approximately 50% and 23%,
respectively, of total revenues. Total general and administrative expenses were
higher in fiscal year 1997 than in fiscal year 1998 principally because of costs
incurred in connection with IBM's acquisition of approximately 80% of our stock
in fiscal 1997, including approximately $300,000 in professional fees. The
decrease in percentage terms occurred as revenues grew at a faster rate than
expenses.
STOCK-BASED COMPENSATION. We amortized approximately $227,000 of the total
deferred stock-based compensation in fiscal year 1998.
INTEREST EXPENSE. Our interest expense consisted primarily of interest on
our borrowings and increased from approximately $234,000 to $1.2 million for the
fiscal years ended September 30, 1997 and 1998, respectively, as we increased
our borrowings during fiscal year 1998. Fiscal year 1998 interest expense
included $201,000 for the Series F preferred stock warrants issued to IBM Credit
Corp.
PERIOD FROM NOVEMBER 21, 1995 (INCEPTION) THROUGH SEPTEMBER 30, 1996
During the period from November 21, 1995 (inception) through September 30,
1996, our operating activities related primarily to recruiting personnel,
raising capital, purchasing operating assets, conducting research and
development, building the NetObjects brand and establishing the market for our
products. We recognized no revenue and incurred operating expenses of $6.7
million during the period. Accordingly, a comparison of the operating results
for that period with the operating results for fiscal year 1997 is not
meaningful and has been omitted.
31
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly results of
operations data for the eight quarters ended March 31, 1999. We believe that
this information has been prepared substantially on the same basis as the
audited consolidated financial statements appearing elsewhere in this
prospectus, and all necessary adjustments, consisting only of normal recurring
adjustments, have been included in the amounts stated below to present fairly
the unaudited quarterly results of operations. The quarterly data should be read
in conjunction with our audited consolidated financial statements and notes to
consolidated financial statements appearing elsewhere in this prospectus. The
operating results for any quarter are not necessarily indicative of the
operating results for any future period:
<TABLE>
<CAPTION>
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1998 1998 1998 1998
----------- ----------- ----------- ----------- ----------- ----------- -----------
Revenues:
<S> <C> <C> <C> <C> <C> <C> <C>
Software license fees............... $ 2,332 $ 1,721 $ 2,086 $ 2,485 $ 2,524 $ 2,608 $ 2,622
Service revenues.................... -- -- -- -- -- -- 190
Software license fees from IBM...... 75 100 199 1,016 1,069 416 1,318
Service revenues from IBM........... -- -- -- 206 1,225 1,436 1,487
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues.................... 2,407 1,821 2,285 3,707 4,818 4,460 5,617
----------- ----------- ----------- ----------- ----------- ----------- -----------
Cost of revenues:
Software license fees............... 240 305 278 704 840 709 495
Service revenues.................... -- -- -- -- -- -- 184
IBM service revenues................ -- -- -- 184 1,095 1,284 1,404
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total cost of revenues............ 240 305 278 888 1,935 1,993 2,083
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit.......................... 2,167 1,516 2,007 2,819 2,883 2,468 3,534
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Research and development............ 2,500 2,711 3,070 2,785 2,175 2,201 2,204
Sales and marketing................. 3,833 4,454 4,060 4,353 4,444 4,257 4,430
General and administrative.......... 1,180 926 769 977 878 951 894
Stock-based compensation............ -- -- -- 53 74 100 100
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses.......... 7,513 8,091 7.899 8,168 7,571 7,509 7,628
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating loss........................ (5,346) (6,575) (5,892) (5,349) (4,688) (5,041) (4,094)
Net other expense................... 37 53 175 303 335 441 714
Nonrecurring interest charge on
beneficial conversion feature of
convertible debt.................. -- -- -- -- -- -- 3,792
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss.............................. $ (5,383) $ (6,628) $ (6,067) $ (5,652) $ (5,023) $ (5,482) $ (8,600)
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Revenues:
Software license fees............... 96.9% 94.5% 91.3% 67.0% 52.4% 58.5% 46.7%
Service revenues.................... -- -- -- -- -- -- 3.4
Software license fees from IBM...... 3.1 5.5 8.7 27.4 22.2 9.3 23.4
Service revenues from IBM........... -- -- -- 5.6 25.4 32.2 26.5
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues.................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----------- ----------- ----------- ----------- ----------- ----------- -----------
Cost of revenues:
Software license fees............... 10.0 16.7 12.2 19.0 17.5 15.9 8.8
Service revenues.................... -- -- -- -- -- -- 3.3
Service revenues from IBM........... -- -- -- 5.0 22.7 28.8 25.0
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total cost of revenues............ 10.0 16.7 12.2 24.0 40.2 44.7 37.1
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit.......................... 90.0 83.3 87.8 76.0 59.8 55.3 62.9
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Research and development............ 103.9 148.9 134.3 75.1 45.1 49.4 39.2
Sales and marketing................. 159.2 244.6 177.7 117.4 92.2 95.4 78.9
General and administrative.......... 49.0 50.8 33.7 26.4 18.2 21.3 15.9
Stock-based compensation............ -- -- -- 1.4 1.6 2.2 1.8
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses.......... 312.1 444.3 345.7 220.3 157.1 168.3 135.8
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating loss........................ (222.1) (361.0) (257.9) (144.3) (97.3) (113.0) (72.9)
Net other expense................... 1.5 2.9 7.6 8.2 7.0 9.9 12.7
Nonrecurring interest charge on
beneficial conversion feature of
convertible debt.................. -- -- -- -- -- -- 67.5
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss.............................. (223.6)% (363.9)% (265.5)% (152.5)% (104.3)% (122.9)% (153.1)%
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
MAR. 31,
1999
-----------
Revenues:
<S> <C>
Software license fees............... $ 2,923
Service revenues.................... 440
Software license fees from IBM...... 1,017
Service revenues from IBM........... 1,246
-----------
Total revenues.................... 5,626
-----------
Cost of revenues:
Software license fees............... 453
Service revenues.................... 540
IBM service revenues................ 688
-----------
Total cost of revenues............ 1,681
-----------
Gross profit.......................... 3,945
-----------
Operating expenses:
Research and development............ 1,781
Sales and marketing................. 4,596
General and administrative.......... 1,072
Stock-based compensation............ 70
-----------
Total operating expenses.......... 7,519
-----------
Operating loss........................ (3,574)
Net other expense................... 1,011
Nonrecurring interest charge on
beneficial conversion feature of
convertible debt.................. 3,665
-----------
Net loss.............................. $ (8,250)
-----------
-----------
Revenues:
Software license fees............... 52.0%
Service revenues.................... 7.8
Software license fees from IBM...... 18.1
Service revenues from IBM........... 22.1
-----------
Total revenues.................... 100.0
-----------
Cost of revenues:
Software license fees............... 8.1
Service revenues.................... 9.6
Service revenues from IBM........... 12.2
-----------
Total cost of revenues............ 29.9
-----------
Gross profit.......................... 70.1
-----------
Operating expenses:
Research and development............ 31.7
Sales and marketing................. 81.7
General and administrative.......... 19.0
Stock-based compensation............ 1.2
-----------
Total operating expenses.......... 133.6
-----------
Operating loss........................ (63.5)
Net other expense................... 18.0
Nonrecurring interest charge on
beneficial conversion feature of
convertible debt.................. 65.1
-----------
Net loss.............................. (146.6)%
-----------
-----------
</TABLE>
32
<PAGE>
Our total revenues fluctuate from quarter to quarter due to many factors,
including new product and product upgrade introductions. In addition, we attempt
to limit sales of existing products during the months preceding the release of
upgraded products in order to reduce returns of the older product from some of
our direct and indirect channel resellers. The timing of our recognition of
revenues from strategic arrangements with other companies such as AT&T, IBM,
Netscape or Novell has contributed to fluctuations in revenues from quarter to
quarter. During the three months ended September 30, 1997, we reduced the
suggested retail price of NetObjects Fusion from $495 to $295, and provided
price protection credits to our indirect channel distributors for unsold
inventory. Consequently, our total revenues for the quarter declined
substantially as a percentage of the preceding quarter's revenues. While unit
volumes increased in quarters subsequent to the price reduction, the price
reduction reduced total revenue growth in subsequent quarters. In addition, our
quarterly revenues may fluctuate significantly in the remaining quarters of 1999
because of the loss of IBM revenue commitments.
FACTORS AFFECTING OPERATING RESULTS. As a result of our limited operating
history and the emerging nature of the markets in which we compete, we are
unable to forecast accurately our revenues. The success of our business and our
revenue growth to date have depended on our ability to create web site building
software that appeals to our customers, to update our main product, NetObjects
Fusion, with new features and to release and deliver new versions of NetObjects
Fusion on time. We need to develop new products in addition to NetObjects Fusion
and NetObjects Authoring Server and to ship the new products on time. Failure to
do so will materially affect the amount and timing of future revenues.
Furthermore, the $10.5 million of cash prepayments under our license agreement
with IBM have provided some revenue certainty for us since April 1997. We expect
to have recognized all of the prepayments as revenues by June 30, 1999. After
that date, our revenues from IBM, if any, are likely to become more variable.
Our expense levels are based in part on our expectations with regard to
future revenues. We may be unable to adjust spending in a timely manner to
compensate for any unexpected revenues shortfall. As a result, any significant
shortfall in demand for our products and services relative to our expectations
would harm our business and cause our revenues to decrease. Further, as a
strategic response to changes in the competitive environment, we may from time
to time implement pricing, service or marketing changes that could have a
material adverse effect on our business, prospects, financial condition and
results of operations. See "Risk Factors--Our ability to generate future
revenues is uncertain," "--Our quarterly operating results will probably
fluctuate," and "Business-- Competition."
We expect to experience significant fluctuations in our future quarterly
operating results due to a variety of factors, many of which are outside our
control, including:
- the expiration of commitments from IBM for software license fees in June
1999 and service revenues in February 1999;
- the timing of the introduction or enhancement of our products and services
and market acceptance of those products and services;
- a longer sales cycle for products for large enterprise customers and for
NetObjects Authoring Server;
- competitors' introductions of other types of software products; for
example, Microsoft's introduction of Windows 98 adversely impacted our
sales temporarily;
- the amount and timing of operating costs and capital expenditures related
to expansion of our business, operations and infrastructure;
33
<PAGE>
- price reductions by us or our competitors or changes in how their products
and services are priced;
- the mix of distribution channels through which our products are licensed
and sold; and
- the promptness with which sales data are reported to us from third
parties.
In addition to fluctuations in revenues from IBM, our revenues may become
more variable due to factors such as seasonal demand for our products and
services, for example, annual reductions in sales in Europe in July and August,
costs of litigation and intellectual property protection, technical difficulties
with respect to the use of our products, general economic conditions and
economic conditions specifically related to businesses dependent upon the
Internet. The promptness with which sales data, used in recognizing product
royalties, is delivered to us from third parties also may affect quarterly
operating results. It often is difficult to forecast the effect these factors,
or any combination thereof, would have on our results of operations for any
given fiscal quarter. We have used, and expect to continue to use, price
promotions to increase the trial, purchase and use of our products, as well as
to increase the overall recognition of our brands. The effect of these
promotions on revenues in a particular period may be significant and extremely
difficult to forecast. Quarterly sales and operating results depend primarily on
the volume and timing of orders received in the quarter, both of which are
difficult to forecast. We typically recognize a substantial portion of our
revenues in the last month of each quarter. Based on the foregoing, we believe
that our quarterly revenues, expenses and operating results could vary
significantly in the future, and that period-to-period comparisons should not be
relied upon as indications of future performance.
We generally distribute our software products in "trial" form to the public
electronically from our web site. The "trial" version generally allows the
customer to use the product but either has an expiration period, in which case
the product is automatically deleted from a hard drive, or prohibits the site
from being published. These features may cause some customers to delay
purchasing decisions until they have thoroughly tested the product, or they may
be able to override the "trial" features and use the product in an unlicensed
manner, which could harm our business and cause our stock price to fall.
Due to the factors noted above, it is likely that in some future quarters
our operating results will fall below the expectations of securities analysts
and investors, which would harm our business and cause our stock price to fall.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through a
combination of private placements of equity securities and borrowings, which
yielded an aggregate of $59.9 million of net proceeds from November 1995 through
March 31, 1999. Since December 1997, approximately $13.5 million and $19.0
million of this financing have been provided by IBM and IBM Credit Corp.,
respectively, in the form of a secured credit facility. In addition, we have
received cash prepayments from IBM of approximately $10.5 million which are
recorded as deferred revenues from IBM on our balance sheet. We have paid
interest to IBM on the amounts of prepayments that we received in advance of the
scheduled prepayment period set forth in our license agreement with IBM. All of
this interest expense ceased at December 31, 1998. Our credit facility with IBM
will be repaid out of the proceeds of this offering and the credit facility will
terminate.
The expiration of our services agreement for IBM's WebSphere in February
1999 and software license agreement with Lotus for committed revenues in March
1999 could materially affect us, but initially would not have an adverse impact
on our liquidity because the IBM revenues have been offsetting the $10.5 million
of cash prepayments against future royalties previously paid by IBM. We
34
<PAGE>
intend to increase revenues from other sources and other contracts but we have
no assurance that our efforts to replace these historical IBM and Lotus revenue
streams will succeed.
We will not receive additional cash on sales of our products by IBM or for
services that we provide to IBM until the balance of the deferred revenues from
IBM has been reduced to zero. At March 31, 1999 approximately $53,000 of the
cash prepayments provided by IBM had not been recognized and were reflected as
deferred revenue from IBM on our balance sheet.
We also have established equipment lease lines under which we may finance
the purchase of up to approximately $2.7 million in furniture, computer
equipment and software, approximately $720,000 of which is provided by IBM
Credit Corp. The lease terms range from three to five years. At March 31, 1999
approximately $129,000 was available under these lease lines.
Net cash used in operating activities in the period from November 21, 1995
(inception) to December 31, 1996 and for the years ended September 30, 1997 and
1998 was $4.8 million, $10.8 million and $19.0 million, respectively, and $15.2
million in the six months ended March 31, 1999. Net cash used for operating
activities in each of these periods resulted primarily from our net losses,
offset in part by increases in our accounts payable, accrued expenses and
non-cash expenses.
Net cash used in investing activities in the period from November 21, 1995
(inception) to December 31, 1996 and for the years ended September 30, 1997 and
1998 was $551,000, $1.0 million and $792,000, respectively, and $1.1 million in
the six months ended March 31, 1999. Net cash used in investing activities in
each of these periods was related to the purchases of property and equipment.
The property and equipment purchased consisted primarily of computer hardware
and software.
Net cash provided by financing activities in the period from November 21,
1995 (inception) to December 31, 1996 and for the years ended September 30, 1997
and 1998 was $6.5 million, $11.0 million and $20.0 million, respectively, and
$17.7 million in the six months ended March 31, 1999. The cash provided by
financing activities was the result of net proceeds from borrowings and the sale
of our preferred stock and common stock.
As of March 31, 1999, we had approximately $1.8 million in cash. Other than
$22.4 million of short-term borrowings from IBM, our principal commitments
consisted of obligations outstanding under operating leases. Although we have no
material commitments for capital expenditures, they may increase consistent with
our anticipated growth in operations, infrastructure and personnel. We will
continue to add computer hardware resources. There can be no assurance, however,
that our growth rate will continue at current levels or that it will meet our
current expectations.
In October 1998, we issued units consisting of convertible notes and
warrants to IBM and Perseus Capital L.L.C., a private equity fund in which
several of our directors are investors, for a total of $10.9 million. Prior to
the closing of this offering, the convertible notes will be converted into
shares of Series E-2 preferred stock, which converts to common stock
automatically at the closing of this offering. The notes bear interest at 10%
per annum. By March 31, 1999, we had received the full $10.9 million. In October
and November 1998, we sold 388,888 shares of Series F-2 preferred stock for a
total of $3.5 million. In February and March 1999, we obtained an additional
approximately $3.5 million through the issuance of notes and warrants to IBM to
continue to finance our operations. In April 1999, we borrowed $2.0 million from
IBM under a 10% demand note. We expect IBM to exercise its right to require the
repayment of the additional notes in full upon the closing of this offering.
After the offering, we anticipate moderate growth in our operating expenses
for the foreseeable future to execute our business plan, particularly in sales
and marketing expenses and to a lesser extent research and development and
general and administrative expenses. As a result, we expect our operating
expenses, as well as planned capital expenditures, to continue to constitute a
material
35
<PAGE>
use of our cash resources. In addition, we may require cash resources to fund
acquisitions or investments in complementary businesses, technologies or product
lines. We believe that the net proceeds from the offering, together with our
current cash and cash equivalents, will be sufficient to meet our anticipated
cash requirements for working capital and capital expenditures through September
30, 2000. Thereafter, if cash generated from operations is insufficient to
satisfy our liquidity requirements, we may seek to sell additional equity or
debt securities, or obtain additional credit facilities. We currently have no
plans, other than this offering, to remedy our deficiency in cash generated from
operations relative to anticipated expenditures. Our liquidity problems are also
discussed in "Risk Factors--We have a history of substantial losses and expect
substantial losses in the future," "--Our auditors have substantial doubt about
our viability as a business," "--Our ability to continue as a going concern is
dependent on the net proceeds of this offering" and "--A substantial portion of
the net offering proceeds will be used to repay debt owed to IBM and not to
implement our business model."
YEAR 2000 READINESS
Many existing software programs are coded to accept only two digit entries
in their date fields. As a result, these programs are unable to distinguish
whether "00" means the year 1900 or the year 2000, which could result in system
failures or miscalculations causing disruptions to operations. Although we
believe that our products are Year 2000 ready, because NetObjects Fusion and
NetObjects Authoring Server may interact with external databases for purposes of
data storage, the ability of applications integrated with a web site built using
NetObjects Fusion or NetObjects Authoring Server to comply with Year 2000
requirements is largely dependent on whether any databases underlying the
application are Year 2000 ready. If NetObjects Fusion or NetObjects Authoring
Server is connected to a database that is not Year 2000 ready, a web application
created or developed for a web site built using NetObjects Fusion or NetObjects
Authoring Server could work incorrectly and could result in unanticipated
expenses to address problems or claims raised by customers that we cannot
presently foresee. Furthermore, the purchasing patterns of customers or
potential customers may be affected by Year 2000 issues as businesses expend
significant resources to correct their current systems for Year 2000 readiness.
STATE OF READINESS. Our assessment plans consist of the following:
- quality assurance testing of NetObjects Fusion and NetObjects Authoring
Server;
- contacting third-party vendors of software that we have purchased for our
internal financial systems, and other third-party service providers of
telecommunications, internet services, utilities and other services and
supplies;
- contacting providers of material non-information technology systems;
- assessment of repair or replacement requirements;
- repair or replacement;
- implementation; and
- creation of contingency plans in the event of Year 2000 failures.
COSTS. To date, we have not incurred significant costs in identifying or
evaluating Year 2000 compliance issues. Most of our expenses have related to,
and are expected to continue to relate to, the indirect operating costs
associated with time spent by employees in the evaluation process and Year 2000
compliance matters generally. At this time, we do not possess the information
necessary to estimate the potential costs of the replacement of third-party
software or hardware that are determined not to be Year 2000 compliant. Although
we do not anticipate that these expenses will
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be material, these expenses, if higher than anticipated, could harm our business
and cause our revenues to decrease and our stock price to fall.
RISKS. We are not currently aware of any significant Year 2000 compliance
problems relating to our software for our product offerings or our information
technology or non-information technology systems that would harm our business or
results of operations, without taking into account our efforts to avoid or fix
these problems. There can be no assurance that we will not discover Year 2000
compliance problems in our software for our product offerings that will require
substantial revisions or replacements. In addition, there can be no assurance
that third-party software, hardware or services incorporated into our material
information technology and non-information technology systems will not need to
be revised or replaced, which could be time-consuming and expensive. Our
inability to fix our software for our product offerings or to fix or replace
third-party software or hardware on a timely basis could result in lost
revenues, increased operating costs and other business interruptions, any of
which could harm our business, cause our revenues to decrease and our stock
price to fall.
CONTINGENCY PLAN. As discussed above, we are engaged in an ongoing Year
2000 assessment and have not developed any contingency plans.
REASONABLY LIKELY WORST CAST SCENARIO. At this stage in our analysis, it is
difficult to specifically identify the cause, and the magnitude, of the most
reasonably likely worst case Year 2000 scenario. Such reasonably likely worst
case scenario would include the failure of our products to operate properly,
causing customers' systems and/or operations to fail or be disrupted. Our
inability to correct a significant Year 2000 problem, if one develops, could
result in an interruption in, or a failure of, certain of our normal business
activities or operations. In addition, a significant Year 2000 problem
concerning NetObjects Fusion and NetObjects Authoring Server could cause our
customers to seek alternate providers of web site building software or services.
Any material Year 2000 problem could require us to incur significant
unanticipated expenses to remedy and could divert our management's time and
attention, either of which could harm our business, cause our revenues to
decrease and our stock price to fall.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This statement establishes standards for the reporting and display of
comprehensive income and its components. SFAS No. 130 is effective beginning in
1998. Adoption of SFAS No. 130 is for presentation only and did not affect our
financial condition or results of operations.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The new standard establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 1999. We do not expect SFAS No. 133 to have a material effect on our
financial condition or results of operations.
In February 1998, the AcSEC issued SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP 98-1 establishes
the accounting for costs of software products developed or purchased for
internal use, including when these costs should be capitalized. We do not expect
SOP 98-1, which is effective for us beginning January 1, 1999, to have a
material effect on our financial condition or results of operations.
RECENT DEVELOPMENTS
In March 1999, we entered into an agreement with Sun Microsystems, Inc. to
develop a version of NetObjects Authoring Server Suite that runs on Sun hardware
and software server products. Under the agreement Sun will advance up to
$350,000 of development funds and up to $300,000 worth of engineering resources.
We are obligated to repay the funds advanced and the value of the engineering
support with royalties due quarterly on our sales of the product that we develop
under the agreement. We expect to incur similar amounts of expense related to
this project ourselves during the next 12 months.
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BUSINESS
OUR COMPANY
We are a leading provider of e-business software and solutions that enable
small businesses and large enterprises to build, deploy and maintain web sites
on the Internet and corporate intranets. Our e-business solutions address the
growing challenges faced by businesses in capturing the explosive growth of the
Internet as an online business medium. Our products are used to build web sites
that can publish content, conduct e-commerce and run web applications. In 1996,
we pioneered the web site building product category with the introduction of our
award-winning flagship product, NetObjects Fusion. NetObjects Fusion is an
easy-to-use desktop software application for building business web sites with an
intuitive, visual interface that helps automate and integrates many site
building functions. NetObjects Fusion supports a wide range of web browsers,
database software and web servers. Since 1996, we have released enhanced
versions of NetObjects Fusion. We have introduced other products, including
NetObjects Authoring Server, a client-server application for large enterprises
and corporate departments. We have also built popular online resources,
including NetObjects.com, eFuse.com, launched in December 1998, eScriptZone.com
and eSiteStore.com, that target communities of business users and provide
sources of information, products and services for building web sites. In
addition, in October 1998, we began offering professional services to our
business customers to better serve their web site planning, building and
maintenance needs.
As part of our strategy to provide complete e-business solutions, we have
formed technology relationships with other Internet companies. Many of these
companies have written software to extend their products to integrate with
NetObjects Fusion and NetObjects Authoring Server, such as Allaire ColdFusion,
iCat Commerce Online, Lotus Domino, Beatnik audio software and IBM HotMedia. In
addition, we have built extensions for the Microsoft ASP Site Server. These
extensions provide us with broader platform connectivity and interoperability.
We offer online solutions with key online service providers such as web site
hosters and banner exchange providers. We also have product bundling agreements
with leading software companies, such as IBM, Lotus and Novell, that help create
greater brand recognition and awareness. In addition, our strategic relationship
with IBM has furnished us with sales and marketing benefits, including access to
IBM and Lotus sales and distribution channels, co-marketing and co-promotion
benefits, and credibility in the marketplace.
We have established a premier Internet brand and estimate that over 300,000
copies of NetObjects Fusion have been delivered to date, and more than 1,000,000
web pages or sites have been built using NetObjects Fusion. Traffic to our web
sites has grown from approximately 800,000 visitors in 1996 to approximately 2.5
million visitors in 1998. New visitors provided approximately half of the
traffic to our web sites in 1998. We think the increasing number of visitors to
our web sites reflects the broad distribution of our products and the growing
strength of our brand.
INDUSTRY OVERVIEW
GROWTH OF THE WEB
In fewer than five years, the web has emerged as a universal, rapidly
growing online business medium enabling millions of users worldwide to share
information, conduct e-commerce and access business applications. According to
International Data Corp., the number of web users worldwide will grow from an
estimated 142 million at the end of 1998 to an estimated 399 million by the end
of 2002. IDC estimates that worldwide Internet commerce will increase from an
estimated $50 billion at the end of 1998 to an estimated $733 billion by the end
of 2002. The explosive growth of the web as an online business medium has been
fueled by a number of factors, including an increased awareness by businesses of
the revenue, cost and performance benefits from using the web to conduct
business, and the large and growing number of web users.
In addition, we believe the cycle of growth will accelerate as an increasing
number of web users attracts more businesses to build or enhance their online
web sites, which in turn attracts more
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users. IDC reported that the number of web site addresses, or URL's, will grow
from 300 million in 1997 to 3.2 billion in 2000.
As developing or enhancing a web presence becomes increasingly important to
businesses, business web sites are becoming more complex. As the web's
importance has grown, businesses have applied advances in Internet technology to
convert business web sites from static "billboards" to sophisticated e-business
web sites where businesses can interact and transact with customers, employees,
suppliers and distributors. E-business sites may contain hundreds of pages,
embed audio and video content and provide access to data, or "e-publishing",
provide online commerce, or "e-commerce" capabilities, and run web applications,
or "e-applications" such as interactive forms. E-business web sites are rapidly
becoming a strategic necessity for many companies as they discover how
conducting business online can enhance revenues, reduce costs and improve
performance.
GROWTH OF CORPORATE INTRANETS
The growth of the web as a global communications medium is also driving
large-scale corporate enterprises to enhance communication, collaboration and
productivity by building corporate intranets consisting of numerous internal web
sites. These intranets bring together corporate information and applications
that facilitate communication and information sharing within an organization.
Intranets can also streamline business processes such as customer service, sales
and marketing and human resources, thereby reducing costs or improving
performance through automation or self-service. According to a recent report,
Zona Research estimates that two-thirds of intranet sites are being developed
through team-based web site building, and corporate intranets represent the
greatest business opportunity for providers of Internet and intranet-related
software technologies and products.
THE BUSINESS WEB SITE OPPORTUNITY
Although it has become relatively easy to access the web, it can be
difficult and expensive to build an effective web presence. The challenges of
building a successful Internet or intranet web site require solutions that
address planning, design, building and deployment, as well as web site promotion
and maintenance after the web site is placed online. Companies are often also
faced with a difficult "make or buy" decision, either to build a web site by
using in-house resources or third-party service providers, or to develop a web
site with available "off-the-shelf" applications. Key factors influencing their
choice of solutions include ease and flexibility of building, construction time
and cost and the cost and flexibility of later maintaining and enhancing their
web site. In addition, the web utilizes multiple standards and platforms,
including different web browsers, databases and web servers, which increase the
complexity of building a site that operates in multiple environments.
The first generation of web site building products was technically difficult
to use and generally required the programming expertise of a limited number of
highly skilled users such as hypertext markup language, or HTML, programmers or
highly skilled designers. HTML is a programming language that allows Web pages
to be viewed by a browser. The second generation of products, and online
services that facilitated web site building, targeted consumers with personal
"home page" building tools and casual desktop users with the ability to publish
simple, static information. Although third-party service providers and in-house
programmers can provide technical coding, these resources can be expensive and
may not provide the flexibility required to develop and maintain dynamic,
evolving web sites. In addition, third-party and in-house solutions often have
excluded key business users from the web site building and maintenance process,
rather than enabling a truly collaborative site building development process
which includes content contributions from users.
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We believe that the majority of small businesses have not strategically
embraced the Internet. We believe those that have a web presence often need to
enhance their web sites with new functionality such as e-commerce or
e-applications, or otherwise improve their web site features and promotion.
Businesses with more sophisticated web site requirements, but without access to
programmers, require an easy-to-use, capability-rich and open solution. In-house
programmers or third-party service providers can address technical design and
programming requirements, but often at a higher cost than a packaged application
and with less flexibility in building and maintaining their web sites. In
addition, large enterprises have a variety of departments and need solutions
that allow effective collaboration in developing, deploying and maintaining
their intranet web sites.
THE NETOBJECTS SOLUTION
We provide e-business software and services that enable small businesses, as
well as large enterprises, to build, deploy and maintain web sites on the
Internet and corporate intranets. We believe our e-business solutions help
businesses build web sites to publish content, conduct e-commerce and run
e-applications on the web. Our solutions include products and online services
for small businesses, and products and professional services for large
enterprises and departments, that use collaborating teams to build web sites.
Small businesses require easy-to-use solutions that enable them to build or
enhance their web sites quickly and efficiently, add key functions such as
e-commerce or web applications and work with a variety of industry standards and
platforms. Our award-winning application, NetObjects Fusion, is designed
specifically to address these needs. NetObjects Fusion has an intuitive, visual
interface that integrates and helps automate many site creation functions,
including site layout and design, page building and content management.
In addition, we offer small businesses online solutions to help them
register, host through third parties, build, maintain and promote their web
sites. eFuse.com is the first online resource to provide integrated content,
products and solutions for small businesses. eScriptZone.com is an online
resource that provides articles, tutorials, software and an online community of
forums and newsgroups for webmasters and corporate web applications builders.
eSiteStore.com is our online retail store that provides a one-stop shopping
destination for businesses to purchase our software, third-party software and
also offers online services to customers.
Large-scale corporate enterprises and departments require reliable and
secure solutions that enable them to design, develop, deploy and manage their
complex Internet and intranet web sites. They also need products that will
operate across disparate corporate systems and platforms in order to leverage
existing legacy systems, databases and content. In addition, teams that develop
corporate intranet sites have requirements distinctly different from those of
individuals who develop external Internet sites. They need a client-server
product for web site building that supports creativity and collaboration, while
allowing an administrator to assert control over the site building process. Our
award-winning NetObjects Authoring Server addresses these large-scale corporate
needs. In addition, software components that provide integration with products
from other technology companies, including Allaire, IBM, Lotus, Microsoft and
Netscape, provide additional web applications, database publishing and
e-commerce capabilities for the NetObjects Authoring Server. In response to
customer demand, in October 1998 we formed our Professional Services Group,
which provides training, consulting and implementation services to large
enterprises to help design, build, deploy and maintain their web sites, and
integrate their web sites with existing corporate applications. We provide these
services through our own professional services organization and through
relationships with third-party service providers.
NETOBJECTS STRATEGY
Our strategy is to establish ourselves as a complete e-business solutions
provider by leveraging our position as a leading provider and brand of web site
building software. As more companies seek solutions for capturing the explosive
growth of the web as an online business medium, we believe
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our e-business software and resources serve as ideal starting points. NetObjects
Fusion, NetObjects Authoring Server and our online resources position us to
aggregate broader solutions, including web site hosting by third parties,
software and components, site content, e-commerce using third-party
transactional software and other web applications and services. Key elements of
our strategy include:
BRAND RECOGNITION AND BROAD CUSTOMER BASE. As a pioneer of the web site
building product category, and as the recipient of several industry awards, we
believe that we have established a premier Internet brand in the market for web
site building products and services. We estimate that over 300,000 copies of
NetObjects Fusion have been delivered to date, and more than 1,000,000 web pages
or sites have been built using NetObjects Fusion. Our customer base and the
active online communities of builders who use our products help sustain and
promote our brand by participating in our web site forums and bulletin boards
and by providing feedback on pre-release versions of our software. Over 60,000
links exist from other web sites to NetObjects.com, including the web sites of
complementary products and services providers. In addition, over 500 businesses
worldwide have deployed NetObjects Authoring Server, or its predecessor
NetObjects TeamFusion. Our strong brand recognition and growing customer base
are significant assets for attracting new customers, as well as for enhancing
our ability to develop relationships with other leading software and service
solution providers.
STRATEGIC RELATIONSHIPS. We form strategic relationships to enhance our
product and service offerings and help expand our market presence. These
strategic relationships include:
- product bundling arrangements with companies such as Allaire, IBM, Lotus
and Novell, to combine NetObjects Fusion with popular business software;
- technology relationships to integrate our products with web application
servers from Allaire, Lotus, IBM, Microsoft and PeopleSoft, and e-commerce
software from Breakthrough Software and iCat, by creating components in
Java, a programming language, that provide our products with additional
functions for building web applications and conducting e-commerce; and
- online solutions that combine our products with online service providers
such as Compuserve, T-Online, Verio and Zip2, by offering our products as
part of their online services, for hosting and promoting e-business sites,
which enhance our products and solutions, as well as complement our sales,
marketing and distribution reach.
These relationships also greatly enhance our brand recognition and may
provide a short-term source of revenues. Our strategic relationship with IBM has
provided us with other sales and marketing benefits, including access to IBM and
Lotus sales and distribution channels, co-marketing and co-promotion benefits
and credibility in the marketplace. See "Risk Factors--Our relationship with IBM
will change substantially after the offering, which could harm our business and
could cause our revenues in fiscal year 1999 to fall below those of fiscal year
1998." for a discussion of risks associated with our strategic relationship with
IBM.
TECHNOLOGICAL LEADERSHIP AND OPEN ARCHITECTURE. NetObjects Fusion and
NetObjects Authoring Server are based on proprietary technology that provides an
intuitive, visual building environment that allows for significant productivity
gains compared to web page coding products that require manual programming of
each page. Our products are windows based and allow users to generate HTML code
by using words and graphics without requiring users to type in HTML codes that
allow browsers to view the content of web pages. In addition, NetObjects
Authoring Server offers a collaborative web site building environment for teams
of builders while providing centralized control over the site building effort.
We have an open architecture that:
- supports all major Internet protocols;
- is publishable on major web browsers, such as Netscape Navigator and
Microsoft Internet Explorer; and
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- allows other web site solutions providers to integrate their products with
our products using components implemented in the Java language.
By maintaining these advantages, we believe our products will continue to be
recognized as open platforms for easy integration with their products and
services.
PLATFORMS OF CHOICE FOR E-BUSINESS SOLUTIONS AGGREGATION. As businesses
face the increasingly complex and numerous challenges of establishing a
successful e-business presence, we believe they will seek aggregated solutions
to address their needs, from building and hosting their web sites to maintaining
and promoting them. We believe that other web site solutions providers have
compelling incentives to use NetObjects Fusion, NetObjects Authoring Server and
our online resources as platforms for aggregating their e-business solutions.
Other solutions providers can benefit from our strong brand to reach a growing
business customer base through our products, services and web sites. In turn, we
can offer more complete solutions by leveraging our strategic relationships to
include e-commerce services, database access, banner exchange, content, web
applications and other online services from other web site solutions providers.
PRODUCTS AND SERVICES
We provide solutions for two broad categories of customers: NetObjects
Fusion and online services for businesses, and NetObjects Authoring Server and
professional services for large enterprises and departments.
NETOBJECTS FUSION AND ONLINE SERVICES
NetObjects Fusion is an easy-to-use desktop application designed
specifically for small businesses and corporate intranet builders. NetObjects
Fusion offers a range of publishing and e-commerce capabilities to simplify web
site building and enhance the productivity of both novice and experienced web
site builders. Earlier versions of NetObjects Fusion are available in major
languages including German, French, Spanish, Chinese and Japanese, and our
relationship with IBM has allowed us to release upgraded versions of NetObjects
in a total of nine languages in addition to English.
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
<S> <C>
NETOBJECTS FUSION NetObjects Fusion provides five views that map to the process of site building:
(suggested selling price SITE VIEW lets the author visually plan and organize the pages on the web site.
$295) NetObjects Fusion automatically creates and maintains the navigation buttons and
links based on how the author lays out the web site.
[LOGO] PAGE VIEW lets the author create pages visually. A wide range of content can be
incorporated on the page, including text, graphics, video, audio, applets and
other components.
STYLES VIEW lets the author create a consistent, attractive visual style for the
site. Over 150 site styles are available, and authors can customize or create
their own styles.
ASSETS VIEW serves as a content manager to make it easy to find and replace
assets throughout the site.
PUBLISH VIEW lets the author publish all or portions of the site as standard
HTML pages to the server of choice.
</TABLE>
eFuse.com is an online resource dedicated to business web site builders and
features articles from the industry's experienced builders and authors on how to
use NetObjects Fusion and other complementary products. eScriptZone.com is an
online resource that provides articles, tutorials, software and an online
community of forums and newsgroups for webmasters and corporate web application
builders. In November 1998, Web21.com's 100 Hot sites rated it as the 33rd most
visited site for technology developers. eSiteStore.com is our online retail
store that provides a one-stop
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shopping destination for businesses to purchase our software, third party
software, components and merchandise, and also offers online services to
customers.
NETOBJECTS AUTHORING SERVER AND PROFESSIONAL SERVICES
We introduced NetObjects Authoring Server Suite 3.0 in September 1998 to
replace our original client-server application, NetObjects TeamFusion, which we
had introduced in December 1997. The family of NetObjects Authoring Server
products now consists of the NetObjects Authoring Server Suite, NetObjects
Authoring Server Connectors and NetObjects Authoring Server for IBM WebSphere,
which may be used with the IBM WebSphere web application server. NetObjects
Authoring Server currently runs only on Windows NT and also supports a variety
of web browsers, databases and web servers. NetObjects Authoring Server Suite
consists of four modules:
AUTHORING SERVER. Authoring Server is the "server"-side control center of
NetObjects Authoring Server and contains an internal database which stores the
information about assets, site pages, site structure, link information and user
profiles for multiple web sites. It also controls the number of concurrent users
that can access the system. Authoring Server works in conjunction with any web
server.
AUTHORING SERVER ADMINISTRATOR. Authoring Server Administrator is used to
create sites and form teams, assign team members with editing and publishing
privileges and monitor workflow. The product is designed to provide control of
the web site building process, without imposing a specific workflow on team
members.
TEAMFUSION CLIENT. TeamFusion Client provides the "client"-side software of
the client-server application and includes all of NetObjects Fusion's features.
CONTENT CONTRIBUTOR CLIENT. Content Contributor Client enables any business
user to submit content directly onto templates created on completed web sites or
web sites under construction, regardless of their web authoring skills, and
without compromising the web site's integrity. Users can add, modify and delete
text easily and without considering web site design. NetObjects Authoring Server
automatically formats the content contributed as a web page when the web site is
published.
In addition, NetObjects Authoring Server Connectors include NetObjects
Authoring Server Connector for Microsoft FrontPage, which enables Microsoft
FrontPage users to collaborate with team members using NetObjects Authoring
Server.
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<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
<S> <C>
NETOBJECTS AUTHORING NetObjects Authoring Server Suite consists of four modules:
SERVER SUITE AUTHORING SERVER is the "server"-side control center and runs on
(suggested selling price a Windows NT server.
for 2 user system AUTHORING SERVER ADMINISTRATOR is used to create sites and form
inclusive of server and teams, assign team members with editing and publishing
clients is $1,585; 20 privileges, and monitor workflow.
user system is $19,850) TEAMFUSION CLIENT is based on the award-winning NetObjects
Fusion, and connects to NetObjects Authoring Server. Its web
[LOGO] site-oriented, graphical approach, along with its
check-in/check-out controls, allows a web team to work
collaboratively and efficiently.
CONTENT CONTRIBUTOR CLIENT is a browser-based application
written in the Java language that lets departmental web
contributors submit content directly to sites under development.
NETOBJECTS AUTHORING AUTHORING SERVER CONNECTOR FOR MICROSOFT FRONTPAGE enables
SERVER CONNECTORS Microsoft FrontPage users to collaborate using NetObjects
Authoring Server.
NETOBJECTS AUTHORING AUTHORING SERVER FOR IBM WEBSPHERE is optimized for tight
SERVER FOR IBM WEBSPHERE integration with the IBM WebSphere Application Server through
powerful server components written in the Java language and
special components.
</TABLE>
We formed our Professional Services Group in October 1998 to provide
training, consulting and implementation services to our customers deploying the
NetObjects Authoring Server. We provide these services through our own
professional services organization and, at present, primarily through
relationships with third-party service providers. We believe that providing a
high level of customer service and technical support is necessary to achieve
rapid product implementation which, in turn, is essential to customer
satisfaction and continued license sales and revenue growth. We also offer
support and training services to our customers in addition to our Professional
Services Group, including telephone and online support. Internationally, with
our technical assistance, our distributors provide telephone support to their
customers.
CUSTOMERS
We market and sell our products to a wide range of customers located in the
U.S. and in over 30 other countries worldwide. We believe that approximately 70%
of our customers have been small businesses and approximately 30% have been
large enterprises, including Fortune 1,000 companies or departments within these
enterprises. Approximately one-third of our small business customers are
third-party service providers that build web sites for other companies.
SMALL BUSINESSES. Our products appeal to small businesses needing to build
web sites that support rich content and e-commerce, with a minimum of resources
and time, and with little design and HTML programming expertise. Some examples
of small business customers that have built e-commerce web sites with our
products include Cellular Market (cellularmarket.com) and Christmas.com. Some
examples of customers that have built e-publishing web sites with our products
include Pangea Systems (pangeasystems.com), Northstar Nursery
(northstarnursery.com), Raychem (raychem.com) and Realty.com.
LARGE ENTERPRISES. Our products appeal to a wide range of larger customers
across multiple industry segments. The following is a sample list of some of our
large enterprise customers that
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have purchased our products and services since January 1998. Together they have
accounted for approximately 2% of our total revenues during the last fiscal
year:
<TABLE>
<CAPTION>
COMMUNICATIONS GOVERNMENT & EDUCATION HEALTHCARE AND MEDICAL
<S> <C> <C>
Cellular One (Bay Area) U.S. Senate Blue Cross/Blue Shield
Bell Atlantic Data Solutions Group State of Utah, Dept. of Community Dept. of Health & Human Services
Nortel Networks &
Economic Development
University of North Carolina
Kings County, California
MANUFACTURING FINANCIAL TECHNOLOGY
The Boeing Company NationsBank Corporation VLSI Technology, Inc.
DaimlerChrysler AG Credit Suisse First Boston Lockheed Martin
Shell Lubricants Travelers Life and Annuity Siemens Microelectronics
Mitsubishi Electronics America
</TABLE>
CUSTOMER SITES BUILT USING NETOBJECTS FUSION
NetObjects Fusion is well-suited for a wide range of web site projects that
require a rapid site building cycle, a combination of rich content and
transaction processing capability, interactivity and personalization and
deployment on a variety of web browsers from multiple server platforms. Some
examples of sites that help demonstrate our product's robust site building
capabilities include:
CHRISTMAS.COM, the most popular Christmas site on the web and selected as
the top Christmas site by Excite, receives over 10 million page views per season
and provides families and children all over the world with rich content sources
about Christmas. First unveiled in 1995, the site was rebuilt with NetObjects
Fusion in 1997 and is enhanced and updated annually using our product, including
recent enhancements to support e-commerce transactions.
JUSTFORFEET.COM, the world's largest athletic shoe store, developed its web
site and corporate intranet using NetObjects Authoring Server Suite. Recently, a
complete web site redesign coincided with the launch of a national television
campaign. The new site provides a variety of information from shoe longevity
tips to store tours to help finding store locations. The state-of-the-art site
also features e-commerce functionality, allowing customers to virtually browse
the shelves, compare prices and purchase shoes online. The sites are maintained
by a core web team of six people, each providing different areas of expertise.
The corporate intranet site, with over 600 pages of information, continuously
maintains up-to-the-minute information provided by over 20 content contributors
throughout the company.
DAIMLERCHRYSLER AG sites built with our products range from departmental
home pages, to newsletters, to sites that share information across the entire
corporation. Many departments within DaimlerChrysler selected NetObjects Fusion
because it provides an open and robust site building environment that integrates
with existing desktop and server software to create web sites that are easy for
users to navigate and search. DaimlerChrysler estimates that over 40 Internet
and intranet sites have been built using NetObjects Fusion within the company by
departments including DaimlerChrysler's Fleet Operations, General Auditor's
Office and Information Systems.
SALES, MARKETING AND DISTRIBUTION
We sell our products and services to our customers using a combination of
indirect distribution channels, our direct enterprise sales force, our online
distribution channel and strategic relationships, and we market our products and
services using a broad range of activities to generate demand and build brand
awareness. As of December 31, 1998, we had 63 employees, or approximately 41% of
our work force, engaged in sales and marketing activities.
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INDIRECT DISTRIBUTION CHANNELS
Our indirect distribution channels include domestic and international
distributors, retail vendors, value-added resellers and other technology
companies with whom we have strategic relationships. We have 15 non-exclusive
distributors worldwide including Ingram Micro, Tech Data and Douglas Stewart in
North America; Softline, Internet 2000, Unipalm and Principal in Europe; and
Mitsubishi, which is our master distributor in Japan. As of December 1998, we
had over 1,500 corporate and catalog resellers, original equipment manufacturers
and value-added resellers purchasing products through these distributors.
DIRECT ENTERPRISE SALES FORCE
Our direct enterprise sales force focuses on sales to larger corporate
customers worldwide. The enterprise sales force is comprised of field
representatives and inside sales representatives. The field representatives
market and sell our products and services to corporate customers that the inside
sales team has identified as sales prospects. The inside representatives develop
and pursue leads generated from inquiries on our web sites, downloads of our
trial products and other direct marketing efforts. Our sales force increased
from 17 employees to 21 employees in fiscal year 1998, and during that period,
revenues per salesperson increased while the number of transactions per
salesperson decreased.
ONLINE DISTRIBUTION CHANNEL
Our web site eSiteStore.com allows users to download and purchase our
products. In addition, several third-party e-commerce and distribution sites,
including buydirect.com, beyond.com and download.com, make our products
available for sale online. The online distribution channel provides us with a
low-cost, globally accessible, 24-hour sales channel.
STRATEGIC RELATIONSHIPS
We have a number of significant ongoing strategic relationships with other
technology companies pursuant to which our products are incorporated into, or
bundled with, the third party's products. We believe that these strategic
relationships significantly enhance our brand recognition and awareness of our
products and services, and also provide a source of revenues. Our strategic
relationships include:
IBM/LOTUS. Lotus markets, bundles and sells a version of NetObjects Fusion
with Lotus Designer for Domino 4.0 under a contract with revenue commitments
that expires in June 1999, and under a new contract without revenue commitments
to market, bundle and sell a version of NetObjects Fusion with Designer for
Domino Application Studio that expires on December 31, 1999. IBM markets,
bundles and sells NetObjects Fusion with its WebSphere Studio product. In
addition, our products are offered for sale through a variety of IBM and Lotus
channels including "Passport Advantage," the worldwide direct purchasing option
for Lotus and IBM branded software and the Lotus Business Partner program, which
allows 18,000 program members access to our products at discounted prices
globally. Our relationship with IBM and Lotus provides us with access to
customers and marketing leverage generally beyond the reach of companies our
size, including participation in advertising, direct marketing, tradeshows and
seminars.
NOVELL. Novell bundles a version of NetObjects Fusion with its NetWare for
Small Business product offering on a worldwide basis. Novell also offers
end-user training on NetObjects Fusion at over 100 Novell certified training
centers worldwide. Novell is an investor in NetObjects. We discuss our
relationship with Novell in "Certain Transactions."
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MARKETING ACTIVITIES
Since our inception, we have invested a substantial percentage of our annual
revenues in a broad range of marketing activities to generate demand, gain
corporate brand identity, establish the site building product category and
educate the market about our products and services. These activities have
included advertising, including both print and online, direct marketing,
including direct mail and e-mail, public relations, sponsoring seminars for
potential customers, participating in trade shows and conferences and providing
product information through our web sites. Our marketing programs are aimed at
informing our customers of the capabilities and benefits of our products and
services, increasing brand awareness, stimulating demand across all market
segments and encouraging independent software developers to develop products and
web applications that are compatible with our products and technology. We also
entered into many co-marketing and distribution arrangements with well-known
companies such as AT&T, Apple Computer, Inc., Compaq Computer, Inc., Microsoft,
Netscape and PeopleSoft that have allowed us to identify our NetObjects Fusion
brand with their brands.
COMPETITION
The market for software and services for the Internet and intranets is
relatively new, constantly evolving and intensely competitive. We expect
competition to intensify in the future. Many of our current and potential
competitors have longer operating histories, greater name recognition and
significantly greater financial, technical and marketing resources. Our
principal competitors in the web site building software market segment include
Microsoft, Adobe and Macromedia, Inc.
Microsoft's FrontPage, a web site building software product, has a dominant
market share. Microsoft has announced but not shipped FrontPage 2000, which may
become one of the products in at least one version of Microsoft's Office product
suite, which dominates the market for desktop business application software. We
believe that NetObjects Fusion and NetObjects Authoring Server contain features
that significantly differentiate them from the announced description of
FrontPage 2000, but widespread distribution of Office with FrontPage 2000, and
the vast number of computer users familiar with Microsoft desktop application
software products, give Microsoft a substantial competitive advantage over us.
In connection with its recent acquisition of GoLive, Inc., Adobe acquired a web
site building software product for Macintosh, which increases the
competitiveness of the market for Macintosh web site building products. Our
current Macintosh product, NetObjects Fusion 3.0, may become less competitive
over time.
Alternatives to using web site building software also may provide
significant competition. The alternatives include products from third-party web
site builders, in-house resources and online web site building resources, such
as GeoCities, some of which also provide web site hosting and other services.
Competitive factors in our market include:
- the manner in which the software is distributed with other products;
- quality and reliability;
- features for creating, editing and developing web sites;
- pricing (for example, during the three months ended September 30, 1997, we
reduced the price of NetObjects Fusion from $495 to $295, which resulted
in a decline in total revenues from the third to the fourth quarters in
fiscal 1997);
- ease of use and interactive user features;
- scalability and cost per user; and
- compatibility with the user's existing computer systems.
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To expand our user base and further enhance the user experience, we must
continue to innovate and improve the performance of our products. We anticipate
that consolidation will continue in the web site building products industry and
related industries such as computer software, media and communications.
Consequently, our competitors may be acquired by, receive investments from or
enter into other commercial relationships with larger, well-established and
well-financed companies. There can be no assurance that we can establish or
sustain a leadership position in this market segment.
We believe that additional competitors may enter the market with competing
products as the size and visibility of the market opportunity increases.
Increased competition could result in additional pricing pressures, reduced
margins or the failure of our products to achieve or maintain market acceptance,
any of which could harm our business and cause our revenues and stock price to
fall. Many of our current and potential competitors such as Microsoft, Adobe and
Macromedia have longer operating histories and substantially greater financial,
technical, marketing and other resources than us and therefore may be able to
respond more quickly to new or changing opportunities, technologies, standards
or customer requirements. Many of these competitors also have broader and more
established distribution channels that may be used to deliver competing products
directly to customers through product bundling or other means. For example,
Microsoft enjoys significant distribution advantages over us, including the vast
number of computer users familiar with Microsoft desktop application software
products. If our competitors bundle competing products with their products, the
demand for our products might be substantially reduced and our ability to
distribute our products successfully would be substantially diminished.
Moreover, Microsoft's dominance in desktop business application software enables
it to vary the pricing for its software sold as part of a suite. As a result of
Microsoft's and other competitors' bundling arrangements, we may need to reduce
our prices for our products to keep them competitive.
New technologies and the enhancement of existing technologies will likely
increase the competitive pressures on us. Competing technologies or the
emergence of new industry standards could adversely affect our competitive
position or render our products or technologies noncompetitive or obsolete.
There is no assurance that we will compete effectively with current or
future competitors or that competitive pressures will not harm our business and
cause our revenues and stock price to fall.
TECHNOLOGY AND DEVELOPMENT
We devote substantial resources to the development of innovative products
for the market for web site building software and services. During the fiscal
years ended September 30, 1997 and 1998, respectively, we invested approximately
111% and 67%, respectively, of our total revenues on research and development
activities. NetObjects Fusion and NetObjects Authoring Server are among the
earliest and most recognized entrants in the emerging market for web site
building software. We believe that we have been able to leverage our
understanding of the market and technology opportunity as well as our staff and
software development processes to build robust, open solutions for customers. We
intend to continue to use these core strengths to introduce innovative products
and product enhancements for building, deploying and maintaining business web
sites. We intend to continue to devote substantial resources to research and
development for at least the next several years.
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Our technology provides the following product advantages:
OPEN ARCHITECTURE
Our products are built upon a flexible object-oriented architecture. This
architecture, which we obtained from Rae Technology, Inc. upon our founding, has
been instrumental in the rapid development of our products. The architecture
provides such significant benefits as:
- separating the visual display of information from its storage;
- supporting multiple databases;
- supporting major Internet protocols;
- allowing any HTML page editor to be used with our products; and
- extending our products using components built using the Java language.
We intend to continue to invest in further development of this architecture
to build and integrate new products and technologies.
CONTROL AND COLLABORATION
Intranet web sites are evolving from simple publishing pages coordinated by
a single webmaster to multi-contributor strategic business platforms that
integrate business processes and deploy mission-critical applications.
Enterprise groups that build these intranet web sites face the conflicting needs
of maintaining control and encouraging collaboration. NetObjects Authoring
Server provides the performance needed to support concurrent, collaborating
users across an enterprise-wide deployment with several underlying technologies
such as a Java-based content contributor, an integrated asset manager and remote
systems administrator.
In addition to our products, product enhancements and core proprietary
technology, we have a highly-skilled engineering workforce that includes several
seasoned software industry veterans. As of December 31, 1998, we had 50
employees, or approximately one-third of our workforce, engaged in research and
development activities. Our original key technologists are still NetObjects
employees, and they continue to play an integral role in defining and leading
our technology vision and strategy. We intend to hire additional software
engineers to further our research and development efforts. If we are unable to
hire and retain the required number of skilled engineers, our business will be
harmed, our revenues could decline and our stock price may fall.
INTELLECTUAL PROPERTY
Our success depends in part on our ability to protect our proprietary
software and other intellectual property. To protect our proprietary rights, we
rely generally on patent, copyright, trademark and trade secret laws,
confidentiality agreements with employees and third parties, license agreements
with consultants, vendors and customers and "shrinkwrap" license agreements.
Despite these protections, a third party could, without authorization, copy or
otherwise obtain and use our products, or develop similar products. There can be
no assurance that our agreements will not be breached, that we will have
adequate remedies for any breach or that our trade secrets will not otherwise
become known or independently developed by competitors.
We currently have several pending patents relating to our product
architecture and technology and have licensed two utility patents from Rae
Technology. For a description of our Rae Technology relationships, see "Certain
Transactions--Transactions with Rae Technology and Studio Archetype." There can
be no assurance that any pending or future patent application will be granted,
that any existing or future patent will not be challenged, invalidated or
circumvented or that the rights
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granted under any patent that has issued or may issue will provide competitive
advantages to us. If a blocking patent has issued or issues in the future, we
would need to obtain a license or design around the patent. Except for patents
licensed from Rae Technology, which we have rights to acquire, there can be no
assurance that we would be able to obtain a license on acceptable terms, if at
all, or to design around the patent.
We pursue the registration of some of our trademarks and service marks in
the United States and in other countries, although we have not secured
registration of all of our marks. Many of our current and potential competitors
dedicate substantially greater resources to protection and enforcement of
intellectual property rights. We are also aware of other companies that use
"Fusion" in their marks alone or in combination with other words, such as
Allaire's ColdFusion, and we do not expect to be able to prevent third party
uses of the word "Fusion" for competing goods and services. We have agreed with
Allaire that neither party will use the word "Fusion" to describe products in
the absence of appropriate brand identification, such as "NetObjects Fusion."
The laws of some foreign countries do not protect our proprietary rights to
the same extent as do the laws of the United States, and effective patent,
copyright, trademark and trade secret protection may not be available in these
jurisdictions. We license some of our proprietary rights to third parties, and
there can be no assurance that these licensees will abide by compliance and
quality control guidelines with respect to our proprietary rights.
EMPLOYEES
As of March 31, 1999, we had 147 full-time employees and 8 part-time
employees. None of our employees is subject to a collective bargaining
agreement, and we believe that our relations with our employees are good. We
believe that our future success will depend in part on our continued ability to
attract, integrate, retain and motivate highly qualified sales, technical,
professional services and managerial personnel, and upon the continued service
of our current personnel. We also use independent contractors to supplement our
work force. None of our personnel is bound by an employment agreement that
prevents the person from terminating his or her relationship at any time for any
reason. Competition for qualified personnel is intense. There can be no
assurance that we will be successful in attracting, integrating, retaining and
motivating a sufficient number of qualified personnel to conduct our business in
the future.
FACILITIES
Our executive offices are located in Redwood City, California, in an office
building in which, as of March 31, 1999, we lease an aggregate of approximately
36,000 square feet. The lease agreement terminates on November 2, 2002. We also
lease three serviced office suites in a facility in Bucks, United Kingdom under
a lease that expires in August 1999.
LEGAL PROCEEDINGS
From time to time, we are subject to legal proceedings and claims in the
ordinary course of business, including claims of alleged infringement of
third-party trademarks and other intellectual property rights by us and our
licensees. These claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources. We are not aware
of any legal proceedings or claims that we believe would harm our business or
cause our revenues or stock price to fall.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers as of April 15, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
Samir Arora(1)............................ 33 Chairman of the Board, Chief Executive Officer and President
Russell F. Surmanek....................... 41 Executive Vice President, Finance and Operations and Chief
Financial Officer
David Kleinberg........................... 40 Executive Vice President, Desktop Products and Online Services
Morris Taradalsky......................... 52 Executive Vice President, Server Products and Professional
Services
Mark Patton............................... 41 Senior Vice President, Worldwide Sales and Corporate Marketing
Clement Mok............................... 41 Chief Creative Architect
Gagan (Sal) Arora......................... 25 Chief Technology Architect and Vice President, Engineering,
Desktop Products and Online Services
Robert G. Anderegg(2)..................... 50 Director
Lee A. Dayton(1).......................... 56 Director
John Sculley(1)(2)........................ 60 Director
Christopher M. Stone(2)(3)................ 41 Director
Michael D. Zisman......................... 50 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) Mr. Stone will become a director of NetObjects on the closing date of the
offering.
Set forth below is information regarding the business experience during the
past five years for each of our officers and directors.
SAMIR ARORA has served as our Chairman of the Board, Chief Executive Officer
and President since our inception in November 1995. In 1992, Mr. Arora founded
Rae Technology, a provider of software applications, and from 1992 through
November 1995 served as its CEO. From 1986 to 1992, Mr. Arora served in several
management roles at Apple Computer, Inc. Mr. Arora holds a diploma in sales and
marketing from the London Business School and attended INSEAD, France and BITS,
India. Samir Arora is the brother of Sal Arora, who is our Chief Technology
Architect and Vice President, Engineering Desktop Products and Online Services.
RUSSELL F. SURMANEK has served as our Executive Vice President, Finance and
Operations and Chief Financial Officer since April 1999. From 1990 to March
1999, Mr. Surmanek served in several senior financial management positions at
Oracle Corporation, most recently as Vice President, Finance and Administration,
Worldwide Operations. Mr. Surmanek holds a B.S. in Business Administration from
the State University of New York at Buffalo and an M.B.A. from the University of
Michigan.
DAVID KLEINBERG has served as our Executive Vice President, Desktop Products
and Online Services since November 1995. In September 1992, Mr. Kleinberg
co-founded Rae Technology with Samir Arora. Mr. Kleinberg served as Executive
Vice President, Sales and Marketing of Rae Technology from September 1992 to
November 1995. Prior to joining Rae Technology, Mr. Kleinberg held
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executive positions in product marketing and sales at Macromedia. Prior to
Macromedia, Mr. Kleinberg was employed at Apple Computer. Mr. Kleinberg holds a
B.A. in English from Georgetown University and an M.B.A. from Stanford
University.
MORRIS TARADALSKY has served as our Executive Vice President, Server
Products and Professional Services since April 1997. From April 1994 to April
1997, Mr. Taradalsky served as Chief Executive Officer of MicroNet Technology,
Inc., a privately-held storage systems supplier. From December 1988 to April
1994, Mr. Taradalsky was employed at Apple Computer, Inc. where he was General
Manager of the Apple Business Systems Division. Prior to joining Apple Computer,
Mr. Taradalsky was employed by IBM for 18 years in a number of positions,
including Vice President and General Manager, Santa Teresa Laboratory. Mr.
Taradalsky graduated MAGNA CUM LAUDE from Pennsylvania State University with a
B.S. in Mathematics.
MARK PATTON has served as our Senior Vice President, Worldwide Sales and
Corporate Marketing since December 1996. From February 1995 to November 1996,
Mr. Patton was Vice President and General Manager of the Digital and Applied
Imaging Division at Eastman Kodak, Inc. From February 1994 to February 1995, Mr.
Patton was Vice President and General Manager, American Division at Logitech,
Inc., a computer peripheral products manufacturer. From August 1985 to February
1994, Mr. Patton held various sales management positions at Apple Computer, Inc.
Mr. Patton holds a B.A. in Speech Communication from the University of
Washington.
CLEMENT MOK has served as our Chief Creative Architect since September 1998.
Prior to that, Mr. Mok had been our Chief Creative Officer since our founding in
November 1995. In 1988, Mr. Mok founded Studio Archetype, now a wholly-owned
subsidiary of Sapient Corporation. From 1988 to 1998, Mr. Mok was Chairman and
Chief Creative Officer of Studio Archetype. He is currently the Chief Creative
Officer of Sapient Corporation. From 1993 to present, Mr. Mok also has been the
Chief Executive Officer of CMCD, Inc., a media publishing company. Mr. Mok holds
a B.F.A. from the Art Center College of Design.
SAL ARORA has served as our Chief Technology Architect and Vice President,
Engineering, Desktop Products and Online Services since November 1995. From
September 1994 to November 1995, Mr. Arora was the lead engineer at Rae
Technology. From June 1992 to September 1994, Mr. Arora was a software engineer
at ACIUS Inc. Mr. Arora holds a B.S. in Computer Science from the University of
California, Berkeley. Sal Arora is the brother of Samir Arora, who is our
Chairman of the Board, Chief Executive Officer and President.
ROBERT G. ANDEREGG has been a director of our company since April 11, 1997.
Mr. Anderegg has served as Vice President and Assistant General Counsel at IBM
since August 1998. He has been appointed to serve on our board of directors by
IBM as one of its representatives. Mr. Anderegg has served as an Assistant
General Counsel or Associate General Counsel at IBM since 1988. Mr. Anderegg
holds a B.S. degree from Georgia Institute of Technology and received his J.D.
from Harvard Law School.
LEE A. DAYTON has been a director of our company since April 11, 1997. Mr.
Dayton is Vice President, Corporate Development and Real Estate at IBM. He has
been appointed to serve on our board of directors by IBM as one of its
representatives. Mr. Dayton has held various management positions at IBM since
he joined in 1965 as a systems engineer. Mr. Dayton holds a B.S. in Engineering
from Northwestern University.
JOHN SCULLEY has been a director of our company since December 20, 1996.
Since April 1994, Mr. Sculley has been a partner of Sculley Brothers, an
investment capital firm. Mr. Sculley also is a director of General Wireless,
Inc., a wireless communications services provider, Talk City, Inc., an online
chat community, and NFO Worldwide, Inc., a market research firm. From 1983 to
1993, Mr. Sculley served as Chief Executive Officer of Apple Computer, Inc. Mr.
Sculley holds a B.A. in
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Architectural Design from Brown University, an M.B.A. from the Wharton School at
the University of Pennsylvania and holds eight honorary doctorates from various
schools.
CHRISTOPHER M. STONE will become a director of our company on the closing
date of this offering. Since August 1997, Mr. Stone has been the Executive Vice
President of Corporate Strategy and Development at Novell, Inc. From September
1989 to August 1997, Mr. Stone was Chairman and Chief Executive Officer of the
Object Management Group, the creator of an industry standard known as CORBA. Mr.
Stone holds a B.S. in Computer Science from the University of New Hampshire.
MICHAEL D. ZISMAN has been a director of our company since April 11, 1997.
Mr. Zisman is an Executive Vice President of Lotus, a position that he has held
since October 1996. He has been appointed to serve on our board of directors by
IBM as one of its representatives. From July 1994 to October 1996, he held other
executive positions at Lotus. Mr. Zisman is also the Vice President of Strategy
for the IBM Software Group. Mr. Zisman was the Chief Executive Officer of
Soft-Switch, Inc., a software development company, from 1979 to July 1994. Mr.
Zisman is a director of Strategic Weather Services, Inc., a privately-held
company. Mr. Zisman holds a B.S. from Lehigh University, an M.S. from the
University of Pennsylvania Moore School and a Ph.D. from The Wharton School at
the University of Pennsylvania.
NUMBER, TERM AND ELECTION OF DIRECTORS
Effective upon the closing of this offering, our bylaws will be amended
automatically to fix the number of directors at six until changed by approval of
the stockholders or a majority of the directors. Each director is elected to
serve until the next annual meeting of stockholders and until the election and
qualification of his or her successor or his or her earlier resignation or
removal.
CONTRACTUAL ARRANGEMENTS
We are party to a voting agreement with IBM that provides, effective upon
the closing of this offering, that IBM will vote its shares of voting stock in a
way that limits the number of IBM representatives on a six-member board of
directors to three, notwithstanding IBM's legal right to elect the entire board
for as long as IBM owns a majority of our voting stock. The agreement defines an
IBM representative as an officer, director or other agent or employee of IBM,
IBM's subsidiaries or any other entity controlled by IBM, other than our
company. The voting agreement also obligates us and IBM to maintain a board of
directors consisting of six members unless the holders of a majority of
outstanding voting stock, excluding IBM's shares, approve an amendment to our
amended and restated bylaws or restated certificate of incorporation to change
the size of the board. The voting agreement remains in effect until IBM holds
less than 45% of our voting securities on a fully-diluted basis for a period of
180 consecutive days. Immediately after the offering, IBM will hold 48.6% of our
voting securities on a fully-diluted basis. While this agreement remains
effective it allows IBM's designees to our board of directors to control any
determinations with respect to most material transactions outside the ordinary
course of our business, including mergers or other business combinations, the
acquisition or disposition of our assets, future issuances of our equity or debt
securities and the payment of dividends.
DIRECTOR COMPENSATION
Our directors do not receive cash compensation for their services as
directors or members of committees of the board of directors. After the offering
we will automatically grant options to purchase 20,000 shares of common stock to
outside directors upon joining the board. The option exercise price will be
equal to the fair market value of a share of common stock at the date of grant.
The option term will be six years and the option will vest and become
exercisable pro rata at the end of each month for 48 months while the option
holder continues to serve as a director.
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BOARD COMMITTEES
We have established an audit committee and a compensation committee.
The audit committee consists of Messrs. Sculley, Anderegg and, after the
offering, Mr. Stone. The functions of the audit committee are to make
recommendations to the board of directors regarding the selection of independent
auditors, review the results and scope of the audit and other services provided
by our independent auditors and evaluate our internal controls.
The compensation committee consists of Messrs. Arora, Dayton and Sculley.
The functions of the compensation committee are to review and approve the
compensation and benefits for our executive officers, administer our stock
option and stock purchase plans and make recommendations to the board of
directors regarding these matters.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As of the end of our last fiscal year, we did not have a compensation
committee, and all decisions regarding compensation of our executive officers
were made by the board of directors. During fiscal year 1998, Mr. Samir Arora
participated in deliberations of the board of directors concerning executive
officer compensation. No executive officer currently serves as a member of the
board of directors or compensation committee of any entity that has one or more
executive officers serving as a member of our board of directors or the
compensation committee, which was established during fiscal year 1999.
EXECUTIVE COMPENSATION AND MANAGEMENT CHANGES
The following table sets forth information concerning the compensation
received by our Chief Executive Officer and by the other four most highly
compensated executive officers during the fiscal year ended September 30, 1998:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------
NAME AND PRINCIPAL POSITION SALARY($)(1) BONUS($)
- --------------------------------------------------------------------------------------- ------------ ----------
<S> <C> <C>
Samir Arora
Chairman of the Board, Chief Executive Officer, President............................ $ 175,338 $ 47,434
Morris Taradalsky
Executive Vice President, Server Products and Professional Services.................. 166,048 86,095(1)
Mark Patton
Senior Vice President, Worldwide Sales and Corporate Marketing....................... 150,000 35,555
David Kleinberg
Executive Vice President, Desktop Products and Online Services....................... 145,600 24,856
Michael J. Shannahan (2)
Vice President, Finance and Chief Financial Officer.................................. 151,436 15,542
</TABLE>
- ------------------------
(1) Includes $65,745 for relocation expenses.
(2) Mr. Shannahan resigned from NetObjects as of April 5, 1999 and Mr. Russell
Surmanek became Executive Vice President, Finance and Operations and Chief
Financial Officer as of that date.
We have entered into an employment agreement with our new Executive Vice
President, Finance and Operations and Chief Financial Officer, Russell F.
Surmanek, as of April 5, 1999. The employment agreement has a term of 24 months.
Under the agreement, Mr. Surmanek will receive an annual salary of $220,000 plus
a 15% sales target bonus payable semi-monthly, up to 20% of his
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annual salary as an annual fiscal year bonus to executives and stock options to
purchase 235,000 shares, 35,000 of which will vest within three months of April
5, 1999, and the remainder of which vest on varying dates during the following
48 months. Mr. Surmanek also receives a starting bonus of $100,000. If Mr.
Surmanek's employment is terminated without cause before April 5, 2001, he is
entitled to be paid the remaining salary which would have been payable during
the term, including pro-rata bonus amounts. If Mr. Surmanek is terminated for
any reason, other than for cause, the vesting of his stock options will
accelerate so that 65% of the shares underlying the options will be vested as of
the date of termination. If we are acquired by another company, the vesting of
Mr. Surmanek's stock options will also accelerate by one calendar year or as
necessary to provide for vesting of at least 65% of the shares underlying the
options as of the date of the acquisition.
The following table sets forth information regarding option exercises, and
the fiscal year-end values of stock options held, by our Chief Executive Officer
and the other four most highly compensated executive officers during the fiscal
year ended September 30, 1998:
AGGREGATED OPTION EXERCISES IN FISCAL 1998 AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT AT SEPTEMBER 30,
SEPTEMBER 30, 1998(#) 1998($)
------------------------ ----------------------
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE(1)
- ---------------------------------------------------------------- ------------------------ ----------------------
<S> <C> <C>
Samir Arora..................................................... 84,375/140,625 $ 374,625/$624,375
Morris Taradalsky............................................... 47,222/86,111 209,666/382,334
Mark Patton..................................................... 55,661/69,339 247,136/307,864
David Kleinberg................................................. 56,250/93,750 249,750/416,250
Michael J. Shannahan (2)........................................ 29,340/78,993 130,270/350,730
</TABLE>
- ------------------------
(1) The fair market value of the underlying securities at the close of business
on September 30, 1998 was estimated to be approximately $4.44 per share, as
determined by the board of directors.
(2) Mr. Shannahan resigned from NetObjects as of April 5, 1999 and Mr. Russell
Surmanek became Executive Vice President, Finance and Operations and Chief
Financial Officer as of that date.
Mr. Surmanek has no prior experience with us and if Mr. Surmanek fails to
quickly become an effective chief financial officer or if he ceases to remain in
our employ, our business could be harmed and our stock price could fall.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our amended and restated certificate of incorporation, which takes effect
only upon the closing of this offering, limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for any breach of their
duty of loyalty to the corporation or its stockholders, acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law,
unlawful payments of dividends or unlawful stock repurchases or redemptions, or
any transaction from which the director derived an improper personal benefit.
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
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Our amended and restated bylaws, which take effect only upon the closing of
this offering, provide that we will indemnify our directors and officers and may
indemnify our employees and other agents to the fullest extent permitted by law.
The amended and restated bylaws also permit us to secure insurance on behalf of
any officer, director, employee or other agent for any liability arising out of
his or her actions in that capacity, regardless of whether the amended and
restated bylaws would permit indemnification. We have obtained officer and
director liability insurance with respect to liabilities arising out of specific
matters, including matters arising under the Securities Act.
We have entered into agreements with our directors and executive officers
that take effect only upon the closing of this offering and, among other things,
will indemnify them for specific expenses, including attorneys' fees, judgments,
fines and settlement amounts incurred by them in any action or proceeding,
including any action by us or on our behalf, arising out of the person's
services as a director or officer of NetObjects or any of our subsidiaries or
any other company or enterprise to which the person provides services at our
request. We are obligated to advance expenses incurred by the indemnified person
prior to the conclusion of any such action or proceeding, in the absence of a
determination, as provided in the agreement, that indemnification would not be
permitted under applicable law. We believe that these provisions and agreements
are necessary to attract and retain qualified directors and officers. These
agreements also provide officers with the same limitation of liability for
monetary damages that Delaware corporate law and our restated certificate of
incorporation provide to directors.
BENEFIT PLANS
1997 STOCK OPTION PLAN
The NetObjects 1997 Stock Option Plan, or the 1997 Plan, provides for the
issuance of incentive stock options under the Internal Revenue Code of 1986 and
nonqualified stock options to purchase common stock to employees, non-employee
directors or consultants at prices not less than the fair market value at the
date of grant. A total of 2,158,943 shares of common stock has been authorized
for issuance under the 1997 Plan. The fair market value of the common stock is
determined by the board of directors. Options currently outstanding generally
vest 25% at the end of the first year and then monthly on a pro rata basis over
the next three years. In connection with IBM's acquisition of approximately 80%
of our outstanding stock, the 1996 Stock Option Plan was cancelled and all
options issued under that plan were reissued under the 1997 Plan. Under the 1996
Stock Option Plan, optionees had the right to exercise unvested options, subject
to our Company's right to repurchase unvested shares held at the time of
termination of employment. That right was carried over to the 1997 Plan for
optionees who held options under the 1996 Stock Option Plan that were reissued
under the 1997 Plan, but does not apply to new options granted under the 1997
Plan since April 11, 1997. At March 31, 1999, 41,252 shares of common stock were
subject to our right of repurchase, and 266,615 shares of common stock were
available for future option grants, under the 1997 Plan.
1997 SPECIAL STOCK OPTION PLAN
In March 1997, our board of directors adopted, and in April 1997, our
stockholders approved, the 1997 Special Stock Option Plan. A total of 1,041,056
shares of common stock were authorized for issuance under the plan. On March 18,
1997, our board of directors authorized the grant of options for the purchase of
all shares of common stock authorized for issuance under the plan to 35 key
employees, including Messrs. Samir Arora and David Kleinberg, who received
grants to purchase 225,000 shares and 150,000 shares, respectively. The options
granted under the plan generally vest 25% at the end of the first year and then
monthly on a pro rata basis over the next three years. Our board of directors
does not intend to grant any more options under this stock option plan.
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1999 EMPLOYEE STOCK PURCHASE PLAN
Our 1999 Employee Stock Purchase Plan, or ESPP, which has been adopted by
our board of directors and our stockholders, will take effect upon the closing
of this offering. We have reserved 300,000 shares of common stock for issuance
under the ESPP. The ESPP is intended to qualify for favorable tax treatment
under Section 423 of the Internal Revenue Code. Generally, the ESPP will be
implemented through a series of offering periods of six months' duration, with
new offering periods commencing on the first trading day on or after August 1
and February 1 of each year. However, the first offering period will commence on
the first trading day after the closing of the offering and will expire on July
31, 2000. Generally, shares may be purchased at the end of each offering period
but during the initial offering period shares may be purchased at the end of
each of July 31, 1999, January 31, 2000 and July 31, 2000.
The ESPP will be administered by the compensation committee of our board of
directors. Each employee of ours or of any majority-owned subsidiary of ours who
has been employed by us or a majority-owned subsidiary for at least 5 days and
for more than 20 hours per week and more than five months per year will be
eligible to participate in the ESPP. The ESPP permits an eligible employee to
purchase common stock through payroll deductions, which may not exceed 10% of
his or her compensation, at a price equal to 85% of the lesser of the fair
market value of the common stock at the beginning of the offering period and the
fair market value of the common stock at the end of each purchase period.
Employees may terminate their participation in the ESPP at any time during the
offering period, but they may not change their level of participation in the
ESPP at any time during the offering period. Participation in the ESPP
terminates automatically on the participant's termination of employment with us.
401(K) PLAN
We maintain a 401(k) plan, a defined contribution plan intended to qualify
under Section 401 of the Internal Revenue Code, that covers all employees who
satisfy specified eligibility requirements relating to minimum age, length of
service and hours worked. Under the profit-sharing portion of the plan, we may
make an annual contribution for the benefit of eligible employees in an amount
determined by the board of directors. We have not made any contributions to date
and currently have no plans to do so. Under the 401(k) portion of the plan,
eligible employees may make pretax elective contributions of up to 15% of their
compensation, subject to maximum limits on contributions prescribed by law.
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CERTAIN TRANSACTIONS
SALES OF COMMON STOCK AND PREFERRED STOCK
Since our inception in November 1995, we have issued, in private placement
transactions, shares of common stock and preferred stock to directors, executive
officers, 5% stockholders, and other purchasers included in the descriptions
below, as follows:
We issued 600,000, 400,000, 333,333 and 250,000 shares of common stock,
respectively, to Samir Arora, David Kleinberg, Clement Mok and Sal Arora, the
founders of NetObjects on December 21, 1995. The purchase price of the shares of
common stock was $0.09 per share. The founders issued three-year full recourse
promissory notes as consideration for the issuance of the shares, in the total
principal amount of $142,500, which bear interest at 8% annually and are secured
by the shares. As of December 31, 1998, the total principal balance of the notes
was $112,500, of which $90,000 was repaid in March 1999. The remaining note for
$22,500 owed by Sal Arora has been extended for one year.
We issued 166,666 and 1,666,666 shares of Series A preferred stock,
respectively, to Studio Archetype and Rae Technology, respectively, on December
21, 1995. The purchase price of the shares was $0.90 per share. All but 651,945
of the shares were exchanged for IBM common stock and were cancelled in
connection with IBM's acquisition of approximately 80% of our stock in April
1997, and remained outstanding at December 31, 1998. Our relationships with Rae
Technology and Studio Archetype are described in "--Transactions with Rae
Technology and Studio Archetype-- Rae Technology" and "--Studio Archetype."
We issued a total of 2,083,333 shares of Series B preferred stock to Norwest
Equity Partners V, 2,233,333 shares collectively to Venrock Associates, Venrock
Associates II, L.P., and one of their affiliates, and 150,000 shares of Series B
preferred stock to John Sculley, on February 2, 1996. The purchase price of the
shares was $1.20 per share. All of the shares were exchanged for IBM common
stock and cancelled in connection with IBM's acquisition of approximately 80% of
our stock in April 1997.
In December 1996, we agreed to issue warrants for the purchase of a total of
6,863,426 shares of Series C preferred stock to a group of institutional
investors led by Perseus U.S. Investors, L.L.C. that also included Norwest
Equity Partners V, Venrock Associates and John Sculley who, together with other
existing investors agreed to exercise the warrants as needed to enable us to
obtain additional financing of approximately $1 million under an existing
secured loan agreement with a bank. We also received $275,000 in loans from
Norwest and Venrock. On exercise of the warrants, we issued a total of 3,476,090
shares, 304,492 shares, 295,355 and 21,920 shares of Series C preferred stock,
respectively, to Perseus U.S. Investors, L.L.C., Norwest Equity Partners V,
Venrock Associates, L.P. and Venrock Associates II, L.P., collectively, and John
Sculley respectively, on various dates between December 1996 and March 1997 and
515,070 shares to other entities and individuals who are not directors,
executive officers or 5% stockholders. The exercise price under the warrants was
approximately $1.82 per share. All of the shares were exchanged for IBM common
stock and cancelled in connection with IBM's acquisition of approximately 80% of
our stock in April 1997. On February 9, 1999, Norwest exercised its remaining
warrant for 591,855 shares of Series C preferred stock by providing a cash
payment to us. On March 23, 1999, warrants were exercised for the purchase of
60,369 shares of Series C Preferred Stock. As of March 31, 1999, warrants to
purchase a total of 1,478,306 shares of Series C preferred stock were held by
Perseus, Venrock and Mr. Sculley, and warrants to purchase 119,969 shares of
Series C preferred stock were held by other entities and individuals who are not
directors, executive officers and 5% stockholders, at an exercise price of
approximately $1.82 per share. These warrants will automatically be surrendered
on a cashless exercise basis by surrendering shares of common stock as payment
of the exercise price upon the closing of this offering, if not exercised
earlier. One of our directors is a
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member of Perseus U.S. Investors, L.L.C., and three of our directors are members
of Perseus Capital, L.L.C., an affiliate of Perseus U.S. Investors, L.L.C.
In connection with IBM's acquisition of approximately 80% of our stock on
April 11, 1997, we issued a warrant to IBM to purchase up to 3,482,838 shares of
Series E preferred stock at an exercise price of approximately $6.68 per share.
IBM's warrant to purchase shares of Series E preferred stock expires on April
11, 2000.
In October and December 1998, we issued convertible notes in the amount of
approximately $10.1 million and $825,000 to IBM and Perseus Capital, L.L.C.,
respectively. The notes may be converted into 1,512,257 and 123,526 shares of
Series E-2 preferred stock at any time and convert automatically on the closing
of an initial public offering of at least $20.0 million of stock. We also issued
warrants to purchase up to 151,335 shares and 12,379 shares of Series E-2
preferred stock, to IBM and Perseus Capital, L.L.C., respectively, at an
exercise price of approximately $6.68 per share, the same price at which the
related notes convert. Each share of Series E-2 preferred stock automatically
converts into common stock upon the effectiveness of the offering and due to an
adjustment triggered by our failure to complete this or a similar offering or
repay the convertible notes prior to specific dates, the earliest of which was
April 8, 1999, the conversion ratio has increased from 1:1 to 1.25:1. The Series
E-2 preferred stock warrants are exercisable for five years after their issuance
dates. All of the warrants to purchase Series E-2 preferred stock permit a
cashless exercise by surrendering shares of common stock as payment of the
exercise price automatically at the closing of this offering. On February 4,
1999, IBM agreed to purchase up to approximately $3.5 million of notes and
additional warrants, at our option, up to the date of closing of the offering.
The notes are similar to the earlier issued notes, but are not convertible into
preferred stock. The warrants are identical to the earlier issued warrants and
represent the right to purchase 51,771 shares of Series E-2 preferred stock. We
issued a note in the amount of $2.0 million and a warrant to purchase 30,012
shares of Series E-2 preferred stock to IBM on February 18, 1999 under the
February 4, 1999 agreement. On March 23, 1999 we issued a note in the amount of
approximately $1.41 million and a warrant to purchase 21,323 shares of Series
E-2 preferred stock to IBM. IBM has the right to require us to repay all
indebtedness under the additional notes in full upon the closing of the
offering.
On April 11, 1997, we issued 10,495,968 shares of Series E preferred stock
to IBM at a purchase price of approximately $6.68 per share. In addition, we
granted the four founders the right to purchase Series E preferred stock in
three equal installments before April 10, 1998 at the same price paid by IBM in
April 1997. On various dates between June 30, 1997 and March 31, 1998, we issued
a total of 299,457, 84,622, 17,891 and 4,596 shares of Series E preferred stock,
respectively, at a purchase price of approximately $6.68 per share, to Samir
Arora, David Kleinberg, Clement Mok and Sal Arora.
On March 14, 1997, we issued warrants to purchase 274,604, 105,511, 73,190,
109,783, 188,636, 13,581 and 10,551 shares of Series F preferred stock,
originally classified as Series D preferred stock, respectively, at a purchase
price of $10.80 per share, to Perseus U.S. Investors, L.L.C., Rae Technology,
LLC, Venrock Associates, L.P., Venrock Associates II, L.P., Norwest Equity
Partners V, John Sculley and Studio Archetype, respectively. On December 23,
1997, we issued a warrant to purchase 83,333 shares of Series F preferred stock,
at a purchase price of $10.80 per share, to IBM Credit Corp. These warrants are
exercisable for three years from the date of issuance. The holders of the
warrants may surrender them on a cashless exercise basis by surrendering shares
of common stock as payment of the exercise price on or after the closing of this
offering and before the expiration date.
Novell purchased 333,333 shares of our Series F-2 preferred stock for $9.00
per share, under a stock purchase agreement dated October 16, 1998. Under the
stock purchase agreement, Novell has
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"observer rights" at meetings of our board of directors so long as Novell
remains the beneficial owner of not less than 1% of our stock, assuming the
exercise or conversion of all options and warrants. In addition, Christopher M.
Stone, an Executive Vice President of Novell, is one of our directors. Novell
also acquired a warrant for the purchase of up to 16,666 shares of Series F-2
preferred stock at an exercise price $9.00 per share under the stock purchase
agreement. The warrant may be exercised between January 1, 2001 and December 31,
2003, but only if we have not completed an initial public offering of our
securities resulting in total cash proceeds of at least $30 million by December
31, 2000.
MC Silicon Valley, Inc., a subsidiary of Mitsubishi, acquired 55,555 shares
of our Series F-2 preferred stock at a price per share of $9.00, under the terms
of a stock purchase agreement dated October 28, 1998. Mitsubishi is also our
master distributor in Japan.
TRANSACTIONS WITH RAE TECHNOLOGY AND STUDIO ARCHETYPE
RAE TECHNOLOGY. In connection with our formation, Rae Technology and we
entered into a technology transfer agreement dated December 21, 1995 under which
Rae Technology granted us, among other things, an exclusive, perpetual,
transferable, worldwide and royalty-free license, with a right of sublicense, to
use technologies referred to as "SOLO" for all commercial applications on
commercial online networks, and all rights to the trademark "NetObjects." In
exchange for our original license and other intangible property we issued
1,666,666 shares of Series A preferred stock to Rae Technology. We also
purchased assets and equipment, and assumed lease obligations, of Rae Technology
and subleased 90% of Rae Technology's office space. Samir Arora, one of our
founders, our Chairman, Chief Executive Officer and President, is the President
and Chief Executive Officer and a director of Rae Technology, and Mr. Arora,
David Kleinberg, our Executive Vice President, Desktop Products and Online
Services, Morris Taradalsky, our Executive Vice President, Server Products and
Professional Services, and Sal Arora, Vice President, Engineering, Desktop
Products and Online Services, collectively own approximately 90% of the
outstanding equity interests of Rae Technology. Messrs. Arora, Kleinberg and
Arora also acquired shares of common stock in connection with our formation.
In March 1997, in connection with IBM's April 1997 acquisition of
approximately 80% of our stock, Rae Technology and we amended the technology
transfer agreement to expand our rights to SOLO and the "NetObjects" trademark
as they existed at the time and to limit Rae Technology's rights to SOLO and our
modifications to it from February 2, 1996 to December 31, 1998. As a result, Rae
Technology now has a non-transferable, perpetual, royalty-free non-exclusive
license to create and sell single user software programs primarily intended to
be used by individuals to manage personal data such as personal contacts,
events, schedules, tasks, projects, notes, pictures, lists of files and other
personal information.
On April 10, 1997, Rae Technology and we entered into a patent transfer and
license agreement under which we assigned all of our rights to four U.S. patent
applications and related rights and inventions and reserved for ourselves a
non-exclusive, perpetual, royalty-free, worldwide, irrevocable license to all of
the transferred rights and inventions, including any patents that issue on them.
Two patents have issued to date. The patent agreement was entered into in
connection with Rae Technology's amendment of the technology transfer agreement
in March 1997. Under the patent agreement we are entitled to receive 85% of all
license revenues earned by Rae Technology and its affiliates from the
transferred rights. We are obligated to reimburse Rae Technology for all patent
prosecution expenses and fees that are not offset by Rae Technology's share of
the licensing revenues. To date, Rae Technology has not earned any licensing
revenues, and we have reimbursed Rae Technology a total of approximately
$41,000. We have the right to reacquire all of the transferred rights, including
issued patents, from Rae Technology under a number of circumstances, including
on April 10, 2000 upon payment of a $5,000 transfer fee to Rae Technology,
unless we otherwise determine not to reacquire the rights at that
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time. We also may reacquire the transferred rights and any patents upon the
occurrence of events of default or Rae Technology's failure to meet licensing
revenue thresholds once it begins earning license fees.
STUDIO ARCHETYPE. In connection with our formation, Studio Archetype and we
entered into a technology license agreement dated December 21, 1995, under which
Studio Archetype granted to us, among other things, a non-exclusive, perpetual,
transferable, worldwide and royalty-free license, with a right of sublicense, to
use intellectual property rights and know-how referred to as the iD System. In
exchange for that license agreement, we issued 166,666 shares of Series A
preferred stock to Studio Archetype, valued at that time at approximately
$150,000.
IBM RELATIONSHIP
Upon the effectiveness of the merger that resulted in IBM's acquisition of
approximately 80% of our stock, Messrs. Dayton, Zisman and Anderegg became
directors of our Company. After the offering, IBM will beneficially own
approximately 54% of our outstanding stock immediately following the offering,
assuming the cashless exercise of all outstanding warrants by surrender of
shares of common stock as payment of the exercise price, conversion of the
convertible notes and no exercise of outstanding options and will continue to
exercise significant influence over the election of directors and other
corporate matters and over other matters submitted to a vote of our
stockholders. We and IBM have entered into numerous transactions and
arrangements including the following:
MERGER AGREEMENT. IBM acquired its controlling interest in us on April 11,
1997 pursuant to an agreement and plan of merger dated March 18, 1997 under
which IBM acquired 10,495,968 shares of Series E preferred stock for
approximately $6.68 per share, representing at the time approximately 80% of our
voting securities. Pursuant to the merger agreement, each preferred stockholder
agreed, severally and not jointly, to indemnify IBM and its affiliates against
any losses arising from any inaccuracy in, or any breach of, representations and
warranties made by us in the merger agreement and any related documents. The
obligations of any preferred stockholder to indemnify IBM and its affiliates
were to be satisfied only from the preferred stockholder's pro rata portion of
the securities and other funds held in escrow in accordance with an escrow
agreement. Rae Technology agreed to indemnify IBM and its affiliates, to the
extent of Rae Technology's pro rata portion, with respect to any inaccuracy in,
or breach of, representations and warranties pertaining to intellectual property
transferred by Rae Technology to us at the time of our formation. The preferred
stockholders deposited all outstanding shares of, and warrants to purchase
shares of, Series A preferred stock, Series C preferred stock and Series F
preferred stock held by them and outstanding immediately after the effective
time of the merger, and 10% of the IBM common stock issued to them under the
merger agreement into an escrow to secure the payment of the indemnification
obligations described above. The shares of IBM common stock held in escrow were
released without claims or offset in April 1998. The escrow agreement provides
that the remaining escrowed securities will be released to the preferred
stockholders on April 11, 1999, or promptly thereafter, subject to any claims
for indemnification or set-off.
In connection with the merger agreement, IBM also paid $250,000 for a
warrant to acquire 3,482,838 more shares of Series E preferred stock at an
exercise price of approximately $6.68 per share. During the same time period, we
and IBM also entered into a number of other agreements, including a
stockholders' agreement, a patent license agreement and a software license
agreement, each of which is discussed below, and a registration rights
agreement.
STOCKHOLDERS' AGREEMENT. On March 18, 1997, NetObjects, IBM and some of our
stockholders executed a stockholders agreement that, among other things,
provided for "freedom of action" for IBM and its affiliates to compete with us
without liability for breach of any fiduciary duty or for usurping any
"corporate opportunity." These protections extended to IBM's representatives on
the board of directors. The stockholders' agreement required approval by our
board of directors before
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our taking a number of actions, and these restrictions were incorporated into
Section 3.14 of our amended and restated bylaws. The stockholders' agreement was
terminated in connection with the offering, but the "freedom of action"
provisions are contained in our restated certificate of incorporation.
PATENT LICENSE AGREEMENT. On April 10, 1997, we and IBM executed a patent
license agreement that grants IBM a non-exclusive, royalty-free, perpetual
license to our patents as they are issued.
SOFTWARE LICENSE AGREEMENT. On March 18, 1997, we and IBM executed a
10-year software license agreement which provides for payment of royalties by
IBM to us in connection with sales of product bundles that include our products
and for payment to us for services performed in connection with the IBM
WebSphere project. Between March 18, 1997 and December 31, 1997, IBM made
nonrefundable prepayments to us totaling $10.5 million, which were recorded as
deferred revenues. As a result, any payments under the agreement, which include
services, royalty and internal license fee payment components, are credited
against the prepaid amount. This license agreement has been amended a number of
times. The size and the committed nature of this $10.5 nonrefundable prepayment
was more advantageous to us than what we could have obtained from a third party.
Under the software license agreement we are obligated to place all of our source
code into an escrow. IBM may obtain access to the source code upon events of
default related to our failure to provide required maintenance and support or
our bankruptcy or similar event of financial reorganization. IBM may use the
source code that it obtains to create derivative works, which it will own
subject to our rights in the underlying software. Additional terms of the
software license agreement and its amendments are as follows:
- Amendment Number 1 and Amendment Number 4 license IBM to use our products
in its internal operations for a one-time fee of $402,000 through April
30, 1998. The license was initially, for 3,000 copies but now provides for
an unlimited quantity. After April 30, 1998, IBM can pay for upgrade
copies at an annual rate of 25% of $402,000 or at a per copy royalty rate.
Amendment Number 4 also sets forth royalty rates for our products if they
are bundled and sold by IBM with IBM products. These rates are based on
the percentage which the value of the NetObjects product bears to the
total value of all of the other products in the bundle. If the value of
our product is equivalent to or less than the total value of all of the
other products in the bundle, we receive 37% of IBM's average selling
price for a stand-alone license of our product during a calendar quarter.
If the value of our product is more than the value of the other products,
we receive 69% of IBM's average selling price for a stand-alone license of
our product during a calendar quarter. If IBM sells our products alone, we
receive 75% of IBM's average selling price for a stand-alone license of
our product during a calendar quarter.
- In Amendment Number 3 and Amendment Number 7, IBM agreed to translate our
software into languages other than English for which we are required to
pay 115% of the costs associated with the translation. The costs are
recovered through the sales of our products outside of the United States
by IBM and Lotus by reducing the royalty rate otherwise due to us by 50%.
We are permitted to repay the translation costs over an extended period of
time, and the repayment is derived solely from earned international
royalties. We would not be able to obtain the same open-ended repayment
terms from a third party.
- We became an IBM "Business Partner" under Amendment Number 5 which permits
us to resell IBM products and pay IBM 50% of the royalty payment received
by us.
- We agreed to perform services for IBM to make our products compatible with
and to integrate our products with IBM's WebSphere products in Amendment
Number 6 and Amendment Number 8. Under Amendment Number 6 we were to
receive a minimum amount of
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license fees equal to the total amount of our expenditures on the project,
plus a 20% profit margin. Amendment No. 8 modified our arrangement to
provide for our receipt of services revenues equal to the total amount of
our expenditures plus a 5% profit margin instead. These amendments further
provide for us to receive license fees on bundles of our products with
IBM's WebSphere products calculated, generally, at 50% of the applicable
software license agreement royalty rate, as described above.
- IBM has paid us $350,000 for developing a capability in one of our
products so that it supports wireless markup language for IBM's wireless
group. Other than the license to IBM, we retain all interests in the
software.
- We have entered into letter agreements subject to all other terms of the
software license agreement to bundle NetObjects Fusion with Lotus'
Designer for Domino. Initially, the letter agreement committed Lotus to
pay us a minimum of $4.0 million in license fees for 200,000 copies of
NetObjects Fusion through September 30, 1998. In January 1999, we signed a
new letter agreement that extended the term to June 30, 1999 and increased
the minimum amount of license fees by $500,000 and the minimum number of
copies by 25,000. We recently entered into a new contract to bundle a
version of NetObjects Fusion with Lotus Designer Application Studio for
Domino R5, which expires on December 31, 1999. There are no commitments
for a minimum number of copies or minimum license fees under this new
contract.
OTHER LICENSE AGREEMENTS. We also entered into a trademark license
agreement wtih IBM that permits IBM to use our NetObjects TopPage trademark on
products developed by IBM in Japan. IBM will pay us fifty cents for each use.
IBM granted us a license to reproduce and create derivative works from and
to distribute a value-added version of IBM's Build-IT software until IBM
terminates the license. We must pay IBM 10% of the gross revenues received when
we distribute the software. There is a minimum royalty of $5 and a maximum
royalty of $20 per software bundle.
LOAN AND SECURITY AGREEMENT. On December 23, 1997, we and IBM Credit Corp.
executed a revolving loan and security agreement, as amended, against which we
have drawn approximately $19 million in total principal amount and issued
convertible revolving credit notes to IBM Credit Corp. for a corresponding
amount. The revolving notes bear interest at LIBOR plus 1.5%. In the event of
our default under the revolving notes, IBM Credit Corp. has the right to convert
the unpaid balance into shares of common stock at the lower of approximately
$6.68 per share or a price determined by independent appraisal. To secure our
obligations under the loan agreement, we granted a recorded first priority
security interest in all of our assets, including intangible assets, to IBM
Credit Corp. IBM has guaranteed our obligations under the revolving notes. We
would not have been able to obtain a $19.0 million loan from an independent
third party without the guarantee from IBM. We were not in compliance with a
financial convenant in the loan agreement concerning the amount of our operating
losses as of December 31, 1999 and March 31, 1999, but on February 3, 1999, IBM
Credit Corp. waived our compliance through December 31, 1998 and has since
agreed to take no action with respect to our noncompliance through May 31, 1999.
We will use proceeds from this offering to repay the credit facility, and it
will terminate upon repayment.
NOTE AND WARRANT PURCHASE AGREEMENT. We and IBM are parties to a note and
warrant purchase agreement dated October 8, 1998, pursuant to which we have
issued convertible notes in the aggregate principal amount of approximately
$10.1 million and $825,000, respectively, to IBM and Perseus Capital, L.L.C., an
affiliate of Perseus U.S. Investors, L.L.C. The notes bear interest at a rate of
10% per year. The principal and interest due under the convertible notes will be
converted automatically into shares of common stock upon closing of this
offering. The convertible notes are
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secured by a security interest in all of our assets and properties that is
second in priority to the security interest we granted to IBM Credit Corp. On
February 4, 1999, we and IBM amended the note and warrant purchase agreement to
permit us to sell up to $3.45 million of notes and additional warrants to IBM.
These notes will be payable in full upon the closing of this offering.
DEMAND NOTE. On April 23, 1999, we obtained an additional $2 million from
IBM under an unsecured demand note. The note bears interest at a rate of 10% per
annum. The principal and interest will be repaid from the proceeds of this
offering. We would not have been able to obtain this additional financing from
an independent third party.
VOTING AGREEMENT. In January 1999, we entered into a voting agreement with
IBM. For a description of the terms of this agreement, see
"Management--Contractual Arrangements."
STRATEGIC RELATIONSHIPS. We have a number of relationships with IBM and its
subsidiary, Lotus, under which some of our products are offered for sale through
a variety of IBM and Lotus channels, all of which are governed by the terms of
the software license agreement. The software license agreement has been amended
several times, and letter agreements have been entered into under a specific
provision of the license agreement to address these relationships. During fiscal
year 1998, approximately 36% of our total revenues were derived from IBM. As
long as we remain a subsidiary of IBM we may receive greater access to customers
and marketing activities, including advertising, direct marketing, tradeshows
and seminars, and advertising media rates that are significantly lower than
those generally available to a company of our size in our industry.
DISTRIBUTION AGREEMENT WITH NOVELL
We also have a strategic relationship with Novell. On September 30, 1998,
Novell agreed to bundle NetObjects Fusion with Novell's NetWare for Small
Business product offering under a license agreement through which we receive
royalties on a per unit basis as products are sold by Novell. We are entitled to
receive a minimum of $250,000 of royalties under the Novell agreement. This
license agreement continues through September 30, 1999 and will automatically
renew for additional one year periods unless terminated by either party. After
the first renewal year, either party may terminate the agreement on 90 days'
written notice. Christopher M. Stone, an Executive Vice President with Novell,
will become a director of NetObjects as of the offering date.
OUTSIDE DIRECTOR OPTION GRANTS AND EXPENSES
Effective on the closing of the offering, we will grant stock options to
Messrs. Sculley and Stone that will entitle each of them to purchase up to
20,000 shares of common stock at an exercise price equal to the public offering
price, vesting over four years. We also have granted an option to Mr. Sculley to
purchase up to 50,000 shares of common stock at an exercise price of $7.50,
vesting over four years, and will reimburse him for some expenses incurred in
connection with his attendance at board meetings.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of the common stock as of March 31, 1999, assuming conversion of all
shares of preferred stock into common stock, and as adjusted to reflect the sale
of 6,000,000 shares of common stock in the offering for (a) each person known to
us to own beneficially more than 5% of the common stock, (b) each of our
directors, (c) each of the named executive officers and (d) all executive
officers and directors as a group. Beneficial ownership is determined in
accordance with rules of the Securities and Exchange Commission, or the
Commission, and includes shares over which the beneficial owner exercises voting
or investment power. Shares of common stock subject to options or warrants
currently exercisable or exercisable within 60 days of March 31, 1999 are deemed
outstanding for the purpose of computing the percentage ownership of the person
holding the options or warrants, but are not deemed outstanding for the purpose
of computing the percentage ownership of any other person. Except as otherwise
indicated, and subject to community property laws where applicable, we believe,
based on information provided by these persons, that the persons named in the
table below have sole voting and investment power with respect to all shares of
common stock shown as beneficially owned by them:
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------------------------------------------
NUMBER OF SHARES
NUMBER OF SHARES ISSUABLE ON PERCENT
ISSUABLE ON EXERCISE OF OWNERSHIP
NUMBER OF SHARES EXERCISE OF OUTSTANDING OPTIONS -------------
BENEFICIALLY OUTSTANDING WITHIN 60 DAYS OF BEFORE
NAME OWNED WARRANTS MARCH 31, 1999 OFFERING
- ------------------------------------------------- ------------------- ------------------- ------------------- -------------
<S> <C> <C> <C> <C>
International Business Machines Corporation (1).. 14,119,537 3,623,569 76.0%
New Orchard Road
Armonk, NY 10504
Samir Arora (2).................................. 1,669,479 10,551 121,875 11.1
c/o NetObjects, Inc.
301 Galveston Drive
Redwood City, CA 94063
Perseus, L.L.C.(3)............................... 925,397 765,148 5.9
The Army and Navy Club Building
16271 I Street, N.W., Suite 610
Washington, D.C. 20006
Kenneth Socha (4).............................. 925,397 765,148 5.9
Frank Pearl (4)................................ 925,397 765,148 5.9
David Kleinberg (5).............................. 774,461 3,137 81,250 5.2
c/o NetObjects, Inc.
301 Galveston Drive
Redwood City, CA 94062
Morris Taradalsky (6)............................ 89,818 356 69,443 *
Mark Patton...................................... 76,493 76,493 *
John Sculley..................................... 37,504 37,504 *
Michael J. Shannahan............................. 42,881 42,881 *
Robert G. Anderegg............................... 0 *
Lee A. Dayton.................................... 0 *
Michael D. Zisman................................ 0 *
All directors and executive officers as a group
(8 persons) (7).................................. 2,490,215 48,055 391,942 16.3%
<CAPTION>
AFTER
NAME OFFERING
- ------------------------------------------------- -------------
<S> <C>
International Business Machines Corporation (1).. 57.6%
New Orchard Road
Armonk, NY 10504
Samir Arora (2).................................. 7.9
c/o NetObjects, Inc.
301 Galveston Drive
Redwood City, CA 94063
Perseus, L.L.C.(3)............................... 4.2
The Army and Navy Club Building
16271 I Street, N.W., Suite 610
Washington, D.C. 20006
Kenneth Socha (4).............................. 4.2
Frank Pearl (4)................................ 4.2
David Kleinberg (5).............................. 3.7
c/o NetObjects, Inc.
301 Galveston Drive
Redwood City, CA 94062
Morris Taradalsky (6)............................ *
Mark Patton...................................... *
John Sculley..................................... *
Michael J. Shannahan............................. *
Robert G. Anderegg............................... *
Lee A. Dayton.................................... *
Michael D. Zisman................................ *
All directors and executive officers as a group
(8 persons) (7).................................. 11.7%
</TABLE>
- ----------------------------------
* Less than 1%.
(1) Includes 2,118,789 shares of common stock issuable on conversion of
outstanding convertible notes.
(2) Includes 299,457 shares owned by Information Capital LLC, wholly owned by
Mr. Arora. Also includes 592,677 shares of common stock and 10,551 shares
of common stock issuable on exercise of outstanding warrants to purchase
convertible preferred stock owned by Rae Technology because he is its
President and owns a majority of its equity interests. Mr. Arora exercises
sole voting and dispositive power over the shares held by Rae Technology,
but disclaims
65
<PAGE>
beneficial ownership of the Rae Technology shares except to the extent of
his pecuniary interest therein. Sal Arora is the brother of Samir Arora.
(3) Perseus U.S. Investors, L.L.C. holds 758,291 shares of common stock
issuable on exercise of warrants, and Perseus Capital, L.L.C. holds 6,857
shares of common stock issuable on exercise of warrants. Includes 160,249
shares of common stock issuable on conversion of outstanding convertible
notes held by Perseus Capital, L.L.C. Perseus, L.L.C. is the manager of
Perseus U.S. Investors, L.L.C. and the indirect manager of Perseus Capital,
L.L.C. Three of our directors, Messrs. Sculley, Zisman and Arora, are
members of Perseus Capital, L.L.C. and one director, Mr. Sculley, is also a
member of Perseus U.S. Investors, L.L.C. They have no voting or dispositive
power over shares held by the Perseus entities and disclaim beneficial
ownership of all common stock held by the Perseus entities except to the
extent of their respective pecuniary interests therein.
(4) The individuals or entities listed have sole or shared voting and
dispositive power over the shares. Each party disclaims beneficial
ownership of the shares except to the extent of any pecuniary interest in
the shares.
(5) Includes 176,909 shares of common stock and 3,370 shares of common stock
issuable on exercise of outstanding warrants to purchase convertible
preferred stock, which is Mr. Kleinberg's pro rata share of securities held
by Rae Technology.
(6) Includes 20,018 shares of common stock and 356 shares of common stock
issuable on exercise of outstanding warrants to purchase convertible
preferred stock, which is Mr. Taradalsky's pro rata share of securities
held by Rae Technology.
(7) Includes securities held by Rae Technology, of which three of our executive
officers are members, owned or controlled by officers of NetObjects.
66
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock and provisions of our
restated certificate of incorporation and restated bylaws is a summary only and
is not a complete description. The descriptions of the common stock and
preferred stock reflect changes to our capital structure, including the
conversion of outstanding preferred stock into common stock and the deletion of
references to Series A, Series B, Series C, Series E, Series E-2, Series F and
Series F-2 preferred stock, that will occur on effectiveness of the offering
under the terms of our restated certificate of incorporation.
Upon completion of the offering our authorized capital stock will consist of
60,000,000 shares of common stock, par value $0.01 per share, and 6,000,000
shares of preferred stock, par value $0.01 per share.
COMMON STOCK
As of March 31, 1999, 2,182,750 shares of common stock were outstanding and
held of record by 110 stockholders, assuming no exercise after March 31, 1998 of
outstanding options or warrants. Each holder of common stock is entitled to the
following:
- one vote per share;
- dividends as may be declared by our board of directors out of funds
legally available therefor subject to the rights of any preferred stock
that may be outstanding; and
- his, her or its pro rata share in any distribution of our assets after
payment or providing for the payment of liabilities and the liquidation
preference of any outstanding preferred stock in the event of liquidation.
Holders of common stock have no cumulative voting rights or preemptive rights to
purchase or subscribe for any shares of our common stock or other securities.
All the outstanding shares of common stock are fully paid and nonassessable. As
of March 31, 1999, 2,900,087 shares of common stock were issuable upon exercise
of outstanding options at a weighted average exercise price of $3.13 per share.
PREFERRED STOCK
Our board of directors has the authority, subject to any limitations
prescribed by Delaware law, to issue shares of preferred stock in one or more
series and to fix and determine the relative rights and preferences of the
shares constituting any series to be established without any further vote or
action by the stockholders. Any shares of preferred stock so issued may have
priority over the common stock with respect to dividend, liquidation and other
rights. On closing of the offering, no shares of preferred stock will be
outstanding. We have no current intention to issue any shares of preferred
stock.
WARRANTS TO PURCHASE PREFERRED STOCK
As of March 31, 1999, we had outstanding warrants to purchase:
- 1,598,275 shares of Series C preferred stock at an exercise price of
approximately $1.82 per share which will terminate automatically on the
closing of the offering through cashless exercise by surrender of shares
of common stock as payment of the exercise price;
- 3,482,838 shares of Series E preferred stock at an exercise price of
approximately $6.68 per share which will expire on April 11, 2000;
- 215,049 shares of Series E-2 preferred stock at an exercise price of
approximately $6.68 per share which will expire between October 2003 and
February 2004;
- 16,666 shares of Series F-2 preferred stock at an exercise price of
approximately $9.00 per share which will terminate on the closing of the
offering without becoming exercisable; and
- 916,666 shares of Series F preferred stock at an exercise price of
approximately $10.80 per share which will expire between March 2000 and
December 2000.
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<PAGE>
The warrants to purchase shares of Series E preferred stock, Series E-2
preferred stock and Series F preferred stock will be exercisable for an
equivalent number of shares of common stock following the offering. For more
detail about the warrants to purchase preferred stock, see "Certain
Transactions--Sales of Common Stock and Preferred Stock."
VOTING AND OTHER MATTERS
The Board may authorize the issuance of preferred stock with voting or
conversion rights that could adversely affect the voting power or other rights
of the holders of common stock. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, could, under some circumstances, have the effect of delaying,
deferring or preventing a change of control.
ANTITAKEOVER EFFECTS OF PROVISIONS OF NETOBJECTS' RESTATED CERTIFICATE OF
INCORPORATION AND AMENDED AND RESTATED BYLAWS
The restated certificate of incorporation contains provisions relating to
the rights and powers of IBM that could have the effect of delaying, deferring
or preventing a change in control of NetObjects. For a description of the risks
associated with IBM's control of us, see "Risk Factors-- Our relationship with
IBM will substantially change after the offering which could harm our business
after the offering and could cause our revenues in fiscal year 1999 to fall
below those of fiscal year 1998."
Special meetings of the stockholders may be called only by the board of
directors, the Chairman of the board of directors, the Chief Executive Officer
or any holder of at least 25% of our outstanding common stock. The amended and
restated bylaws provide that stockholders seeking to bring business before, or
to nominate directors at, an annual meeting of stockholders must provide timely
notice thereof in writing. To be timely, a stockholder's notice must be received
by our Secretary not less than 120 calendar days nor more than 150 calendar days
before the date of our proxy statement sent to stockholders for the prior year's
annual meeting. The amended and restated bylaws also contain notice provisions
in the event that no annual meeting was held in the previous year, or if the
date of the applicable annual meeting has been changed by more than 30 days. The
amended and restated bylaws also contain specific requirements for the form of a
stockholder's notice. These provisions may preclude or deter some stockholders
from bringing matters before the stockholders or from making nominations of
directors, and may have the effect of delaying, deferring or preventing a change
in control of our company.
CONTRACTUAL AGREEMENTS RELATING TO VOTING
Under the voting agreement, IBM has agreed, in some circumstances, that it
shall not be permitted to elect more than three of the six directors,
notwithstanding its position as our majority stockholder. For a description of
the terms of this agreement, see "Management--Contractual Arrangements."
WAIVER OF DELAWARE ANTITAKEOVER STATUTE
Section 203 of the DGCL generally prohibits a publicly-held Delaware
corporation from engaging in a merger, asset sale or other transaction resulting
in a financial benefit with any person who, together with affiliation and
association, owns, or within three years, did own, 15% or more of a
corporation's voting stock. The prohibition continues for a period of three
years after the date of the transaction in which the person became an owner of
15% or more of the corporation's voting stock unless the business combination is
approved in a prescribed manner. The statute could prohibit or delay, defer or
prevent a "change in control" with respect to NetObjects. However, we have
waived the provisions of Section 203 by an amendment to our restated certificate
of incorporation.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is EquiServe.
68
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
If our stockholders sell substantial amounts of our stock in the public
market following the offering, then the market price of our stock could fall.
After the offering, 26,112,862 shares of our stock will be outstanding, assuming
no exercise of the underwriters' over-allotment option and no exercise of
outstanding options or warrants. Of those shares, the 6,000,000 shares sold in
the offering will be freely tradable except for any shares purchased by our
"affiliates," as defined in Rule 144 under the Securities Act. The remaining
20,112,862 restricted shares are "restricted securities," as that term is
defined in Rule 144, and may be sold in the public market only if registered or
if they qualify for an exemption from registration under Rule 144 or Rule 701,
which rules are summarized below. All of our officers and directors and almost
all of our stockholders have signed lock-up agreements pursuant to which they
have agreed not to sell any shares of common stock, or any securities
convertible into or exercisable or exchangeable for common stock, for 180 days
after the offering without the prior written consent of BT Alex. Brown. BT Alex.
Brown may, in its sole discretion, release all or any portion of the shares
subject to the lock up agreements.
The following table depicts securities eligible for future sale:
<TABLE>
<S> <C>
Total shares outstanding......................................... 26,112,862
Total restricted securities...................................... 20,112,862
Shares that are freely tradable after the date of this prospectus
under Rule 144(k), subject to the 180-day lock-up agreement.... 1,439,927
Shares that are freely tradable 90 days after the date of this
prospectus under Rule 144 or Rule 701, subject to the 180-day
lock-up agreement.............................................. 1,945,753
Shares that are freely tradable 180 days after the date of this
prospectus under Rule 144 (subject, in some cases, to volume
limitations), under Rule 144(k) or pursuant to a registration
statement to register for resale shares of common stock issued
on exercise of stock options................................... 18,318,973
</TABLE>
Following the offering, we intend to file a registration statement under the
Securities Act covering 3,466,702 shares of common stock reserved for issuance
under the 1997 Plan, the Special Plan and the ESPP. Upon expiration of the
lock-up agreements, at least 1,301,232 shares of common stock will be subject to
vested options, based on options outstanding as of March 31, 1999. The
registration statement is expected to be filed and become effective prior to
expiration of the lock-up agreements; accordingly, shares registered under the
registration statement will, subject to Rule 144 volume limitations applicable
to "affiliates," be available for sale in the open market immediately after the
lock up agreements expire. In addition, 3,110,924 shares of common stock
issuable upon exercise of warrants, assuming all outstanding warrants are
exercised, all of which are subject to the lock-up agreements, will be eligible
for sale following expiration of the lock-up agreements, subject to compliance
with Rule 144.
Assuming the exercise of the Series E preferred stock warrant by IBM, the
conversion of all Series E preferred stock into common stock and conversion of
all Series C preferred stock into common stock, the exercise of warrants for
Series F preferred stock and the conversion of all convertible notes and
exercise or conversion of the warrants issued under the note and warrant
purchase agreement and conversion of all Series E-2 preferred stock, the holders
of 17,278,167 shares of common stock and warrants have demand and piggyback
registration rights. The exercise of these rights could adversely affect the
market price of our stock. For the details of the registration rights, see
"--Registration Rights."
69
<PAGE>
In general, Rule 144 provides that any person who has beneficially owned
shares for at least one year, including an affiliate, is generally entitled to
sell, within any three-month period, a number of shares that does not exceed the
greater of 1% of the shares of common stock then outstanding, approximately
261,128 shares immediately after the offering, or the reported average weekly
trading volume of the common stock during the four calendar weeks immediately
preceding the date on which notice of the sale is sent to the Commission. Sales
under Rule 144 are subject to manner of sale restrictions, notice requirements
and availability of current public information concerning us. A person who is
not an affiliate of ours, and who has not been an affiliate within three months
prior to the sale, generally may sell shares without regard to the limitations
of Rule 144 provided that the person has held the shares for at least two years.
Under Rule 144(k), a person who is not deemed to have been an "affiliate" of
ours at any time during the 90 days preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, is entitled to sell
the shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
Any employee, director or officer of ours, or consultant to us, holding
shares purchased pursuant to a written compensatory plan or contract, including
options, entered into prior to the offering is entitled to rely on the resale
provisions of Rule 701, which permit nonaffiliates to sell shares without having
to comply with the public information, holding period, volume limitation or
notice requirements of Rule 144 and permit affiliates to sell their Rule 701
shares without having to comply with the holding period restrictions of Rule
144, in each case beginning 90 days after the date of this prospectus.
REGISTRATION RIGHTS
Our second amended and restated registration rights agreement provides
rights to register shares under the Securities Act to some holders of our
capital stock or their permitted transferees. Under the terms of this agreement,
if we propose to register any of our securities under the Securities Act in an
underwritten primary registration, we must include the shares that we have been
requested to register pursuant to "piggyback" rights, subject to any limitation
set by the underwriters on the number of shares included in the registration.
Also, IBM may require us to use our best efforts, not more than twice, to file a
registration statement under the Securities Act, at our expense, with respect to
IBM's shares of common stock. None of the shares of any stockholder have been
registered for sale in this offering.
Following this offering, IBM also may require us to use our best efforts to
file up to two registration statements on Form S-3, at the expense of IBM,
provided that the aggregate offering price net of underwriting discounts and
commissions for each registration is not less than $500,000. In addition, any
holder of Series E-2 preferred stock and any holder of at least 100,000 shares
of Series F-2 preferred stock may require us to use our best efforts to file
registration statements on Form S-3, at our expense, to register shares of
common stock acquired in connection with the exercise of warrants. IBM may
assign its registration rights to any person to whom it transfers at least
1,000,000 shares of common stock.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives BT Alex. Brown
Incorporated, BancBoston Robertson Stephens and U.S. Bancorp Piper Jaffray Inc.,
the underwriters' representatives, have severally agreed to purchase from us the
following numbers of shares of common stock at the initial public offering price
less the underwriting discounts and commissions set forth on the cover page of
this prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------------------------------------------------------------------------------------------------- -----------
<S> <C>
BT Alex. Brown Incorporated..........................................................................
BancBoston Robertson Stephens........................................................................
U.S. Bancorp Piper Jaffray Inc.......................................................................
-----------
Total............................................................................................ 6,000,000
-----------
-----------
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to specified conditions and that the underwriters will purchase all
shares of the common stock offered in the offering if any of the shares are
purchased.
We have been advised by the underwriters' representatives that the
underwriters propose to offer the shares of common stock to the public at the
initial public offering price set forth on the cover page of this prospectus and
to dealers at that price less a concession not in excess of $ per share.
The underwriters may allow, and the dealers may re-allow, a concession not in
excess of $ per share to other dealers. After the initial public offering,
the offering price and other selling terms may be changed by the underwriters'
representatives.
We have granted to the underwriters an option, exercisable not later than 30
days after the date of this prospectus, to purchase up to 900,000 additional
shares of common stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
prospectus. To the extent that the underwriters exercise the option, each of the
underwriters will have a firm commitment to purchase approximately the same
percentage of the option shares that the number of shares of common stock to be
purchased by it in the above table bears to the total number of shares to be
sold in the offering. The underwriters may exercise the option only to cover
over-allotments made in connection with the sale of the common stock offered in
the offering. If purchased, the underwriters will offer the additional shares on
the same terms as those on which the shares are being offered.
At our request, the underwriters have reserved up to 328,000 shares of
common stock for sale, at the initial public offering price, to employees and
friends of ours through a directed share program. The number of shares of common
stock available for sale to the general public in the public offering will be
reduced to the extent that employees and friends purchase the reserved shares.
AMOUNTS PAYABLE TO THE UNDERWRITERS
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
------------ -------------
<S> <C> <C>
Per Share............................................................................ $ $
Total................................................................................ $
</TABLE>
71
<PAGE>
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act of 1933.
Each of our officers, directors and a substantial majority of our
stockholders have agreed not to offer, sell, contract to sell or otherwise
dispose of, or enter into any transaction which is designed to, or could be
expected to result in the disposition of any portion of, any common stock for a
period of 180 days after the effective date of the registration statement of
which this prospectus is a part, without the prior written consent of BT Alex.
Brown Incorporated, except in the case of transfers to charitable organizations
or from entities to their partners. Such consent may be given at any time
without public notice. We have entered into a similar agreement, except that we
may issue, and grant options or warrants to purchase, shares of common stock or
any securities convertible into, exercisable for or exchangeable for shares of
common stock, pursuant to the exercise of outstanding options and warrants and
our issuance of options and stock granted under the existing stock option and
stock purchase plans.
The underwriters' representatives have advised us that the underwriters do
not intend to confirm sales to any account over which they exercise
discretionary authority.
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for the common stock will
be determined by negotiation among us and the underwriters' representatives.
Among the factors considered in negotiations are prevailing market conditions,
our results of operations in recent periods, the market capitalizations and
stages of development of other companies that we and the underwriters'
representatives believe to be comparable to us, estimates of our business
potential, the present stage of our development and other factors deemed
relevant.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
market price of the common stock. Specifically, the underwriters may over-allot
shares of the common stock in connection with this offering, thereby creating a
short position in the underwriters' syndicate account. Additionally, to cover
over-allotments or to stabilize the market price of the common stock, the
underwriters may bid for, and purchase, shares of the common stock in the open
market. Any of these activities may maintain the market price of the common
stock at a level above that which might otherwise prevail in the open market.
The underwriters are not required to engage in these activities, and, if
commenced, the activities may be discontinued at any time. The underwriters'
representatives, on behalf of the underwriters, also may reclaim selling
concessions allowed to an underwriter or dealer, if the syndicate repurchases
shares distributed by that underwriter or dealer.
LEGAL MATTERS
The validity of the common stock being offered hereby will be passed upon
for NetObjects by McCutchen, Doyle, Brown & Enersen LLP, Palo Alto, California.
Alan Kalin, a partner in the firm of McCutchen, Doyle, Brown & Enersen LLP,
serves as our Secretary and indirectly beneficially owns 12,060 shares of the
common stock. Legal matters in connection with the offering will be passed upon
for the underwriters by Cravath, Swaine & Moore, New York, New York.
EXPERTS
The consolidated financial statements and schedule of NetObjects, Inc. as of
September 30, 1997 and 1998, and for the period from November 21, 1995
(inception) to September 30, 1996, and for each of the years in the two-year
period ended September 30, 1998 included herein and in the registration
statement are included in reliance upon the reports of KPMG LLP, independent
auditors, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
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<PAGE>
The report of KPMG LLP covering the September 30, 1998 consolidated
financial statements contains an explanatory paragraph that states that our
recurring losses from operations and net capital deficiency raise substantial
doubt about our ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the
outcome of that uncertainty.
CHANGE IN AUDITORS
Ernst & Young LLP was previously our principal accountant. On October 29,
1997, Ernst & Young LLP was dismissed as our principal accountant and KPMG LLP
was engaged to audit our consolidated financial statements. The board of
directors has approved the appointment of KPMG LLP as our principal accountants.
In connection with the audit for the period from November 21, 1995, our
inception, through September 30, 1996, and the subsequent interim period through
October 29, 1997, there were no disagreements with Ernst & Young LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures, which disagreements if not resolved to their
satisfaction would have caused them to make reference in connection with their
opinion on the subject matter of the disagreement.
The audit report of Ernst & Young LLP on our consolidated financial
statements as of and for the period from November 21, 1995, our inception,
through September 30, 1996 contained a statement that our operating loss since
inception raises substantial doubt about our ability to continue as a going
concern.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Commission a registration statement on Form S-1,
including exhibits, schedules and amendments filed with this registration
statement, under the Securities Act with respect to the common stock pursuant to
be sold under this prospectus. Prior to the offering we were not required to
file reports with the Commission. This prospectus does not contain all the
information set forth in the registration statement. For further information
about NetObjects and the shares of common stock to be sold in the offering,
please refer to the registration statement. Statements made in this prospectus
concerning the contents of any contract, agreement or other document filed as an
exhibit to the registration statement are summaries of the terms of contracts,
agreements or documents and are not necessarily complete. Complete exhibits have
been filed with the registration statement.
The registration statement and exhibits may be inspected, without charge,
and copies may be obtained at prescribed rates, at the Commission's Public
Reference facility maintained by the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The public may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. The registration
statement and other information filed with the Commission is available at the
web site maintained by the Commission on the world wide web at
http://www.sec.gov.
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent accountants and quarterly
reports for the first three quarters of each fiscal year containing unaudited
financial statements.
73
<PAGE>
NETOBJECTS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Form of Independent Auditors' Report.................................................. F-2
Consolidated Balance Sheets as of September 30, 1997 and 1998 and March 31, 1999
(unaudited)......................................................................... F-3
Consolidated Statements of Operations for the period from November 21, 1995
(inception) to September 30, 1996, for the years ended September 30, 1997 and 1998
and for the six-month periods ended March 31, 1998 and 1999 (unaudited)............. F-4
Consolidated Statements of Shareholders' Deficit for the period from November 21, 1995
(inception) to September 30, 1996, for the years ended September 30, 1997 and 1998
and for the six-month period ended March 31, 1999 (unaudited)....................... F-5
Consolidated Statements of Cash Flows for the period from November 21, 1995
(inception) to September 30, 1996, for the years ended September 30, 1997 and 1998
and for the six-month periods ended March 31, 1998 and 1999 (unaudited)............. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
FORM OF INDEPENDENT AUDITORS' REPORT
The Board of Directors
NetObjects, Inc.:
When the recapitalization, which includes a change in par value, the number
of shares authorized and a reverse stock split, referred to in Note 8 of the
Notes to Consolidated Financial Statements has been consumated, we will be in a
position to render the following report.
/s/ KPMG LLP
The Board of Directors
NetObjects, Inc.:
We have audited the accompanying consolidated balance sheets of NetObjects,
Inc. and subsidiary (the Company), a majority owned subsidiary of IBM
Corporation, as of September 30, 1997 and 1998, and the related consolidated
statements of operations, stockholders' deficit, and cash flows for the period
from November 21, 1995 (inception) to September 30, 1996, and for each of the
years in the two-year period ended September 30, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of NetObjects,
Inc. and subsidiary, a majority owned subsidiary of IBM Corporation, as of
September 30, 1997 and 1998, and the results of their operations and their cash
flows for the period from November 21, 1995 (inception) to September 30, 1996,
and for each of the years in the two-year period ended September 30, 1998, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1(d) to the consolidated financial statements, the Company has suffered
recurring losses from operations and has a net capital deficit that raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1(d). The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Mountain View, California,
December 21, 1998, except as to Note 8,
which is as of , 1998
F-2
<PAGE>
NETOBJECTS, INC.
AND SUBSIDIARY
(A MAJORITY OWNED SUBSIDIARY OF IBM CORPORATION)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31, 1999
-------------------- ------------------------
1997 1998 ACTUAL PRO FORMA(A)
--------- --------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash................................................................. $ 303 $ 459 $ 1,816 $ 3,816
Accounts receivable, net of allowances of $781, $2,263, and $969 as
of September 30, 1997 and 1998, and March 31, 1999, respectively... 2,018 2,292 3,658 3,658
Prepaid expenses and other current assets............................ 448 754 1,437 1,437
--------- --------- --------- -------------
Total current assets............................................. 2,769 3,505 6,911 8,911
Property and equipment, net............................................ 1,836 1,640 2,247 2,247
--------- --------- --------- -------------
Total assets........................................................... $ 4,605 $ 5,145 $ 9,158 $ 11,158
--------- --------- --------- -------------
--------- --------- --------- -------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Short-term borrowings from IBM and IBM Credit Corp................... $ -- $ 20,666 $ 22,165 $ 24,421
Short-term borrowings................................................ 2,050 -- -- --
Accounts payable..................................................... 2,518 4,723 3,556 3,556
Accrued compensation................................................. 1,041 1,690 1,355 1,355
Other accrued liabilities............................................ 684 1,066 1,778 1,361
Deferred revenue from IBM............................................ 6,228 5,121 53 53
Other deferred revenues.............................................. 61 169 673 673
Current portion of capital lease obligations......................... 303 299 293 293
--------- --------- --------- -------------
Total current liabilities........................................ 12,885 33,734 29,873 31,712
Capital lease obligations, less current portion........................ 633 336 212 212
Convertible notes from IBM and related party........................... -- -- 10,111 --
--------- --------- --------- -------------
Total long-term obligations...................................... 633 336 10,323 212
--------- --------- --------- -------------
Total liabilities................................................ 13,518 34,070 40,196 31,924
--------- --------- --------- -------------
Commitments
Stockholders' deficit:
Preferred stock, $0.01 par value; 22,816,333 shares authorized;
11,394,965, 11,576,937 and 12,700,399 shares issued and outstanding
as of September 30, 1997 and 1998 and March 31, 1999, respectively,
and none outstanding on a pro forma basis as of March 31, 1999
(aggregrate liquidation preference of $75,279,768 as of September
30, 1998).......................................................... 107 109 121 --
Common stock, $0.01 par value; 28,333,333 shares authorized;
1,857,449, 2,001,186, and 2,182,750 shares issued and outstanding
as of September 30, 1997 and 1998 and March 31, 1999, respectively,
and 20,112,862 shares issued and outstanding on a pro forma basis
at March 31, 1999.................................................. 18 20 21 201
Additional paid-in capital........................................... 15,599 18,318 34,252 44,721
Deferred stock-based compensation.................................... -- (541) (1,838) (1,838)
Notes receivable from stockholders................................... (143) (113) (23) (23)
Accumulated other comprehensive losses............................... -- -- (3) (3)
Accumulated deficit.................................................. (24,494) (46,718) (63,568) (63,824)
--------- --------- --------- -------------
Total stockholders' deficit...................................... (8,913) (28,925) (31,038) (20,766)
--------- --------- --------- -------------
Total liabilities and stockholders' deficit.......................... $ 4,605 $ 5,145 $ 9,158 $ 11,158
--------- --------- --------- -------------
--------- --------- --------- -------------
</TABLE>
- ------------------------------
(a) Assumes the conversion of all outstanding shares of preferred stock into
common stock, the cash payment from IBM of $2 million for the purchase of
promissory notes, the issuance of 2,118,789 shares of common stock,
reflecting the conversion of $10,910,000 of convertible debt and $417,060 in
related interest, the issuance of 3,110,924 shares of common stock upon the
cashless exercise of 1,598,277, 3,482,838, 215,050 and 916,668 warrants to
purchase Series C, Series E, Series E-2 and Series F convertible preferred
stock, respectively at a weighted average exercise price of $6.04 per share
by surrending shares of common stock as payment of the exercise price,
assuming an initial public offering price of $12.00 per share and the
accretion of discount on short-term borrowings of $256,000.
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
NETOBJECTS, INC.
AND SUBSIDIARY
(A MAJORITY OWNED SUBSIDIARY OF IBM)
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 21,
1995 YEAR ENDED SIX MONTHS ENDED
(INCEPTION) TO SEPTEMBER 30, MARCH 31,
SEPTEMBER 30, -------------------------- --------------------------
1996 1997 1998 1998 1999
-------------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Software license fees.................. $ -- $ 7,392 $ 9,703 $ 4,571 $ 5,545
Service revenues....................... -- -- -- -- 630
Software license fees from IBM......... -- 175 2,700 1,215 2,335
Service revenues from IBM.............. -- -- 2,867 206 2,733
-------------- ------------ ------------ ------------ ------------
Total revenues....................... -- 7,567 15,270 5,992 11,243
-------------- ------------ ------------ ------------ ------------
Cost of revenues:
Software license fees.................. -- 772 2,531 982 948
Service revenues....................... -- -- -- -- 724
Service revenues from IBM.............. -- -- 2,562 184 2,092
-------------- ------------ ------------ ------------ ------------
Total cost of revenues............... -- 772 5,093 1,166 3,764
-------------- ------------ ------------ ------------ ------------
Gross profit......................... -- 6,795 10,177 4,826 7,479
-------------- ------------ ------------ ------------ ------------
Operating expenses:
Research and development............... 2,765 8,436 10,231 5,855 3,985
Sales and marketing.................... 2,998 12,161 17,114 8,413 9,026
General and administrative............. 978 3,762 3,575 1,746 1,966
Stock-based compensation............... -- -- 227 53 170
-------------- ------------ ------------ ------------ ------------
Total operating expenses............. 6,741 24,359 31,147 16,067 15,147
-------------- ------------ ------------ ------------ ------------
Operating loss....................... (6,741) (17,564) (20,970) (11,241) (7,668)
Interest income (expense)................ 46 (234) (1,194) (441) (1,723)
Nonrecurring interest charge on
beneficial conversion feature of
convertible debt....................... -- -- -- -- (7,457)
-------------- ------------ ------------ ------------ ------------
Loss before income taxes............. (6,695) (17,798) (22,164) (11,682) (16,848)
Income taxes............................. -- 1 60 (37) 2
-------------- ------------ ------------ ------------ ------------
Net loss............................. $ (6,695) $ (17,799) $ (22,224) $ (11,719) $ (16,850)
Translation adjustment................... -- -- -- --
-------------- ------------ ------------ ------------ ------------
Comprehensive loss................... $ (6,695) $ (17,799) $ (22,224) $ (11,719) $ (16,850)
-------------- ------------ ------------ ------------ ------------
-------------- ------------ ------------ ------------ ------------
Basic and diluted net loss per share..... $ (4.10) $ (10.45) $ (12.26) $ (6.63) $ (8.33)
-------------- ------------ ------------ ------------ ------------
-------------- ------------ ------------ ------------ ------------
Shares used to compute basic and diluted
net loss per share..................... 1,634,259 1,702,726 1,812,484 1,768,429 2,023,214
-------------- ------------ ------------ ------------ ------------
-------------- ------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NETOBJECTS INC.
AND SUBSIDIARY
(A MAJORITY OWNED SUBSIDIARY OF IBM)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
PERIOD FROM NOVEMBER 21, 1995 (INCEPTION) TO SEPTEMBER 30, 1996 AND FOR THE
YEARS ENDED SEPTEMBER 30, 1997 AND 1998
AND FOR THE SIX-MONTH PERIOD ENDED MARCH 31, 1999 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK
-----------------------------------------------------------------------------------
SERIES A SERIES B SERIES C SERIES E SERIES F
-------------- -------------- -------------- -------------- ---------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of November 21, 1995
(inception)...................... -- $-- -- $-- -- $-- -- $-- -- $--
Exercise of stock options.......... -- -- -- -- -- -- -- -- -- --
Issuance of common stock........... -- -- -- -- -- -- -- -- -- --
Issuance of Series A preferred
stock in exchange for
technology....................... 1,833 -- -- -- -- -- -- -- -- --
Issuance of Series B preferred
stock, net of $59 in issuance
fees............................. -- -- 4,467 45 -- -- -- -- -- --
Net loss........................... -- -- -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Balances, September 30, 1996....... 1,833 -- 4,467 45 -- -- -- -- -- --
Exercise of stock options.......... -- -- -- -- -- -- -- -- -- --
Issuance of common stock........... -- -- -- -- -- -- -- -- -- --
Repurchase of restricted stock..... -- -- -- -- -- -- -- -- -- --
Warrants exercised................. -- -- 27 -- 4,821 48 23 -- -- --
Issuance of Series E and F
warrants......................... -- -- -- -- -- -- -- -- -- --
Conversion of Series A, B, and C
preferred stock to Series E
preferred stock.................. (1,181) -- (4,494) (45) (4,821) (48) 10,495 105 -- --
Issuance of Series E preferred
stock............................ -- -- -- -- -- -- 225 2 -- --
Net loss........................... -- -- -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Balances, September 30, 1997....... 652 -- -- -- -- -- 10,743 107 -- --
Exercise of stock options.......... -- -- -- -- -- -- -- -- -- --
Issuance of common stock........... -- -- -- -- -- -- -- -- -- --
Repurchase of restricted stock..... -- -- -- -- -- -- -- -- -- --
Warrant to purchase Series F
preferred stock.................. -- -- -- -- -- -- -- -- -- --
Issuance of Series E preferred
stock............................ -- -- -- -- -- -- 182 2 -- --
Repayment of stockholder notes
receivable....................... -- -- -- -- -- -- -- -- -- --
Deferred compensation related to
stock option grants.............. -- -- -- -- -- -- -- -- -- --
Amortization of stock-based
compensation..................... -- -- -- -- -- -- -- -- -- --
Net loss........................... -- -- -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Balances, September 30, 1998....... 652 $-- -- $-- -- $-- 10,925 $109 -- $--
Exercise of stock options
(unaudited)...................... -- -- -- -- -- -- -- -- -- --
Issuance of common stock
(unaudited)...................... -- -- -- -- -- -- -- -- -- --
Repurchase of restricted stock
(unaudited)...................... -- -- -- -- -- -- -- -- --
Warrants exercised (unaudited)..... -- -- -- -- 652 7 -- -- -- --
Warrants to purchase Series E
Preferred Stock (unaudited)...... -- -- -- -- -- -- -- -- -- --
Issuance of in the money
convertible debt and warrants to
purchase Series E preferred stock
(unaudited)...................... -- -- -- -- -- -- -- -- -- --
Issuance of Series F preferred
stock net of $30 issuance costs
(unaudited)...................... -- -- -- -- -- -- -- -- 389 4
Repayment of Stockholder notes
(unaudited)...................... -- -- -- -- -- -- -- -- -- --
Issuance of Series E preferred
stock net of $67 issuance costs
(unaudited)...................... -- -- -- -- -- -- 82 1 -- --
Deferred compensation related to
stock option grants
(unaudited)...................... -- -- -- -- -- -- -- -- -- --
Amortization of stock-based
compensation (unaudited)......... -- -- -- -- -- -- -- -- -- --
Translation adjustment
(unaudited)...................... -- -- -- -- -- -- -- -- -- --
Net loss (unaudited)............... -- -- -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Balances, March 31, 1999
(unaudited)...................... 652 $-- -- $-- 652 $ 7 11,007 $110 389 $ 4
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<CAPTION>
COMMON STOCK NOTES ACCUMULATED
ADDITIONAL DEFERRED RECEIVABLE OTHER
--------------- PAID-IN STOCK-BASED FROM COMPREHENSIVE ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS LOSSES DEFICIT
------ ------ ---------- ------------- ------------ -------------- -----------
<S> <C>
Balances as of November 21, 1995
(inception)...................... -- $-- -- -- -- -- --
Exercise of stock options.......... 259 3 28 -- -- -- --
Issuance of common stock........... 1,633 16 133 -- (143) -- --
Issuance of Series A preferred
stock in exchange for
technology....................... -- -- -- -- -- -- --
Issuance of Series B preferred
stock, net of $59 in issuance
fees............................. -- -- 5,256 -- -- -- --
Net loss........................... -- -- -- -- -- -- (6,695)
------ ------ ---------- ------------- ----- --- -----------
Balances, September 30, 1996....... 1,892 19 5,417 -- (143) -- (6,695)
Exercise of stock options.......... 127 1 15 -- -- -- --
Issuance of common stock........... 2 -- 1 -- -- -- --
Repurchase of restricted stock..... (164) (2) (18) -- -- -- --
Warrants exercised................. -- -- 8,400 -- -- -- --
Issuance of Series E and F
warrants......................... -- -- 298 -- -- -- --
Conversion of Series A, B, and C
preferred stock to Series E
preferred stock.................. -- -- (12) -- -- -- --
Issuance of Series E preferred
stock............................ -- -- 1,498 -- -- -- --
Net loss........................... -- -- -- -- -- -- (17,799)
------ ------ ---------- ------------- ----- --- -----------
Balances, September 30, 1997....... 1,857 18 15,599 -- (143) -- (24,494)
Exercise of stock options.......... 144 2 89 -- -- -- --
Issuance of common stock........... 18 -- 116 -- -- -- --
Repurchase of restricted stock..... (18) -- (2) -- -- -- --
Warrant to purchase Series F
preferred stock.................. -- -- 535 -- -- -- --
Issuance of Series E preferred
stock............................ -- -- 1,213 -- -- -- --
Repayment of stockholder notes
receivable....................... -- -- -- -- 30 -- --
Deferred compensation related to
stock option grants.............. -- -- 768 (768) -- -- --
Amortization of stock-based
compensation..................... -- -- -- 227 -- -- --
Net loss........................... -- -- -- -- -- -- (22,224)
------ ------ ---------- ------------- ----- --- -----------
Balances, September 30, 1998....... 2,001 $ 20 18,318 (541) (113) -- (46,718)
Exercise of stock options
(unaudited)...................... 177 1 129 -- -- -- --
Issuance of common stock
(unaudited)...................... 33 -- 316 -- -- -- --
Repurchase of restricted stock
(unaudited)...................... (28) -- (3) -- -- -- --
Warrants exercised (unaudited)..... -- -- 1,181 -- -- -- --
Warrants to purchase Series E
Preferred Stock (unaudited)...... -- -- 120 -- -- -- --
Issuance of in the money
convertible debt and warrants to
purchase Series E preferred stock
(unaudited)...................... -- -- 8,776 -- -- -- --
Issuance of Series F preferred
stock net of $30 issuance costs
(unaudited)...................... -- -- 3,466 -- -- -- --
Repayment of Stockholder notes
(unaudited)...................... -- -- -- -- 90 -- --
Issuance of Series E preferred
stock net of $67 issuance costs
(unaudited)...................... -- -- 482 -- -- -- --
Deferred compensation related to
stock option grants
(unaudited)...................... -- -- 1,467 (1,467) -- -- --
Amortization of stock-based
compensation (unaudited)......... -- -- -- 170 -- -- --
Translation adjustment
(unaudited)...................... -- -- -- -- -- (3) --
Net loss (unaudited)............... -- -- -- -- -- -- (16,850)
------ ------ ---------- ------------- ----- --- -----------
Balances, March 31, 1999
(unaudited)...................... 2,183 $ 21 34,252 (1,838) (23) (3) (63,568)
------ ------ ---------- ------------- ----- --- -----------
------ ------ ---------- ------------- ----- --- -----------
<CAPTION>
TOTAL
STOCKHOLDERS'
DEFICIT
-------------
Balances as of November 21, 1995
(inception)...................... --
Exercise of stock options.......... 31
Issuance of common stock........... 6
Issuance of Series A preferred
stock in exchange for
technology....................... --
Issuance of Series B preferred
stock, net of $59 in issuance
fees............................. 5,301
Net loss........................... (6,695)
-------------
Balances, September 30, 1996....... (1,357)
Exercise of stock options.......... 16
Issuance of common stock........... 1
Repurchase of restricted stock..... (20)
Warrants exercised................. 8,448
Issuance of Series E and F
warrants......................... 298
Conversion of Series A, B, and C
preferred stock to Series E
preferred stock.................. --
Issuance of Series E preferred
stock............................ 1,500
Net loss........................... (17,799)
-------------
Balances, September 30, 1997....... (8,913)
Exercise of stock options.......... 91
Issuance of common stock........... 116
Repurchase of restricted stock..... (2)
Warrant to purchase Series F
preferred stock.................. 535
Issuance of Series E preferred
stock............................ 1,215
Repayment of stockholder notes
receivable....................... 30
Deferred compensation related to
stock option grants.............. --
Amortization of stock-based
compensation..................... 227
Net loss........................... (22,224)
-------------
Balances, September 30, 1998....... (28,925)
Exercise of stock options
(unaudited)...................... 130
Issuance of common stock
(unaudited)...................... 316
Repurchase of restricted stock
(unaudited)...................... (3)
Warrants exercised (unaudited)..... 1,188
Warrants to purchase Series E
Preferred Stock (unaudited)...... 120
Issuance of in the money
convertible debt and warrants to
purchase Series E preferred stock
(unaudited)...................... 8,776
Issuance of Series F preferred
stock net of $30 issuance costs
(unaudited)...................... 3,470
Repayment of Stockholder notes
(unaudited)...................... 90
Issuance of Series E preferred
stock net of $67 issuance costs
(unaudited)...................... 483
Deferred compensation related to
stock option grants
(unaudited)...................... --
Amortization of stock-based
compensation (unaudited)......... 170
Translation adjustment
(unaudited)...................... (3)
Net loss (unaudited)............... (16,850)
-------------
Balances, March 31, 1999
(unaudited)...................... (31,038)
-------------
-------------
</TABLE>
F-5
<PAGE>
NETOBJECTS, INC.
AND SUBSIDIARY
(A MAJORITY OWNED SUBSIDIARY OF IBM)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 21,
1995 YEAR ENDED SEPTEMBER SIX MONTHS ENDED
(INCEPTION) TO 30, MARCH 31,
SEPTEMBER 30, -------------------- --------------------
1996 1997 1998 1998 1999
--------------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................................... $ (6,695) $ (17,799) $ (22,224) $ (11,719) $ (16,850)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................ 88 697 1,104 533 522
Accretion of discount on borrowings.......................... -- -- 201 67 599
Nonrecurring interest charge on beneficial conversion feature
of convertible debt........................................ -- -- -- -- 7,457
Amortization of deferred stock-based compensation............ -- -- 227 53 170
Changes in operating assets and liabilities:
Accounts receivable........................................ -- (2,018) (275) 47 (1,366)
Prepaid expenses and other current assets.................. (474) 27 (306) (32) (683)
Accounts payable........................................... 1,759 721 2,205 196 (852)
Accrued compensation....................................... 342 699 649 454 (335)
Other accrued liabilities.................................. 37 685 382 108 260
Deferred revenue........................................... 102 6,186 (999) 3,182 (4,564)
Interest payable........................................... -- -- -- 120 451
--------------- --------- --------- --------- ---------
Net cash used in operating activities.................... (4,841) (10,802) (19,036) (6,991) (15,191)
--------------- --------- --------- --------- ---------
Cash flows used in investing activities--purchases of property
and equipment.................................................. (551) (1,028) (792) (433) (1,129)
--------------- --------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from short-term borrowings............................ 1,000 1,050 21,000 8,583 3,421
Repayments of short-term borrowings............................ -- -- (2,050) (2,050) (2,000)
Proceeds from convertible debt................................. -- -- -- -- 10,910
Payment on capital lease obligations........................... (35) (252) (300) (151) (130)
Proceeds from sale and leaseback of equipment.................. 179 -- -- -- --
Proceeds from issuance of preferred stock...................... 5,301 10,246 1,215 1,215 5,262
Proceeds from issuance of common stock......................... 39 17 91 11 133
Repurchases of common stock.................................... -- (20) (2) (1) (6)
Repayment of shareholder notes receivable...................... -- -- 30 -- 90
--------------- --------- --------- --------- ---------
Net cash provided by financing activities................ 6,484 11,041 19,984 7,607 17,680
--------------- --------- --------- --------- ---------
Effect of exchange rate changes on cash........................ -- -- -- -- (3)
--------------- --------- --------- --------- ---------
Net increase (decrease) in cash.................................. 1,092 (789) 156 183 1,357
Cash at beginning of period...................................... -- 1,092 303 303 459
--------------- --------- --------- --------- ---------
Cash at end of period............................................ $ 1,092 303 459 486 1,816
--------------- --------- --------- --------- ---------
--------------- --------- --------- --------- ---------
Supplemental disclosures of cash flow information:
Interest paid.................................................. $ 28 $ 293 $ 753 $ 282 $ 608
--------------- --------- --------- --------- ---------
--------------- --------- --------- --------- ---------
Noncash investing and financing activities:
Equipment recorded under capital leases...................... $ 423 $ 941 $ -- $ -- $ --
--------------- --------- --------- --------- ---------
--------------- --------- --------- --------- ---------
Common stock issued in exchange for notes receivable......... $ 143 $ -- $ -- $ -- $ --
--------------- --------- --------- --------- ---------
--------------- --------- --------- --------- ---------
Deferred stock-based compensation............................ $ -- $ -- $ 768 $ 376 $ 1,467
--------------- --------- --------- --------- ---------
--------------- --------- --------- --------- ---------
Discount on borrowings....................................... $ -- $ 298 $ 535 $ 535 $ 8,776
--------------- --------- --------- --------- ---------
--------------- --------- --------- --------- ---------
Stock issued in exchange for services........................ $ -- $ -- $ -- $ 4 $ 316
--------------- --------- --------- --------- ---------
--------------- --------- --------- --------- ---------
Stock issued for property and equipment...................... $ -- $ -- $ 116 $ -- $ --
--------------- --------- --------- --------- ---------
--------------- --------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NETOBJECTS, INC.
AND SUBSIDIARY
(A MAJORITY OWNED SUBSIDIARY OF IBM)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1997, AND 1998
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE SIX-MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
NetObjects, Inc. (the Company) was incorporated in Delaware on November 21,
1995. On March 18, 1997, the Company, and certain stockholders of the Company,
entered into an agreement with International Business Machines Corporation (IBM)
whereby IBM would acquire all the Company's outstanding shares of Series B and C
Preferred Stock and the majority of the outstanding Series A Preferred Stock in
exchange for newly issued shares of common stock of IBM (the IBM Transaction).
The Series A, B and C Preferred Stock were then converted into Series E
Preferred Stock of the Company. The transaction closed on April 11, 1997, and as
a result, the Company became a majority-owned subsidiary of IBM. The transaction
did not result in a new accounting basis for financial reporting purposes of the
Company.
NetObjects develops and markets software applications that enable businesses
to build and manage Internet and intranet web sites and applications. In fiscal
1998, the Company changed its fiscal year end from September 30 to the Saturday
nearest September 30. For presentation purposes, the consolidated financial
statements and notes refer to the calendar month end.
(B) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, NetObjects Limited. All
intercompany accounts and transactions have been eliminated in consolidation.
(C) FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's foreign subsidiary is their local
currency. Gains and losses arising from the translation of the subsidiary
financial statements are reflected as a separate component of stockholders'
deficit. Foreign currency transaction losses are shown net on the consolidated
statement of operations.
(D) BASIS OF PRESENTATION
The Company has incurred significant operating losses since inception and
has significant debt and a capital deficit as of September 30, 1998 that raises
substantial doubt about its ability to continue as a going concern. The Company
plans to finance its operations by raising additional capital through an initial
public offering of its common stock (IPO) and by generating revenues. The
Company's ability to continue as a going concern is dependent upon its
successfully completing the IPO. The accompanying financial statements have been
prepared assuming the Company will continue as a going concern, the basis of
which contemplates the realization of assets through continuing operations. No
adjustments have been made to reflect potentially lower realizable values of
assets should the Company be unable to continue its operations.
F-7
<PAGE>
NETOBJECTS, INC.
AND SUBSIDIARY
(A MAJORITY OWNED SUBSIDIARY OF IBM)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1997, AND 1998
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE SIX-MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
(E) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets,
ranging from three to five years. Leasehold improvements and assets recorded
under capital leases are amortized on a straight-line basis over the lesser of
the related asset's estimated useful life or the remaining lease term.
The Company evaluates long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset may not be
recoverable. If such assets are considered to be impaired, the impairment to be
recognized is measured as the difference between the carrying amount of the
property and equipment and its fair value. To date, the Company has made no
adjustments to the carrying values of its long-lived assets.
(F) SOFTWARE DEVELOPMENT COSTS
Software development costs associated with new products and enhancements to
existing software products are expensed as incurred until technological
feasibility is established upon completion of a working model. To date, the
Company's software development has been completed concurrent with the
establishment of technological feasibility, and, accordingly, no costs have been
capitalized.
(G) INCOME TAXES
Income taxes are recorded using the asset and liability method. The
Company's tax provision for all years has been calculated on a stand-alone
basis. Deferred tax liabilities and assets are recognized for the expected
future tax consequences attributable to differences between the carrying amounts
and the tax bases of assets and liabilities. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. A valuation allowance is recorded to reduce deferred tax assets to an
amount whose realization is more likely than not. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(H) CONCENTRATION OF CREDIT RISK
Accounts receivable potentially subject the Company to concentrations of
credit risk. The Company performs ongoing credit evaluations of its customers'
financial condition and generally does not require collateral for accounts
receivable. When required, the Company maintains allowances for credit losses,
and to date such losses have been within management's expectations.
For the years ended September 30, 1997 and 1998, software license fees to
one customer were 31% and 29%, of total revenues, respectively. Accounts
receivable from the customer represented 51% of accounts receivable as of
September 30, 1998. See Note 3 for a discussion of software license fees and
service revenues from IBM.
F-8
<PAGE>
NETOBJECTS, INC.
AND SUBSIDIARY
(A MAJORITY OWNED SUBSIDIARY OF IBM)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1997, AND 1998
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE SIX-MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
The Company's principal markets are North America, Europe and Japan. Export
sales represented approximately 15% and 16% of revenues for the fiscal years
ended September 30, 1997 and 1998, respectively. There were no revenues in
fiscal 1996.
(I) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's cash, accounts receivable, accounts payable
and short-term borrowings approximates their carrying values due to their short
maturity or variable-rate structure.
(J) USE OF ESTIMATES
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
disclosure of contingent assets and liabilities at the date of the financial
statements and reported results of operations during the reporting period.
Actual results could differ from those estimates.
(K) REVENUE RECOGNITION
Through September 30, 1998, the Company recognized revenue in accordance
with American Institute of Certified Public Accountants (AICPA) Statement of
Position (SOP) 91-1, SOFTWARE REVENUE RECOGNITION. Software license fees were
generally recognized upon delivery to distributors, net of an allowance for
estimated returns, price protection and rebates, provided no significant
obligations of the Company remained and collection for the resulting receivable
was probable. The Company receives inventory on hand and sales information from
its significant distributors on a periodic basis. The allowance for returns and
price protection is determined based on a comparison of inventory on hand in the
distribution channel to historical sales made by the distributors to their
respective customers. This analysis is performed on a product line basis to
estimate potential excess inventory in the distribution channel. The allowance
for rebates is based upon contractual rebate rates certain distributors earn
upon selling products to their respective customers. Software license fees
earned from products bundled with original equipment manufacturer's (OEM)
products are recognized upon the OEM shipping bundled products to its customer.
Service revenues from maintenance agreements for support and upgrades of
existing products are deferred and recognized ratably over the term of the
contract, which typically is 12 months. IBM and Lotus are considered OEMs for
purposes of this accounting policy. See Note 3(b) for a discussion of software
license fees from IBM. Service revenues for training and consulting services are
recognized as the services are performed. See Note 3(b) for a discussion of
service revenues from IBM.
In October 1997, the AICPA issued SOP 97-2, SOFTWARE REVENUE RECOGNITION,
which supersedes SOP 91-1. SOP 97-2 is effective for transactions entered into
during fiscal years beginning after December 15, 1997. Under SOP 97-2, software
license revenue is recognized upon delivery of the software and when persuasive
evidence of an agreement exists, provided the fee is fixed, determinable and
collectible and the arrangement does not involve significant customization of
the software.
F-9
<PAGE>
NETOBJECTS, INC.
AND SUBSIDIARY
(A MAJORITY OWNED SUBSIDIARY OF IBM)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1997, AND 1998
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE SIX-MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Maintenance and service revenue are recognized in a similar manner as SOP 91-1.
In addition, SOP 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair values of the elements. The fair value of an element must be based
on evidence that is specific to the vendor. If a vendor does not have evidence
of the fair value for all elements in a multiple-element arrangement, all
revenue from the arrangement is deferred until such evidence exists or until all
elements are delivered.
In February 1998, the Accounting Standards Executive Committee (AcSEC) of
the AICPA issued SOP 98-4, "DEFERRAL OF THE EFFECTIVE DATE OF SOP 97-2". The SOP
defers the effective date for applying the provisions regarding vendor-specific
objective evidence ("VSOE") of fair value until the AcSEC can reconsider what
constitutes such VSOE.
In December 1998, AcSEC issued SOP 98-9 "SOFTWARE REVENUE RECOGNITION, WITH
RESPECT TO CERTAIN ARRANGEMENTS", which requires recognition of revenue using
the "residual method" in a multiple element arrangement when fair value does not
exist for one or more of the delivered elements in the arrangement. Under the
"residual method", the total fair value of the undelivered elements is deferred
and subsequently recognized in accordance with SOP 97-2.
On October 1, 1998, the Company adopted the provisions of SOP 97-2, SOP 98-4
and SOP 98-9. The Company modified certain aspects of its business model such
that any impact from adopting SOP 97-2, SOP 98-4 and SOP 98-9 was not material.
(L) STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans using the
intrinsic value method. Deferred stock-based compensation expense is recorded
if, on the date of grant, the current market value of the underlying stock
exceeds the exercise price. The Company amortizes deferred stock-based
compensation in accordance with Financial Accounting Standards Board (FASB)
Interpretation No. 28.
(M) NET LOSS PER SHARE
Basic net loss per share is computed using the weighted-average number of
outstanding shares of common stock. Diluted net loss per share is computed using
the weighted-average number of shares of common stock outstanding and, when
dilutive, potential common shares from options and warrants to purchase common
stock using the treasury stock method and from convertible securities using the
if-converted basis. All potential common shares have been excluded from the
computation of diluted net loss per share for all periods presented because the
effect would have been antidilutive. See Notes 7 and 8 for a discussion of
potential common shares. Pursuant to the Securities and Exchange Commission
(SEC) Staff Accounting Bulletin No. 98, common stock and convertible preferred
stock issued for nominal consideration, prior to the anticipated effective date
of the IPO, are included in the calculation of basic and diluted net loss per
share as if they were outstanding for all
F-10
<PAGE>
NETOBJECTS, INC.
AND SUBSIDIARY
(A MAJORITY OWNED SUBSIDIARY OF IBM)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1997, AND 1998
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE SIX-MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
periods presented. To date, the Company has not had any issuances or grants for
nominal consideration.
Diluted net loss per share for the year ended September 30, 1998, does not
include the effect of approximately 11,576,937 (on as if converted basis) shares
of convertible preferred stock outstanding, 2,472,343 stock options with a
weighted-average exercise price of $1.32 per share, 6,650,006 preferred stock
warrants with a weighted-average exercise price of $5.60 per share, or 88,177
shares of common stock issued and subject to repurchase by the Company at a
weighted-average price of $0.12 per share, because their effects are
antidilutive.
Diluted net loss per share for the six months ended March 31, 1999, does not
include the effect of approximately 12,700,399 (on as if converted basis) shares
of convertible preferred stock outstanding, approximately 2,118,789 shares from
the assumed conversion of convertible debt and interest, 2,900,087 stock options
with a weighted-average exercise price of $3.13 per share, 6,229,499 preferred
stock warrants with a weighted-average exercise price of $6.04 per share, or
41,252 shares of common stock issued and subject to repurchase by the Company at
a weighted-average price of $0.13 per share, because their effects are
antidilutive.
(N) ACCUMULATED OTHER COMPREHENSIVE LOSSES
Accumulated other comprehensive losses consist entirely of cumulative
translation adjustments resulting from the Company's application of its foreign
currency translation policy. The tax effects of translation adjustments were not
significant.
(O) UNAUDITED INTERIM FINANCIAL INFORMATION
The consolidated financial information as of March 31, 1999 and for the
six-months ended March 31, 1998 and 1999 is unaudited, but includes all
adjustments (consisting only of normal recurring adjustments) that the Company
considers necessary for the fair presentation of the financial position at such
dates and the operations and cash flows for the periods then ended. Operating
results for the six-months ended March 31, 1999 are not necessarily indicative
of results that may be expected for the entire year.
(P) RECENT ACCOUNTING PRONOUNCEMENTS
The FASB recently issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. For a derivative not designated as a hedging
instrument, changes in the fair value of the derivative are recognized in
earnings in the period of change. The Company must adopt SFAS No. 133 by
F-11
<PAGE>
NETOBJECTS, INC.
AND SUBSIDIARY
(A MAJORITY OWNED SUBSIDIARY OF IBM)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1997, AND 1998
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE SIX-MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
July 1, 1999. Management does not believe the adoption of SFAS No. 133 will have
a material effect on the financial position of the Company.
(Q) ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. Such costs are included in
selling and marketing expense and totaled approximately $376,000, $4.9 million
and $5.8 million, during the period from November 21, 1995 (inception) through
September 30, 1996, and for the years ended September 30, 1997 and 1998,
respectively.
(R) EMPLOYEE BENEFIT PLAN
The Company has an Employee Savings and Retirement Plan under Section 401(k)
of the Internal Revenue Code for its eligible employees (the Benefit Plan). The
Benefit Plan is available to all domestic employees who meet minimum age and
service requirements, and provides employees with tax deferred salary deductions
and alternative investment options. Employees may contribute up to 15% of their
salary, subject to certain limitations. The Benefit Plan allows for
contributions by the Company at the discretion of the Company's Board of
Directors. The Company has not contributed to the Benefit Plan since its
inception.
(2) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Computer equipment and software............................................ $ 1,893 $ 2,166
Furniture and equipment.................................................... 475 559
Leasehold improvements..................................................... 253 795
--------- ---------
2,621 3,520
Less accumulated depreciation
and amortization........................................................... 785 1,880
--------- ---------
$ 1,836 $ 1,640
--------- ---------
--------- ---------
</TABLE>
Equipment recorded under capital leases is $1.2 million and the related
accumulated amortization is $638,000 as of September 30, 1998.
F-12
<PAGE>
NETOBJECTS, INC.
AND SUBSIDIARY
(A MAJORITY OWNED SUBSIDIARY OF IBM)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1997, AND 1998
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE SIX-MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(3) RELATED PARTY TRANSACTIONS
(A) SHORT-TERM BORROWINGS
In December 1997, the Company entered into a line of credit with IBM Credit
Corporation (IBM Credit Corp.), a subsidiary of IBM, for $15 million, secured by
all tangible and intangible assets of the Company. IBM has guaranteed the line
of credit. Subsequently, the agreement was amended to increase the line of
credit to $19 million. The note is repayable on the earlier of the effective
date of an IPO or December 23, 1999. Interest is charged at LIBOR plus 1.5% (6%
as of September 30, 1998) per year. To maintain the line, the Company's net loss
measured on a 12-month basis must not be worse than $20 million. In the event of
default, IBM Credit Corp. has the right to convert amounts outstanding into
shares of Series E preferred stock using the lower of $6.68 per share or a
mutually agreed-upon conversion price.
In connection with the IBM Credit Corp. line of credit, the Company issued
warrants to purchase up to 83,333 shares of Series F preferred stock at an
exercise price of $10.80 per share. These warrants are exercisable at any time
and expire on the earlier of the closing of an IPO or December 23, 2002. IBM
Credit Corp. has the right to exercise the warrants without the payment of cash
by surrendering the warrants and receiving shares of preferred stock equal in
value at the exercise date to the value of the warrants so surrendered. The
Company determined the fair value of these warrants using the Black-Scholes
pricing model with the following assumptions: A risk-free interest rate of 5.6%;
an expected life of five years; volatility of 65%; and no dividend yield. The
resulting discount is being amortized over the term of the line of credit. As of
September 30, 1998, $18.6 million was outstanding under the line of credit, net
of a discount of $334,000.
Additionally, as of September 30, 1998, IBM has advanced the Company $2
million pursuant to certain note agreements. See Note 8.
As of September 30, 1998 the Company was not in compliance with certain
financial covenants on the aforementioned credit facility. The Company has
received a waiver of such non-compliance for the year ended September 30, 1998
from IBM Credit Corp.
(B) LICENSE AGREEMENT
On March 18, 1997, the Company entered into a Master License Agreement with
IBM. A summary of the salient terms of this agreement, as amended as of
September 30, 1998, is as follows (see Note 8):
- IBM may sublicense the Company's software products in exchange for per
unit royalty payments.
- Beginning on April 1, 1997, IBM will make seven quarterly nonrefundable
prepaid royalty payments of $1.5 million.
- At the Company's option, the Company can request the prepaid royalty
payments to be made in advance of the due date and pay 7.5% interest.
F-13
<PAGE>
NETOBJECTS, INC.
AND SUBSIDIARY
(A MAJORITY OWNED SUBSIDIARY OF IBM)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1997, AND 1998
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE SIX-MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(3) RELATED PARTY TRANSACTIONS (CONTINUED)
- The Company will perform services as requested by IBM in order to
integrate certain of the Company's software products into IBM's WebSphere
software products. In consideration for such services, IBM will pay the
Company for the cost of providing the services plus a mark up, however
amounts to be paid shall not exceed approximately $6.0 million. Amounts
owed to the Company under this arrangement can be deducted from the
prepaid royalty payments.
In February 1998 the Company entered into an agreement with Lotus to allow
Lotus to bundle up to 200,000 units of certain Company products for a
promotional period from February 1, 1998 through September 30, 1998 (the Special
Promotion), in exchange for per unit royalty payments substantially discounted
from the royalty rates with IBM under the Master License Agreement. The
royalties earned under this arrangement were also applied to the IBM deferred
revenue.
During the years ended September 30, 1997 and 1998, IBM had made payments of
$6.4 million and $4.5 million, respectively, in accordance with the license
agreement which have been recorded as deferred revenue until royalty and
services have been earned. For the year ended September 30, 1998 the Company
recognized approximately $166,000 in interest expense associated with such
advance payments.
During the years ended September 30, 1997 and 1998 and the six-month period
ended March 31, 1999, the Company recognized approximately $175,000, $2.7
million and $2.3 million (unaudited), respectively, of the IBM prepaid royalty
payments as software license fees from IBM, primarily upon IBM shipping to
customers the Company's software products bundled with certain IBM products. The
Company recognized $500,000 of software license fees during the three-month
period ended March 31, 1999 resulting from an adjustment to reflect Lotus site
license bundles fees that had not been reported to the Company over the term of
the contract which commenced in February 1998.
During the year ended September 30, 1998 and the six month period ended
March 31, 1999, the Company recognized approximately $2.9 million and $2.7
million (unaudited), respectively of the IBM prepaid royalty payments as service
revenues from IBM in connection with the integration of certain of the Company's
software with IBM's WebSphere software products. During the year ended September
30, 1998 and the six-month period ended March 31, 1999, the Company incurred
$2.9 million and $2.3 million in service costs, which includes $305,000 and
$249,000 in overhead costs, respectively, in connection with the arrangement.
The Company is recognizing revenue using the percentage-of-completion method and
is deferring the recognition of profit on this arrangement due to uncertainties
related to the amount of profit ultimately expected to be realized. As of
February 28, 1999, the integration services were completed and all profit from
the arrangement was recognized during the six months ended March 31, 1999.
(C) NOTES RECEIVABLE FROM STOCKHOLDERS
Upon inception, the Company received promissory notes from its founders in
exchange for common stock for a total amount of $143,000. As of September 30,
1998, $30,000 was paid down
F-14
<PAGE>
NETOBJECTS, INC.
AND SUBSIDIARY
(A MAJORITY OWNED SUBSIDIARY OF IBM)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1997, AND 1998
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE SIX-MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(3) RELATED PARTY TRANSACTIONS (CONTINUED)
by the stockholders. The notes bear interest at 8%, and interest is to be paid
annually with any accrued but unpaid interest and principal payable in full on
or before December 21, 1998. The Company has full recourse against the founders
for the amounts of the notes.
(D) RAE TECHNOLOGY AND STUDIO ARCHETYPE
In December 1995, the Company issued 1,833,333 shares of Series A preferred
stock to the stockholders of Rae Technology, Inc. (Rae) and Studio Archetype,
upon formation of the Company, in exchange for the transfer of certain
technology and intellectual property rights. Rae's and Studio Archetype's
founders and significant shareholders also were the founders of the Company. The
exchange was recorded at predecessor book value.
In April 1997 the Company and Rae entered into a patent transfer and license
agreement whereby the Company assigned all of its rights to four U.S. patent
applications to Rae and the Company reserved a non-exclusive, perpetual, royalty
free license to such patents.
(4) SHORT-TERM BORROWINGS
As of September 30, 1997, the Company had $2.1 million outstanding under a
line of credit granted by a financial institution. Borrowings under the line of
credit bear interest at the bank's prime rate plus 1% (9.5% as of September 30,
1997). In connection with the line of credit, the financial institution was
issued warrants to purchase 237,851 shares of Series C preferred stock at an
exercise price of $1.82 per share. See Note 7(c). The line of credit was repaid
with proceeds from the IBM Credit Corp. line of credit and, accordingly, no
amounts are outstanding as of September 30, 1998.
(5) COMMITMENTS
The Company leases its facilities under a noncancelable operating lease and
has acquired computers and other equipment through operating and capital leases.
In connection with one of the property leases, the Company sublets the space.
Future minimum payments for both operating and capital leases as of September
30, 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING SUBLEASE NET OPERATING CAPITAL
YEAR ENDING SEPTEMBER 30, LEASES INCOME LEASES LEASES
- ---------------------------------------------------- ----------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
1999................................................ $ 659 $ 338 $ 321 $ 338
2000................................................ 651 338 313 290
2001................................................ 181 -- 181 61
2002................................................ 83 -- 83 --
Thereafter,......................................... 34 -- 34 --
----------- ----- ----- -----
$ 1,608 $ 676 $ 932 689
----------- ----- -----
----------- ----- -----
Less amount representing interest................... 54
-----
Present value minimum lease payments................ 635
Less amounts due within one year.................... 299
-----
$ 336
-----
-----
</TABLE>
F-15
<PAGE>
NETOBJECTS, INC.
AND SUBSIDIARY
(A MAJORITY OWNED SUBSIDIARY OF IBM)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1997, AND 1998
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE SIX-MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(5) COMMITMENTS (CONTINUED)
Total rent expense under the operating leases was $74,000, $341,000 and
$683,000 for the period from November 21, 1995 (inception) through September 30,
1996, and for the years ended September 30, 1997 and 1998, respectively. Total
rent expense paid to IBM under operating leases was $0, $12,000 and $93,000 for
the period from November 21, 1995 (inception) through September 30, 1996, and
for the years ended September 30, 1997 and 1998, respectively
As of September 30, 1998, approximately $200,000 of the Company's cash
balance is pledged as security for a lease line for furniture and fixtures.
(6) INCOME TAXES
Significant components of the Company's deferred tax assets are as follows
(in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Net operating loss carryforwards....................................... $ 9,306 $ 17,506
Research and development credit carryforwards.......................... 571 1,649
Accruals and reserves not currently deductible......................... 477 1,767
Property, plant and equipment.......................................... 268 488
--------- ---------
Gross deferred tax assets............................................ 10,622 21,410
Valuation allowance.................................................... (10,622) (21,410)
--------- ---------
Net deferred tax assets.............................................. $ -- $ --
--------- ---------
--------- ---------
</TABLE>
The Company's actual tax expense for the period from November 21, 1995
(inception) to September 30, 1996 and the years ended September 30, 1997 and
1998 differs from the benefit of the federal statutory tax rate of 34%, as
follows (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 21,
1995 YEAR ENDED SEPTEMBER
(INCEPTION) 30,
TO SEPTEMBER --------------------
30, 1996 1997 1998
------------- --------- ---------
<S> <C> <C> <C>
Expense at:
Statutory federal income tax rate......................... $ (2,292) $ (6,051) $ (7,556)
Losses not benefited...................................... 2,292 6,051 7,556
State taxes............................................... -- 1 1
Foreign taxes............................................. -- -- 59
------------- --------- ---------
$ -- $ 1 $ 60
------------- --------- ---------
------------- --------- ---------
</TABLE>
F-16
<PAGE>
NETOBJECTS, INC.
AND SUBSIDIARY
(A MAJORITY OWNED SUBSIDIARY OF IBM)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1997, AND 1998
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE SIX-MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(6) INCOME TAXES (CONTINUED)
The components of income taxes for the period from November 21, 1995
(inception) to September 30, 1996 and for the years ended September 30, 1997 and
1998, are as follows (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 21,
1995 YEAR ENDED SEPTEMBER
(INCEPTION) 30,
TO SEPTEMBER --------------------
30, 1996 1997 1998
------------- --------- ---------
<S> <C> <C> <C>
Current:
Foreign................................................... $ -- $ -- $ 59
State..................................................... -- 1 1
------------- --------- ---------
$ -- $ 1 $ 60
------------- --------- ---------
------------- --------- ---------
</TABLE>
The Company has recorded a valuation allowance on its deferred tax assets
due to uncertainty of future realization of such amounts.
As of September 30, 1998, the Company had net operating loss carryforwards
of approximately $40.9 million for both federal and state income tax purposes.
The federal net operating loss carryforwards expire in the years 2012 through
2019. The state net operating loss carryforwards expire in the year 2005. As of
September 30, 1998, the Company has research and development credit
carryforwards for federal and state tax purposes of approximately $964,000 and
$685,000, respectively. The federal research and development credit
carryforwards expire in the years 2012 through 2014. The state research and
development credits can be carried forward indefinitely.
The Tax Reform Act of 1986 and the California Tax Conformity Act of 1987
limit the use of net operating loss carryforwards in certain situations where
changes occur in the stock ownership of a company. The Company had such an
ownership change, as defined, in April 1997. Accordingly, $11.5 million of the
Company's federal and state net operating loss carryforwards are limited in
their annual usage to $3.9 million per year on a cumulative basis.
F-17
<PAGE>
NETOBJECTS, INC.
AND SUBSIDIARY
(A MAJORITY OWNED SUBSIDIARY OF IBM)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1997, AND 1998
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE SIX-MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(7) STOCKHOLDERS' DEFICIT
(A) PREFERRED STOCK
At March 31, 1999, the Company's restated certificate of incorporation
authorizes shares of preferred stock. As of September 30, 1997 and
1998, and March 31, 1999 the Company has designated and issued preferred stock
as follows:
<TABLE>
<CAPTION>
OUTSTANDING SHARES
-------------------------------------------
SEPTEMBER 30,
DESIGNATED ---------------------------- LIQUIDATION
SHARES 1997 1998 PREFERENCE
------------- ------------- ------------- MARCH 31, -------------
1999
-------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Series A............................... 750,000 651,945 651,945 651,945 $ 0.90
Series B............................... 33,000 -- -- -- 1.20
Series C............................... 2,833,333 -- -- 652,223 1.82
Series E............................... 15,033,333 10,743,020 10,924,992 11,007,343 6.68
Series E-2............................. 2,000,000 -- -- -- 6.68
Series F............................... 916,666 -- -- 388,888 10.80
Series F-2............................. 416,666 -- -- -- 9.00
------------- ------------- ------------- ------------- -----
21,982,998 11,394,965 11,576,937 12,700,399
------------- ------------- ------------- ------------- -----
------------- ------------- ------------- ------------- -----
</TABLE>
The rights, preferences, and restrictions of the Series A, B, C, E and F
preferred stock are as follows:
- Each share of Series A, B, C, E and F preferred stock is convertible at
the option of the holder at any time into one share of common stock,
subject to certain antidilution provisions. If the Company does not close
an initial public offering by April 8, 1999, the Series E-2 preferred
stock is convertible into 1.25 shares of common stock. Conversion of all
Series A, B, C, E and F preferred stock is automatic upon the closing of a
firm underwritten commitment public offering of shares of common stock of
the Company, which results in aggregate cash proceeds of at least $30
million.
- Holders of Series A, B, C, E and F preferred stock are entitled to receive
dividends at 8% per annum in preference to any dividend on common stock
when and if declared by the Board of Directors out of legally available
funds. Dividends are noncumulative. No dividends have been declared
through September 30, 1998.
- Series A, B, C, E and F preferred stock have a liquidation preference in
the amounts listed above plus all declared but unpaid dividends on such
shares plus an amount equal to an 8% annually compounded return calculated
from the original issue date through the liquidation date.
F-18
<PAGE>
NETOBJECTS, INC.
AND SUBSIDIARY
(A MAJORITY OWNED SUBSIDIARY OF IBM)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1997, AND 1998
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE SIX-MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(7) STOCKHOLDERS' DEFICIT (CONTINUED)
- Series A, B, C, E and F preferred stock have the same voting rights as the
number of shares of common stock issuable upon conversion of such shares.
The consent of a majority of the outstanding Series E preferred stock is
required for all major corporate actions. The holders of the Series E
preferred stock have a right to elect a majority of directors of the
Company until the outstanding shares of Series E preferred stock and
warrants to purchase such shares represent less than 45% of the fully
diluted shares of voting securities of the Company or the consummation of
an IPO.
(B) COMMON STOCK
The Company's restated certificate of incorporation authorizes 28,333,333
shares of common stock. As of September 30, 1998, the Company has reserved
shares of common stock for future issuance as follows:
<TABLE>
<CAPTION>
SHARES
-------------
<S> <C>
Conversion of preferred stock:
Series A......................................................................................... 651,945
Series C......................................................................................... 2,250,500
Series E......................................................................................... 3,482,838
Series F......................................................................................... 1,833,333
</TABLE>
(C) PREFERRED STOCK WARRANTS
In fiscal 1996, as consideration for a lease line facility from a leasing
company, the Company issued warrants to purchase 33,000 shares of the Company's
Series B preferred stock at an exercise price of $1.20 per share. The warrants
were exercised through a cashless exchange in fiscal 1997. There were no Series
B warrants outstanding as of September 30, 1998.
In fiscal 1997, in consideration for a bank line of credit and an equipment
lease line facility with a financial institution and leasing company,
respectively (the lenders) and other service providers, the Company issued
warrants to purchase 244,715 shares of Series C preferred stock at an exercise
price of $1.82 per share, and 22,459 shares of Series E preferred stock at an
exercise price of $6.68 per share. The Company determined the fair value of
these warrants using the Black-Scholes pricing model with the following
assumptions: a risk-free interest rate of 5.6%; an expected life of three years;
volatility of 65%; and no dividend yield. The fair value of these warrants does
not have a material effect on the consolidated financial statements. During
fiscal 1997, the lenders exercised all warrants by foregoing the receipt of that
number of shares of preferred stock, that would otherwise have been issued upon
exercise, equal in value to the exercise price of all warrants exercised. All
other service providers exercised their warrants for cash.
F-19
<PAGE>
NETOBJECTS, INC.
AND SUBSIDIARY
(A MAJORITY OWNED SUBSIDIARY OF IBM)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1997, AND 1998
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE SIX-MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(7) STOCKHOLDERS' DEFICIT (CONTINUED)
During fiscal 1997, the Company issued to holders of Series B preferred
stock, and third party investors, warrants to purchase up to 6,863,426 shares of
Series C preferred stock at an exercise price of $1.82 per share. This round of
financing was in the form of warrants to purchase Series C preferred stock which
would be exercised over time. The warrants contained certain provisions whereby
if the third party investors exercised their warrants, the other warrantholders
were required to exercise warrants on a pro rata basis. The fair value of the
warrants was based on the de minimis amount of consideration received from the
investors. These warrants are exercisable at any time and expire on the earlier
of the closing of an IPO or March 13, 2000. During fiscal 1997, warrants to
purchase 4,612,926 shares of Series C preferred stock were exercised. Warrants
to purchase 2,250,500 shares of Series C preferred stock have not been exercised
as of September 30, 1998. Each warrant holder has the right to exercise the
warrant by foregoing the receipt of that number of shares of preferred stock,
that would otherwise have been issued upon exercise, equal in value to the
exercise price of all warrants exercised.
In connection with the IBM Transaction, the Company issued warrants to
purchase up to 833,333 shares of Series F preferred stock, previously Series D
preferred stock, at an exercise price of $10.80 per share to the holders of the
Series A, B, and C preferred stock for $48,000 in cash, net of expenses. In
addition, warrants to purchase up to 3,482,838 shares of Series E preferred
stock at an exercise price of $6.68 were issued to IBM for $250,000 in cash.
These warrants are exercisable at any time and expire on the earlier of the
closing of an IPO or April 11, 2000. These warrants to purchase Series E and F
preferred stock have not been exercised as of September 30, 1998. Each warrant
holder has the right to exercise the warrant by foregoing the receipt of that
number of shares of preferred stock, that would otherwise have been issued upon
exercise, equal in value to the exercise price of all warrants exercised.
In connection with the IBM Transaction, the Company granted to its founders,
who are also employees, the right to purchase 673,778 shares of Series E
preferred stock at an exercise price of $6.68 per share in three equal
installments prior to April 10, 1998. In June 1997, the four founders exercised
the first installment. Had the Company valued these stock rights pursuant to
SFAS No. 123 using the minimum value option pricing model, the Company's 1997
net loss would have been greater by approximately $111,000. This determination
was made using the following assumptions: a risk-free interest rate of 6.5%; an
expected life of one year; and no dividends.
During fiscal 1998, the Company entered into a line of credit agreement with
IBM Credit Corp. In connection with the line of credit, NetObjects issued
warrants to purchase 83,333 shares of Series F preferred stock at an exercise
price of $10.80. See Note 3.
(D) STOCK OPTION PLANS
Under the Company's 1996 Stock Option Plan (1996 Plan), a total of 1,658,943
shares of common stock were authorized for issuance. In connection with the IBM
Transaction, the 1996 Plan
F-20
<PAGE>
NETOBJECTS, INC.
AND SUBSIDIARY
(A MAJORITY OWNED SUBSIDIARY OF IBM)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1997, AND 1998
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE SIX-MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(7) STOCKHOLDERS' DEFICIT (CONTINUED)
was terminated and the Company established the 1997 Stock Option Plan and the
1997 Special Stock Option Plan (the 1997 Plans). A total of 2,158,943 and
1,041,056 shares of the Company's common stock have been authorized for issuance
under these plans, respectively. In April 1997, the Company canceled the
outstanding options under the 1996 Plan and granted replacement options under
the 1997 Plans with the same terms. The cancellation and reissuance is not
reflected in the stock option activity table below.
Options granted under the 1997 Plans may be designated as qualified or
nonqualified at the discretion of the Company's Board of Directors with exercise
prices not less than the fair value at the date of grant. Options granted under
the 1996 Plan, and the replacement options granted under the 1997 Plans, are
immediately exercisable upon grant, and the Company retains the right to
repurchase the unvested shares held at the time of termination of employment at
the original purchase price. Options generally vest 25% at the end of the first
year and monthly over the next three years. Options expire ten years from the
date of grant. As of September 30, 1998, 88,177 shares were subject to the
Company's right of repurchase.
The Company uses the intrinsic value method to account for the 1997 Plans.
Accordingly, compensation cost has been recognized for its stock options in the
accompanying financial statements if, on the date of grant, the current market
value of the underlying common stock exceeded the exercise price of the stock
options at the date of grant. During fiscal 1998, the Company granted options
with a weighted-average exercise price of $2.10 per share compared to the
weighted-average fair value of approximately $4.44 during the same period. For
the period from November 21, 1995 (inception) to September 30, 1996 and for the
year ended September 30, 1997, the weighted-average exercise price of options
granted approximated the weighted-average fair value. In connection with options
granted in fiscal year 1998 and during the six months ended March 31, 1999, the
Company has recorded deferred stock-based compensation of $768,000 and
$1,467,000 (unaudited), respectively, representing the difference between the
exercise price and the fair value of the Company's common stock at the date of
grant. The amount is being amortized over the vesting period for the individual
options. Amortization of deferred stock-based compensation of $227,000 was
recognized during the fiscal year ended September 30, 1998 and was $170,000
(unaudited) during the six months ended March 31, 1999.
Pursuant to SFAS No. 123, the Company is required to disclose the pro forma
effects on the operating results of the Company as if the Company has elected to
use the fair value approach to account for all its stock-based employee
compensation plans. Had compensation costs for the Company's 1997 Plans been
determined consistent with the fair value approach enumerated in SFAS No. 123,
net losses for the period from November 21, 1995 (inception) to September 30,
1996 and for the years ended September 30, 1997 and 1998 would have been greater
by approximately $0, $52,000 and $193,000, respectively. The fair value of each
option is estimated using the minimum value method with the following
assumptions: a risk-free interest rate of 6.5%; an expected life of four years;
and no dividend yield.
F-21
<PAGE>
NETOBJECTS, INC.
AND SUBSIDIARY
(A MAJORITY OWNED SUBSIDIARY OF IBM)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1997, AND 1998
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE SIX-MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(7) STOCKHOLDERS' DEFICIT (CONTINUED)
The following table summarizes stock option activity during the year:
<TABLE>
<CAPTION>
PERIOD FROM NOVEMBER 21,
1995 (INCEPTION) TO YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30, SIX MONTHS
ENDED MARCH
SEPTEMBER 30, 1996 1997 1998 31, 1999
-------------------------- -------------------------- -------------------------- -----------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF
SHARES PRICE SHARES PRICE SHARES PRICE SHARES
----------- ------------- ----------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Shares under options
outstanding at
beginning of
period............... -- $ -- 758,051 $ 0.12 2,517,670 $ 1.20 2,472,343
Granted................ 1,017,305 0.12 2,251,557 1.08 341,340 2.10 849,437
Exercised.............. (259,254) 0.12 (126,353) 0.12 (144,432) 0.60 (177,707)
Canceled............... -- -- (365,585) 0.48 (242,235) 1.26 (243,984)
----------- ----------- ----------- -----------
Shares under options
outstanding at end of
period............... 758,051 0.12 2,517,670 1.20 2,472,343 1.32 2,900,087
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Shares vested at
period-end........... -- 128,388 852,158 976,264
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE
PRICE
-------------
<S> <C>
Shares under options
outstanding at
beginning of
period............... $ 1.32
Granted................ 7.47
Exercised.............. 0.73
Canceled............... 1.74
Shares under options
outstanding at end of
period............... 3.13
Shares vested at
period-end...........
</TABLE>
The following table summarizes information about stock options outstanding
as of September 30, 1998:
<TABLE>
<CAPTION>
OUTSTANDING
- ------------------------------------------
WEIGHTED-
AVERAGE
NUMBER REMAINING
OF CONTRACTUAL SHARES
EXERCISE PRICE SHARES LIFE VESTED
- --------------- ----------- ------------ ---------
<S> <C> <C> <C>
$ 0.12 305,942 7.50 years 15,416
0.30 81,948 8.25 37,740
0.60 83,333 8.25 40,036
1.50 1,456,540 8.50 512,265
1.65 225,000 8.50 84,375
2.10 319,577 9.75 12,249
----------- ---------
2,472,340 702,081
----------- ---------
----------- ---------
</TABLE>
(8) SUBSEQUENT EVENTS
On October 8, 1998, the Company entered into Convertible Note and Warrant
Purchase Agreements with IBM and a Series C preferred warrantholder, whereby the
Company may borrow up to $10.9 million, of which $8.3 million was received by
the Company as of December 31, 1998 and the
F-22
<PAGE>
NETOBJECTS, INC.
AND SUBSIDIARY
(A MAJORITY OWNED SUBSIDIARY OF IBM)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1997, AND 1998
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE SIX-MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(8) SUBSEQUENT EVENTS (CONTINUED)
remaining amount was received in January, 1999. A portion of the proceeds
received has been used to repay $2 million in notes payable due to IBM. The new
notes are due October 8, 2000, have a stated interest rate of 10% per annum, and
are convertible (principal and accrued interest) into Series E-2 preferred stock
at $6.68 per share at any time or automatically upon the completion of an IPO.
The Company has recorded a $7.5 million nonrecurring interest charge during the
six month period ended March 31, 1999 to account for the "in-the-money"
conversion right of the convertible notes.
In connection with the notes, the Company issued warrants to acquire 163,715
shares of Series E-2 preferred stock at an exercise price of $6.68 per share.
The warrants are exercisable at any time before October 8, 2003. The Company
determined the fair value of these warrants using the Black-Scholes pricing
model with the following assumptions: A risk-free interest rate of 6%; an
expected life of five years; volatility of 65%; and no dividend yield. The
resulting discount is being amortized over the term of the convertible note. As
of March 31, 1999, $10.9 million was outstanding under the convertible note, net
of a discount of $799,000.
On October 16, 1998, NetObjects entered into a Stock Purchase Agreement with
a company authorizing the sale and issuance of 333,333 shares of Series F-2
preferred stock at a purchase price of $9.00 per share for an aggregate price of
$3 million. The transaction closed on October 26, 1998. Warrants to acquire
16,666 shares of Series F-2 preferred stock were also issued at an exercise
price of $10.80 and are exercisable between January 1, 2001 and December 31,
2003 only in the event the Company has not completed an IPO prior to December
31, 2000.
On October 28, 1998, NetObjects entered into a Stock Purchase Agreement with
a company authorizing the sale and issuance of 55,555 shares of Series F-2
preferred stock at a purchase price of $9.00 per share, for an aggregate price
of $500,000. The transaction closed on November 10, 1998.
STOCK SPLIT
On February 4, 1999, the Board of Directors authorized a recapitalization of
the Company's equity structure, including changes in par value, and the number
of shares authorized and a 1-for-6 reverse split of all the outstanding shares
of the Company's preferred and common stock which will be effective prior to the
closing of the IPO. Share information has been restated in the accompanying
consolidated financial statements to reflect the reverse stock split for all
periods presented.
INITIAL PUBLIC OFFERING (UNAUDITED)
On February 4, 1999, the Board of Directors authorized the filing of a
registration statement with the SEC permitting the Company to sell shares of the
Company's common stock in connection with a proposed IPO. If the offering is
consummated under the terms presently anticipated, all currently outstanding
shares of preferred stock will automatically convert into shares of common
F-23
<PAGE>
NETOBJECTS, INC.
AND SUBSIDIARY
(A MAJORITY OWNED SUBSIDIARY OF IBM)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1997, AND 1998
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE SIX-MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(8) SUBSEQUENT EVENTS (CONTINUED)
stock upon the closing of the proposed IPO. The conversion of the preferred
stock has been reflected in the pro forma balance sheet as of March 31, 1999.
EMPLOYEE STOCK PURCHASE PLAN (UNAUDITED)
The Company's Board of Directors adopted the 1999 Employee Stock Purchase
Plan (the "1999 Purchase Plan") on February 4, 1999. A total of 300,000 shares
of common stock are proposed to be reserved for issuance under the 1999 Purchase
Plan.
IBM LICENSE AGREEMENT (UNAUDITED)
In January 1999 the Company and IBM amended the NetObjects License Agreement
as follows:
- The Special Promotion period was extended to June 30, 1999 and the maximum
number of units to be shipped under the program was increased from 200,000
to 225,000.
- The maximum amount to be paid to the Company in connection with the
services provided to IBM was reduced to approximately $5.3 million, and
the related mark-up on the services to be provided was reduced.
In March 1999 the Company and IBM amended the NetObjects license agreement
to establish a new special promotion program whereby Lotus will bundle certain
NetObjects products with certain Lotus products, and Lotus will pay the Company
royalties based on a percentage of Lotus' net revenue. The promotion period
begins on January 1, 1999 and ends on December 31, 1999.
NOTES AND WARRANT PURCHASE AGREEMENTS (UNAUDITED)
On February 18, 1999 and March 23, 1999, respectively, the Company issued
notes and warrants to IBM pursuant to the note and warrant purchase agreement
dated February 4, 1999, under which the Company borrowed $2 million and $1.4
million, respectively. The new notes are due on the earlier of (i) the closing
of an IPO in which the gross proceeds are in excess of $60 million, (ii) April
30, 1999, or (iii) when declared due and payable by IBM, and have a stated
interest rate of 10% per annum.
In connection with the notes, the Company issued warrants to acquire 51,335
shares of Series E-2 preferred stock at an exercise price of $6.68 per share.
The warrants are exercisable at any time before February 18, 2004. The Company
determined the fair value of these warrants using the Black-Scholes pricing
model with the following assumptions: a risk-free interest rate of 6%; an
expected life of five years; volatility of 65%; and no dividend yield. The
resulting discount of $432,000 was accounted for as additional paid-in capital
and amortized over the term of the notes.
On April 23, 1999, pursuant to a note agreement, the Company borrowed $2
million from IBM. The note bears interest at 10% per annum and is due and
payable on June 23, 1999.
F-24
<PAGE>
INSIDE BACK COVER OF PROSPECTUS:
TITLE: BROADENING OUR REACH
INTRO PARAGRAPH:
As business use of the Internet and intranets matures, products alone are
not enough to fulfill customers' needs. We have built popular online resources,
including eFuse.com, that target communities of business users and provide
sources of information, products and services for building business web sites.
We also formed our Professional Services Group in October 1998 to provide
training, consulting and implementation services to our customers deploying
NetObjects Authoring Server.
GRAPHICS: four overlapping screen shots of web sites
CAPTIONS (ONE FOR EACH SCREEN SHOT; CLOCKWISE FROM TOP):
(1) eScriptZone.com: articles, tutorials, software and an online community for
webmasters and web application builders
(2) eFuse.com: integrated content, products, and solutions for small and
medium-sized businesses
(3) netobjects.com: information, products, partner solutions and support
(4) eSiteStore.com: software, components, books, merchandise and online services
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN
THIS PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE SALE OF COMMON
STOCK MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE
DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION
OF AN OFFER TO BUY THESE SHARES OF COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH
THE OFFER OR SOLICITATION IS UNLAWFUL.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 7
Forward-looking Statements..................... 18
Use of Proceeds................................ 18
Dividend Policy................................ 18
Capitalization................................. 19
Dilution....................................... 21
Selected Consolidated Financial Data........... 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 24
Business....................................... 38
Management..................................... 51
Certain Transactions........................... 58
Principal Stockholders......................... 65
Description of Capital Stock................... 67
Shares Eligible for Future Sale................ 69
Underwriting................................... 71
Legal Matters.................................. 72
Experts........................................ 72
Change in Auditors............................. 73
Where You Can Find More Information............ 73
Index to Consolidated Financial Statements..... F-1
</TABLE>
--------------
DEALER PROSPECTUS DELIVERY OBLIGATION:
Until , 1999 (25 days after the date of this Prospectus), all
dealers that buy, sell or trade these shares of common stock, whether or not
participating in this offering, may be required to deliver a Prospectus. This is
in addition to the dealers' obligation to deliver a Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
6,000,000 SHARES
[LOGO]
COMMON STOCK
-----------------
P R O S P E C T U S
-----------------
BT ALEX. BROWN
BANCBOSTON ROBERTSON STEPHENS
U.S. BANCORP PIPER JAFFRAY
, 1999
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 24,937
NASD Filing Fee............................................. 8,090
Nasdaq National Market Listing Fee.......................... 95,000
Legal Fees and Expenses..................................... 400,000
Accountants' Fees and Expenses.............................. 450,000
Printing and Engraving Expenses............................. 150,000
Directors' and Officers' Liability Insurance................ 250,000
Transfer Agent and Registrar Fees........................... 10,000
Miscellaneous Expenses...................................... 100,000
----------
Total..................................................... $1,488,027
----------
----------
</TABLE>
- ------------------------
All expenses other than the Securities and Exchange Commission Registration Fee,
the NASD Filing Fee and the Nasdaq National Market Listing Fee are estimates.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") authorizes
a court to award, or a corporation's board of directors to grant, indemnity to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act").
As permitted by the DGCL, our Amended and Restated Bylaws provide that the
Registrant shall indemnify its directors and officers, and may indemnify its
employees and other agents, to the fullest extent permitted by law. The Amended
and Restated Bylaws also permit the Registrant to secure insurance on behalf of
any officer, director, employee or other agent for any liability arising out of
his or her actions in such capacity, regardless of whether the Amended and
Restated Bylaws would permit indemnification. The Registrant has obtained
officer and director liability insurance with respect to liabilities arising out
of certain matters, including matters arising under the Securities Act.
The Registrant also has entered into agreements with its directors and
executive officers that, among other things, indemnify them for certain expenses
(including attorneys' fees), judgments, fines and settlement amounts incurred by
them in any action or proceeding, including any action by or in the right of the
Registrant, arising out of such person's services as a director or officer of
the Registrant, any subsidiary of the Registrant or any other company or
enterprise to which the person provides services at the request of the
Registrant.
Reference is also made to Section 8 of the form of Underwriting Agreement to
be filed as Exhibit 1.1 to this Registration Statement for certain provisions
regarding the indemnification of officers and directors of the Registrant by the
underwriters.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since November 21, 1995, the Registrant has issued and sold unregistered
securities as follows:
(1) In connection with our formation, we issued an aggregate of 1,583,333
shares of common stock in a private placement on December 21, 1995 to Samir
Arora, David Kleinberg, Sal Arora and Clement Mok, our four founders. The
aggregate consideration received was promissory notes in the aggregate principal
amount of $142,500. The exemption from registration relied upon for this
transaction was Section 4(2).
(2) In connection with our formation and the transfer of technology to us,
an aggregate of 1,833,332 shares of Series A preferred stock were issued in a
private placement on December 21, 1995 to Studio Archetype and Rae Technology.
The aggregate consideration received was certain technology and intellectual
property rights. The exemption from registration relied upon for this
transaction was Section 4(2).
(3) An aggregate of 4,466,666 shares of Series B preferred stock were issued
in a private placement on February 2, 1996 to five accredited investors. The
aggregate consideration received was $5.36 million. The exemption from
registration relied upon for this transaction was Section 4(2).
(4) Warrants for the purchase of up to 6,863,426 shares of Series C
preferred stock were issued in a private placement in December 1996 to seven
institutional investors. No consideration was received in connection with the
issuance of such warrants. On various dates between December 1996 and March
1999, 5,265,150 of the Series C preferred stock warrants were exercised. The
aggregate consideration received was approximately $9.6 million. The exemption
from registration relied upon for this transaction was Section 4(2).
(5) A warrant to purchase up to 3,482,838 shares of Series E preferred stock
was issued in a private placement on April 11, 1997 to IBM. The aggregate
consideration received in connection with the issuance of such warrant was
approximately $250,000. The exemption from registration relied upon for this
transaction was Section 4(2).
(6) An aggregate of 10,495,968 shares of Series E preferred stock were
issued in a private placement on April 11, 1997 to IBM in exchange for 1,181,388
shares of Series A preferred stock and all outstanding shares of Series B and C
preferred stock. The exemption from registration relied upon for this
transaction was Section 4(2).
(7) An aggregate of 406,566 shares of Series E preferred stock were issued
in private placements on various dates between June, 1997 and March, 1998 to our
four founders. The aggregate consideration received was approximately $2.7
million. The exemption from registration relied upon for this transaction was
Section 4(2).
(8) Warrants to purchase of up to 833,333 shares of Series F preferred
stock, originally classified as Series D preferred stock, pursuant to an option
agreement made in connection with IBM's acquisition of approximately 80% of our
stock were issued in a private placement on March 14, 1997 to 10 accredited
investors. The aggregate consideration received in connection with the issuance
of such warrants was $50,000. The exemption from registration relied upon for
this transaction was Section 4(2).
(9) A warrant to purchase up to 83,333 shares of Series F preferred stock
was issued to IBM Credit Corp. in a private placement effective as of December
23, 1997 in connection with a $15 million loan pursuant to a Revolving Loan and
Security Agreement. The loan was subsequently increased to $19 million. The
exemption from registration relied upon for this transaction was Section 4(2).
II-2
<PAGE>
(10) Units for the purchase of 10% Senior Subordinated Secured Convertible
Promissory Notes representing the right to acquire upon conversion up to
1,695,984 shares of Series E-2 preferred stock assuming accrued interest at
March 31, 1999 of $417,060 were issued in a private placement on October 8, 1998
and December 31, 1998 to IBM and Perseus Capital LLC for an aggregate
consideration of $10.9 million, $2.6 million of which was received from IBM on
January 5, 1999. Warrants to purchase up to 163,715 shares of Series E-2
preferred stock were issued in connection with the convertible notes. The
aggregate consideration received in connection with the issuance of such
warrants was approximately $92,000. In February 1999, we issued to IBM a $2.0
million note and warrants to purchase 30,012 shares of Series E-2 preferred
stock and in March 1999, we issued a $1.42 million note and a warrant to
purchase 21,323 shares of Series E-2 preferred stock to IBM under the terms of a
February 4, 1999 agreement. The exemption from registration relied upon for this
transaction was Section 4(2).
(11) 333,333 shares of Series F-2 preferred stock were issued and a warrant
for the purchase of up to 16,666 shares of Series F-2 preferred stock was issued
in a private placement of shares of preferred stock and warrants for the
purchase of preferred stock on October 16, 1998 to Novell, Inc. The
consideration received in connection with the issuance of the shares was $3
million. No additional consideration was received in connection with the
issuance of such warrants. The exemption from registration relied upon for this
transaction was Section 4(2).
(12) 55,555 shares of Series F-2 preferred stock were issued on October 28,
1998 to MC Silicon Valley, Inc., a subsidiary of Mitsubishi. The consideration
received was approximately $500,000. The exemption from registration relied upon
for this transaction was Section 4(2).
(13) As of March 31, 1999, an aggregate of 810,433 shares of common stock had
been issued to our employees and consultants on exercise of options. The
aggregate consideration received for such shares was $772,000.00. The exemption
from registration relied upon for this transaction was Section 3(b).
No underwriters were engaged in connection with these issuances and sales.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1+ Form of Underwriting Agreement
3.1+ Restated Certificate of Incorporation of the Registrant
3.1.1+ Form of Restated Certificate of Incorporation to be in effect at the closing of the offering made
under this Registration Statement
3.2+ Bylaws of the Registrant as amended through the date of this Registration Statement
3.2.1+ Form of Amended and Restated Bylaws to be in effect upon the closing of the offering made under this
Registration Statement
4.1+ Specimen stock certificate
4.2+ Form of Series C Preferred Stock Warrant
4.2.1+ Amendment to Series C Preferred Stock Warrant
4.3+ Form of Series E Preferred Stock Warrant
4.4+ Form of Series E-2 Preferred Stock Warrant
4.5+ Form of Series F Preferred Stock Warrant
5.1 Opinion of McCutchen, Doyle, Brown & Enersen LLP
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
9.1+ Voting Agreement between NetObjects, Inc. and International Business Machines Corporation
10.1+ NetObjects, Inc. 1997 Stock Option Plan
10.1.1+ NetObjects, Inc. Amended and Restated 1997 Stock Option Plan to be in effect upon the closing of the
offering made under this Registration Statement
10.1.2+ Form of Stock Option Agreement under the 1997 Stock Option Plan
10.1.3+ Form of Restricted Stock Purchase Agreement under the 1997 Stock Option Plan
10.1.4+ Form of Restricted Stock Transfer Agreement under the 1997 Stock Option Plan
10.2+ NetObjects, Inc. 1997 Special Stock Option Plan
10.3+ 1999 Employee Stock Purchase Plan
10.3.1 Amended 1999 Employee Stock Purchase Plan
10.4 IBM Software License Agreement (NetObjects License Agreement #L97063) by and between NetObjects and
IBM dated as of March 18, 1997
10.4.1 Amendment Number 1 to NetObjects License Agreement L97063 dated as of April 30, 1997
10.4.2+ Second Amendment to NetObjects License Agreement L97063 dated as of October 7, 1997
10.4.3 Third Amendment to NetObjects License Agreement L97063 dated as of December 16, 1997
10.4.4 Fourth Amendment to NetObjects License Agreement L97063 dated as of April 27, 1998
10.4.5 Fifth Amendment to NetObjects License Agreement L97063 dated as of January 14, 1999
10.4.6 Amendment No. 6 to NetObjects License Agreement L97063 dated as of September 18, 1998
10.4.7 Seventh Amendment to NetObjects License Agreement L97063 effective January 15, 1999
10.4.8 Eighth Amendment to NetObjects License Agreement L97063 dated September 18, 1998
10.4.9 Amendment No. 9 to NetObjects License Agreement effective January 21, 1999
10.4.10+ Amendment No. 10 to NetObjects License Agreement dated as of February 4, 1999
10.4.11 Letter Agreement modifying NetObjects License Agreement L97063 dated as of February 6, 1998
10.4.12+ Letter Agreement modifying NetObjects License Agreement L97063 dated as of June 30, 1998
10.4.13 Letter Agreement modifying NetObjects License Agreement L97063 dated as of January 14, 1999
10.4.14 Letter Agreement modifying NetObjects License Agreement L97063 dated as of March 25, 1999
10.5+ IBM Patent License Agreement by and between NetObjects and IBM dated as of April 10, 1997
10.6+ Lease Agreement by and between NetObjects and Metropolitan Life Insurance Company dated July 24, 1998
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.7+ Lease Agreement by and between NetObjects Limited and HQ Executive Offices (UK) LTD dated February
15, 1999
10.8+ Revolving Loan and Security Agreement by and between NetObjects, Inc. and IBM Credit Corp. dated as
of December 23, 1997
10.8.1+ Amendment to Revolving Loan and Security Agreement dated July 1998
10.9+ Note and Warrant Purchase Agreement by and among NetObjects, IBM and Perseus Capital, LLC dated as of
October 8, 1998
10.9.1+ Supplement to Note and Warrant Purchase Agreement dated as of February 4, 1999
10.10+ Technology Transfer Agreement between Rae Technology, Inc. and NetObjects, Inc. dated February 2,
1996
10.10.1+ Amendment to Technology Transfer Agreement by and between Rae Technology and NetObjects dated as of
March 18, 1997
10.11+ Patent Transfer and License Agreement by and between Rae Technology LLC and NetObjects, Inc. dated as
of April 10, 1997, as amended
10.12+ Technology License Agreement by and between NetObjects and Clement Mok Designs dated as of December
21, 1995
10.13+* Distribution Agreement by and between Ingram Micro, Inc. and NetObjects, Inc. dated March 6, 1997
10.14+* Commercial Application Partner Agreement by and between Sybase, Inc. and NetObjects, Inc. dated June
30, 1997
10.15+* Master Distributor Agreement by and between Mitsubishi Corporation and NetObjects, Inc. dated
September 30, 1997
10.16+* Standard Inbound License Agreement by and between NetObjects and Novell effective September 30, 1998
10.16.1* Amendment to Standard Inbound License Agreement by and between NetObjects and Novell effective April
2, 1999
10.17 Build-It License Agreement dated as of February 2, 1999
10.18 IBM Trademark License Agreement dated as of January 19, 1999
10.19+ Letter Agreement by and between NetObjects and John Sculley dated February 3, 1999
10.20+ Sun Microsystems, Inc. Porting Agreement by and between Sun Microsystems, Inc. and NetObjects dated
as of March 26, 1999
10.21** Employment Agreement between Russell F. Surmanek and NetObjects dated as of April 5, 1999
10.22 Distribution Agreement by and between Lotus Development Corporation and NetObjects dated as of April
21, 1999
10.23 $2,000,000 Promissory Note issued to IBM by NetObjects dated April 23, 1999
16.1+ Letter from Ernst & Young LLP dated February 5, 1999 regarding change in certifying accountant
21.1+ Subsidiaries of the Registrant
23.1 Consent of McCutchen, Doyle, Brown & Enersen LLP (included in its opinion to be filed as Exhibit 5.1
hereto)
23.2 Consent of KPMG LLP
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
24.1+ Power of Attorney
27.1+ Financial Data Schedule
</TABLE>
- ------------------------
+ Previously filed.
* Confidential treatment requested.
** To be filed by amendment.
(b) FINANCIAL STATEMENT SCHEDULE
<TABLE>
<S> <C>
Independent Auditors' Report on Schedule
Schedule II--Valuation and Qualifying Accounts
</TABLE>
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the underwriters,
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the city of Redwood
City, State of California, on April 30, 1999.
<TABLE>
<S> <C> <C>
NETOBJECTS, INC.
By: /s/ SAMIR ARORA
-----------------------------------------
Samir Arora
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed by the following persons in the
capacities indicated below on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chairman of the Board,
/s/ SAMIR ARORA Chief Executive Officer,
- ------------------------------ President (Principal April 30, 1999
Samir Arora Executive Officer)
/s/ RUSSELL F. SURMANEK Chief Financial Officer
- ------------------------------ (Principal Financial and April 30, 1999
Russell F. Surmanek Accounting Officer)
/s/ JOHN SCULLEY+
- ------------------------------ Director April 30, 1999
John Sculley
/s/ LEE A. DAYTON+
- ------------------------------ Director April 30, 1999
Lee A. Dayton
/s/ MICHAEL D. ZISMAN+
- ------------------------------ Director April 30, 1999
Michael D. Zisman
/s/ ROBERT G. ANDEREGG+
- ------------------------------ Director April 30, 1999
Robert G. Anderegg
/s/ CHRISTOPHER M. STONE*+
- ------------------------------ Director April 30, 1999
Christopher M. Stone
</TABLE>
* Mr. Stone will become a director of our Company on the closing date of the
offering.
<TABLE>
<S> <C> <C> <C>
+By: /s/ SAMIR ARORA
-------------------------
Samir Arora
ATTORNEY-IN-FACT
</TABLE>
II-7
<PAGE>
FORM OF INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Directors
NetObjects, Inc.:
When the recapitalization, which includes a change in par value, and the
number of shares authorized and a reverse stock split, referred to in Note 8 of
the Notes to Consolidated Financial Statements have been consummated, we will be
in a position to render the following report.
/s/ KPMG LLP
The Board of Directors
Net Objects, Inc:
Under date of December 21, 1998, we reported on the consolidated balance
sheets of NetObjects, Inc. and subsidiary as of September 30, 1997 and 1998, and
the related consolidated statements of operations, stockholders' deficit, and
cash flows for the period from November 21, 1995 (inception) to September 30,
1996, and for each of the years in the two-year period ended September 30, 1998,
which are included in the prospectus. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedules in the registration statement. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
The accompanying consolidated financial statement schedules have been
prepared assuming that the Company will continue as a going concern. As
discussed in note 1(d) to the consolidated financial statements, the Company has
suffered recurring losses from operations and has a net capital deficiency that
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in note 1(d).
The consolidated financial statement schedules do not include any adjustments
that might result from the outcome of this uncertainty.
Mountain View, California
December 21, 1998 except as to Note 8,
which is as of , 1998
S-1
<PAGE>
NETOBJECTS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS--
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND DEDUCTIONS-- END OF
FISCAL YEAR EXPENSES WRITEOFFS FISCAL YEAR
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Period from November 21, 1995 (inception)
to September 30, 1996
Allowance for doubtful accounts, returns and price
protection.................................................. -- -- -- --
Year ended September 30, 1997
Allowance for doubtful accounts, returns and price
protection.................................................. -- $ 1,905,810 $ (1,150,228) $ 755,582
Year ended September 30, 1998
Allowance for doubtful accounts, returns and price
protection.................................................. $ 755,582 $ 4,691,000 $ (3,183,475) $ 2,263,107
</TABLE>
S-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1+ Form of Underwriting Agreement
3.1+ Restated Certificate of Incorporation of the Registrant
3.1.1+ Form of Restated Certificate of Incorporation to be in effect at the closing of the offering made
under this Registration Statement
3.2+ Restated Bylaws of the Registrant as amended through the date of this Registration Statement
3.2.1+ Form of Amended and Restated Bylaws to be in effect upon the closing of the offering made under this
Registration Statement
4.1+ Specimen stock certificate
4.2+ Form of Series C Preferred Stock Warrant
4.2.1+ Amendment to Series C Preferred Stock Warrant
4.3+ Form of Series E Preferred Stock Warrant
4.4+ Form of Series E-2 Preferred Stock Warrant
4.5+ Form of Series F Preferred Stock Warrant
5.1 Opinion of McCutchen, Doyle, Brown & Enersen LLP
9.1+ Voting Agreement between NetObjects, Inc. and International Business Machines Corporation
10.1+ NetObjects, Inc. 1997 Stock Option Plan
10.1.1+ NetObjects, Inc. Amended and Restated 1997 Stock Option Plan to be in effect upon the closing of the
offering made under this Registration Statement
10.1.2+ Form of Stock Option Agreement under the 1997 Stock Option Plan
10.1.3+ Form of Restricted Stock Purchase Agreement under the 1997 Stock Option Plan
10.1.4+ Form of Restricted Stock Transfer Agreement under the 1997 Stock Option Plan
10.2+ NetObjects, Inc. 1997 Special Stock Option Plan
10.3+ 1999 Employee Stock Purchase Plan
10.3.1 Amended 1999 Employee Stock Purchase Plan
10.4 IBM Software License Agreement (NetObjects License Agreement #L97063) by and between NetObjects and
IBM dated as of March 18, 1997
10.4.1 Amendment Number 1 to NetObjects License Agreement L97063 dated as of April 30, 1997
10.4.2+ Second Amendment to NetObjects License Agreement L97063 dated as of October 7, 1997
10.4.3 Third Amendment to NetObjects License Agreement L97063 dated as of December 16, 1997
10.4.4 Fourth Amendment to NetObjects License Agreement L97063 dated as of April 27, 1998
10.4.5 Fifth Amendment to NetObjects License Agreement L97063 dated as of January 14, 1999
10.4.6 Amendment No. 6 to NetObjects License Agreement L97063 dated as of September 18, 1998
10.4.7 Seventh Amendment to NetObjects License Agreement L97063 effective January 15, 1999
10.4.8 Eighth Amendment to NetObjects License Agreement L97063 dated September 18, 1998
10.4.9 Amendment No. 9 to NetObjects License Agreement effective January 21, 1999
10.4.10+ Amendment No. 10 to NetObjects License Agreement dated as of February 4, 1999
10.4.11 Letter Agreement modifying NetObjects License Agreement L97063 dated as of February 6, 1998
10.4.12+ Letter Agreement modifying NetObjects License Agreement L97063 dated as of June 30, 1998
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.4.13 Letter Agreement modifying NetObjects License Agreement L97063 dated as of January 14, 1999
10.4.14 Letter Agreement modifying NetObjects License Agreement L97063 dated as of March 25, 1999
10.5+ IBM Patent License Agreement by and between NetObjects and IBM dated as of April 10, 1997
10.6+ Lease Agreement by and between NetObjects and Metropolitan Life Insurance Company dated July 24, 1998
10.7+ Lease Agreement by and between NetObjects Limited and HQ Executive Offices (UK) LTD dated February
15, 1999
10.8+ Revolving Loan and Security Agreement by and between NetObjects, Inc. and IBM Credit Corp. dated as
of December 23, 1997
10.8.1+ Amendment to Revolving Loan and Security Agreement dated July 1998
10.9+ Note and Warrant Purchase Agreement by and among NetObjects, IBM and Perseus Capital LLC dated as of
October 8, 1998
10.9.1+ Supplement to Note and Warrant Purchase Agreement dated as of February 4, 1999
10.10+ Technology Transfer Agreement between Rae Technology, Inc. and NetObjects, Inc. dated February 2,
1996
10.10.1+ Amendment to Technology Transfer Agreement by and between Rae Technology and NetObjects dated as of
March 18, 1997
10.11+ Patent Transfer and License Agreement by and between Rae Technology LLC and NetObjects, Inc. dated as
of April 10, 1997, as amended
10.12+ Technology License Agreement by and between NetObjects and Clement Mok Designs dated as of December
21, 1995
10.13+* Distribution Agreement by and between Ingram Micro, Inc. and NetObjects, Inc. dated March 6, 1997
10.14+* Commercial Application Partner Agreement by and between Sybase, Inc. and NetObjects, Inc. dated June
30, 1997
10.15+* Master Distributor Agreement by and between Mitsubishi Corporation and NetObjects, Inc. dated
September 30, 1997
10.16+* Standard Inbound License Agreement by and between NetObjects and Novell effective September 30, 1998
10.16.1* Amendment to Standard Inbound License Agreement by and between NetObjects and Novell effective April
2, 1999
10.17 Build-It License Agreement dated as of February 2, 1999
10.18 IBM Trademark License Agreement dated as of January 19, 1999
10.19+ Letter Agreement by and between NetObjects and John Sculley dated February 3, 1999
10.20+ Sun Microsystems, Inc. Porting Agreement by and between Sun Microsystems, Inc. and NetObjects dated
as of March 26, 1999
10.21** Employment Agreement between Russell F. Surmanek and NetObjects dated as of April 5, 1999
10.22 Distribution Agreement by and between Lotus Development Corporation and NetObjects dated as of April
21, 1999
10.23 $2,000,000 Promissory Note issued to IBM by NetObjects dated April 23, 1999
16.1+ Letter from Ernst & Young LLP dated February 5, 1999 regarding change in certifying accountant
21.1+ Subsidiaries of the Registrant
23.1 Consent of McCutchen, Doyle, Brown & Enersen LLP (included in its opinion to be filed as Exhibit 5.1
hereto)
23.2 Consent of KPMG LLP
24.1+ Power of Attorney
27.1+ Financial Data Schedule
</TABLE>
- ------------------------
+ Previously filed.
* Confidential treatment requested.
** To be filed by amendment.
<PAGE>
EXHIBIT 5.1
<TABLE>
<CAPTION>
<S> <C>
Direct: (650) 849-4816
April 29, 1999 [email protected]
</TABLE>
NetObjects, Inc.
301 Galveston Drive
Redwood City, CA 94063
REGISTRATION ON FORM S-1 -- SEC FILE NO. 333-71893
Dear Ladies and Gentlemen:
We have acted as counsel to NetObjects, Inc., a Delaware corporation (the
"Company"), in connection with its initial public offering of 6,000,000 shares
of common stock, par value $.01 (the "Common Stock").
In this regard, we have examined the Company's Restated Certificate of
Incorporation and Bylaws, each as amended to date, and records of meetings of
the stockholders and the directors of the Company. In addition, we have made
such examinations of matters of law as we deemed appropriate for purposes of
this opinion. As to certain factual matters we deem relevant to this opinion, we
have relied upon a certificate of officers of the Company and have not sought to
independently verify the matters stated therein.
Based upon the foregoing, it is our opinion that the 6,000,000 shares of
Common Stock, as well as any additional shares issued upon exercise by the
underwriters of their option to purchase shares to cover over-allotments, are
duly authorized and, when issued to the underwriters for the consideration set
forth in the registration statement, will be validly issued, fully paid and
non-assessable, and no personal liability will attach to the holders of such
shares by reason of the ownership thereof.
This opinion is rendered solely to you in connection with the registration
of the shares of Common Stock in your initial public offering.
We consent to being named as counsel to the Company in the registration
statement and to the inclusion of a copy of this opinion letter as an exhibit to
the registration statement. In giving this consent, however, we do not thereby
admit that we are an "expert" within the meaning of the Securities Act of 1933,
as amended.
Very truly yours,
MCCUTCHEN, DOYLE, BROWN & ENERSEN, LLP
By: /s/ ALAN B. KALIN
Alan B. Kalin
A Member of the Firm
<PAGE>
Exhibit 10.3.1
NETOBJECTS, INC.
AMENDED 1999 EMPLOYEE STOCK PURCHASE PLAN
NetObjects, Inc., a Delaware corporation (the "Company"), hereby
establishes this 1999 Employee Stock Purchase Plan (the "Plan").
1. PURPOSE OF PLAN. The purpose of the Plan is to enable Eligible
Employees (as defined in Section 3) who wish to become stockholders of the
Company a convenient and favorable method of doing so. The Plan is intended to
constitute an "employee stock purchase plan," as defined in Section 423(b) of
the Internal Revenue Code of 1986, as amended (the "Code"), and shall be
interpreted and administered to further that intent.
2. ADMINISTRATION OF THE PLAN. The Plan will be administered by the
Compensation Committee (the "Committee") of the Board of Directors of the
Company (the "Board"). Subject to the provisions of the Plan, the Committee will
have the complete authority to interpret the Plan, to adopt, amend and rescind
rules and procedures relating to the Plan, and to make all of the determinations
necessary or advisable for the administration of the Plan. All such
interpretations, rules, procedures and determinations will, in the absent of
fraud or patent mistake, be conclusive and binding on all persons with any
interest in the Plan.
3. ELIGIBLE EMPLOYEES. The term "Eligible Employees" means all
common law employees of the Company and its current subsidiary, as defined in
Section 424(f) of the Code, (and each other corporation designated by the
Committee that hereafter becomes a majority-owned subsidiary of the Company) as
of the beginning of each Offering Period (as defined in Section 5), except the
following: (a) employees who have been continuously employed for less than
five days prior to the commencement of the Offering Period (as defined in
Section 5); (b) employees whose customary employment is 20 hours or less per
week; and (c) employees whose customary employment is for not more than five
months in any calendar year. The employment of an employee shall be treated as
continuing intact while the employee is on sick leave or other leave of absence
approved by the Company. Except as otherwise expressly provided in the Plan and
permitted by Section 423 of the Code, all Eligible Employees shall have the same
rights and obligations under the Plan.
4. STOCK SUBJECT TO THE PLAN. The stock subject to the Plan shall
be shares of the Company's authorized but unissued Common Stock, $.01 par value
per share, (the "Common Stock"). The aggregate number of shares of Common Stock
that may be purchased by Eligible Employees pursuant to the Plan is 300,000,
subject to adjustment as provided in Section 13.
5. OFFERING PERIODS. The Common Stock shall be offered under the
Plan during consecutive offering periods (the "Offering Periods"). The first
Offering Period
<PAGE>
shall begin upon the issue and sale shares of Common Stock in a bona fide
public offering on an underwritten firm commitment basis pursuant to a
registration statement filed with and declared effective by the Securities
and Exchange Commission, pursuant to the Securities Act of 1933, as amended,
and end on July 31, 2000 (the "Initial Offering Period"). An overlapping
Offering Period will commence on the first Business Day on or after August 1,
1999 and will end on January 31, 2000. All subsequent Offering Periods will
begin on the first day and end on the last day of each subsequent six-month
periods spanning February 1 to July 31 and August 1 to January 31 until the
Plan termination date, as provided in Section 16.1.
6. PARTICIPANTS; PAYROLL DEDUCTIONS
6.1 A person who is an Eligible Employee at the beginning of
an Offering Period may elect to have the Company make deductions from the
person's Compensation (as defined in Section 6.4), at a specified percentage
rate, to be used to purchase shares of Common Stock pursuant to the Plan during
each purchase period ("Purchase Period), which shall be coterminous with the
Offering Period except that the Initial Offering Period shall include three
Purchase Periods: the first such period will commence on the first day of the
Initial Offering Period and will end on July 31, 1999; the second such period
will commence on August 1, 1999 and will end on January 31, 2000; and the third
such period will commence on February 1, 2000 and will end on July 31, 2000.
This election must be made prior to the beginning of the Offering Period in
accordance with such procedures as the Committee may adopt (each Eligible
Employee who so elects to have such deductions made will be referred to as a
"Participant").
6.2 The maximum rate of deduction that a Participant may
elect for any Offering Period is 10%. An amount equal to the elected percentage
shall be deducted from the Participant's pay each time during the Purchase
Period that any Compensation is paid to the Participant. The Committee may set
such minimum level of payroll deductions as the Committee determines to be
appropriate. Any minimum level of deductions set by the Committee shall apply
equally to all Eligible Employees. A Participant's accumulated payroll
deductions shall remain the property of the Participant until applied toward the
purchase of shares of Common Stock under the Plan, but may be commingled with
the general funds of the Company. No interest will be paid on payroll deductions
accumulated under the Plan.
6.3 A Participant in the Plan on the last day of a Purchase
Period shall automatically continue to participate in the Plan during the next
Purchase Period unless he or she withdraws in the manner described in Section 11
or is no longer an Eligible Employee.
6.4 The term "Compensation" means all base salary, straight
time wages and commissions paid to or on behalf of a Participant for services
performed or on account of holidays, vacation, sick leave or other similar
events (including any
2
<PAGE>
amounts by which such earnings are reduced, at the election of a Participant,
pursuant to a cafeteria plan described in Section 125 of the Code, a
dependent care assistance program described in Section 129 of the Code, a
cash or deferred arrangement described in Section 401(k) of the Code, or any
similar plan, program or arrangement), and excluding any overtime, shift
premium, bonuses and other incentive compensation, the value of any noncash
benefits under any employee benefit plans, and any other amounts paid to the
Participant that are specifically excluded by the Committee.
7. PURCHASE OF SHARES
7.1 At the end of the Purchase Period, a Participant's
accumulated payroll deductions for the Purchase Period will, subject to the
limitations in Section 9 and the withdrawal provisions of Section 11, be applied
toward the purchase of shares of Common Stock at a purchase price (the "Purchase
Price") equal to the lesser of --
(a) 85% of the Market Price (as defined in
Section 8.1) of the Common Stock on the first Business Day (as defined in
Section 8.2) of the Offering Period; or
(b) 85% of the Market Price of the Common Stock on the
last Business Day of the Purchase Period,
in either event rounded to the nearest whole cent.
7.2 Shares of Common Stock may be purchased under the Plan
only with a Participant's accumulated payroll deductions. Fractional shares
cannot be purchased. Any portion of a Participant's accumulated payroll
deductions for an Offering Period not used for the purchase of Common Stock
shall be applied to the purchase of Common Stock in the next Purchase Period, if
the Participant is participating in the Plan during that Purchase Period, or
returned to the Participant.
7.3 Each Participant who purchases shares of Common Stock
under the Plan shall thereby be deemed to have agreed that the Company or the
subsidiary of the Company that employs the Participant shall be entitled to
withhold, from any other amounts that may be payable to the Participant at or
around the time of the purchase, such federal, state, local and foreign income,
employment and other taxes which may be required to be withheld under applicable
laws. In lieu of such withholding, the Company or such subsidiary may require
the Participant to remit such taxes to the Company or such subsidiary as a
condition of the purchase.
8. MARKET PRICE
8.1 For purposes of the Plan, the term "Market Price" on any
day means, if the Common Stock is publicly traded, the last sales price (or, if
no last sales price is reported, the average of the high bid and low asked
prices) for a share of Common Stock on that day as reported by the principal
exchange on which the
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Common Stock is listed, or, if the Common Stock is publicly traded but not
listed on an exchange, as reported by The Nasdaq Stock Market, or, if such
prices or quotations are not reported by The Nasdaq Stock Market, as reported
by any other available source of prices or quotations selected by the
Committee.
8.2 For purposes of the Plan, the term "Business Day" means a
day on which prices or quotations for the Common Stock are reported by a
national securities exchange, The Nasdaq Stock Market, or any other available
source of prices or quotations selected by the Committee, whichever is
applicable pursuant to the preceding paragraph.
8.3 If the Market Price of the Common Stock must be
determined for purposes of the Plan at a time when the Common Stock is not
publicly traded, then the term "Market Price" shall mean the fair market value
of the Common Stock as determined by the Committee, after taking into
consideration all the factors it deems appropriate, including, without
limitation, recent sale and offer prices of the Common Stock in private
transactions negotiated at arm's length.
9. LIMITATIONS ON SHARE PURCHASES
9.1 Notwithstanding Section 3, an employee will not be an
Eligible Employee for purposes of the Plan if the employee owns stock possessing
5% or more of the total combined voting power or value of all classes of stock
of the Company. For purposes of this 5% limitation, an employee shall be treated
as owning any stock the ownership of which is attributed to him or her under the
rules of Section 424(d) of the Code, as well as any stock that, in the absence
of this paragraph, the employee could purchase under the Plan with his or her
payroll deductions held pursuant to Section 6 but not yet applied to the
purchase of shares of Common Stock under the Plan.
9.2 During any calendar year, the maximum value of the Common
Stock that may be purchased by a Participant under the Plan and all such plans
of Company, any Subsidiary of the Company, and any parent corporation (as
defined in Section 424(e) of the Code) is $25,000, said value to be determined
on the basis of the Market Price of the Common Stock on the first Business Day
of each Offering Period that ends in the calendar year. Notwithstanding any
other provision of the Plan to the contrary, the rights of a Participant to
purchase shares of capital stock under the Plan and all such other plans shall
not accrue at a rate which exceeds $25,000 annualized at any time during the
calendar year.
9.3 The limitations in Section 9.1 and Section 9.2 are
intended to and shall be interpreted in such a manner as will comply with
Section 423(b)(3) and Section 423(b)(8) of the Code, respectively.
10. CHANGES IN PAYROLL DEDUCTIONS. The rate of payroll deductions
for an Offering Period may not be increased or decreased by a Participant during
the Purchase Period. However, the Participant may change the rate of payroll
deduction for
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a subsequent Purchase Period. In addition, a Participant may withdraw in full
from the Plan in the manner described in Section 11.
11. WITHDRAWAL FROM THE PLAN
11.1 A Participant may elect to withdraw from the Plan,
effective for the Offering Period in progress, by delivering to the Committee
written notice thereof prior to the end of the Offering Period.
11.2 If a Participant ceases for any reason (including death,
disability or voluntary or involuntary termination of employment) to be an
employee of the Company or one of its subsidiaries, the Participant will be
deemed to have elected to withdraw from the Plan for the Offering Period and
Purchase Period in progress when the Participant's employment ceases.
11.3 If a Participant's payroll deductions are interrupted by
any legal process, the Participant will be deemed to have elected to withdraw
from the Plan for the Purchase Period in progress when the interruption occurs.
11.4 If a Participant elects or is deemed to have elected to
withdraw for a Purchase Period in progress, all of the Participant's payroll
deductions for that Purchase Period, will be promptly returned to the
Participant.
11.5 A Participant may elect to withdraw from the Plan,
effective for a Purchase Period that has not yet commenced, by delivering to the
Committee written notice thereof prior to the first day of the Purchase Period.
11.6 Following withdrawal from the Plan, in order to
participate in the Plan for any subsequent Offering Period, the Participant must
again elect to participate in the manner described in Section 6.1.
12. ISSUANCE OF COMMON STOCK
12.1 Certificates for the shares of Common Stock purchased by
Participants will be delivered by the Company's transfer agent as soon as
practicable after each Purchase Period. In lieu of issuing certificates for such
shares directly to Participants, the Company shall be entitled to issue such
shares to a bank, broker-dealer or similar custodian (the "Custodian") that has
agreed to hold such shares for the accounts of the respective Participants. Fees
and expenses of the Custodian shall be paid by the Company or allocated among
the respective Participants in such manner as the Committee determines.
12.2 A Participant may direct, in accordance with such
procedures as the Committee may adopt, that shares purchased by the Participant
shall be issued (or, if such shares are issued to the Custodian, that the
account for such shares be held) in the names of the Participant and one other
person designated by the Participant, as
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joint tenants with right of survivorship, tenants in common, or community
property, to the extent and in the manner permitted by applicable law.
12.3 A Participant may at any time, in the manner described in
Section 17, undertake a disposition (as that term is defined in Section 424(c)
of the Code), whether by sale, exchange, gift or other transfer of legal title,
of any or all of the shares held for the Participant by the Custodian. In the
absence of such a disposition of the shares, the shares shall continue to be
held by the Custodian until the holding period set forth in Section 423(a) of
the Code has been satisfied. If a Participant so requests, shares for which such
holding period has been satisfied will be transferred to another brokerage
account specified by the Participant, or a stock certificate for such shares
will be issued and delivered to the Participant or his or her designee.
13. CHANGES IN CAPITALIZATION
13.1 Upon the happening of any of the following described
events, a Participant's right to purchase shares of Common Stock under the Plan
shall be adjusted as hereinafter provided:
(a) If the shares of Common Stock are subdivided or
combined into a greater or smaller number of shares of Common Stock or if, upon
a recapitalization, split-up or other reorganization of the Company, the shares
of Common Stock are exchanged for other securities of the Company, the rights of
each Participant shall be modified so that the Participant is entitled to
purchase, in lieu of the shares of Common Stock that the Participant would
otherwise have been entitled to purchase for the Purchase Period in progress at
the time of such subdivision, combination or exchange (the "Offering Period
Shares"), such number of shares of Common Stock or such number and type of other
securities as the Participant would have received if such Offering Period Shares
had been issued and outstanding at the time of such subdivision, combination or
exchange (unless in the case of an exchange the Committee determines that the
nature of the exchange is such that it is not feasible or advisable that the
rights of Participants be so modified, in which event the exchange shall be
deemed a Terminating Event under Section 14); and
(b) If the Company issues any of its shares as a stock
dividend upon or with respect to the Common Stock, each Participant who
purchases shares of Common Stock under the Plan at the end of the Purchase
Period in progress on the record date for the stock dividend shall be entitled
to receive the shares so purchased (the "Purchased Shares") and shall also be
entitled to receive at no additional cost, but only if the Purchase Price for
the Purchased Shares was determined with reference to the Market Price of the
Common Stock on the first Business Day of the Offering Period, the number of
shares of the class of stock issued as a stock dividend, and the amount of cash
in lieu of fractional shares, that the Participant would have received if he or
she had been the holder of the Purchased Shares on the record date for the stock
dividend.
13.2 Upon the happening of an event specified in clause (a) or
(b)
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above, the class and aggregate number of shares available under the Plan, as
set forth in Section 4, shall be appropriately adjusted to reflect the event.
Notwithstanding the foregoing, such adjustments shall be made only to the extent
that the Committee, based on advice of counsel for the Company, determines that
such adjustments will not constitute a change requiring shareholder approval
under Section 423(b)(2) of the Code.
14. TERMINATING EVENTS
14.1 Upon (a) the dissolution or liquidation of the Company,
(b) a merger or other reorganization of the Company with one or more
corporations as a result of which the Company will not be a surviving
corporation, (c) the sale of all or substantially all of the assets of the
Company or a material division of the Company, (d) a sale or other transfer,
pursuant to a tender offer or otherwise, of more than fifty percent (50%) of the
then outstanding shares of Common Stock of the Company, (e) an acquisition by
the Company resulting in an extraordinary expansion of the Company's business or
the addition of a material new line of business, or (f) any exchange that is
subject to this Section 14 in accordance with the provisions of Section 13 (any
of such events is herein referred to as a "Terminating Event"), the Committee
may but shall not be required to --
(a) make provision for the continuation of the
Participants' rights under the Plan on such terms and conditions as the
Committee determines to be appropriate and equitable, including where
applicable, but not limited to, an arrangement for the substitution on an
equitable basis, for each share of Common Stock that could otherwise be
purchased at the end of the Purchase Period in progress at the time of the
Terminating Event, of any consideration payable with respect to each then
outstanding share of Common Stock in connection with the Terminating Event; or
(b) terminate all rights of Participants under the
Plan for such Purchase Period and --
(i) return to the Participants all of their
payroll deductions for such Purchase Period (if shorter); and
(ii) for each share of Common Stock, if any,
that otherwise could have been purchased under the Plan by a Participant at the
end of such Purchase Period (if shorter) (determined by assuming that payroll
deductions at the rate elected by the Participant were continued to the end of
the payroll period and used to purchase shares based on the Market Price of the
Common Stock on the first Business Day of the Offering Period) and with respect
to which (A) the Purchase Price at which such share could be purchased
(determined with reference only to the Market Price of the Common Stock on the
first Business Day of the Offering Period) is exceeded by (B) the Market Price
on the date of the Terminating Event of a share of Common Stock, as determined
by the Committee, pay to the Participant an amount equal to such excess.
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14.2 The Committee shall make all determinations necessary or
advisable in connection with Terminating Events, and its determinations shall,
in the absent of fraud or patent mistake, be conclusive and binding on all
persons with any interest in the Plan.
15. NO TRANSFER OR ASSIGNMENT OF EMPLOYEE'S RIGHTS. An Eligible
Employee's rights under the Plan are the Eligible Employee's alone and may not
be voluntarily or involuntarily transferred or assigned to, or availed of by,
any other person other than by will or the laws of descent and distribution. An
Eligible Employee's rights under the Plan are exercisable during his or her
lifetime by the Eligible Employee alone.
16. TERMINATION AND AMENDMENT OF PLAN
16.1 The Plan shall terminate on January 31, 2004. The Plan
may be terminated at any earlier time by the Board, but, except as provided in
Section 14, such termination shall not affect the rights of Participants under
the Plan for the Offering Period in progress at the time of termination. The
Plan will also terminate in any case when all or substantially all of the
unissued shares of Common Stock reserved for the purposes of the Plan have been
purchased. If at any time shares of Common Stock reserved for the purpose of the
Plan remain available for purchase but not in sufficient number to satisfy all
then unfilled purchase requirements, the available shares shall be apportioned
among Participants in proportion to the respective amounts of their accumulated
payroll deductions, and the Plan shall terminate. Upon such termination or any
other termination of the Plan, all payroll deductions not used to purchase
shares of Common Stock will be refunded to the Participants entitled thereto.
16.2 The Committee or the Board may from time to time adopt
amendments to the Plan; PROVIDED, HOWEVER, that, without the approval of the
stockholders of the Company, no amendment may increase the number of shares that
may be issued under the Plan or make any other change for which shareholder
approval is required by Section 423 of the Code or the regulations thereunder.
17. DISPOSITION OF SHARES. Subject to compliance with any applicable
federal and state securities and other laws and any policy of the Company in
effect from time to time with respect to trading in its shares, a Participant
may effect a disposition (as that term is defined in Section 424(c) of the Code)
of Common Stock purchased under the Plan at any time the Participant chooses;
PROVIDED, HOWEVER, each Participant agrees, by purchasing shares of Common Stock
under the Plan, that (a) the Company shall be entitled to withhold, from any
other amounts that may be payable to the Participant by the Company at or around
the time of such disposition, such federal, state, local and foreign income,
employment and other taxes as the Company may be required to withhold under
applicable law; and (b) in lieu of such withholding, the Participant will, upon
request of the Company, promptly remit such taxes to the Company. EACH EMPLOYEE
PURCHASING SHARES OF COMMON STOCK UNDER THE PLAN ASSUMES THE RISK OF ANY MARKET
FLUCTUATIONS IN
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THE PRICE THEREOF.
18. NO SHAREHOLDER RIGHTS; INFORMATION TO PARTICIPANTS. A
Participant shall not have any rights as a shareholder of the Company (other
than the right potentially to receive stock dividends under Section 13) on
account of shares of Common Stock that may be purchased under the Plan prior to
the time such shares are actually purchased by and issued to the Participant.
Notwithstanding the foregoing, the Company shall deliver to each Participant
under the Plan who does not otherwise receive such materials (a) a copy of the
Company's annual financial statements (which shall be delivered annually as
promptly as practical following each fiscal year of the Company and review or
audit of such statements by the Company's auditors), together with management's
discussion and analysis of financial condition and results of operations for the
fiscal year, and (b) a copy of all reports, proxy statements and other
communications distributed to the Company's security holders generally.
19. USE OF PROCEEDS. The proceeds received by the Company from the
sale of shares of Common Stock under the Plan will be used for general corporate
purposes.
20. GOVERNMENTAL REGULATIONS. The Company's obligation to sell and
deliver shares of the Common Stock under the Plan is subject to the approval of
any governmental authority required in connection with the authorization,
issuance or sale of such shares, including the Securities and Exchange
Commission, the securities administrators of the states in which Participants
reside, and the Internal Revenue Service.
21. MISCELLANEOUS PROVISIONS
21.1 Nothing contained in the Plan shall obligate the Company
or any of its subsidiaries to employ a Participant for any period, nor shall the
Plan interfere in any way with the right of the Company or any of its
subsidiaries to reduce a Participant's compensation.
21.2 The provisions of the Plan shall be binding upon each
Participant and, subject to the provisions of Section 15, the heirs, successors
and assigns of each Participant.
21.3 Where the context so requires, references in the Plan to
the singular shall include the plural, and vice versa, and references to a
particular gender shall include either or both additional genders.
21.4 The Plan shall be construed, administered and enforced in
accordance with the laws of the United States, to the extent applicable thereto,
as well as the laws of the State of California.
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22. APPROVAL OF STOCKHOLDERS. The Plan shall be effective January 1, 1999,
subject to approval by the stockholders of the Company in a manner that complies
with Section 423(b)(2) of the Code. If such approval does not occur prior to
December 31, 1999, the Plan shall be void and of no effect.
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EXHIBIT 10.4
3/18/97
NETOBJECTS LICENSE AGREEMENT
AGREEMENT NUMBER: L97063
This NetObjects License Agreement ("Agreement") dated as of March 18, 1997
between NetObjects Corporation ("NETOBJECTS") with an address at 2055 Woodside
Road Redwood City, California 94061 and International Business Machines
Corporation ("IBM") with an address at Route 100 Somers, NewYork 10589. Under
this Agreement, IBM licenses computer software from NETOBJECTS.
By signing below, the parties agree to the terms of this Agreement. The
complete Agreement between the parties regarding this transaction consists of
this Agreement and the following Exhibits:
I. Description of Licensed Work, EXHIBIT A.
II. Pricing, EXHIBIT B.
III. Source Escrow Agreement, EXHIBIT C.
IV. Product Improvements, EXHIBIT D.
V. NETOBJECTS Trademarks and Product Names, EXHIBIT E.
VII. Maintenance and Support, EXHIBIT F.
The following are related agreements between the parties:
VII. Agreement for Exchange of Confidential Information between IBM and
NETOBJECTS dated April 29, 1996. ("AECI")
This Agreement replaces all prior oral or written communications between the
parties relating to the subject matter. Once signed, any reproduction of this
Agreement made by reliable means (for example, photocopy or facsimile) is
considered an original, unless prohibited by local law.
ACCEPTED AND AGREED TO: ACCEPTED AND AGREED TO:
INTERNATIONAL BUSINESS NETOBJECTS CORPORATION
MACHINES CORPORATION
By: /s/ R.G. Anderegg By: /s/ Samir Arora
--------------------------- ------------------------------
Authorized Signature Authorized Signature
Name: R.G. Anderegg Name: Samir Arora
--------------------------- ----------------------------
Title: Asst. General Counsel Title: CEO
--------------------------- ---------------------------
Date: 3/18/97 Date: 3/18/97
--------------------------- ---------------------------------
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1.0 DEFINITIONS
Capitalized terms in the Agreement and its exhibits and other attachments have
the following meanings.
1.1 BUNDLE is a work that integrates, embeds, bundles or incorporates the
Licensed Work into or with other software or hardware.
1.2 CODE is computer programming code, including both Object Code and Source
Code.
a. OBJECT CODE is Code substantially in binary form, and includes header
files of the type necessary for use or interoperation with other computer
programs. It is directly executable by a computer after processing or linking,
but without compilation or assembly. Object Code is all Code other than Source
Code.
b. SOURCE CODE is Code in a form which when printed out or displayed is
readable and understandable by a programmer of ordinary skills. It includes
related source code level system documentation, comments and procedural code.
Source Code does not include Object Code.
1.3 DELIVERABLE is any item that NETOBJECTS provides under this Agreement.
1.4 DERIVATIVE WORK is a work that is based on an underlying work and that
would be a copyright infringement if prepared without the authorization of the
copyright owner(s) of the underlying work. Derivative Works are subject to the
ownership rights and licenses of a party or of others in the underlying work.
1.5 DISTRIBUTORS are those authorized or licensed by IBM, IBM Subsidiaries or
IBM Distributors to license or distribute Products.
1.6 EFFECTIVE TIME shall have the meaning set forth in the Agreement and Plan
of Merger dated as of March 18, 1997, among IBM, Net Acquisition Corporation,
NETOBJECTS and the Holders (as set forth therein).
1.7 ENHANCEMENTS are changes or additions, including versions and releases,
other than Error Corrections, to the Licensed Work during the term of this
Agreement.
1.8 ERROR CORRECTIONS are revisions that correct errors and deficiencies
(collectively referred to as "Errors") in the Licensed Work created during the
term of this Agreement.
1.9 EXTERNALS are (1) any pictorial, graphic, and audiovisual works (such as
icons, screens, sounds, toolbars, palettes and characters) generated by
execution of Code, and (2) any programming interfaces, languages or protocols
implemented in Code to enable interaction with other computer programs or the
end user, including application program interfaces ("API"). Externals do not
include the Code that implements them.
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1.10 LICENSED WORK is (1) any material described in Exhibit A, Description of
Licensed Work, or that is delivered to IBM as the Licensed Work, including (but
not limited to) Code, associated documentation, and Externals, and (2) Error
Corrections and Enhancements.
1.11 MORAL RIGHTS are personal rights associated with authorship of a work
under applicable law. They include the rights to approve modifications and to
require authorship identification.
1.12 PRODUCT is an offering to customers or other users, whether or not branded
by IBM or its Subsidiaries, that includes the Licensed Work or a Derivative Work
of the Licensed Work.
1.13 SUBSIDIARY is an entity during the time that more than 50% of its voting
stock is owned or controlled, directly or indirectly, by another entity. If
there is no voting stock, a Subsidiary is an entity during the time that more
than 50% of its decision-making power is controlled, directly or indirectly, by
another entity.
1.14 TOOLS include devices, compilers, programming, documentation, media and
other items used by NETOBJECTS for the development, maintenance or
implementation of a Licensed Work or other Deliverable that are not commercially
available.
2.0 RESPONSIBILITIES OF NETOBJECTS
2.1 NETOBJECTS will provide the following to IBM on a reasonable schedule:
a. The Licensed Works in Object Code form, in accordance with Exhibit A; and
b. Early access to NETOBJECTS product plans and new product testing
and releases; and
c. Maintenance and support for the Licensed Work, as described in Exhibit F.
2.2 NETOBJECTS will:
a. implement a process designed to help prevent contamination by harmful
code. NETOBJECTS will provide IBM notice if NETOBJECTS suspects
contamination;
b. have written agreements with NETOBJECTS' personnel and third parties to
perform obligations and to grant or assign rights to IBM as required by
this Agreement, including all necessary consents of individuals or
entities required for the use of names, likenesses, voices, and the like
in the Licensed Work and agreements not to assert any Moral Rights from
any person or entity having Moral Rights in the Licensed Work. NETOBJECTS
agrees not to assert any Moral Rights in the Licensed Work. NETOBJECTS
further agrees to maintain records to verify authorship of the Licensed
Work for four (4) years after the termination or expiration of this
Agreement. On request, NETOBJECTS will deliver or otherwise make
available the foregoing records and information to IBM;
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c. not assign or transfer this Agreement or NETOBJECTS' rights under it, or
delegate or subcontract NETOBJECTS' obligations, without IBM's prior
written consent. Any attempt to do so is void.
d. work closely with IBM to develop a list of priorities, establish schedules
for implementation, and implement the product improvements described in
Exhibit D.
e. deposit Source Code of the Licensed Works and Tools (including all updates
and upgrades thereto) with an escrow agent selected jointly by IBM and
NETOBJECTS under the Escrow Agreement attached hereto as Exhibit C. IBM
will pay the fees of the escrow agent.
3.0 MUTUAL RESPONSIBILITIES
3.1 Each party agrees to:
a. not provide any information to the media, or issue any press releases or
other publicity, regarding this Agreement or the parties' relationship
under it, without the other party's prior written consent; and
b. not disclose to a third party the terms of this Agreement, without the
other party's prior written consent. Each party may, however, make such
disclosures (i) to its accountants, lawyers or other professional advisors
provided that any such advisor is under a confidentiality obligation and
(ii) as required by law provided the party obtains any confidentiality
treatment for it which is available. Also, NETOBJECTS may disclose the
terms of this Agreement to its shareholders of record as of the Effective
Time, subject to appropriate confidentiality obligations.
3.2 NETOBJECTS and IBM agree to participate in technical and business meetings
and discussions of plans for the Licensed Work, and to implement the product
improvement plan described in Exhibit D. Such meetings shall occur quarterly or
more often if requested by either party and will be held at a location to be
determined alternately by IBM and NETOBJECTS. Both parties shall bear their own
expenses associated with participating in these meetings. At each such meeting,
NETOBJECTS agrees to disclose its current road map or schedule for revisions,
enhancements, or other upgrades to the Licensed Work.
4.0 GRANT OF LICENSES
4.1 NETOBJECTS hereby grants IBM a nonexclusive, worldwide, irrevocable
license during the Term (as defined in Section 8.1) to use, execute, reproduce
and have reproduced, and to prepare and have prepared Bundles, in Object Code
form, and to display, perform, transfer, distribute, transmit and sublicense the
Licensed Works and Bundles, in Object Code form, in any medium or distribution
technology whatsoever, whether now known or hereafter invented. The rights and
licenses granted by NETOBJECTS to IBM under this Section 4.1 include the right
of IBM to authorize or sublicense its Subsidiaries, subcontractors, and
Distributors to exercise any of the rights granted to IBM hereunder.
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4.2 NETOBJECTS hereby grants IBM a nonexclusive, worldwide, irrevocable
license during the Term to use, execute, reproduce and have reproduced, and to
prepare and have prepared Derivative Works of the Licensed Works and Tools in
Source Code form for use in connection with the purposes and subject to the
Release Events set forth in Exhibit C, the Escrow Agreement. The rights and
licenses granted by NETOBJECTS to IBM under this Section 4.2 include the right
of IBM to authorize or sublicense its Subsidiaries and subcontractors to
exercise any of the rights granted to IBM hereunder.
4.3 NETOBJECTS hereby grants IBM a nonexclusive, worldwide, perpetual,
irrevocable, paid-up license during the Term to use the names and trademarks
used by NETOBJECTS to identify, or otherwise in connection with, the Licensed
Work, and Derivative Works, thereof, including but not limited to the names and
trademarks set forth in Exhibit E. NETOBJECTS grants IBM the right to
authorize or sublicense its Subsidiaries, Distributors and subcontractors to
exercise any of the rights granted to IBM hereunder. IBM will treat NETOBJECTS'
trademarks in the same manner as IBM treats its own trademarks. However, if
NETOBJECTS provides IBM with reasonable trademark guidelines, IBM will, for a
Product, comply with the version of such trademark guidelines that is current at
the time IBM announces the general availability of such Product.
4.4 Any goodwill attaching to IBM's trademarks, service marks, or trade names
belongs to IBM, and this Agreement does not grant NETOBJECTS any right to use
them. IBM may state that NETOBJECTS has provided the Licensed Work. Any
goodwill attaching to NETOBJECTS' trademarks, service marks, or trade names
belongs to NETOBJECTS and, subject to Section 4.3, this Agreement does not grant
IBM, its Subsidiaries, or Distributors, any right to use them.
5.0 PAYMENT
5.1 IBM will pay NETOBJECTS royalties as set forth in Exhibit B hereto.
5.2 IBM has no royalty obligation for:
a. copies of the Licensed Work or its Derivative Works made by IBM, its
Subsidiaries or subcontractors which are used for:
(1) IBM's and IBM Subsidiaries' (including third parties under contract)
Product development, maintenance or support activities;
(2) Product marketing demonstrations, customer testing or trial periods
(including early support, pre-release, or other similar programs),
Product training or education; or
(3) Product backup and archival purposes;
b. a copy of the Product used by a licensed end user at home or on travel
when such Product is stored on both the user's primary machine as well as
another machine, provided that the end user is not authorized to actively
use the Product on both machines at the same time;
c. the Licensed Work (or a functionally equivalent work) that becomes
available generally from NETOBJECTS to third parties without a payment
obligation;
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d. documentation provided with, contained in, or derived from the Licensed
Work;
e. Error Corrections or Enhancements;
f. warranty replacement copies of the Product;
g. Externals; or
h. use of an insignificant portion of the Licensed Work measured on the basis
of functionality.
5.3 IBM, IBM Subsidiaries, and Distributors may, without incurring any royalty
obligation, copy the Product and distribute it on a CD-ROM, or other media or
distribution technology now known or hereafter invented in a manner where the
customer, under a limited license, is allowed a limited preview, trial or
demonstration use of the Product. IBM will have no royalty obligation to
NETOBJECTS unless IBM, IBM Subsidiaries, or Distributors license the Product to
such customer for full unrestricted, productive use.
5.4 IBM may request a lower royalty for the Licensed Work when a licensing
transaction requires a substantial discount. If NETOBJECTS agrees, both parties
will sign a letter specifying the licensing transaction and its lower royalty
payment.
5.5 If NETOBJECTS offers another party lower rates, prices or royalties for
any Licensed Work, portions thereof, or Derivative Work thereof, than are
available to IBM under this Agreement, NETOBJECTS will promptly, in writing,
offer the same to IBM including other associated price related terms, if any.
If IBM accepts NETOBJECTS' offer, IBM will also accept the associated price
related licensing terms which may include volume commitments. NETOBJECTS will
maintain relevant records to evidence that IBM has been offered the most
favored customer pricing terms in accordance with the preceding paragraph.
These records will be made available by NETOBJECTS to an independent auditor
chosen and compensated by IBM. Such independent auditor shall sign a
confidentiality agreement.
5.6 For Hard Bundles and Soft Bundles, royalties are paid against revenue
recorded by IBM in a royalty payment quarter. In the U.S., a royalty payment
quarter ends on the last business day of the calendar quarter. Outside of the
U.S., a royalty payment quarter is defined according to IBM's then current
administrative practices. Upon request, IBM shall advise NETOBJECTS of all
applicable royalty payment quarters, and any changes thereto. Payment will be
made by the last day of the second calendar month following the royalty payment
quarter. Royalties will be paid less adjustments and refunds due to IBM in
accordance with this Agreement. IBM will provide a statement summarizing the
royalty calculation with each payment. All payments will be made in U.S.
dollars. Payments based on foreign revenue will be converted to U.S. dollars on
a monthly basis at the rate of exchange published by Reuters Financial Service
on approximately the same day each month.
5.7 IBM or any of its Subsidiaries will order a N.O. Package by issuing a
purchase order to NETOBJECTS against which NETOBJECTS will invoice IBM. IBM
will pay such invoices net thirty (30) days from the date of IBM's receipt of an
acceptable invoice. NETOBJECTS will deliver the N.O. Package (as defined in
Section 3.4 of Exhibit B) to IBM in accordance with the
6
<PAGE>
terms of the purchase order. The terms of this Agreement will govern in the
case of a conflict between this Agreement and any terms of a purchase order.
5.8 Each party will be solely responsible for any taxes incurred by the party,
directly or indirectly, associated with its performance of this Agreement.
5.9 The payments defined in this Section 5.0 and in Exhibit B hereto fully
compensate NETOBJECTS for its performance under, and for the rights and licenses
granted in, this Agreement.
5.10 IBM will maintain relevant records to support payments made to NETOBJECTS.
The records will be retained and made available for two (2) years from the date
of the related payment. If NETOBJECTS requests, IBM will make these records
available to an independent certified public accountant chosen and compensated
(other than on a contingency basis) by NETOBJECTS. NETOBJECTS' request will be
in writing, will provide IBM ninety (90) days prior notice, and will not occur
more than once each year. The audit will be conducted during normal business
hours at IBM's office and in such a manner as not to interfere with IBM's normal
business activities. The auditor will sign a confidentiality agreement and will
only disclose to NETOBJECTS any amounts overpaid or underpaid for the period
examined. In the event royalties are found by any audit to have been underpaid
by greater than ten percent (10%), IBM shall reimburse NETOBJECTS for the
reasonable charges of the auditor.
6.0 REPRESENTATIONS AND WARRANTIES
6.1 NETOBJECTS makes the following ongoing representations and warranties:
a. NETOBJECTS has full legal rights to grant the rights and licenses granted
herein;
b. NETOBJECTS is not under, and will not assume, any contractual obligation
that prevents NETOBJECTS from performing its obligations or conflicts with
the rights and licenses granted in this Agreement;
c. there are no liens, encumbrances or claims pending or threatened against
NETOBJECTS, or to NETOBJECTS' knowledge, anyone else, that relate to the
rights and licenses granted in this Agreement;
d. neither the Licensed Work nor the Tools contain libelous matters nor do
they directly or indirectly infringe any publicity, privacy or
intellectual property rights of a third party including, to NETOBJECTS'
knowledge, any patents or patent applications;
e. the Licensed Work will conform to NETOBJECTS' user documentation, and any
sales and marketing materials provided by NETOBJECTS;
f. the fully commented Source Code that NETOBJECTS provides corresponds to
the current release or version of the Licensed Work provided by NETOBJECTS
under this Agreement;
NETOBJECTS will immediately provide IBM written notice of any change that may
affect its representations and warranties.
7
<PAGE>
6.2 Except as provided above, anything either party provides to the other
related to this Agreement is "AS IS", without warranty of any kind.
7.0 INDEMNIFICATION AND LIABILITY
7.1 NETOBJECTS shall indemnify, defend and hold harmless IBM, IBM
Subsidiaries, and its and their end-users ("Indemnified Parties") and pay any
costs, expenses, attorneys' fees and damages finally awarded against or
settlements paid by any Indemnified Party, against any claim by a third party
that any Licensed Work infringes a copyright, trademark or patent or
misappropriates any trade secret of a third party or otherwise violates any
third party's intellectual property rights.
7.2 If any current release or unaltered version of any Product or component
part of a Licensed Work becomes the subject of any infringement action,
NETOBJECTS may at its option procure for IBM the right to continue promoting and
selling such Licensed Work, or replace or modify the Licensed Work.
7.3 NETOBJECTS will not be liable for any claim of infringement based on (i)
the use of Licensed Work in combination with any other products if such
infringement would have been avoided by the use of such Licensed Work without
such other products (unless such combination is consistent with the Licensed
Work intended use pursuant to the accompanying documentation or has been
specified by NETOBJECTS); (ii) IBM's use or distribution of such Licensed Work
without an Enhancement or Error Correction provided by NETOBJECTS that, if used,
would have made such Licensed Work non-infringing; or (iii) any use or
distribution of a Licensed Work in a manner not permitted under the licenses
granted under this Agreement or not in accordance with the documentation
provided by NETOBJECTS for such Licensed Work.
7.4 NETOBJECTS shall not be obligated to indemnify IBM under this Section
unless (i) IBM promptly notifies NETOBJECTS in writing of any claim to which the
indemnity obligations might apply; (ii) NETOBJECTS has the sole control of the
defense and/or settlement of such claim at NETOBJECTS' sole cost and expense;
and (iii) IBM reasonably cooperates with NETOBJECTS in defending or settling any
such claim. Subject to the foregoing conditions, IBM shall be entitled to
participate in the defense of any such claim at its expense.
7.5 IBM shall indemnify, defend and hold harmless NETOBJECTS and pay any
costs, expenses, attorneys' fees and damages finally awarded against or
settlements authorized by IBM, against any claim by a third party that the
modifications to the Source Code of the Licensed Work created by IBM in
accordance with Section 4.2 hereof ("IBM Derivative") infringe a copyright,
trademark or patent or misappropriate any trade secret of a third party or
otherwise violate any third party's intellectual property rights.
7.6 IBM will not be liable for any claim of infringement based on (i) the use
of the IBM Derivative in combination with any other products if such
infringement would have been avoided
8
<PAGE>
by the use of such IBM Derivative without such other products (unless such
combination is consistent with the IBM Derivative's intended use pursuant to the
accompanying documentation or has been specified by IBM); (ii) NETOBJECTS', its
distributors or its or their end-users use or distribution of such IBM
Derivative without an enhancement or error correction provided by IBM that, if
used, would have made such IBM Derivative non-infringing; (iii) any use or
distribution of an IBM Derivative in a manner not permitted under the licenses
granted to the IBM Derivative or not in accordance with the documentation
provided by IBM for such IBM Derivative; or (iv) any claim based upon any
intellectual property provided by NETOBJECTS to IBM pursuant to this Agreement.
7.7 IBM shall not be obligated to indemnify NETOBJECTS under this Section
unless (i) NETOBJECTS promptly notifies IBM in writing of any claim to which the
indemnity obligations might apply; (ii) IBM has the sole control of the defense
and/or settlement of such claim at IBM's sole cost and expense; and (iii)
NETOBJECTS reasonably cooperates with IBM in defending or settling any such
claim. Subject to the foregoing conditions, NETOBJECTS shall be entitled to
participate in the defense of any such claim at its expense.
7.8 Each party is responsible for any actual loss or damage only up to the
amount of charges paid or due (if any) for the Licensed Work or IBM Derivative
that is the subject of a claim. Neither party shall be liable to the other for
any economic consequential damages (including lost profits or savings),
indirect, or incidental damages, even if advised of their possibility. This
Section describes the parties' sole remedies and exclusive liabilities for any
breach of this Agreement. Notwithstanding the foregoing, none of the above
limitations apply to claims arising under Sections 7.1, 7.2, 7.3 7.4, 7.5, 7.6
or 7.7.
8.0 TERM AND TERMINATION
8.1 The term of this Agreement ("Term") shall begin on the Effective Time and
will continue, for ten (10) years unless terminated by IBM on thirty (30) days'
notice to NETOBJECTS. Notwithstanding the foregoing, IBM may not terminate the
Agreement after the Effective Time until the end of the Initial Period (as
defined in Section 5.0 of Exhibit B). NETOBJECTS shall have no right to
terminate this Agreement during the Term. Notwithstanding the foregoing,
nothing in this Agreement shall limit NETOBJECTS' rights at law or in equity to
seek an injunction against IBM in the event that IBM materially breaches this
Agreement.
8.2 Any provisions of this Agreement that by their nature extend beyond
termination or expiration will survive in accordance with their terms. These
include License, Representations and Warranties, Indemnification and Liability,
and General. These terms will apply to either party's successors and assigns.
Termination or expiration of this Agreement does not affect any previously
granted end user licenses granted by IBM, its Subsidiaries or Distributors
pursuant to this Agreement.
9.0 COORDINATORS
9
<PAGE>
9.1 Any notice required or permitted to be made by either party to this
Agreement must be in writing. Notices are effective when received by the
appropriate coordinator as demonstrated by reliable written confirmation (for
example, certified mail receipt).
9.2 The Contract Coordinators responsible to receive all notices, act as
liaison and administer this Agreement are:
FOR IBM: FOR NETOBJECTS:
Name: Carolyn Kelly Name: David Kleinberg
Title: Contract Administrator Title: Exec. V.P.
Address: Route 100 Address: 2055 Woodside Rd.
Somers, NY Redwood City, CA
10589 94061
Phone: 914-766-1732 Phone: 415-482-1940
Fax: 914-766-1789 Fax: 415-482-3240
9.3 The Technical Coordinators responsible to accept all Deliverables,
coordinate all exchanges of confidential information, and administer and
coordinate the technical matters associated with this Agreement are:
FOR IBM: FOR NETOBJECTS:
Name: David Rosenbaum Name: Bernard Desarnauts
Title: Senior Product Manager Title: Dir. of Program
Lotus Notes Management
Address: One Charles Park Address: 2055 Woodside Rd
Cambridge, MA Redwood City, CA
02154 94061
Phone: 617-693-5676 Phone:
Fax: 617-693-2426 Fax:
9.4 A party will provide written notice to the other when its coordinators
change.
10.0 GENERAL
10.1 INDEPENDENT CONTRACTOR. Each party is an independent contractor. Neither
party is, nor will claim to be, a legal representative, partner, franchisee,
agent or employee of the other except as specifically stated in the Subsection
entitled "Copyright" below. Neither party will assume or create obligations for
the other. Each party is responsible for the direction and compensation of its
employees.
10.2 FREEDOM OF ACTION. Each party may have similar agreements with others.
Each party may design, develop, manufacture, acquire or market competitive
products and services, and
10
<PAGE>
conduct its business in whatever way it chooses. IBM is not obligated to
announce or market any products or services. IBM does not guarantee the success
of its marketing efforts. IBM will independently establish prices for its
products and services.
10.3 RELIANCE. Neither party relies on any promises, inducements or
representations made by the other or expectations of more business dealings,
except as expressly provided in this Agreement. This Agreement accurately
states the parties' agreement.
10.4 COMPLIANCE WITH APPLICABLE LAWS. Each party will comply with all
applicable laws and regulations at its expense including, to the extent
applicable, Executive Order 11246 on Equal Employment Opportunity, as amended,
the Occupational Safety and Health Act of 1970, as amended, and the Americans
With Disabilities Act of 1990, as amended. This also includes all applicable
government export and import laws and regulations.
10.5 CONFIDENTIAL INFORMATION. The parties agree that information exchanged
under this Agreement that is considered by either party to be confidential
information will be subject to the terms of the AECI referenced on the first
page of this Agreement. The parties hereby agree to extend the terms of the
AECI such that it is coextensive with the Term, and the term of the AECI will
expire ten (10) years from the Effective Date hereof. In addition, NETOBJECTS
will not provide IBM with any information which may be considered confidential
information of any third party unless provided under the AECI. The obligations
set forth in the AECI with regard to confidential information will not limit or
preclude the exercise of the licenses granted in this Agreement or the
assignment or reassignment of either party's personnel.
10.6 COPYRIGHT. Any publication by IBM of the Licensed Work or a Derivative
Work thereof may contain an appropriate copyright notice, as determined by IBM.
IBM will not remove any copyright notice of NETOBJECTS contained within the
Licensed Works.
NETOBJECTS will enforce and maintain its copyright protection in the
Licensed Work. IBM is not responsible for enforcing and maintaining such
copyright protection. However, NETOBJECTS authorizes IBM to act as NETOBJECTS'
agent in the copyright registration of the Licensed Work. At IBM's request,
NETOBJECTS agrees to provide IBM reasonable assistance in registering any
Product.
10.7 ORDER OF PRECEDENCE. If there is a conflict among the terms of this base
License Agreement and its Exhibits, the terms of this base License Agreement
prevail over those of the Exhibits, unless the parties expressly indicate in
the Attachments that particular terms within the Exhibits prevail.
Inconsistent terms in IBM's purchase orders and NETOBJECTS' invoices or
acknowledgments, if any, are void.
10.8 HEADINGS. The headings of this Agreement are for reference only. They
will not affect the meaning or interpretation of this Agreement.
10.9 COUNTERPARTS. This Agreement may be signed in one or more counterparts,
each of which will be considered an original, but all of which together form one
and the same instrument.
11
<PAGE>
10.10 AMENDMENT AND WAIVERS. For a change to this Agreement to be valid, both
parties must sign it. No approval, consent or waiver will be enforceable unless
signed by the granting party. Failure to insist on strict performance or to
exercise a right when entitled does not prevent a party from doing so later for
that breach or a future one.
10.11 ACTIONS. Neither party will bring a legal action relating to the subject
matter of this Agreement, against the other more than two (2) years after the
cause of action arose, except in the case of indemnification for infringement,
in which case this period runs for two (2) years after the award or settlement
was made.
10.12 GOVERNING LAW. The laws of the State of N.Y. (irrespective of its choice
of law principles) shall govern the enforceability and validity of this
Agreement, the construction of its terms, and the interpretation of enforcement
of the rights and duties of the parties hereto.
10.13 DISPUTE RESOLUTION. In the event of any problem, claim, or dispute
arising from, out of, or based upon this Agreement, the aggrieved party shall
promptly notify the other party of the existence of the problem, claim, or
dispute, and such other party shall promptly undertake all reasonable efforts,
including but not limited to, submitting such problem, claim or dispute for
resolution to a Manager (as defined below) of each Technical Coordinator. For
the purposes of this Section "Manager" shall mean someone in the management
chain of the applicable Technical Coordinator who is senior to such Technical
Coordinator in terms of responsibility, and who is familiar with the
administration of this Agreement. The Managers shall make a reasonable effort
to resolve the dispute as quickly as possible. In the event that the Managers
cannot resolve such dispute within sixty (60) business days the matter may at
the option of either party, be submitted for resolution to each party's
executive with overall responsibility for the subject matter in dispute. If the
matter is not resolved at the executive level, the parties may then pursue any
remedies available to them in law or equity. Each party agrees to waive its
rights to a jury trial in any litigation resulting from a dispute between the
parties concerning this Agreement.
12
<PAGE>
EXHIBIT A
Description of Licensed Work
Object Code Licensed Work:
NETOBJECTS Fusion and all future updates and versions, and all replacements.
Delivery of Licensed Works:
Within fifteen (15) days after the Effective Date, NETOBJECTS will deliver to
IBM two (2) golden master disks in CD ROM format containing the Licensed Work in
English and all foreign language translations then commercially available, as
well as all on-line documentation and end-user documentation and other related
documentation and installation procedures in camera-ready copy form ("Licensed
Work Materials"). For all Enhancements, NETOBJECTS will deliver the Licensed
Work Materials to IBM as soon as possible, but no later than five (5) days prior
to the general availability of such Enhancements.
National Language Version:
Within seventy-five (75) days after the Effective Time, NETOBJECTS will present
to IBM a detailed outline of its planned development and delivery of
internationalized Licensed Works and translations of the Licensed Works into
languages other than U.S. English ("NLVs"), identifying, at a minimum, any
differences between the U.S.English version of the Licensed Works and any NLV,
the supported languages and the delivery dates of the NLVs ("NLV Plan").
Within fifteen (15) days after its receipt of the NLV Plan, IBM will either
accept the NLV Plan or offer an alternate NLV Plan.
Products:
IBM shall be entitled to add any or all future NETOBJECTS products to the
Agreement (which shall be licensed to IBM at reasonable mutually agreed upon
royalties, and in accordance with the most favored customer pricing terms
contained in Section 5.5 of the Agreement).
<PAGE>
EXHIBIT B
ROYALTY RATE FOR LICENSED WORKS
1.0 The amounts which shall be payable to NETOBJECTS as royalties shall be
determined by application of the royalty rates for the Licensed Work as set
forth in this Exhibit B ("Royalty Rates").
2.0 All pricing terms and conditions contained in this Exhibit B are subject
to the most favored customer terms and conditions set forth in Section 5.5 of
the Agreement. In addition, in the event that any pre-existing customers of
NETOBJECTS have not converted their current pricing and discount schedules for
the Licensed Works to be the same as those reflected in this Exhibit B as of
June 30, 1998, NETOBJECTS will as of June 30, 1998 offer to IBM such prices to
the extent that they are more favorable to IBM than the prices reflected in this
Exhibit B, and upon acceptance by IBM such prices shall become effective.
3.0 Royalty Rate Tables
3.1 The "List Price" shall be NETOBJECTS' current list price for the Licensed
Work at the time that the sale of the Licensed Work is made.
3.2 The Royalty Rate table in this Section 3.2 is for offerings that contain
the Licensed Work and add significant function or value to the Licensed Work by
integrating, embedding, bundling or incorporating the Licensed Work into or with
other software or hardware, where the reasonable commercial value of such other
software or hardware is at least equivalent to the reasonable commercial value
of the Licensed Work it is Bundled with ("Hard Bundle"):
<TABLE>
<CAPTION>
Licensed Work Cumulative Number Royalty Rate
of Units % Discount
Per Year off List Price
---------------------------------------------------------
<S> <C> <C>
"NetObjects
FUSION" 1 - 2,500 72.0%
2,501 - 5,000 75.0%
5,001 - 10,000 77.2%
10,001 - 25,000 78.6%
25,001 - 50,000 80.6%
50,001 - 100,000 83.5%
100,001 and above 84.6%
</TABLE>
<PAGE>
3.3 The Royalty Rate in this Section 3.3 is for offerings that contain the
Licensed Work and add other function or value to the Licensed Work, where the
added function or value is not sufficient to qualify as a Hard Bundle, but whose
reasonable commercial value is a) at least equivalent to 40% of the reasonable
commercial value of the Licensed Work it is Bundled with, or b) any other Bundle
which is approved by NETOBJECTS (collectively referred to as a "Soft Bundle"):
<TABLE>
<CAPTION>
Licensed Work Cumulative Number Royalty Rate
of Units Discount %
Per Year off List Price
---------------------------------------------------------
<S> <C> <C>
"NetObjects
FUSION" 1 - 2,500 60.0%
2,501 - 5,000 62.02%
5,001 - 10,000 63.6%
10,001 - 25,000 64.8%
25,001 - 50,000 66.2%
50,001 - 100,000 67.1%
100,001 and above 68.0%
</TABLE>
The following Bundles which include the Licensed Work are approved by NETOBJECTS
as Soft Bundles: a) Licensed Work Bundled with "Kona" components; and b)
Licensed Work Bundled with Java components.
3.4 The Royalty Rate for Licensed Works that are not Bundled with any hardware
or software, and for which NetObjects provides level 3 support ("N.O. Package")
is a 55% discount off NETOBJECTS' List Price for the Licensed Work..
NETOBJECTS shall include with each N.O. Package sufficient information to inform
end users of IBM's contact information for Level 1 and Level 2 support, and IBM
shall provide Level 1 and Level 2 support for the N.O. Package.
3.5
A) The Royalty Rates shall apply to the units sold by IBM or any of its
Subsidiaries in any calendar year during the Term, except as set forth in
Section 5.0, below. Volumes shall be aggregated between Hard Bundle, Soft
Bundle and N.O. Package units sold during a calendar year for the purpose of
determining the applicable Royalty Rates (i.e., in a calendar year, the first
2500 units sold by IBM and its Subsidiaries shall result in the following
Royalty Rates: for each such unit which is a Hard Bundle the Royalty Rate shall
be 72% off of List Price; and each such unit which is a Soft Bundle shall be
60% off of List Price; and each such unit which is a N.O. Package shall be
60% off of List Price, all subject to Section 2.0, above. The next 2500
units sold by IBM or any of its Subsidiaries during that calendar year shall
result in the following Royalty Rates: Hard Bundle units = 75% off of List
Price; Soft Bundle units = 62.2% off of List Price; and N.O. Package units =
60% off of List Price. Subsequent units sold in that calendar
<PAGE>
year would follow the same process through the Royalty Rate tables set forth in
this Exhibit B.)
B)
i. Notwithstanding Section 3.5 A), above, IBM shall have the option, for any
calendar year(s) during the Term to make a Volume Commitment. The "Volume
Commitment" for any calendar year during the Term shall be made in writing and
provided to NETOBJECTS, and shall consist of the number of Hard Bundle, Soft
Bundle and N.O. Package units that IBM and its Subsidiaries commit to sell
during that calendar year, if any. Where IBM elects to make a Volume Commitment
for a calendar year, each unit sold by IBM or any of its Subsidiaries during
such calendar year, up to the Volume Commitment number, shall be subject to the
Royalty Rate applicable to the Volume Commitment amount. Units sold during such
calendar year which are in excess of the Volume Commitment shall be subject to
the Royalty Rate applicable to the actual unit volumes, as described in Section
3.5 A), above (i.e., in a calendar year where IBM makes a Volume Commitment of
55,000 units of Hard Bundle and 30,000 units of Soft Bundle, each of the first
55,000 units which is a Hard Bundle shall have a Royalty Rate of 83.5% off of
List Price; each of the first 30,000 units which are Soft Bundle units shall
have a Royalty Rate of 66.2% off of List Price; and each of the units which
are N.O. Package units shall have a Royalty Rate of 60% off of List Price,
all subject to Section 2.0, above). Notwithstanding the foregoing, all of the
cumulative unit volumes sold by IBM and its Subsidiaries in the calendar year
shall be aggregated for the purpose of determining whether IBM achieved its
Volume Commitment for the calendar year (i.e., using the foregoing example,
IBM's Volume commitment of 55,000 Hard Bundle units and 30,000 Soft Bundle units
would be added (55,000 + 30,000 = 85,000) and the actual number of cumulative
units sold would be added). The difference between the cumulative number of
units sold (adding Hard Bundle units, Soft Bundle units and N.O. Package units
sold) and the cumulative Volume Commitment would be calculated. A "Shortfall"
would exist if the number of total number of cumulative units committed exceeds
the total number of cumulative units sold.
ii. At the conclusion of any calendar year in which IBM has made a Volume
Commitment, IBM shall be obligated to pay the applicable Royalty Rate for units
that make up the Shortfall, if any, between the units in the Volume Commitment
and the actual number of units sold by IBM and its Subsidiaries in such
calendar year. Any units which are paid for but unsold as a result of a
Shortfall may be sold by IBM in subsequent periods but would not be counted
against unit volumes in subsequent years. Notwithstanding the foregoing, IBM
shall not be obligated to pay for any Shortfall pursuant to this Agreement in
the event that: a)Netobjects has as of the Effective Date or does in the future
enter into any agreement pursuant to which a party receives the right to
distribute, resell or sublicense any of the Licensed Works, and b) where such
party receives a royalty rate more advantageous than the Royalty Rate applicable
to the first unit sold by IBM hereunder without the requirement to make a firm
volume commitment (where a firm volume commitment means that the party must
commit to sell a certain volume of the Licensed Works and where such party must
pay the applicable royalty based upon NETOBJECTS standard Royalty Rate schedules
for the Licensed Work for such units which make up the committed volume, whether
or not such party actually sells such committed volume of units), or c) where
such party, having made a volume commitment is not required to actually pay
NETOBJECTS the applicable royalty for units which make up the shortfall between
their volume
<PAGE>
commitment and the actual number of units sold. Netobjects shall promptly
inform IBM if either b) or c), above, occur.
3.6 The determination of whether a package which includes a Licensed Work is a
Hard Bundle or a Soft Bundle shall be made by IBM, exercising reasonable
judgment. If NETOBJECTS does not agree with IBM's determination, the parties
shall follow the dispute resolution process outlined in Section 10.13 of this
Agreement.
The following examples are provided for the purpose of illustrating the
distinction between a Hard Bundle, a Soft Bundle and a N.O. Package:
a. EXAMPLES OF HARD BUNDLE:
- -An offering which contains the Licensed Work packaged with Domino. Lotus
manufactures the product and provides level 1 and 2 support;
- -An offering which contains the Licensed Work preloaded on a Network Station.
IBM manufactures the hardware, and preloads the Licensed Work, and an IBM OEM
reseller provides level 1 and 2 support;
- -An offering which contains the Licensed Work packaged with the IBM Internet
Connection Secure Server. IBM distributes the product through an electronic
sales channel through an IBM web site, and IBM provides level 1 and 2 support.
b. EXAMPLES OF A SOFT BUNDLE:
- -An offering which contains the Licensed Work packaged with Applet Author and a
browser. Lotus manufactures the product and provides level 1 and 2 support;
c. N.O. PACKAGE:
- - A N.O. Package is a copy of a Licensed Work which was manufactured by
NetObjects, and which is not Bundled with other hardware or software.
4.0 The Royalty Rate for new versions or upgrades will be determined by
applying the same discount percentage as set forth above to the published list
price for the new products or upgrades.
5.0 Notwithstanding anything in this Exhibit B to the contrary, the period
commencing with the Effective Time, and ending 12/31/98 (the "Initial Period")
shall be considered to be the first year of the Agreement for the purpose the
Royalty Rate tables set forth in this Exhibit B, and IBM's Volume Commitment for
the Initial Period shall be 50,000 units of Hard Bundle and 35,000 units of Soft
Bundle.
DURING THE INITIAL PERIOD, IBM SHALL MAKE THE FOLLOWING NONREFUNDABLE PAYMENTS
WHICH SHALL BE CREDITABLE AGAINST ROYALTIES AND PAYMENTS WHICH BECOME DUE
PURSUANT TO THIS AGREEMENT. In the event that royalties which become due during
the Initial Period are not sufficient to fully exhaust the foregoing credit, the
remainder of the credit shall be applied against royalties and payments which
become due in subsequent years:
<PAGE>
April 1, 1997 (or the Effective Time, whichever is later) - $1,493,257.00
July 1, 1997 - $1,493,257.00
October 1, 1997 -$1,493,257.00
January 1, 1998-$1,493,257.00
April 1, 1998 -$1,493,257.00
July 1, 1998 -$1,493,257.00
October 1, 1998 -$1,493,258.00
In the event that IBM and its Subsidiaries sell greater than 100,000 cumulative
units of Hard Bundle, Soft Bundle and N.O. Package units during the Initial
Period, IBM shall receive a credit of $250,000. which shall be applied in
calendar year 1999 against royalties due pursuant to this Agreement, to be
applied in 4 (four) equal quarterly amounts of $62,500.
<PAGE>
EXHIBIT C
SOURCE CODE CUSTODY AGREEMENT
BASE AGREEMENT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This Source Code Custody Agreement ("SCCA") between NetObjects Corporation
("NetObjects"), __________________ ("Custodian") and International Business
Machines Corporation ("IBM") describes the rights and obligations of the parties
for the Escrowed Works that NetObjects delivers to Custodian. This SCCA
supplements the NetObjects License Agreement number L97063 ("NLA").
The SCCA consists of this Base Agreement and its DESCRIPTIONS OF ESCROWED WORK
("DEWs"). Each DEW together with this SCCA forms a separate agreement. The
SCCA is our complete agreement and replaces all prior oral or written
communications between us regarding the Custodian's holding of the Escrowed
Works in escrow.
By signing below for our companies, the parties agree to the terms of this Base
Agreement. Once signed, 1) all parties agree any reproduction of the SCCA made
by reliable means (for example, photocopy or facsimile) is an original unless
prohibited by local law and 2) all Escrowed Works are subject to it.
<TABLE>
<S> <C>
Agreed To: Agreed To:
NetObjects Corporation ("NetObjects") International Business Machines
Corporation Corporation ("IBM")
-----------------------------
By: By:
----------------------------------- -------------------------------
AUTHORIZED SIGNATURE AUTHORIZED SIGNATURE
Name: Name:
----------------------------------- -------------------------------
Date: Date:
----------------------------------- -------------------------------
NetObjects Address: IBM Office Address: Carolyn Kelly
Route 100
----------------------------------- Somers, NY 10589
----------------------------------- Mail Drop 1139
-----------------------------------
IBM Source Code Custody Agreement #:
----------
Agreed To:
- ---------------------------------------- License Agreement #: L97063
CUSTODIAN NAME
By: IBM/NetObjects Confidentiality Agrmt. dated 4/29/96
------------------------------------- Areement Agrm A
AUTHORIZED SIGNATURE
Name:
-----------------------------------
Date:
-----------------------------------
Custodian Address:
-----------------------------------
-----------------------------------
-----------------------------------
</TABLE>
<PAGE>
IBM SOURCE CODE CUSTODY AGREEMENT
BASE AGREEMENT
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PART 1 DEFINITIONS
Capitalized terms in the SCCA have the following meanings. A DEW may define
additional terms. However, those terms apply only to that DEW.
PART 1.1 CODE is computer programming code including both Object Code and
Source Code.
a) OBJECT CODE is the computer programming code substantially in binary
form, and includes header files of the type necessary for use or interoperation
with other computer programs. It is directly executable by a computer after
processing or linking, but without compilation or assembly. Object Code is all
Code other than Source Code.
b) SOURCE CODE is the computer programming code that may be displayed in a
form readable and understandable by a programmer of ordinary skill. It includes
related source code level system documentation, comments and procedural code.
Source Code does not include Object Code.
PART 1.2 DELIVERABLE is any item that NetObjects provides under the NLA.
PART 1.3 DERIVATIVE WORK is a work that is based on an underlying work and
that would be a copyright infringement if prepared without the authorization of
the copyright owners of the underlying work. Derivative Works are subject to
the ownership rights and licenses of a party or of others in the underlying
work.
PART 1.4 ENHANCEMENTS are changes or additions including versions and
releases, other than Error Corrections, to the Licensed Work during the term of
the NLA.
PART 1.5 ERROR CORRECTIONS are revisions that correct errors and deficiencies
(collectively referred to as "Errors") in the Licensed Work created during the
term of the NLA.
PART 1.6 ESCROWED WORKS are the materials, including all updates to them, that
are described in a Description for Escrowed Work ("DEW"). They include:
a) the Source Code for the Licensed Work in machine-readable form,
including all updates to it, and the Source Code level system documentation in
hard and soft copy form;
b) a list of all Source Code modules of the Licensed Work;
c) a directory listing for each machine-readable medium;
d) commentary required to understand and use the Source Code;
e) a list of all Tools, both those that are commercially available, and
those that are not provided by IBM and are not commercially available; and
f) the Tools that NetObjects is required to escrow under the License
Agreement.
PART 1.7 EXTERNALS are (1) any pictorial, graphic, and audiovisual works (such
as icons, screens, sounds, toolbars, palettes and characters) generated by
execution of Code, and (2) any programming interfaces, languages or protocols
implemented in Code to enable interaction with other computer programs or the
end user, including application program interfaces ("API"). Externals do not
include the Code that implements them.
PART 1.8 LICENSE AGREEMENT is the NetObjects License Agreement between IBM and
NetObjects Corporation number L97063, dated March 18, 1997 ("NLA").
PART 1.9 LICENSED WORK is (1) any material described in EXHIBIT A "Description
of Licensed Work", or that is delivered to IBM as the Licensed Work, including
(but not limited to) Code, associated documentation, and Externals, and (2)
Error Corrections and Enhancements.
PART 1.10 PRODUCT is an offering to customers or other users, whether or not
branded by IBM or its Subsidiaries, that includes the Licensed work or a
Derivative Work of the Licensed Work.
<PAGE>
PART 1.11 RELEASE EVENTS are the following occurrences when IBM may demand that
Custodian deliver the Escrowed Works to IBM:
a) NetObjects has voluntarily filed a petition under any insolvency or
bankruptcy statute in the United States;
b) NetObjects has voluntarily sought reorganization under any insolvency
or bankruptcy statute;
c) NetObjects has acknowledged in writing its insolvency or inability to
pay its debts as they become due;
d) A petition has been filed or a proceeding commenced against NetObjects
by a third party under any bankruptcy or insolvency statute, which has resulted
in an order for relief or which has not been discharged by NetObjects within one
hundred eighty (180) days of such filing or commencement of proceedings,
whichever comes first;
e) NetObjects has materially failed to comply with its obligations to
provide maintenance and support under the NLA; or
f) NetObjects has materially failed to comply with its obligation to
improve and enhance its FUSION product as set forth in EXHIBIT D of the NLA.
PART 1.12 TOOLS include devices, compilers, programming documentation, media or
other items required for the development, maintenance or implementation of a
Licensed Work or other Deliverable that are not commercially available.
PART 2 ESCROWED WORKS DEPOSITS
PART 2.1 NetObjects will:
a) deposit with Custodian two (2) copies of Escrowed Works for each
Licensed Work described in a DEW. NetObjects will identify each item in the
deposit by labeling it;
b) deliver the Escrowed Works in good condition in sealed containers;
c) provide Custodian with a nonconfidential notice of all items contained
in each container; and
d) replace all lost or damaged Escrowed Works within three (3) days of
notice from Custodian.
PART 2.2 Custodian will:
a) accept each Escrowed Works deposit in trust for IBM and send IBM a
notice confirming receipt within three (3) business days;
b) retain both the original Escrowed Works and any updates to them.
Together, these will comprise Escrowed Works;
c) match all items on the nonconfidential notice to the labels on Escrowed
Works;
d) take all reasonable steps to protect and store Escrowed Works in
appropriate containers and atmospheric conditions, segregated from other
materials;
e) promptly provide notice to IBM and NetObjects in the event of lost or
damaged Escrowed Works; and
f) store a copy of this SCCA and the nonconfidential notice of items with
Escrowed Works.
PART 2.3 If IBM provides Custodian notice to return to NetObjects or to
destroy certain portions of Escrowed Works, Custodian will do so and provide
notice to NetObjects and IBM when complete.
PART 3 ESCROWED WORKS VERIFICATION
PART 3.1 Unless IBM and Custodian agree in writing, Custodian is not
responsible for technical verification that Escrowed Works are complete,
accurate and current. IBM may, at its expense, hire a party qualified to do
this verification. NetObjects will reimburse IBM's expenses if the Escrowed
Works do not comply with the requirements of this SCCA.
PART 3.2 Verification includes generating Object Code from Source Code for
each Licensed Work. The verifier will witness the transfer of the verified
Source Code to deposited media. NetObjects will supervise the verification
which will be conducted at NetObjects' facilities unless otherwise agreed by IBM
and NetObjects.
PART 3.3 One technical IBM employee may witness verification. To the extent
possible, verification will be done in a way that does not expose the Source
Code to the IBM employee. If this is not possible, the IBM employee will treat
the Source Code according to Section 4.3d of this SCCA.
PART 4 RELEASE OF ESCROWED WORKS
PART 4.1 In the event that IBM seeks to obtain any release of the Escrowed
Works, IBM will give NetObjects and Custodian a written notice describing the
Release Event which it believes has occurred. The notice will state that IBM
intends to demand release of the Escrowed Works, and will describe the Release
Event in detail. If the Release Event is any one or
<PAGE>
more of the Release Events described in Sections 1.11 (a) - (d) of this SCCA,
Custodian will deliver the Escrowed Works to IBM five (5) business days after
receipt of the above described notice, unless NetObjects has given Custodian and
IBM written notice that the Release Event does not exist or has been cured and
provides substantiating documentation thereof, together with IBM's written
concurrence that the Release Event did not occur or was cured. If this occurs,
Custodian will not release the Escrowed Works to IBM. If the Release Event
described in IBM's notice is described in Section 1.11(e), Custodian will
deliver the Escrowed Works to IBM five (5) business days after receipt of the
notice from IBM, unless NetObjects has provided written notice to Custodian and
IBM that it contests that the Release Event has occurred. In such case, IBM and
NetObjects will not use the dispute resolution process provisions of Section
10.13 of the NLA, but will attempt to resolve the matter within the next five
(5) business days. If they are unable to resolve the disagreement within that
time, Custodian will release the Escrowed Works to IBM and IBM shall solely be
entitled to use such works for the purpose of performing NetObjects' maintenance
and support obligations. Thereafter, NetObjects will be entitled to invoke the
dispute resolution provisions of Section 10.13 of the NLA, and if NetObjects
prevails in such proceeding, IBM will return the Escrowed Works to Custodian
when a court of competent jurisdiction finally determines that a Release Event
under Section 1.11(e) has not occurred. If the Release Event described in IBM's
notice is described in Section 1.11 (f), Custodian will deliver the Escrowed
Materials to IBM five (5) business days after receipt of the notice from IBM
unless NetObjects has provided written notice to Custodian and IBM that it
contests that the Release Event has occurred. In such case, NetObjects will be
entitled to invoke the dispute resolution provisions of Section 10.13 of the
NLA. If the dispute is not resolved within sixty (60) days, Custodian will
deliver the Escrowed Works to IBM for its use solely for the purpose of
performing NetObjects' product improvement and enhancement obligations as
provided in the NLA. If NetObjects prevails in such proceeding, IBM will return
the Escrowed Works to Custodian when a court of competent jurisdiction finally
determines that a Release Event under Section 1.11 (f) has not occurred. In no
event will Custodian be required to independently verify that a Release Event
has occurred.
PART 4.2 If IBM determines that it does not have a complete set of Escrowed
Works, IBM may request them from NetObjects. NetObjects will provide the
materials required within three (3) days of IBM's request.
PART 4.3 IBM will:
a) use Escrowed Works solely as permitted under the NLA;
b) own any Derivative Works of Escrowed Works that it creates, subject to
NetObjects' rights in the underlying work;
c) pay NetObjects the royalties specified in the NLA to maintain its
rights to the Licensed Works; and
d) treat Escrowed Works according to the AECI.
In addition to the confidentiality obligations set forth in the
AECI, IBM agrees that for a period of ten (10) years from the date of receipt of
Licensed Work Source Code:
i) to only make available the Licensed Work Source Code to IBM's
employees, its agents, subsidiaries and subcontractors on a "need to know
basis"; and
ii) to only use Source Code in accordance with the terms of the NLA, and
not to disclose it to others except as set forth herein. IBM shall protect the
Source Code using at least the same degree of care as it uses to protect its own
Source Code of a like nature, and in no event less than reasonable care.
PART 4.4 The occurrence of Release Events does not relieve NetObjects of its
obligations under the SCCA.
PART 4.5 When NetObjects signs the DEW, NetObjects grants IBM, its
subsidiaries, successors and assigns all right and title to the media containing
the Escrowed Works.
PART 4.6 If Escrowed Works are released to IBM, IBM retains its rights to the
Licensed Works as provided in the NLA. This includes IBM's right to use
NetObjects' trademarks and product names.
PART 5 NETOBJECTS' WARRANTY
NetObjects represents and warrants that:
a) it has all rights necessary for IBM to maintain, support and modify the
Licensed Works;
b) it has the authority to deliver the Escrowed Works to the Custodian;
c) Escrowed Works are sufficient to allow a programmer of ordinary skill
to understand, maintain and prepare Derivative Works using the Source Code
version of the Licensed Work; and
d) Escrowed Works are complete, accurate and current.
PART 6 LIABILITY AND INDEMNIFICATION
<PAGE>
PART 6.1 Custodian will take all reasonable precautions to prevent disclosure
of Escrowed Works to unauthorized third parties.
PART 6.2 Custodian is liable only for willful misconduct, gross negligence and
fraud in performing its duties under this SCCA. Custodian is not liable if
NetObjects or IBM fails to comply with any provision of the NLA or this SCCA.
Custodian is not liable for acting on any notice that it in good faith believes
to be genuine and legitimate.
PART 6.3 If a third party makes a claim against Custodian:
a) NetObjects will indemnify Custodian for claims based on NetObjects'
failure to comply with this SCCA; and
b) IBM will indemnify Custodian for claims based on IBM's failure to
comply with this SCCA.
These indemnities do not apply where it is found that Custodian acted with
willful misconduct, gross negligence or fraud.
PART 6.4 The indemnifying party will pay any settlement amount that it
authorizes and all costs, damages and attorney's fees that a court finally
awards if Custodian:
a) promptly provides the indemnifying party notice of the claim; and
b) allows the indemnifying party to control and cooperates with it in the
defense of the claim and settlement negotiations.
Custodian may participate in the proceedings at its option and expense.
PART 7 TERM AND TERMINATION
PART 7.1 This SCCA begins when all parties sign it and continues until
terminated. The terms of the SCCA apply to a Licensed Work when the parties sign
the associated DEW. IBM may, at its option, extend the term of any DEW for
additional years as described in PAYMENT. IBM may, for its convenience,
terminate this SCCA or any DEW on notice to Custodian and NetObjects. However,
this SCCA will continue for any DEWs already in place until they are terminated
or expire.
PART 7.2 Custodian will destroy any remaining Escrowed Works thirty (30) days
after the expiration or termination of the DEW unless IBM provides notice
otherwise.
PART 7.3 Any terms of this SCCA that by their nature extend beyond its
termination (for example, RELEASE OF ESCROWED WORKS, LICENSE TO ESCROWED WORKS
and LIABILITY AND INDEMNIFICATION) will survive. These terms will apply to the
parties' respective successors and assigns.
PART 7.4 If Custodian cannot continue its responsibilities, Custodian may
resign by giving IBM and Netobjects ninety (90) days' notice. IBM will select a
successor custodian to assume Custodian's responsibilities.
PART 8 COORDINATORS
PART 8.1 SCCA Coordinators responsible to administer all matters associated
with this SCCA and its exhibits are:
<TABLE>
<S> <C>
FOR: IBM FOR: NETOBJECTS CORPORATION
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CORPORATIONETOBJECTS
Name: Carolyn Kelly Name: Michelle Smith
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Title/Dept: Procurement Professional Title/Dept: Engineering Products Manager
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Address: Rte. 100 Address: 2055 Woodside Road
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Somers, NY 10589 Redwood City, CA 94061
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MD# 1139
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Phone: 914-766-1732 Phone:
----------------------------- ----------------------------
Facsimile: 914-766-1789 Facsimile:
----------------------------- ----------------------------
FOR:
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Name:
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Title/Dept:
-------------------------------
Address:
-------------------------------
-------------------------------
-------------------------------
<PAGE>
Phone:
-------------------------------
Facsimile:
-------------------------------
</TABLE>
PART 1.1 Each of us will assign an Escrowed Work Coordinator in the DEW.
These coordinators are responsible to administer matters associated with the
DEW. The SCCA Coordinator and the Escrowed Work Coordinator may be the same
person. A party will provide notice to the others when coordinators change.
PART 2 PAYMENT
PART 2.1 IBM will pay Custodian within thirty (30) days after receipt of an
acceptable invoice for services under active DEWs. All payments will be made in
U.S. dollars. The EXHIBIT: FEE SCHEDULE identifies the specified period of
Custodian's services and the firm fees for that period. Custodian may propose a
revised fee schedule to the IBM SCCA Coordinator no later than ninety (90) days
before the end of the specified period. The IBM SCCA Coordinator will notify
Custodian if it accepts or rejects the proposed fee schedule. If rejected, the
IBM and Custodian SCCA Coordinators will negotiate a new fee schedule for the
next period. The IBM and Custodian SCCA Coordinators add the new fee schedule
to the SCCA by initialing and dating it. If IBM and Custodian cannot agree to a
new fee schedule for an active DEW, it will expire at the end of its term and
IBM may select a successor custodian. Custodian will provide all assistance
required to move the Escrowed Works to the successor custodian.
PART 2.2 Custodian will invoice IBM for:
a) all services to be performed under a DEW for one (1) year; and
b) renewal of a DEW sixty (60) days before it expires. IBM may renew the
DEW for an additional year by paying the renewal fees. If Custodian does not
receive the renewal fees within thirty (30) days, it will notify the IBM
Escrowed Work Coordinator. If IBM does not pay the fees by the expiration date
of the DEW, that DEW will expire.
In addition to information required by the DEW, the invoice will identify
this SCCA, the DEW and the services invoiced plus their associated fees.
Custodian will submit all invoices as identified in the DEW.
PART 3 GENERAL
PART 3.1 Each party will comply with all applicable laws and regulations at
its expense. This includes all export and import laws and regulations.
PART 3.2 Except as provided in the SCCA, none of the parties may assign or
transfer the SCCA or its rights under it or delegate or subcontract its
obligations without the prior written approval of the other parties. Any
attempt to do so is void.
PART 3.3 If any provision of the SCCA is unenforceable at law, the rest of the
provisions remain in effect. The headings in the SCCA are for reference only.
They will not affect the meaning or interpretation of the SCCA.
PART 3.4 No party will bring a legal action against another party more than
two (2) years after the cause of action arose. All parties will act in good
faith to resolve disputes. All parties waive their rights to a jury trial in
any resulting litigation. Litigation will only be commenced in the State of New
York.
PART 3.5 All notices must be in writing. Except as provided in the SCCA, for
a change to the SCCA to be valid, IBM and NetObjects must sign it. Other than
changes to the Release Events, Custodian must also sign changes that affect its
rights or obligations under the SCCA. IBM will provide Custodian with copies of
all changes that Custodian is not required to sign.
No approval, consent or waiver will be enforceable unless signed by the
granting party. Failure to insist on strict performance or to exercise a
right when entitled does not prevent a party from doing so later for that
breach or a future one.
PART 3.6 The substantive laws of the State of New York govern the SCCA.
<PAGE>
EXHIBIT 10.4.1
April 30, 1997
Mr. Morris Taradalsky
Executive Vice President
NetObjects, Inc.
2055 Woodside Road
Redwood, CA 94061
Dear Mr. Taradalsky:
This is Amendment Number 1 to NetObjects License Agreement L97063, between
International Business Machines Corporation and NetObjects, Inc. dated March 18,
1997 (the "Agreement").
Capitalized terms used herein shall have the meanings set forth in the
Agreement.
The following section shall be added to Exhibit B to the Agreement, entitled
"Royalty Rate for Licensed Works":
Section 3.7 "Internal Copies" shall mean copies of the Licensed Works which
are provided to Employees of IBM and IBM Subsidiaries, as well as agents and
contractors working for and on behalf of IBM or an IBM Subsidiary, where such
copies are intended for use by such persons to perform productive work on behalf
of IBM or any IBM subsidiary, and not for resale.
In lieu of the Royalty Rates set forth in 3.1 through 3.5 of this Exhibit B,
IBM shall pay NetObjects a one time fee of four hundred and two thousand
dollars ($402,000.00), within 45 days after this Amendment is executed by
both parties, for all Internal Copies of NetObjects Fusion 2.0, and all
upgrades thereto which are made available by NetObjects during the first 12
months after the date of this Amendment. After the initial 12 month period,
at IBM's option, and subject to the most favored customer pricing terms
contained in Section 5.5 of the Agreement, IBM may elect: 1) to pay for
individual Internal Copy upgrades at the per copy Royalty Rates set forth in
Sections 3.1 though 3.5 of this Agreement, or 2) to pay a single Upgrade Fee
for all copies calculated as follows:
Internal Copies Upgrade Fee = $402,000. multiplied by (retail price of upgrade
divided by $695.00)
<PAGE>
Mr. Taradalsky
Page 2
April 30, 1997
Upon receipt of the payment required in this Section 3.7, three thousand (3,000)
units shall be counted towards IBM's fulfillment of its Volume Commitment for
the Initial Period. However, IBM shall be entitled to an unlimited number of
Internal Copies of NetObjects Fusion 2.0.
All other terms and conditions of the Agreement shall remain in full force and
effect.
IN WITNESS WHEREOF, the parties have caused this Amendment Number 1 to be
executed below by their duly authorized representatives.
ACCEPTED AND AGREED TO:
INTERNATIONAL BUSINESS NETOBJECTS, INC.
MACHINES CORPORATION
BY: /s/ R.G. Anderegg BY: /s/ Morris Taradalsky
NAME: R.G. Anderegg NAME: Morris Taradalsky
TITLE: Assistant General Counsel TITLE: EVP Business Development
Date: 4/30/97 Date: 4/30/97
<PAGE>
EXHIBIT 10.4.3
THIRD AMENDMENT TO NETOBJECTS LICENSE AGREEMENT
Agreement Number: L97063
Third Amendment, effective December 16, 1997 (the "Amendment) to the
NetObjects License Agreement, dated March 18, 1997 (the "Agreement"), between
NetObjects Corporation with an address at 602 Galveston Drive, Redwood City,
California 94063 ("NETOBJECTS") and International Business Machines Corporation
with an address at Route 100, Somers, New York 10589 ("IBM"). All capitalized
terms and definitions used in this Amendment and not otherwise defined herein
shall have the meanings given them in the Agreement.
In consideration of the covenants and agreements contained herein, the
parties hereto agree to amend the Agreement as follows:
I. EXHIBIT A OF THE AGREEMENT IS HEREBY AMENDED AS FOLLOWS.
The definition of Object Code Licensed Work is hereby deleted in its
entirety and replaced with the following:
"Object Code Licensed Work: NETOBJECTS Fusion ("Fusion"), Team Fusion ("Team
Fusion") and all future updates, versions, successor products and derivative
works of each of the foregoing products."
II. THE FOLLOWING IS HEREBY ADDED TO THE AGREEMENT AS SECTION 11.
11.0 LOCALIZATION OF LICENSED WORK
11.1 NETOBJECTS grants to IBM, a nonexclusive, worldwide right and
license, without right to sublicense (except to its Subsidiaries and
subcontractors), to use the Licensed Work in source code form and related
documentation and specifications solely for the purpose of enabling it and
translating it into all IBM Group 1 languages (attached as Appendix A), (the
"Translated Versions"). Each Translated Version shall be deemed a Derivative
Work as defined in the Agreement. The rights and licenses granted by NETOBJECTS
to IBM under this Section 11.1 include the right of IBM to authorize or
sublicense its Subsidiaries and subcontractors, to exercise any of the rights
granted to IBM hereunder. The Translated Versions shall be created by Lotus
Development Corporation, a wholly owned subsidiary of IBM ("LOTUS").
11.2 Promptly following execution of this Amendment, NETOBJECTS AND LOTUS
shall jointly develop and agree upon a project plan (the "Project Plan") for
creation of the Translated Versions. NETOBJECTS shall provide engineering and
business assistance to LOTUS, as may be required, to support LOTUS in completing
the work under the Project Plan. The Project Plan shall include a projected
budget for the total cost of developing the Translated Versions (the "Budget"),
projected expenses for each Translated Version, and the projected date of
completion for each Translated Version. In the fourth quarter of each calendar
year, LOTUS shall provide NETOBJECTS with an updated Budget and an estimate of
the expenditures for the coming year. Any changes to the Budget and/or
completion dates, shall be agreed to in advance by both parties.
<PAGE>
11.3 TRANSLATION COST. Lotus shall track the amount spent developing the
Translated Versions and shall submit the amount to NETOBJECTS in quarterly
invoices. The total amount spent by LOTUS, on the Translated Versions, from the
date the development work begins until December 31, 1999 shall be referred to
herein as the ("Translation Cost").
11.4 Lotus shall perform the development work to enable Fusion, version 2,
to be translated. Until December 31, 1999, Lotus shall be responsible for
translating Fusion into the IBM Group 1 languages; thereafter, NETOBJECTS may
elect to have Lotus continue the translation work or may seek an alternative
vendor.
11.5 NETOBJECTS shall own all rights, title and interest in and to the
Translated Versions. LOTUS hereby assigns and transfers to NETOBJECTS all
ownership rights it may have in the Translated Versions. LOTUS shall transfer
source code and the Translated Versions to NETOBJECTS upon completion of agreed
to Project Plan for each language.
11.6 ENABLEMENT OF FUSION 3.0.
(a) Ninety (90) days after first customer ship of Fusion 3.0, NETOBJECTS
shall deliver to Lotus a version of Fusion 3.0 that is fully enabled for
international use and ready for translation. LOTUS and IBM shall assist
NETOBJECTS by consulting on this process and by providing NETOBJECTS with a copy
of Lotus' enablement procedures contained in the "ISV Development Checklist"
which is attached as Exhibit A and incorporated by reference.
(b) In the event that NETOBJECTS is unable to deliver the fully-enabled
version of Fusion 3.0 in the time frame provided above, Lotus may, at its
option, enable Fusion 3.0 and the cost of such development work shall be
included in the Translation Cost.
11.7. DISTRIBUTION.
(a) NETOBJECTS hereby grants IBM a nonexclusive, worldwide, irrevocable
license during the Term (as defined in Section 8.1) to use, execute, reproduce,
display, perform, transfer, distribute, transmit and sublicense the Translated
Versions in Object Code form, in any medium or distribution technology
whatsoever, whether now known or hereafter invented. The rights and licenses
granted by NETOBJECTS to IBM under this Section 11.8 include the right of IBM to
authorize or sublicense its Subsidiaries, subcontractors, and Distributors to
exercise any of the rights granted to IBM hereunder.
(b) NETOBJECTS will establish an Estimated Retail Price ("ERP") for each
of the Translated Versions.
(c) Maintenance and support for the Licensed Works shall be provided, in
accordance with Exhibit F of the Agreement.
<PAGE>
11.8 REPAYMENT.
(a) NETOBJECTS shall reimburse IBM by giving it a fifty percent (50%)
discount off of royalties owed, under the Agreement, for sales of the Licensed
Work in markets outside of the U.S. (the "Royalty Discount"). The cumulative
Royalty Discount shall be tracked and reported to NETOBJECTS on a quarterly
basis. The Royalty Discount shall be IBM's sole means of recovering the
Translation Cost.
(b) If on or before December 31, 1999, the cumulative Royalty Discount is
equal to or greater than the Translation Cost multiplied by 1.15, then the
Translation Cost will have been repaid in full and Royalty Discount shall no
longer remain in effect.
(c) Between December 31, 1999 and December 31, 2000, if the cumulative
Royalty Discount is equal to or greater than the Translation Cost multiplied by
1.5, then the Translation Cost will have been repaid in full and the Royalty
Discount shall no longer remain in effect.
(d) If on or before December 31, 2000, the cumulative Royalty Discount is
not equal to or greater than the Translation Cost multiplied by 1.5, then IBM
shall continue to receive the Royalty Discount until such time as the cumulative
Royalty Discount equals the Translation Cost multiplied by 2.0.
11.9 PUBLIC ANNOUNCEMENTS.
Prior to execution of this Amendment, neither party shall make any public
announcements about this Amendment or the parties' discussions without the
other party's prior written consent. The parties agree that any announcements
concerning this Amendment shall be a mutually agreed upon joint announcement.
The Agreement remains in full force and effect in accordance with its
terms, except as such terms have been expressly modified by this Amendment. In
the event of any conflict between the terms of this Amendment and the terms of
the Agreement, this Amendment shall control. This Amendment constitutes the
entire understanding of the parties with respect to its subject matter and
merges and supersedes all prior communications, understandings and agreements
between the parties concerning the subject matter hereof. This Agreement shall
not be modified except by a writing subsequently dated, signed on behalf of each
party by a duly authorized representative.
Executed by the authorized representatives of the parties as of the date
first set forth above.
NETOBJECTS, INC. INTERNATIONAL BUSINESS MACHINES
CORPORATION
By: /s/ Michael J. Shannahan By: /s/ R. G. ANDEREGG
Name: Michael J. Shannahan Name: R. G. ANDEREGG
Title: Chief Financial Officer Title: ASSISTANT GENERAL COUNSEL
Date: 12/15/97 Date: 31-MARCH 1998
------------------------ --------------------------
<PAGE>
EXHIBIT 10.4.4
FOURTH AMENDMENT TO NETOBJECTS LICENSE AGREEMENT
Agreement Number: L97063
Fourth amendment, dated April 27, 1998 (the "Amendment) to the NetObjects
License Agreement, dated March 18, 1997, including all amendments thereto (the
"Agreement"), between NetObjects Corporation with an address at 602 Galveston
Drive, Redwood City, California 94063 ("NETOBJECTS") and International Business
Machines Corporation with an address at Route 100, Somers, New York 10589
("IBM"). All references herein to "LOTUS" shall mean Lotus Development
Corporation, an IBM subsidiary, with an address at 55 Cambridge Parkway,
Cambridge, Massachusetts 02142. All capitalized terms and definitions used in
this Amendment and not otherwise defined herein shall have the meanings given
them in the Agreement.
In consideration of the covenants and agreements contained herein, the
parties hereto agree to amend the Agreement as follows:
1. The following definition is hereby added to the Agreement as Section 1.15:
"Average Selling Price" or "ASP" is the average amount of net revenue
that IBM and LOTUS are able to recognize for the standalone license of
the Licensed Work over the course of a calendar quarter."
2. The following definition is hereby added to the Agreement as Section 1.16:
"Maintenance" is the right, at IBM'S or LOTUS'S option, to receive,
install and use commercially-available upgrades to the Licensed Work.
Maintenance is sold on an annual basis."
3. The first paragraph of Exhibit A is hereby deleted in its entirety and
replaced with the following:
"Object Code Licensed Work: NETOBJECTS Fusion ("Fusion"), NETOBJECTS
TeamFusion ("TeamFusion"), NETOBJECTS ScriptBuilder ("ScriptBuilder")
and all future updates, versions, successor products and derivative
works of each of the foregoing products."
4. The Royalty Rate table in Exhibit B, Section 3.2 is hereby deleted in its
entirety and replaced with the following:
"The Hard Bundle Royalty Rate is 37% of ASP of the Licensed Work."
5. The Royalty Rate table in Exhibit B, Section 3.3 is hereby deleted in its
entirety and replaced with the following:
<PAGE>
"The Soft Bundle Royalty Rate is 69% of ASP of the Licensed Work."
6. Section 3.4 of Exhibit B is hereby deleted in its entirety and replaced with
the following:
"A. "The Royalty Rate for Licensed Works that are not Bundled with
any hardware or software, and for which NETOBJECTS provides level 3
support ("N.O. Package") is 75% of ASP for the Licensed Work.
NETOBJECTS shall include with each N.O. Package sufficient information
to inform end users of IBM'S contact information for Level 1 and Level
2 support, and IBM shall provide Level 1 and Level 2 support for the
N.O. Package.
B. The Royalty Rate for Volume N.O. Packages may be renegotiated, at
LOTUS'S and/or IBM'S option, three months after the date of execution
of this Amendment and thereafter whenever the pricing structure of
either the Licensed Work or LOTUS'S and/or IBM'S volume sales program
is adjusted."
C. The Royalty Rate for Maintenance of the Licensed Work is 25%
of the applicable Royalty Rate for such Licensed Work."
7. Section 3.5 of Exhibit B is hereby deleted in its entirety and replaced with
the following:
"A. IBM, LOTUS and NETOBJECTS agree to negotiate, in good faith,
separate royalty arrangements for special (e.g., OEM) or promotional
bundles.
B. In the event that IBM or LOTUS desire to materially discount the
price of the Licensed Work, IBM/LOTUS shall involve NETOBJECTS in
IBM/LOTUS'S applicable 'Pricing Exception Process' and the parties
agree to promptly negotiate in good faith an appropriate reduction in
the applicable Royalty Rate."
8. Section 3.7 of Exhibit B is hereby deleted in its entirety and replaced with
the following:
"SECTION 3.7 INTERNAL USE LICENSES.
3.7.1 "Internal Copies" shall have the following meaning:
* for IBM, copies of the Licensed Works which are provided to Employees
of IBM and IBM Subsidiaries, as well as agents and contractors working
for and on behalf of IBM or an IBM Subsidiary, where such copies are
intended for use by such persons to perform productive work on behalf
of IBM or any IBM Subsidiary, and not for resale; and
* for NETOBJECTS, copies of LOTUS SmartSuite, LOTUS Domino and LOTUS
Notes which are provided to Employees of NETOBJECTS, as well as agents
and contractors working for and on behalf of NETOBJECTS, where such
copies are
<PAGE>
intended for use by such persons to perform productive work on behalf
of NETOBJECTS, and not for resale. NETOBJECTS agrees to use all such
Internal Copies in accordance with the LOTUS Software Agreement
governing the use of such LOTUS products.
3.7.2 In lieu of the Royalty Rates set forth in Sections 3.1 through
3.5 of this Exhibit B, IBM has paid NETOBJECTS a one time fee of four
hundred two thousand dollars ($402,000.00) for all Internal Copies of
NETOBJECTS Fusion 2.0 and all upgrades thereto which are made available
by NETOBJECTS through April 30, 1998. After April 30, 1998, at IBM'S
option, and subject to the most favored customer pricing terms contained
in Section 5.5 of the Agreement, IBM may elect 1) to pay for individual
Internal Copy upgrades at the per copy Royalty Rates set forth in
Sections 3.1 though 3.5 of this Agreement, or 2) to pay 25% of the
Internal License Fee, per annum, for upgrades for all of the Internal
Copies.
3.7.3 IBM has agreed, during the Term of this Agreement, to provide
to NETOBJECTS Internal Copies of LOTUS SmartSuite, LOTUS Domino and LOTUS
Notes in exchange for NetObject's agreement, during the Term of this
Agreement, to provide to IBM Internal Copies of TeamFusion and
Scriptbuilder. The Internal Copies for the products set forth in this
Section 3.7.3 include all Enhancements and Error Corrections thereto made
commercially available during the term of this Agreement. Support for the
LOTUS/IBM products set forth in this Section 3.7.3 is NOT included, and may
be separately acquired (for a fee) by NETOBJECTS. Either party may
terminate the license to these Internal Copies as follows: i) within
thirty days following notice of material breach given to licensee, provided
that such breach has not been cured within such thirty day period, or ii)
for convenience upon no less than ninety (90) days' prior written notice;
provided, however, that such termination shall apply solely to the
deployment of: i) new copies of the Internal Copies, and ii) any
Enhancements and/or Error Corrections to the Internal Copies.
9. Modify Section 5.0 of Exhibit B as follows: Delete the first paragraph in
its entirety, and delete and replace the first sentence of the second paragraph
with the following:
"During the period commencing with the Effective Time, and ending 12/31/98
(the "Initial Period"), IBM shall make the following nonrefundable payments
which shall be creditable against royalties and payments which become due
pursuant to this Agreement."
10. All changes to Royalty Rates made in this Amendment shall be deemed
effective as of September 1, 1997 and shall apply to all sales of the Licensed
Works made since that date.
<PAGE>
The Agreement remains in full force and effect in accordance with its
terms, except as such terms have been expressly modified by this Amendment. In
the event of any conflict between the terms of this Amendment and the terms of
the Agreement, this Amendment shall control. This Amendment constitutes the
entire understanding of the parties with respect to its subject matter and
merges and supersedes all prior communications, understandings and agreements
between the parties concerning the subject matter hereof. This Agreement shall
not be modified except by a writing subsequently dated, signed on behalf of each
party by a duly authorized representative.
Executed by the authorized representatives of the parties as of the date
first set forth above.
NETOBJECTS, INC. INTERNATIONAL BUSINESS MACHINES
CORPORATION
By: /s/ Michael J. Shannahan By: /s/ R.G. ANDEREGG
------------------------------ ------------------------------
Name: Michael J. Shannahan Name: ROBERT G. ANDEREGG
---------------------------- ----------------------------
Title: VP & CFO Title: ASSISTANT GENERAL COUNCIL
--------------------------- ---------------------------
Date: 4/27/98 Date: 12 MAY 1998
---------------------------- ----------------------------
<PAGE>
EXHIBIT 10.4.5
FIFTH AMENDMENT TO NETOBJECTS LICENSE AGREEMENT
Agreement Number: L97063
Fifth amendment, effective January 14, 1999 (the "Amendment") to the NetObjects
License Agreement, dated March 18, 1997, including all amendments thereto (the
"Agreement"), between NetObjects Corporation with an address at 301 Galveston
Drive, Redwood City, California 94063 ("NETOBJECTS") and International Business
Machines Corporation with an address at Route 100, Somers, New York 10589
("IBM"). All capitalized terms and definitions used in this Amendment and not
otherwise defined herein shall have the meanings given them in the Agreement.
In consideration of the covenants and agreements contained herein, the parties
hereto agree to amend the Agreement as follows:
The following sections are added to Exhibit B of the Agreement, entitled
"Royalty Rate for Licensed Works":
3.8 Business Partner Package
3.8.1 "Business Partner Package" shall mean a copy of a Licensed
Work that is not Bundled with any hardware or software, and is
licensed to IBM Business Partners (as defined below) in accordance
with the terms of the applicable NetObjects end user license for the
Licensed Work.
3.8.2 "IBM Business Partner" shall mean a business entity through
which IBM or its Subsidiaries, directly or indirectly, markets
products or services to customers in the regular course of business,
including IBM's Subsidiaries or its or their agents, distributors,
dealers, resellers, remarketers, solution providers, and integrators,
pursuant to (i) a written agreement or (ii) qualification under an
approved business partner program.
3.8.2 Business Partner Packages may be distributed by IBM to IBM
Business Partners from the effective date of this Amendment and
continuing for the term of the Agreement.
3.8.3 In lieu of the Royalty Rates set forth in Sections 3.1
through 3.5 of Exhibit B, the Royalty Rate for Business Partner
Packages is 50% of the Royalty Rate for N.O. Packages.
<PAGE>
All other terms of the Agreement remain in full force and effect and shall apply
to Business Partner Packages, except as expressly provided above. Any copy of
this Amendment by reliable means, for example photocopy or facsimile, shall be
deemed an original. This Amendment shall not be altered except in a writing
executed by the parties. This Amendment and the Agreement supersede all
previous agreements relating to the subject matter hereof, whether oral or in
writing, and constitute the entire agreement of the parties with respect to this
subject matter
IN WITNESS WHEREOF, the parties have caused this Amendment Number 5 to be
executed below by their duly authorized representatives.
INTERNATIONAL BUSINESS NETOBJECTS, INC.
MACHINES CORPORATION
BY: /s/ Eugenia C. Rerros BY: /s/ E. Cicogna
------------------------------- -----------------------------
NAME: Eugenia C. Rerros NAME: E. Cicogna
----------------------------- ----------------------------
TITLE: Contract Relations Advisor TITLE: VP Finance
---------------------------- ---------------------------
DATE: 1/15/99 DATE: 1/15/99
----------------------------- ----------------------------
<PAGE>
EXHIBIT 10.4.6
AMENDMENT NO. 6 TO NETOBJECTS LICENSE AGREEMENT
This Amendment Number 6 to the NetObjects License Agreement, dated March 18,
1997 ("Agreement") between NetObjects Corporation ("NetObjects") with an address
at 602 Galveston Drive, Redwood City, California 94063 and International
Business Machines Corporation ("IBM") with an address at Route 100, Somers, New
York 10589 is entered into on September 18, 1998 ("Effective Date"). All
capitalized terms and definitions used in this Amendment and not otherwise
defined herein shall have the meanings given them in the Agreement.
In consideration of the covenants and agreements contained herein, the parties
hereto agree to amend the Agreement as follows:
1. The following section is hereby added as Section 12 of the Agreement:
12.0 WebSphere Deliverables
12.1 Definitions.
12.1.1 "WebSphere Deliverables" shall mean the deliverables described
on Exhibit 1 hereto. WebSphere Deliverables are Enhancements as defined in
Section 1.7 of the Agreement.
12.1.2. "WebSphere Net Revenue" shall mean the gross revenue amount
recorded by IBM in consideration for the licensing of a Bundle within which
a WebSphere Version is integrated, excluding any amount received by IBM for
sales and use taxes, shipping, insurance and duties, and reduced by
discounts and refunds granted to customers and distributors.
12.1.3 "WebSphere Version" shall mean a Licensed Work that includes a
WebSphere Deliverable.
12.2 NetObjects Responsibilities. NetObjects shall perform the activities
described in Exhibit 1 hereto and will deliver the WebSphere Deliverables to IBM
in accordance with Exhibit 1 hereto (including but not limited to the delivery
schedule included in Exhibit 1).
12.3 IBM Responsibilities.
12.3.1 In consideration for the services performed by NetObjects to
develop the WebSphere Deliverables, NetObjects shall bill IBM an amount
equal to NetObjects' reasonable and actual time (e.g., employee hours) and
materials (e.g., software development tools) cost for developing the
WebSphere Deliverables ("Development Cost") plus
<PAGE>
20 percent of the Development Cost (collectively, "IBM Payment"),
provided that the maximum IBM Payment is six million U.S. dollars
(6,000,000). NetObjects shall maintain detailed records according to
generally-accepted accounting principles to support the amount of the
Development Cost.
12.3.2 If the parties discuss or agree to material changes to Exhibit
1 hereto ("Statement of Work"), or if work is performed that is materially
different from the work outlined in the Statement of Work, the IBM Payment
will not exceed the maximum payment listed in Section 12.3.1 above (i.e.,
$6,000,000) unless the parties first sign a written agreement to that
effect.
12.3.3 The IBM Payment will be made in twelve (12) equal monthly
installments beginning on the date of the Acceptance of the WebSphere
Deliverables by IBM (as defined below), and the IBM Payment is to be
applied against the prepaid royalties made by IBM in accordance with
Section 5 of Exhibit B to the Agreement (i.e., on a monthly basis,
NetObjects is to deduct the amount of the IBM Payment from the balance of
IBM prepaid royalties which have not yet been credited against royalties
for the Licensed Work). If the balance of royalties that have been prepaid
by IBM in accordance with Section 5 of Exhibit B to the Agreement have been
fully credited against royalties and payments for the Licensed Work in
accordance with the Agreement before all twelve (12) installments of the
IBM Payment have been made in accordance with this Section 12.3.3., IBM
will pay any of the outstanding twelve (12) monthly installments on a
monthly basis net thirty (30) days from the date of IBM's receipt of an
acceptable invoice.
12.3.4 "Acceptance of the WebSphere Deliverables by IBM" or
"Acceptance" shall mean the date on which IBM sends written notice to
NetObjects of its acceptance of the WebSphere Deliverables. IBM will
provide NetObjects with its Acceptance of the WebSphere Deliverables that
conform to the acceptance criteria contained in Exhibit 1 no later than
January 31, 1999 provided that NetObjects fulfills its obligations in
accordance with Exhibit 1 hereto.
12.3.5 For the twelve (12) month period immediately following
Acceptance ("First Year"), the WebSphere Versions will be provided to IBM
hereunder royalty-free. After the First Year, the Royalty Rate for the
WebSphere Version will be 16% of the WebSphere Net Revenue instead of
the Royalty Rate set forth in Exhibit B. On each anniversary of the
Effective Date (i.e., September 18, 1999, September 18, 2000, September 18,
2001), the percentage used to calculate the Royalty Rate for a WebSphere
Version will be subject to change by either party in
2
<PAGE>
accordance with the following process, provided that the maximum Royalty
Rate for a WebSphere Version will be no more than fifty percent (50%) of
the Royalty Rate for a Hard Bundle or Soft Bundle (whichever is applicable
to the Bundle within which the WebSphere Version is integrated):
1. no later than ninety (90) days prior to the annual anniversary
date of the Effective Date, either party may provide written notice
("Notice") to the other party requesting a change in the Royalty Rate for
the WebSphere Version due to a change in the reasonable commercial value of
the function of the WebSphere Version as compared to the reasonable
commercial value of the function of the Bundle within which the WebSphere
Version is integrated. At a minimum, such Notice will include a detailed
list of all of the function and value included in the Bundle within which
the WebSphere Version is included, and the corresponding reasonable
commercial value of each item of function or value contained therein,
including the WebSphere Deliverable;
2. the recipient of the Notice ("Recipient") will be provided with
three (3) business days to ask the other party questions regarding the
Notice, and all such questions will be answered within three (3) business
days of their receipt;
3. if the Recipient accepts the revised Royalty Rate included in the
Notice, the Royalty Rate for the WebSphere Version will be adjusted
accordingly once the Recipient indicates its agreement by singing an
acknowledgment line on the Notice;
4. if the Recipient does not agree to the newly proposed Royalty Rate
included in the Notice, within seven (7) business days of its receipt of
such Notice, the Recipient is to provide a detailed written justification
for the existing Royalty Rate for the WebSphere Deliverable to the other
party ("Justification"). At a minimum, such Justification shall include a
detailed list of all of the function and value included within the Bundle
within which the WebSphere Version is included and the reasonable
commercial value of each item of function or value contained therein,
including the WebSphere Deliverable;
5. the recipient of the Justification will be provided with three (3)
business days to ask questions of the other party regarding the
Justification, and all such questions will be answered within three (3)
business days of their receipt;
6. within seven (7) business days after the Justification is received
by the other party, the parties will meet to discuss the Notice and
Justification, and potential resolution; and if no resolution is reached
within five (5) business days after this meeting, upon mutual agreement of
the parties, they may submit the Justification and Notice to a jointly
chosen independent consulting group. The consulting group will be
requested to
3
<PAGE>
issue an opinion which the parties may accept or reject. The consultant's
fee will be paid by the parties equally; and
7. if no resolution is reached within five (5) business days
following the consultant review above, the parties will submit the Notice
and Justification (which the parties may revise as a result of the
consultant review) to the dispute resolution process outlined in
Section 10.13 of the Agreement
Example as of October 1999 - THESE PRICES ARE HYPOTHETICAL AND DO NOT
REFLECT IBM'S OR NETOBJECTS' PLANS
<TABLE>
<CAPTION>
Proportion of Value at Execution of Contract
---------------------------------------------
<S> <C>
Reasonable Commercial Value of WebSphere Version
- (current Team Fusion Estimated Selling Price)
$3,445.00
Reasonable Commercial Value of additional function or value
in the bundle
- WebSphere Application Server $3,975.00
- Bean Machine $ 975.00
- Visual Age (Java Version) $ 495.00
---------
Proportion of Value = $3,445.00/5,445.00 = .633 $5,445.00
Proportion of Value as of October 1999
--------------------------------------
Reasonable Commercial Value of WebSphere Version
- (future Team Fusion Estimated Selling Price) $3,995.00
Reasonable Commercial Value of additional function
or value in the Bundle
- WebSphere Application Server $2,975.00
- Bean Machine $ 775.00
- Visual Age (Java Version) $ 295.00
- Additional function or value $2,995.00
---------
$7,040.00
Proportion of Value = $3,995.00/$7,040.00 = .567
ADJUSTED WEBSPHERE VERSION ROYALTY RATE AS OF OCTOBER 1999
</TABLE>
4
<PAGE>
New Proportion of Value
------------------------------ X WebSphere Version
Royalty Rate at Contract Execution = New Rate Old
Proportion of Value
535/567 X 16% = 15.1%
12.3.5 At any time within six (6) months following Acceptance, and on
thirty (30) days written notice to NetObjects, IBM shall be entitled, at
its own expense, to retain an independent certified public accountant to
review the books and records of NetObjects solely for the purpose of
verifying the actual cost of developing the WebSphere Deliverables (i.e.,
verify the Development Cost). If such independent accountant determines
that the actual cost of developing the WebSphere Deliverables is less than
the Development Cost, then IBM shall only be required to pay to NetObjects
such actual cost of development, and such actual cost of development shall
be considered the Development Cost for the purposes of Section 22.3.1(a),
12.3.1(b), and 12.3.2 above.
2. The Agreement remains in full force and effect in accordance with its
terms, except as such terms have been expressly modified by this Amendment.
This Amendment and the Agreement constitute the entire understanding of the
parties with respect to this subject matter and supersede all prior
communications, understandings and agreements between the parties concerning the
subject matter hereof. A copy of this Amendment by reliable means (e.g.,
facsimile or photocopy) will be deemed an original.
ACCEPTED AND AGREED TO: ACCEPTED AND AGREED TO:
INTERNATIONAL BUSINESS NETOBJECTS, INC.
MACHINES CORPORATION
BY: /s/ Eugenia C. Rerros BY: /s/ Ernest J. Cicogna
------------------------------ --------------------------
NAME: Eugenia C. Rerros NAME: Ernest J. Cicogna
---------------------------- -------------------------
TITLE: Contract Relations Advisor TITLE: VP Finance
---------------------------- ------------------------
DATE: 9/18/98 DATE: 9/18/98
------------------------- ------------------------
5
<PAGE>
EXHIBIT 10.4.7
SEVENTH AMENDMENT TO NETOBJECT LICENSE AGREEMENT
Agreement Number: L97063
Seventh Amendment, effective January 15, 1999, to the NetObjects License
Agreement Number L97063 dated March 18, 1997 as amended ("Agreement") between
NetObjects, Inc. with an address at 301 Galveston Drive, Redwood City,
California 94063 ("NetObjects") and International Business Machines Corporation
with an address at Route 100, Somers, New York 10589 ("IBM"). All capitalized
terms and definitions used in the Amendment and not otherwise defined herein
shall have the meanings give them in the Agreement.
In consideration of the covenants and agreements contained herein, the parties
hereto agree to amend the Agreement as follows:
1. Subparagraph (b) of the Section 11.8 titled "Repayment" is hereby deleted in
its entirety and replaced with the following:
"(b) Once the cumulative Royalty Discount, received by IBM is equal to
or greater than the Translation Cost multiplied by 1.15, then the
Translation Cost will have been repaid in full and Royalty Discount
shall no longer remain in effect."
2. Subparagraphs (c) and (d) of the Section 11.8 titled "Repayment" are hereby
deleted in their entirety.
The Agreement remains in full force and effective in accordance with its terms,
except as such terms have been expressly modified by the Amendment. In the event
of any conflict between the terms of the Amendment and the terms of the
Agreement, the Amendment shall control. This Amendment constitutes the entire
understanding of the parties with respect to its subject matter and merges and
supersedes all prior communications, understandings and agreements between the
parties concerning the subject matter hereof. This Agreement shall not be
modified except in writing subsequently dated, signed on behalf of each party by
a duly authorized representative.
Executed by the authorized representatives of the parties as of the date first
set forth above.
NETOBJECTS,INC INTERNATIONAL BUSINESS
MACHINES CORPORATION
By: /s/ E. Cicogna By: /s/ R.G. Anderegg
-------------------------- -------------------------------
Name: E. Cicogna Name: R.G. Anderegg
-------------------------- -------------------------------
Title: V.P. Finance Title: VP & Asst. General Counsel
-------------------------- -----------------------------
Date: 1/18/99 Date: 1/22/99
-------------------------- -----------------------------
<PAGE>
EXHIBIT 10.4.8
EIGHTH AMENDMENT TO NETOBJECT LICENSE AGREEMENT
Agreement Number: L97063
This is the Eighth Amendment, effective September 18, 1998, to the NetObjects
License Agreement Number L97063 dated March 18, 1997 as amended ("Agreement")
between NetObjects, Inc. with an address at 301 Galveston Drive, Redwood City,
California 94063 ("NetObjects") and International Business Machines Corporation
with an address at Route 100, Somers, New York 10589 ("IBM"). All capitalized
terms and definitions used in the Amendment and not otherwise defined herein
shall have the meanings give them in the Agreement.
In consideration of the covenants and agreements contained herein, the parties
hereto agree to amend the Agreement as follows:
1. Section 12.3.1 of the Agreement (added thereto in Amendment Number 6) is
hereby deleted in its entirety and replaced with the following:
In consideration for the services performed by NetObjects to develop
the Websphere Deliverables, NetObjects shall bill IBM an amount equal
to NetObjects' reasonable and actual time (i.e., employee hours) and
materials (e.g., software development tools, reasonable overhead) cost
expended prior to February 28, 1999 in the development of the
WebSphere Deliverables ("Development Costs") plus five percent of the
Development costs (collectively the "IBM Payment"), provided that the
maximum IBM Payment is five million, two-hundred and fifty thousand
dollars ($5,250,000). NetObjects shall maintain detailed records
according to generally accepted accounting principles to support the
amount of the Development Costs.
2. The dollar amount (i.e., $6,000,000) in Section 12.3.2 of the Agreement
(added thereto in Amendment Number 6) is hereby deleted and replaced with
the dollar amount $5,250,000.
3. Section 12.3.3 of the Agreement (added thereto in Amendment No. 6) is
hereby deleted in its entirety and replaced with the following:
Between the Acceptance of the WebSphere Deliverables (as defined
below) and March 30, 1999, on a quarterly basis, NetObjects will
provide IBM a detailed summary of the Development Costs incurred. The
IBM Payment is to be applied against prepaid royalties made by IBM in
accordance with Section 5 of Exhibit B to the Agreement (i.e., on a
quarterly basis, NetObjects is to deduct the amount of the IBM Payment
from the balance of the IBM prepaid royalties which have not yet been
credited against royalties for the Licensed Work). If the balance of
royalties that have been prepaid by IBM in accordance with Section 5
of Exhibit B to the Agreement have been fully credited against
royalties and payments for the Licensed Work in accordance with the
Agreement before all of the quarterly bills have been submitted to IBM
in accordance with Section 12.3.1, and all of the quarterly bills have
been submitted to IBM prior to March 30, 1999, then IBM will
<PAGE>
pay the quarterly bill within thirty (30) days from the date of IBM's
receipt of an acceptable invoice.
4. The first two sentences in Section 12.3.5 of the Agreement (added thereto
in Amendment Number 6) are hereby deleted in their entirety and replaced
with the following:
The Royalty Rate for the WebSphere Version will be fifty percent
(50%) of the Royalty Rate for the Licensed Work set forth in
Exhibit B of the Agreement instead of the Royalty Rate set forth in
Exhibit B. (e.g., For a Hard Bundle where the WebSphere Version
constitutes the Licensed Work, the Royalty Rate will be 18.5% of ASP
of the applicable Licensed Work, Fusion or TeamFusion.)
5. The second Section 12.3.5 of the Agreement (added thereto on page three of
Amendment Number 6) shall not be modified in any way by this Amendment
Number 8, but shall be renumbered as Section 12.3.6.
6. The following shall be added to Exhibit 1 to Amendment Number 6 to the
Agreement, (the Statement of Work), as Section 7:
NetObjects will complete the engineering work for the first phase of
abstracting the NetObjects Authoring Server Suite such that it will
integrate with IBM Universal Database instead of Sybase SQL Anywhere. This
first phase entails only engineering coding to modify or extend portions of
the NetObjects Authoring Server Suite software and does not include testing
and meeting product release criteria. In addition, the first phase does not
include modifying or extending the following elements of NetObjects
Authoring Server Suite: Site Utilities, Publish, Preview, Content
Contributor. The work for the first phase will be completed no later than
January 28, 1999, and made available to IBM no later than February 28, 1999.
7. The following is hereby added as Section 12.3.7 of the Agreement:
IBM may provide NetObjects with written notice that all further development
work associated with Section 12 of the Agreement is to be terminated. Upon
receipt of such notice, NetObjects is to immediately stop all further
activites associated with Section 12 of the Agreement. NetObjects will be
paid in accordance with Section 12.3 of the Agreement for the work
performed by NetObjects in accordance with this Amendment and Exhibit 1
hereto through the date of NetObjects' receipt of IBM's notice.
The Agreement remains in full force and effect in accordance with its terms,
except as such terms have been expressly modified by the Amendment. In the event
of any conflict between the terms of the Amendment and the terms of the
Agreement, the Amendment shall control. This Amendment and the Agreement
constitute the entire understanding of the parties with respect to its subject
matter and merges and supersedes all prior
<PAGE>
communications, understandings and agreements between the parties concerning the
subject matter hereof. This Agreement shall not be modified except in writing
subsequently dated, signed on behalf of each party by a duly authorized
representative. A copy of this Amendment by reliable means (e.g., photocopy or
facsimile) will be deemed an original.
Executed by the authorized representatives of the parties as of the date first
set forth above.
NETOBJECTS, INC INTERNATIONAL BUSINESS
MACHINES CORPORATION
By: /s/ E. Cicogna By: /s/ R.G. Anderegg
------------------------ ------------------------------
Name: E. Cicogna Name: R.G. Anderegg
------------------------ ------------------------------
Title: VP Finance Title: VP & Asst. General Counsel
------------------------ ------------------------------
Date: 1/28/99 Date: 1/29/99
------------------------ ------------------------------
<PAGE>
EXHIBIT 10.4.9
AMENDMENT NO. 9 TO NETOBJECTS LICENSE AGREEMENT
This Amendment Number 9 to the NetObjects License Agreement, dated March 18,
1997 ("Agreement") between NetObjects Corporation ("NetObjects") with an address
at 602 Galveston Drive, Redwood City, California 94063 and International
Business Machines Corporation ("IBM") with an address at Route 100, Somers, New
York 10589 is entered into on January 21, 1999 ("Effective Date"). All
capitalized terms and definitions used in this Amendment and not otherwise
defined herein shall have the meanings given them in the Agreement.
In consideration of the covenants and agreements contained herein, the parties
hereto agree to amend the Agreement as follows:
1. The following section is hereby added as Section 13 of the Agreement:
13.0 WIRELESS MARKUP LANGUAGE DELIVERABLES
13.1 "Wireless Markup Language ("WML") Deliverables" shall mean the
deliverables described on Exhibit 1 to this Amendment, which is attached hereto
and incorporated by reference. WML Deliverables are Enhancements as defined in
Section 1.7 of the Agreement.
13.2 NetObjects Responsibilities.
13.2.1 NetObjects shall provide all development, integration and testing
required to perform the activities and provide the functionality described in
Exhibit 1 hereto and will deliver the WML Deliverables to IBM in accordance with
Exhibit 1 hereto (including but not limited to the delivery schedule included in
Exhibit 1).
13.2.2 NetObjects' marketing materials for ScriptBuilder, including, but not
limited to the NetObjects web site located at http://www.netobjects.com
("NetObjects Web Site"), shall identify, describe and promote the WML functions
listed in Exhibit 1 ("WML Functions"). NetObjects will also add a page to the
NetObjects Web Site which shall only contain promotional material for the WML
Functions. NetObjects shall make all necessary updates or additions to the
ScriptBuilder marketing materials to describe the WML Functions by January 30,
1999.
13.2.3 NetObjects shall replace ScriptBuilder 3.0 with ScriptBuilder 3.01 as
the version of ScriptBuilder which NetObjects makes generally available to its
customers, following delivery to IBM of the WML Deliverable set forth in Section
9(d) of Exhibit 1 hereto, but in no event later than April 30, 1999.
NetObjects shall also make available to existing ScriptBuilder 3.0 customers a
software upgrade which will add the WML Functions to ScriptBuilder 3.0. This
software upgrade shall be made available, at a minimum, via download from the
NetObjects web site concurrent with the delivery of the WML Deliverable set
forth above. NetObjects shall, at a minimum, notify customers of the
availability of this upgrade software on the NetObjects Web Site.
<PAGE>
13.3 IBM Responsibilities.
13.3.1 In consideration for the services performed by NetObjects to
develop the WML Deliverables, IBM shall pay to NetObjects the total amount of
$350,000 upon (i) delivery of all Deliverables as set forth in Exhibit 1 and
(ii) acceptance of those Deliverables as defined in 13.3.2below. Payment
shall be made to NetObjects net thirty (30) days after receipt of an
acceptable invoice from NetObjects. An acceptable invoice shall contain at a
minimum the purchase order number and supporting documentation for the work
performed. The purchase order number will be provided to NetObjects by IBM
after the execution of this Amendment. All billings shall be addressed to:
IBM Corporation
Accounts Payable
P.O. Box 8099
Endicott, NY 13761-8099
13.3.2 "Acceptance of the WML Deliverables by IBM" or "Acceptance" shall
mean the date on which IBM sends written notice to NetObjects of its
acceptance of the WML Deliverables in accordance with Exhibit 1 hereto.
2. Section 6.0 REPRESENTATIONS AND WARRANTIES, is amended to add the following:
"g. throughout the term of the Agreement, the Licensed Works are Year 2000
ready, meaning they are capable of correctly processing, providing, receiving
and displaying date data, as well as exchanging accurate date data with all
products with which they are intended to be used, within and between the
twentieth and twenty-first centuries."
3. The Agreement remains in full force and effect in accordance with its terms,
except as such terms have been expressly modified by this Amendment. This
Amendment and the Agreement constitute the entire understanding of the parties
with respect to this subject matter and supersede all prior communications,
understandings and agreements between the parties concerning the subject matter
hereof. A copy of this Amendment by reliable means (e.g., facsimile or
photocopy) will be deemed an original.
ACCEPTED AND AGREED TO: ACCEPTED AND AGREED TO:
INTERNATIONAL BUSINESS NETOBJECTS, INC.
MACHINES CORPORATION
BY: /s/ R.A. Anderegg BY: /s/ E.J. CICOGNA
----------------------- ------------------------
NAME: R.A. Anderegg NAME: E. CICOGNA
--------------------- ----------------------
TITLE: VP & Asst. General TITLE: V.P. FINANCE
Counsel ----------------------
--------------------
DATE: 1/22/99 DATE: 1/21/99
--------------------- ----------------------
<PAGE>
EXHIBIT 10.4.11
[Lotus Development Corporation Letterhead]
CONFIDENTIAL
February 6, 1998
Mr. Samir Arora
Chief Executive Officer
NetObjects, Inc.
602 Galveston Drive
Redwood City, California 94063
Re: Promotional Bundles
Dear Samir:
Reference is made to the NetObjects License Agreement, dated March 18, 1997, as
amended, between NetObjects, Inc. ("NetObjects") and International Business
Machines Corporation ("IBM"), (the "Agreement"). Capitalized terms used in this
letter, and not otherwise defined, shall have the meaning give to them in the
Agreement.
Pursuant to Section 5.4 of the Agreement, IBM may request a lower royalty for
the Licensed Work when a licensing transaction requires a substantial discount.
The following are the terms of these promotional bundles.
1. Licensed Work: NetObjects Fusion (versions 2 and 3)
2. Bundles: (a) NetObjects Fusion with Lotus Notes Designer for Domino
(b) NetObjects Fusion with Domino Intranet Starter Pack
3. Promotion Period: February 1, 1998 - September 30, 1998
4. Quantity: up to 200,000 units
5. Royalty: $4 million for the total 200,000 units (this equates to
$40/unit with every second unit bearing $0 royalty, in consideration of
Lotus' investment in integrating Lotus Domino and NetObjects Fusion). The
parties agree that the $4 million royalty payment is guaranteed to NetObjects
whether or not all of the units are sold and shall be deemed fully paid on or
before September 30, 1998. The guaranteed royalty payment shall be credited
against the pre-paid royalties made by IBM to NetObjects. In the event of a
material change in the estimated retail price of Fusion, during the Promotion
Period, the parties shall renegotiate the royalty in good faith.
<PAGE>
6. Maintenance Offer: NetObjects offers Lotus the opportunity to deliver
NetObjects Fusion, during the Promotion Period, to Lotus' 384,000 Lotus Notes
Designer "maintenance" customers for a total royalty of $1 million (credited
against the pre-paid royalties made by IBM to NetObjects) plus in-kind
advertising assistance with a value of $1 million. This offer shall remain
valid through [January 31, 1998].
7. Marketing: The parties shall develop a joint marketing plan due on the
later of February 1st or first customer ship of the Bundle. The Lotus marketing
contact is John Lautenbach and the NetObjects marketing contact is Param Singh.
On or before June 1, 1998, the parties shall review the sales of the Bundle and
plan additional marketing efforts, if necessary.
8. Agreement: The terms of the Agreement remain in full force and effect and
shall apply to this Bundle, except as expressly provided above. In the event of
any conflict between the terms of this letter and the terms of the Agreement,
the terms of this letter shall control with respect to this promotional Bundle.
Please sign below to indicate that the terms of this letter accurately reflect
our agreement for this promotional bundle.
Sincerely,
Eileen Rudden
Senior Vice President
Lotus Development Corporation
ACCEPTED AND ACKNOWLEDGED
Mike Shannahan
CFO, NetObjects, Inc.
Date February 6, 1998
<PAGE>
Lotus Development
LOTUS Corporation
DEVELOPMENT 85 Cambridge Parkway Phone: 017-577-3500
CORPORATION Cambridge, MA 02102 FAX: 017-639-1105
- ------------------------------------------------------------------------------
CONFIDENTIAL
January 14, 1999
Mr. Ernest Cicogna
NetObjects, Inc.
602 Galveston Drive
Redwood City, California 94063
Re: Promotional Lotus Bundles distributed under the terms of the NetObjects
License Agreement, dated March 18, 1997, between NetObjects, Inc.
("NetObjects") and International Business Machines Corporation ("IBM"), as
amended ("Agreement")
Dear Ernie:
This letter is to confirm our agreement that in exchange for the mutual
covenants contained herein, the letter agreement between IBM and NetObjects
regarding the above subject matter, dated February 6, 1998, ("Letter") is
hereby amended as described below:
1. The following statement is added to the end of the second paragraph
contained in the Letter:
"IBM and NetObjects agree that during the time period between February 1,
1998 and June 30, 1999, ("Promotion Period") IBM and its Subsidiaries may
distribute up to two hundred thousand (200,000) copies of the Lotus Bundles
(described in Section 2 below), and instead of IBM paying the per copy
Royalty Rate listed in Section 5 of Exhibit B of the Agreement for its
distribution of the Lotus Bundles, four million dollars $4,000,000 will be
deducted from the outstanding prepaid royalties listed in section 5 of
Exhibit B of the Agreement. IBM is under no obligation to distribute the
full 200,000 copies of Lotus Bundles, but, if, during the Distribution
Period, IBM distributes fewer than the full 200,000 copies of Lotus Bundles,
the foregoing four million dollar ($4,000,000) deduction is still to be made
from the outstanding prepaid royalties listed in the Agreement."
2. The first enumerated statement (i.e., "1. Licensed Work: NetObjects
Fusion") is deleted.
3. The second enumerated statement is amended to read as follows:
"2. Lotus Bundles: (a) NetObjects Fusion and Lotus Notes Designer for Domino
(b) NetObjects Fusion and Domino Intranet Starter Pack
<PAGE>
4. The third enumerated statement is amended to read as follows:
"3. Promotion Period: February 1, 1998 - June 30, 1999:
5. The forth enumerated statement is amended to read as follows:
"4. Quantity: up to 225,000 units of the Lotus Bundles"
6. The fifth and six enumerated statements are each deleted in their entirety.
7. A new fifth enumerated statement is added that reads as follows:
"5. IBM and NetObjects agree that during Promotion Period, IBM and its
Subsidiaries may distribute up to twenty five thousand (25,000) copies of any
version or release of NetObjects Fusion, and instead of IBM paying the per
copy Royalty Rate listed in Section 5 of Exhibit B of the Agreement for its
distribution of these 25,000 copies, five hundred thousand dollars ($500,000)
will be deducted from the outstanding prepaid royalties listed in section 5
of Exhibit B of the Agreement ("Prepaid Royalties") no later than June 30,
1999 (the $500,000 deduction is the "Lotus Upfront Royalty"), but if the
balance of the Prepaid Royalties is less than five hundred thousand dollars
($500,000). IBM shall pay to NetObjects the difference between the
outstanding balance of Prepaid Royalties and five hundred thousand dollars
($500,000) within thirty (30) days after IBM's receipt of an acceptable
invoice, provided that such invoice is received by IBM no later than July 1,
1999. Notwithstanding the foregoing, the Lotus Upfront Royalty does not
apply to a distribution by IBM or its Subsidiaries of NetObjects Fusion as
part of the product branded as "Domino Application Studio" nor a distribution
by IBM or its Subsidiaries of NetObjects Fusion as part of any IBM Websphere
product line but applies to all other distributions of NetObjects Fusion by
IBM and its Subsidiaries during the Promotion Period (i.e., if IBM
distributes NetObjects Fusion as part of a product branded as "Domino
Designer Release 5", IBM will pay the Royalty Rate listed in Section 5 of
Exhibit B of the Agreement, but for all other distributions of NetObjects
Fusion by IBM during the Promotion Period, the Lotus Upfront Royalty will
apply, and no further royalty is owed by IBM for such distribution). IBM is
under no obligation to distribute the full 25,000 copies of NetObjects
Fusion, but, if IBM distributes fewer than the full 25,000 copies of
NetObjects Fusion during the Promotion Period, the foregoing five hundred
thousand dollar ($500,000) deduction is still to be made from the outstanding
prepaid royalties listed in section 5 of Exhibit B of the Agreement."
The terms of the Agreement remain in full force and effect except as
expressly provided above. Please sign below to indicate that the terms of
this letter accurately reflect our agreement for this promotional bundle.
Any copy of this Letter by reliable means (e.g., photocopy or facsimile)
shall be deemed an original.
Sincerely,
/s/ Eileen Rudden
Eileen Rudden
Senior Vice-President
Lotus Development Corporation
ACCEPTED AND ACKNOWLEDGED
By: /s/ Ernest Cicogna
-----------------------
Ernest Cicogna
NetObjects, Inc.
Date: 2-1-99
<PAGE>
EXHIBIT 10.4.14
March 25, 1999
Ms. Eileen Rudden
Senior Vice President
Communications Products Division
Lotus Development Corporation
One Charles Park
Cambridge, MA 02142-1245
Re: Royalty Rate for Promotional Bundles in accordance with Section 5.4 of the
NetObjects License Agreement, dated March 18, 1997, as amended, between
NetObjects and IBM.
Dear Eileen:
Reference is made to the NetObjects License Agreement, dated March 18, 1997, as
amended, between NetObjects, Inc. ("NetObjects") and International Business
Machines Corporation ("IBM"), (the "Agreement"). Capitalized terms used in this
letter ("Letter"), and not otherwise defined, shall have the meaning given to
them in the Agreement. The effective date of this Letter is January 1, 1999.
Pursuant to Section 5.4 of the Agreement, IBM may request a lower royalty for
the Licensed Work when a licensing transaction requires a substantial discount.
IBM and NetObjects agree that during the time period between January 1, 1999 and
December 31, 1999, ("Promotion Period"), a lower royalty described in Section 4
below will apply instead of the per copy Royalty Rate listed in Section 5 of
Exhibit B of the Agreement for any distribution of the Promotional Bundles
(defined in Section 2 below) by IBM and its Subsidiaries.
1. Licensed Works:
NetObjects Fusion (any version shipping during Promotion Period); and
NetObjects ScriptBuilder (any version shipping during Promotion Period).
2. Promotional Bundles: Studio Bundles and Server Bundles and Upgrade Bundles
are, collectively, Promotional Bundles.
a. Studio Bundle means the product tentatively titled "Lotus Domino
Application Studio" consisting of Licensed Works listed in Section 1 above
Bundled with other software, including NetObjects BeanBuilder and Lotus Domino
Designer or any future update, version, successor product or derivative work of
Lotus Domino Designer or NetObjects BeanBuilder.
b. Server Bundle means the Licensed Works listed in Section 1 above
Bundled with NetObjects BeanBuilder and Lotus Domino Server, or any future
update, version, successor product or derivative work of Lotus Domino Server or
NetObjects BeanBuilder.
c. Upgrade Bundle means the Bundle consisting of the software contained
in the Studio Bundle, except Lotus Domino Designer, and that is sold to
customers that had previously
<PAGE>
purchased Lotus Domino Designer or Lotus Domino Server or some other
predecessor products, usually with subscription maintenance.
3. Promotion Period: January 1, 1999 - December 31, 1999
4. Royalty:
a. Studio Bundle
The royalty payment for the Studio Bundle shall be paid against revenue recorded
by IBM in a royalty payment quarter in accordance with Section 5.6 of the
Agreement, as follows:
CHART 1: Cumulative Royalties paid by IBM for Promotional Bundles And
Corresponding Royalty Rate for the Studio Bundle
<TABLE>
<CAPTION>
BAND CUMULATIVE ROYALTY ACCRUED FOR ROYALTY (% OF BUNDLE ASP) FOR
PROMOTIONAL BUNDLES DURING STUDIO BUNDLE
PROMOTION PERIOD
<S> <C> <C>
Band 1. $1 - $1,125,000 9.7%
Band 2. $1,125,000 - $2,000,000 7.56%
Band 3. over $2,000,000 4.05%
</TABLE>
The royalty payment for the Studio Bundle shall be 9.7% of the revenue
received by IBM and its Subsidiaries for the Studio Bundles in a given
calendar quarter, less any returns and promotional discounts ("Bundle ASP")
until $1,125,000 in cumulative royalty payments for Promotional Bundles has
accrued during the Promotion Period ("Band 1"). Thereafter, until an
additional $875,000 in cumulative royalty payments for Promotional Bundles
has accrued (for a total cumulative royalties of $2,000,000) during the
Promotion Period ("Band 2"), the royalty payment for the Studio Bundle shall
be 7.56% of Bundle ASP. For all Studio Bundles sold thereafter, until the
end of the Promotion Period ("Band 3"), the royalty payment for Studio
Bundles will be 4.05% of Bundle ASP. Although royalties are to be paid to
NetObjects on a quarterly basis, the cumulative royalty payments (Band 1,
Band 2 and Band 3) are aggregated across the Promotion Period.
Following each calendar quarter during the Promotion Period, the per unit
royalty accrued for the Studio Bundles distributed during that quarter will
be calculated in accordance with the Per Unit Formula set forth below ("Per
Unit Royalty"). If the Per Unit Royalty accrued for the Studio Bundles
distributed during that quarter is found to vary by more than $7 per unit
from the Comparison Royalty per unit listed in Chart 2 below (for example, in
a given calendar quarter, for Band 1, the Per Unit Royalty is either higher
than $52 or lower than $38), a new mutually-agreed upon royalty rate for the
Studio Bundles will be expressed as a percentage of Bundle ASP and set forth
in a separate letter signed by IBM and NetObjects within two months after the
end of the quarter ("New Royalty"), and the New Royalty will apply for the
Studio Bundles sold during that quarter instead of the royalty listed in
Chart 1
<PAGE>
above. The New Royalty will apply for future quarters during the Promotion
Period, unless otherwise stated in the letter signed by IBM and NetObjects.
If a New Royalty is not set forth in a letter signed by NetObjects and IBM
within the aforementioned two-month period, the New Royalty will be equal to
the Comparison Royalty listed in Chart 2 below. The "Per Unit Formula"
derives the per unit royalty for Studio Bundles by dividing the sum of the
royalties earned by NetObjects for Studio Bundles during the calendar quarter
by the number of units of Studio Bundles distributed by IBM and its
Subsidiaries in that calendar quarter. i.e., Per Unit Royalty for a Studio
Bundle = (Bundle ASP * Royalty listed in Chart 1)/number of units of Studio
Bundles.
CHART 2: Cumulative Royalties paid by IBM for Promotional Bundles And
Comparison Royalty per unit
<TABLE>
<CAPTION>
BAND CUMULATIVE ROYALTY ACCRUED FOR COMPARISON ROYALTY PER UNIT
PROMOTIONAL BUNDLES DURING PROMOTION
PERIOD
<S> <C> <C>
Band 1. $1 - $1,125,000 $45.00
Band 2. $1,125,000 - $2,000,000 $35.00
Band 3. over $2,000,000 $18.75
</TABLE>
b. Server Bundle. The royalty payment for the Server Bundle shall be set forth
in a separate written document signed by IBM and NetObjects, and, like the
Studio Bundle pricing in Section 4a, shall be based upon a percentage of the
revenue received by IBM and its Subsidiaries for the Server Bundle.
c. Upgrade Bundle Royalties: For purposes of this section 5, "Upgrade ASP"
shall be defined as the revenues received by IBM and its Subsidiaries for the
Upgrade Bundles during a calendar quarter, less any returns or discounts. The
"Per Unit Upgrade ASP" shall mean Upgrade ASP for a given calendar quarter
divided by the number of Upgrade Bundles distributed by IBM or its Subsidiaries
during that quarter. The "Per Unit Bundle ASP" shall mean Bundle ASP for a
given calendar quarter divided by the number of Studio Bundles distributed by
IBM or its Subsidiaries during the quarter. The "Upgrade Rate" shall be derived
by multiplying the royalty percentage for Studio Bundles in Chart 1 for the
applicable Band by the quotient of the Per Unit Upgrade ASP divided by the Per
Unit Bundle ASP. The royalties to be paid by IBM to NetObjects for Upgrade
Bundles will be equal to the Upgrade Rate multiplied by Upgrade ASP. An
example of the calculation of the royalty payment for an Upgrade Bundle is
provided below:
Example:
Upgrade Rate = Per Unit Bundle ASP / Per Unit Upgrade ASP * applicable royalty
for Studio Bundles in Chart 1
Royalty Rate for Upgrade Bundles = Upgrade Rate * Upgrade ASP
<PAGE>
Upgrade ASP = $400
Bundle ASP = $550
applicable royalty rate = 7.56%
Upgrade ASP = $200,000.00
Upgrade Rate = $550 / $400 * 7.56 = 10.40%
Royalty for Upgrade Bundles = $200,000.00 * 10.40% = $20,800.00
The royalties paid by IBM or its Subsidiaries to NetObjects for units sold as
part of the "Upgrade Bundle" shall apply towards the aggregate royalties paid by
IBM to NetObjects for the purposes of calculating royalties due as set forth
above in Section 4 or under this section.
5. Marketing: The parties shall develop a joint marketing plan due on the
first customer ship of the Studio Bundle. The Lotus marketing contact is John
Lautenbach and the NetObjects marketing contact is Bernard Desarnauts. On or
before July 1, 1999, the parties shall review the sales of the Studio Bundle and
plan additional marketing efforts, if necessary.
6. Software: Lotus will be responsible for producing the first "Gold" CD for
the Studio Bundle containing NetObjects Fusion 4.1 and 3.01, NetObjects
ScriptBuilder 3.01 and NetObjects BeanBuilder 1.0 and CD artwork ("Gold CD").
Subsequently thereafter, whenever updated versions or releases of the
Licensed Works or updated versions or releases of NetObjects BeanBuilder
become generally available to the public ("Public Availability Date"),
NetObjects shall provide to Lotus a single Gold CD containing the most recent
versions and releases of the Licensed Works listed in Section 1 above along
with the most recent version and release of NetObjects BeanBuilder within
fifteen (15) days of the Public Availability Date. The Gold CDs provided by
NetObjects will contain artwork for each of the Licensed Works and NetObjects
BeanBuilder and will have a unified install experience for the end user which
guides them through installation of the Licensed Works, NetObjects
BeanBuilder and documentation without requiring the user to browse
directories on the Gold CD directly. The Licensed Works and NetObjects
BeanBuilder on the Gold CD will be delivered by NetObjects in such a way that
Lotus will not be required to deliver individual product serial numbers for
the Licensed Works to end users. Lotus will be responsible for duplication
of the Gold CD.
7. Distribution of NetObjects BeanBuilder: Any distribution of NetObjects
BeanBuilder by NetObjects to IBM or by IBM to a third party in conjunction with
Licensed Works as part of Studio Bundle or Server Bundle under this Letter
("BeanBuilder Distribution") shall constitute a distribution of NetObjects
BeanBuilder by IBM (and not a distribution of NetObjects BeanBuilder by
NetObjects) and thus this Letter shall not obligate NetObjects to pay royalties
to IBM for a BeanBuilder Distribution under the agreement number 4998S20724
entered into between IBM and NetObjects, Inc. on September 14, 1998.
<PAGE>
8. Agreement: The terms of the Agreement remain in full force and effect and
shall apply to the Promotional Bundles, except as expressly provided above. In
the event of any conflict between the terms of this letter and the terms of the
Agreement, the terms of this letter shall control with respect to the
Promotional Bundles set forth above.
Please sign below to indicate that the terms of this letter accurately reflect
our agreement for these Promotional Bundles.
Sincerely,
Samir Arora
CEO, NetObjects, Inc.
ACCEPTED AND ACKNOWLEDGED
/s/ Eileen Rudden
Eileen Rudden
Senior Vice-President
Lotus Development Corporation
Date: 3/25/99
<PAGE>
Exhibit 10.16.1
AMENDMENT TO STANDARD INBOUND LICENSE AGREEMENT
This is the First Amendment, effective April 2, 1999 (the "Amendment") to
the Standard Inbound License Agreement, effective September 30, 1998 (the
"Agreement"), between NetObjects, Inc. with an address at 301 Galveston Drive,
Redwood City, California 94063 ("NETOBJECTS") and Novell, Inc. with an address
at 122 East 1700 South, Provo, Utah 84606 ("NOVELL").
In consideration of the covenants and agreements contained herein, the
parties hereto agree to amend the Agreement as follows:
1. NetObjects hereby grants Novell the right to add one of the following
products, at Novell's sole discretion, to the Agreement as a Licensed
Work: NetObjects ScriptBuilder, or NetObjects BeanBuilder ("Additional
Product"). Distribution of the Additional Product shall be solely as
bundled with a single Novell product offering (including without
limitation all versions and releases of the offering, ports to other
platforms, translations, and/or localizations, whether such versions and
releases are created, marketed, distributed, and/or sold by Novell or
third parties), to be determined at Novell's sole discretion, except
that Novell shall be free to distribute updates, upgrades (that are made
Generally Available to customers free of charge), replacement copies,
Error Corrections, and fixes on a stand-alone basis, including
electronic distribution.
2. Paragraph 1 of Section 1 of Exhibit G is hereby deleted in its entirety and
replaced with the following:
Subject to the terms of this Agreement and specifically Section 8.b, Novell
shall pay Company $[***] per each NWSB sold that includes the Licensed Work
(referred to as a "Copy", for the purposes of this Exhibit G) with the
exceptions that Novell shall pay Company $[***] for each of the first 5,791
Copies sold under this Agreement.
Novell shall pay NetObjects One Dollar ($[***]) in consideration for the
licenses granted Novell to the Additional Product and any related
obligations of NetObjects under the Agreement. This payment shall be the
sole and complete consideration required of Novell in connection with the
Additional Product.
The Agreement remains in full force and effect in accordance with its
terms, except as such terms have been expressly modified by this Amendment. In
the event of any conflict between the terms of this Amendment and the terms of
the Agreement, this Amendment shall control. This Amendment constitutes the
entire understanding of the parties with respect to its subject matter and
merges and supersedes all prior communications, understandings and agreements
between the parties concerning the subject matter hereof. This Amendment shall
not be modified except in writing subsequently dated, signed on behalf of each
party by a duly authorized representative.
1
*** Portions of this exhibit have been omitted and filed separately with the
Commission pursuant to a request for confidential treatment under Rule 406.
<PAGE>
Executed by the authorized representatives of the parties as of the date
set forth above.
NETOBJECTS, INC. NOVELL, INC.
BY: /s/ Mark Patton BY: /s/ Mary Susan Espy
------------------------------- -------------------------------
NAME: Mark Patton NAME: Mary Susan Espy
----------------------------- -----------------------------
TITLE: Sr. V.P. Sales & Corp. Marketing TITLE: Dir. Corp. Development
---------------------------- ----------------------------
DATE: 4/2/99 DATE: 4/2/99
----------------------------- -----------------------------
2
<PAGE>
EXHIBIT 10.17
BUILD-IT LICENSE AGREEMENT BETWEEN IBM AND NETOBJECTS
1. Ownership and License.
The software product formerly marketed by Wallop Software, Inc. as "Build-IT
version 2.7 for the Enterprise" ("Software") is owned by International
Business Machines Corporation ("IBM") and is copyrighted and licensed, not
sold.
IBM grants NetObjects, Incorporated ("you") a world-wide, non-exclusive,
non-transferable, copyright license to:
1) reproduce and create derivative works from the object code and source code
versions of the Software; and 2) distribute the Software and derivative works
thereof, in object code only, and only when you provide some "value-add" with
the Software or derivative work thereof ("Bundle"). Examples of value-add
would be other software or hardware products. No license to any other IBM
intellectual property is granted hereunder.
IBM wishes to continually improve upon the Software. You agree to provide to
IBM a copy of any modifications to the Software that you develop or otherwise
receive ("Software Modifications") by sending a copy of all such Software
Modifications, in source code and object code form, to IBM. You hereby grant
to IBM and its subsidiaries a world-wide, non-exclusive, non-transferable,
royalty-free license to execute, reproduce, create derivative works from and
distribute the Software Modifications and derivative works thereof.
2. Termination
IBM may request, upon one hundred twenty (120) days written notice that you
discontinue further distribution of the Software and that you delete or
destroy all copies of the Software you possess except:
a) for one copy that may be kept in your archives for reference purposes; and
b) you may distribute any inventory of Bundles on hand at the time of such
termination, provided you make available to IBM an accounting of such
inventory promptly upon termination; and
c) you may continue to distribute Bundles for a period of up to three
(3) months after termination to fill any orders received in the normal course
of business by you prior to the effective date of termination.
Any licenses to the Software that you granted to your customers prior to such
termination will continue to be in effect following such termination.
3. Warranty Disclaimer and Limitation of Liability
IBM represents and warrants that it has the right to grant the licenses
granted to you hereunder. IBM licenses the Software to you on an "AS IS"
basis, without warranty of any kind. Except as provided above in this Section
3, IBM HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OR CONDITIONS, EITHER
EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OR
CONDITIONS OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. IBM WILL
NOT BE LIABLE FOR ANY DIRECT DAMAGES OR FOR ANY SPECIAL, INCIDENTAL, OR
INDIRECT DAMAGES OR FOR ANY ECONOMIC CONSEQUENTIAL DAMAGES (INCLUDING LOST
PROFITS OR SAVINGS), EVEN IF IBM HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES. IBM will not be liable for the loss of, or damage to, your records
or data, the records or data of any third party, or any damages claimed by
you based on a third party claim.
You agree to distribute the Software and any derivative works thereof under a
license agreement that: 1) is sufficient to notify all licensees of the
Software and any derivatives thereof that IBM and its subsidiaries assume no
liability for any claim that may arise regarding the Software or any
derivative works thereof; and 2) that disclaims all warranties, both express
and implied, from IBM regarding the Software and any derivative works thereof.
<PAGE>
4. Payment
For each Bundle distributed by you, you will pay to IBM ten precent (10%) of
the gross revenue you receive for the Bundle, net of discounts and returns
("Net Revenue"), provided that for each copy of the Software that is
distributed by you, you will pay to IBM a minimum of five dollars ($5.00) and
a maximum of twenty dollars (i.e., if 10% of the Net Revenue is less than
five dollars ($5.00), you will pay to IBM a royalty of five dollars ($5.00),
and if 10% of the Net Revenue is more than twenty dollars ($20.00), you will
pay to IBM a royalty of twenty dollars ($20.00)).
You shall provide to IBM, within forty-five (45) days after the conclusion of
each calendar quarter, a quarterly accounting, and payment based on such
accounting, of all royalties accruing to IBM for all copies of Software
distributed externally or installed internally during such calendar quarter
by you or your distributors.
5. General
All confidential information shall be exchanged under the terms of the
Agreement for the Exchange of Confidential Information between the parties,
dated April 30, 1996.
This Agreement is governed by the laws of the State of New York. You and IBM
each waive its rights to a jury trial in any resulting litigation. Neither
party may assign this agreement without the prior written consent of the
other.
This Agreement does not grant You or your licensees the right to use any IBM
trademark or name.
This Agreement is the only understanding and agreement we have regarding your
use of the Software. It supersedes all other communications, understandings
or agreements we may have had prior to this Agreement. Any reproduction of
this Agreement made by reliable means (for example, photocopy or facsimile)
is an original.
ACCEPTED AND AGREED TO:
NETOBJECTS, INC. INTERNATIONAL BUSINESS MACHINES
CORPORATION
BY: /s/ E. Cicogna BY: /s/ R.G. Anderegg
---------------------------------- -------------------------------
NAME: E. Cicogna NAME: R.G. Anderegg
--------------------------------- -----------------------------
TITLE: VP Finance TITLE: Asst. General Counsel
--------------------------------- -----------------------------
DATE: Feb. 2, 1999 DATE: Feb. 2, 1999
--------------------------------- -----------------------------
<PAGE>
EXHIBIT 10.18
TRADEMARK LICENSE AGREEMENT
THIS TRADEMARK LICENSE AGREEMENT (the "Agreement") is entered into by
and among International Business Machines Corporation, a New York corporation
("IBM"), and NetObjects, Inc., a Delaware corporation ("NetObjects").
WHEREAS, IBM deems it to be in its self interest to obtain a license to
use the "NetObjects" trademark to rebrand IBM's "TopPage" software product,
and any subsequent versions, enhancements and derivative works thereof (the
"Product"), as "NetObjects TopPage"; and
WHEREAS, NetObjects deems it to be in its self interest to grant such a
license to IBM in order to enhance the goodwill and recognition of its
"NetObjects" trademark.
NOW, THEREFORE, in consideration of the mutual promises and agreements
set forth below, IBM and NetObjects agree as follows:
NetObjects hereby grants IBM a non-exclusive, sub-licensable, worldwide
license to use the "NetObjects" trademark and associated artwork attached
hereto as Exhibit 1 (the "Trademark") as part of a new "NetObjects TopPage"
trademark (the "New Trademark"), and to use the New Trademark in conjunction
with the Product including, without limitation, to name and to market the
Product using the New Trademark. NetObjects warrants that it has all
requisite rights in the Trademark to make the forgoing license grant to IBM.
IBM may sublicense its rights under this Agreement so long as IBM enters
into a written agreement with each sublicensee that is at least as protective
of NetObjects' intellectual property and other rights as is this Agreement
and provides payment obligations at least equivalent to those set forth in
this Agreement.
In consideration for the forgoing license grant, for each authorized
copy of the Product branded with the New Trademark ("Rebranded Product")
licensed to an end user by IBM on a stand-alone basis (i.e., without any
other software, hardware or services), IBM will pay NetObjects a royalty of
fifty cents ($0.50).
IBM has no royalty obligation for copies of the Rebranded Product used
by IBM, its subsidiaries or their contractors: internally; for development,
maintenance or support activities, marketing demonstrations, customer testing
or trial periods (including early support, prerelease, or other similar
programs); for training or education; or for backup and archival purposes. In
addition, IBM has no royalty obligation: for copies of the Rebranded Product
used by a licensed end user at home or on travel when such Product is stored
on both the user's primary machine as well as another machine, provided that
the end user is not authorized to actively use the Product on both machines
at the same time; for copies of Rebranded Product licensed or distributed by
or through NetObjects; for copies of Rebranded Product not licensed for full
productive use ("Limited Functionality Copies") so long as such Limited
Functionality Copies have limited time of use or limited functionality; for
copies of the Rebranded Product that become available
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generally to third parties without a payment obligation; for documentation
provided with, contained in, or derived from the Rebranded Product; for
copies of the Rebranded Product sold in combination with other software or
hardware products, or services; for copies of the Rebranded Product which
contain error corrections or enhancements to earlier versions of Rebranded
Product ("Error Correction Copies") so long as such Error Correction Copies
are made available only to previous purchasers of Rebranded Product; for
copies of the Rebranded Product distributed with for warranty replacement
copies of the Rebranded Product; for transfer of copies of Rebranded Product
to, or possession of such copies by, IBM or its subsidiaries from a customer
under an outsourcing arrangement; for any pictorial, graphic, and audiovisual
works (such as icons, screens, sounds, and characters) generated by execution
of the Rebranded Product; and for any programming interfaces, languages or
protocols implemented in Rebranded Product to enable interaction with other
computer programs. Royalties, if any, shall be paid quarterly, and payment
shall be made by the last day of the second calendar month following each
royalty payment quarter.
IBM and NetObjects acknowledge that they are negotiating a separate
agreement (the "IBM Software License Agreement") whereby, in exchange for a
mutually-agreeable royalty payment to IBM, NetObjects will acquire
non-exclusive rights to distribute Rebranded Product. The Parties agree to
use commercially reasonable efforts to negotiate and execute the IBM Software
License Agreement by March 31, 1999. The Parties propose that relevant
terms of the IBM Software License Agreement may include terms related to or
in accordance with the following: IBM and NetObjects will both have the
rights to distribute the Rebranded Product in different geographic regions;
NetObjects will pay IBM a royalty for licensing the Rebranded Product; and
technical support duties of the Parties. Although each party may exchange
written or oral proposals (including, but not limited to the proposal
included in this paragraph), term sheets, draft agreements or other
materials, neither party will have any obligations or liability to the other
unless and until their authorized representatives sign the IBM Software
License Agreement. Exchanged terms are non-binding to the extent they are
not included in the IBM Software License Agreement. Either company can end
these discussions at any time, for any reason, and without liability to the
other. Each company remains free to negotiate or enter into similar
relationships with others. Each of the parties agree to pay all costs it
incurs in connection with the negotiation of the IBM Software License
Agreement. Neither party is authorized to make any commitments or
statements on behalf of the other. Information disclosed during the course of
negotiations shall be considered confidential under, and shall be disclosed
under the terms of a the Agreement for the Exchange of Confidential
Information between the parties, dated April 30, 1996.
The term of this Agreement will be six (6) months from the date the last
party executes it or until the IBM Software License Agreement is executed,
whichever may occur first, and will be automatically renewable for an
additional one (1) year term unless notice of termination is provided at
least thirty (30) days prior to such renewal date. Upon any termination or
expiration of this Agreement, IBM will be allowed to continue use of the New
Trademark, under the terms of this Agreement, until IBM makes generally
available to the public the next release of the Product.
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Each party shall have the right to terminate this Agreement in the event
of a material breach by the other party of its obligations hereunder. Such
termination shall be made by written notice to the breaching party
specifically identifying the breach on which termination is based and shall
become effective sixty (60) days after giving such notice, unless the
breaching party shall have corrected the breach during the sixty (60) day
period. Correction of the breach described in such notice shall render the
notice void.
In the event of any termination or expiration of this Agreement, all
rights and licenses granted to IBM herein shall terminate except that:
a) the termination shall not affect any rights or licenses exercised or
granted by IBM prior to termination under this Section; , and
b) the rights and licenses granted to IBM in this Agreement (and
associated royalty obligations) will continue to permit IBM to provide error
corrections and enhancements to the Rebranded Product, and to fill orders
received before termination or expiration, and to fill new orders to
distribute existing inventory, and to continue distributing the versions and
releases of the Rebranded Product that had already been announced prior to
any termination or expiration of this Agreement. For example, if this
Agreement terminates or expires (i.e., the term ends) on 4/1/99, and prior to
4/1/99, IBM had already announced the following versions and releases of the
Rebranded Products: 1.1, 1.2, 2.1, 2.2, then IBM may continue to distribute
those same versions and releases of the Rebranded Products and will pay the
applicable royalty to NetObjects, but any future versions and releases of
that same product (e.g., 2.3, 3.0) cannot carry the Trademark under the terms
of this Agreement.
This Agreement represents the entire agreement of the parties hereto with
respect to the subject matter hereof, and may be amended only by a writing
signed by both parties hereto. This Agreement shall be governed by the laws
of the State of New York without regard to conflicts of law principles. Both
parties waive the right to a jury in any resulting litigation. Any
reproduction of this Agreement, by reliable means (e.g., photocopy or
facsimile) shall be deemed an original.
IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
representatives to execute this Agreement on their behalf.
INTERNATIONAL BUSINESS
MACHINES CORPORATION NETOBJECTS, INC.
By: /s/ Seita Iida By: /s/ E. Cicogna
-------------------- --------------------
Name: S. Iida Name: E. Cicogna
-------------------- --------------------
Its: ESBU Marketing Its: V.P. Finance
-------------------- --------------------
Date: 1/19/99 Date: 1/19/99
-------------------- --------------------
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Exhibit 10.22
DISTRIBUTION AGREEMENT
This Distribution Agreement dated as of April 21, 1999 (this "Agreement"),
is made by and between Lotus Development Corporation, a Delaware corporation
with its principal place of business at 55 Cambridge Parkway, Cambridge, MA
02142 ("Lotus") and NetObjects, Inc., a Delaware corporation having a principal
place of business at 301 Galveston Drive, Redwood City, CA 94063 ("NetObjects").
BACKGROUND
A. NetObjects has assisted Lotus in the development of a modified version
of Lotus FastSite to be known as "NetObjects Authoring Server Connector for
Business Documents, featuring Lotus FastSite" (the "Lotus Product," as further
defined below).
B. NetObjects has independently developed connector code which is
incorporated into the Lotus Product ("NetObjects Connector Code," as further
defined below).
C. NetObjects desires to obtain a license to duplicate and distribute the
Lotus Product, and Lotus desires to obtain a license to duplicate and distribute
the NetObjects Connector Code as a component of the Lotus Product, pursuant and
subject to the terms and conditions of this Agreement.
Therefore, in consideration of the mutual promises and covenants set forth
below, the parties agree as follows:
SECTION 1
DEFINITIONS
Capitalized terms used herein and not otherwise defined herein are used as
defined in this Section 1.
1.1 "Documentation" shall mean the end user manuals and related
documentation for the Lotus Product or the NetObjects Product, as the case may
be.
1.2 "Lotus Product" shall mean Lotus FastSite for NAS, version 2.0x
(including the version branded as "NetObjects Authoring Server Connector for
Business Documents, featuring Lotus FastSite"), as referenced above, configured
to interoperate correctly with the NetObjects Product, and any successor Point
Releases made commercially available during the Term hereof, together with
applicable Documentation. The Lotus Product is a Document-to-HTML conversion
tool for NetObjects Authoring Suite customers who wish to publish various office
documents, directly in HTML form onto a Website, or directly to the NAS content
manager.
1.3 "NetObjects Product" shall mean the NetObjects Authoring Suite ("NAS")
family of products and any successor Point Releases made commercially available
during the Term hereof, together with applicable Documentation.
1.4 "Point Release" shall mean any successor version of a product that is
identified by a change to one or more digits to the right of the decimal point
in the version number.
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1.5 "NetObjects Connector Code" shall mean the software developed by
NetObjects for the purpose of facilitating integration between Lotus FastSite
and the NetObjects Product, including any new Point Releases, modifications or
ehancements made commercially available by NetObjects during the Term hereof.
SECTION 2
DEVELOPMENT TASKS
2.1 LOTUS PRODUCT. NetObjects provided engineering services and assisted
Lotus in the development of modifications to Lotus FastSite to create the Lotus
Product. Lotus acknowledges and agrees that the development of the Lotus
Product has been sucessfully completed and accepted by Lotus, and that no
further development is required.
2.2 CONNECTOR CODE. In connection with the development of the Lotus
Product, NetObjects independently developed the NetObjects Connector Code which
is incorporated into the Lotus Product. Lotus acknowledges and agrees that the
development of the NetObjects Connector Code has been sucessfully completed and
accepted by Lotus, and that no further development is required.
2.3 PROPRIETARY RIGHTS. Each party shall retain all title and interest in
any intellectual property created or developed by it except to the extent
otherwise expressly provided in this Agreement. It is expressly agreed however,
that as provided in Section 6.1 hereof, all modifications to Lotus FastSite
referenced in Section 2.1 hereof shall be deemed for all purposes to be works
made for hire and shall be the sole property of Lotus, excluding modifications,
if any, to the NetObjects Connector Code.
SECTION 3
LICENSES
3.1 LICENSE TO DISTRIBUTE LOTUS PRODUCT. Lotus hereby grants to NetObjects
during the Term hereof a worldwide, non-exclusive, non-transferable right and
license, subject to the terms and conditions hereof, to copy, modify,
manufacture and distribute the Lotus Product, in object code form only.
NetObjects may distribute the Lotus Product directly to customers or through
NetObjects' normal distribution channels.
3.2 LICENSE TO DISTRIBUTE NETOBJECTS CONNECTOR CODE. NetObjects hereby
grants to Lotus a worldwide, royalty-free, non-exclusive, non-transferable,
perpetual right and license, subject to the terms and conditions hereof, to
copy, manufacture and distribute the NetObjects Connector Code, in object code
form only, and only bundled with Lotus FastSite. Lotus may distribute the
NetObjects Connector Code as incorporated into the Lotus Product directly to
customers or through Lotus' normal distribution channels.
3.3 UPGRADES. Lotus hereby grants to NetObjects a worldwide,
non-exclusive, non-transferable right and license to use, copy, manufacture and
distribute on a stand-alone basis any bug-fixes, patches, maintenance releases
or upgrades (collectively "Upgrades") of the Lotus Product provided by Lotus to
NetObjects during the Term hereof, provided that such distribution
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shall be limited to customers who have previously acquired valid licenses to
the Lotus Product. NetObjects may distribute Upgrades directly to customers
or through NetObjects' normal distribution channels, including electronic
distribution channels.
3.4 LOTUS SOFTWARE AGREEMENT. The Lotus Product sold and distributed by
NetObjects under this Agreement shall be subject to the terms and conditions of
the applicable standard Lotus License Agreement, copies of which will be
provided to NetObjects upon request. All end user licenses shall be between
Lotus and the end users.
3.5 LICENSE TO REPRODUCE LOTUS MATERIALS FOR DISTRIBUTION. Lotus hereby
grants to NetObjects a worldwide, non-exclusive, non-transferable right and
license, subject to the terms and conditions hereof, to reproduce and
manufacture any and all artwork, marketing, promotional and other collateral
materials provided by Lotus to NetObjects for the purpose of marketing and
promoting the Lotus Product and to distribute such materials in connection with
the marketing or promotion thereof.
3.6 DOCUMENTATION. Within ten (10) business days after the date of this
Agreement, Lotus will deliver its Documentation for the version of the Lotus
Product distributed by Lotus. Within forty-five (45) business days after the
date of this Agreement, NetObjects will create and deliver to Lotus a separate
document describing the interaction of the Lotus Product with the NetObjects
Product. The source for such separate document or any other on-line help
document created by NetObjects will be provided to Lotus in Rich Text (RTF)
format.
3.7 MASTER COPIES. Within ten (10) business days after the date of this
Agreement: (i) Lotus will deliver to NetObjects one (1) master copy of the Lotus
Product, in object code format only, for NetObjects use in exercising its
duplication and distribution rights under this Agreement; and (ii) NetObjects
will deliver to Lotus one (1) master copy of the NetObjects Connector Code, in
object code format only, for Lotus' use in exercising its duplication and
distribution rights under this Agreement.
SECTION 4
ROYALTIES; PAYMENT
4.1 ROYALTY. NetObjects will pay Lotus a royalty for each copy of the
Lotus Product distributed or sold by NetObjects, including maintenance releases
and upgrades. Such royalty will be equal to twenty-five percent (25%) of ASP
(as defined in this Section 4.1) for the first 5,000 units distributed, and
twenty percent (20%) of ASP for units in excess of 5,000 distributed during
each 12-month term of this agreement, provided that in no event shall the
royalty be less than fifteen dollars ($15) per copy and that there will be no
minimum royalty for distributions by NetObjects of updates, upgrades and error
correction copies of the Lotus Product made available free of charge only to
those users who have previously purchased a licensed copy of the Lotus Product.
For purposes of this Agreement, "ASP" or "Actual Selling Price" shall mean the
total revenue collected directly or indirectly by NetObjects, net of actual
returns (not to exceed 15 % annually, as determined after the end of each one
year period), for sales of the Lotus Product.
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4.2 EXCEPTIONS. NetObjects will not owe any royalty for copies of the
Lotus Product used internally by NetObjects, or used in sales training,
evaluations, trials, and demonstrations, or for distribution by Lotus to Lotus
Business Partners under the terms of the Lotus Business Partner Agreement,
provided that the number of royalty-free copies used internally or distributed
by NetObjects for sales, marketing and trial purposes shall not exceed 500 in
the aggregate.
4.3 PAYMENT TERMS.
(a) Royalties shall be due and payable net forty-five (45) days after each
calendar quarter during the Term hereof. Each quarterly payment shall be
accompanied by a report (in electronic form), copies of which shall be provided
to the Lotus FastSite group and the Lotus OEM Sales group (address noted in (c)
below), detailing the number of units of the Lotus Product sold by region (i.e.
North America, Latin America, Asia/Pacific, or Europe/Middle-East/Africa), to
the extent such information is reasonably available, during such calendar
quarter.
(b) The royalties payable hereunder do not include sales, use,
withholding, excise or other taxes, fees, duties or tariffs now or hereafter
imposed on the production, storage, transportation, import, export, licensing or
use of the Lotus Product. Such charges (if any) shall be paid by NetObjects to
the applicable taxing authority or, in lieu of payment of any tax, NetObjects
shall provide a valid exemption certificate acceptable to Lotus and the
applicable taxing authority.
(c) Payments shall be sent to:
Lotus Development Corporation
55 Cambridge Parkway
Cambridge, MA 02142
Attn: Mike Cloukey
4.4 RECORDS AND AUDIT. NetObjects shall keep accurate records which are
sufficient for the computation of payments due under this Agreement and, with
thirty (30) days' advance notice, shall make such records reasonably available
to Lotus' independent auditors, which shall be an accounting firm of nationally
recognized standing, at the place or places where such records are customarily
kept, for inspection during normal business hours, subject to appropriate
nondisclosure obligations. Such audits shall not occur more often than once in
a twelve month period. NetObjects shall reimburse Lotus for any reasonable,
documented, out-of-pocket expenses if such inspection reveals that the payments
made by NetObjects during the period reviewed aggregated less than 90% of the
payments required to be made by NetObjects during such period.
SECTION 5
MARKETING; CUSTOMER SUPPORT; LOCALIZATION
5.1 MEDIA, PACKAGING, COLLATERAL MATERIAL AND PRICING. NetObjects shall
be responsible for the selection of the media to contain the Lotus Product, (2)
the design of the packaging for the Lotus Product, (3) all collateral and
related materials to be included in the Media with the
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Lotus Product, and (4) the pricing of the Lotus Product, provided that use of
the Lotus Trademarks (as Lotus Trademarks are defined in Section 5.2 below)
by NetObjects shall adhere to Trademark Guidelines (as Trademark Guideliens
are defined in Section 5.2 below). In the event and upon notification by
Lotus that NetObjects' use of Lotus Trademarks does not adhere to Trademark
Guidelines, NetObjects shall make such corrections as necessary in its use of
Lotus Trademarks so as to be in compliance with Trademark Guidelines.
NetObjects acknowledges that Lotus will continue to manufacture, market and
sell a Lotus-branded version of the Lotus Product, either as a standalone
product or bundled with other Lotus or third-party products. At its option,
NetObjects may elect to purchase media containing the Lotus Product
manufactured by Lotus at Lotus' cost (including all shipping and handling
costs) plus one percent (1%), provided that Lotus is given 30-days prior
written notice.
5.2 NO JOINT MARKETING. Each party shall be responsible for its own
marketing and sales activities. Neither party shall make any representations or
statements regarding the software products of the other party which are in
substance different from those contained in a party's sales literature and
advertising copy, without such party's prior review and written approval.
NetObjects may use the "Lotus" and "Lotus Fastsite" logos and trademarks ("Lotus
Trademarks") in its packaging, advertising and sales literature, provided that
such names are used in a manner consistent with Lotus' then-current trademark
usage policy ("Trademark Guidelines").
5.3 QUALITY CONTROL. During the Term of this Agreement, Lotus shall
apprise NetObjects of its reasonable marketing guidelines and quality standards
as in effect from time to time. Thereafter, Lotus may from time to time request
and inspect copies of marketing materials reproduced by NetObjects to confirm
NetObjects' compliance with such guidelines and standards.
5.4 NO OTHER OBLIGATION TO MARKET. Lotus shall have no obligation to
market or distribute the Lotus Product and nothing contained in herein shall be
deemed to impair or inhibit Lotus' right to develop and/or distribute similar or
competitive technology as that contained in the NetObjects Product.
5.5 SUPPORT. NetObjects will provide Level 1 and Level 2 product support
(as defined in Exhibit F of "NetObjects License Agreement: IBM Agreement Number
L97063" in reciprocal fashion) for the Lotus Product. NetObjects will refer
customer problems with the Lotus Product which NetObjects cannot resolve to
Lotus for Level 3 support. Lotus will provide training, Knowledge Base access,
etc. to assist NetObjects in performing its support obligations hereunder.
NetObjects and Lotus will jointly develop a process for escalation of Level 3
issues and bug reporting as specified in said Exhibit F.
5.6 LOCALIZATION. Lotus will be responsible for enablement and
localization/translation of the Lotus Product ( excluding, however, the
NetObjects Connector Code) to the extent that Lotus performs such
localization/translation for its own purposes. Currently, FastSite is enabled
for multi-byte characters and can convert documents of a multibyte nature, but
its user interface is available only in English. Lotus shall provide to
NetObjects master copies of localized/translated versions of the Lotus Product
when ready for commercial shipment, and such localized/translated versions shall
be deemed to be "Lotus Product" for the purposes of this Agreement.
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SECTION 6
PROPRIETARY RIGHTS; CONFIDENTIALITY
6.1 PROPRIETARY RIGHTS.
(a) Each party shall fully and exclusively retain all of its proprietary rights
to its technology, including, without limitation, patent, copyright, trade
secret and all other proprietary rights, and except for the licenses
specifically granted herein neither party by virtue of this Agreement shall
acquire any rights to the other party's technology. Lotus shall be the
exclusive owner of all intellectual property rights in and to Lotus Product
including all right, title and interest in and to the development work performed
by NetObjects under this Agreement to modify and/or enhance the Lotus Product.
NetObjects shall be the exclusive owner of all intellectual property rights in
and to the NetObjects Product, the NetObjects Connector Code and the
documentation created by NetObjects pursant to Section 3.6. Each party shall
take such acts and execute such documents as may be reasonably necessary to
create or perfect the other parties proprietary rights as provided herein.
(b) Except as expressly and unambiguously provided in this Agreement and
except with respect to its own software to which it retains full and exclusive
proprietary rights, neither party shall (i) resell, copy, distribute, transfer,
loan, sublicense or make available to others the other party's software, or (ii)
alter, modify or adapt the other party's software, including but not limited to
translating, decompiling, disassembling, reverse engineering or creating
derivative works; furthermore, neither party shall remove, cover or alter any
copyright or other proprietary rights notice.
6.2 NO OTHER LICENSES. Except as expressly set forth in this Agreement,
neither party grants to the other any rights or licenses in or to any trademark,
copyrighted or patented work, or other intellectual property it possesses.
SECTION 7
WARRANTIES; LIMITATION OF REMEDIES AND LIABILITIES
7.1 LIMITED WARRANTY. Lotus shall provide, in its Software Agreement, its
standard end user warranty for the Lotus Product, but such warranty shall apply
and be enforceable only by customers holding valid licenses. EXCEPT AS
SPECIFICALLY SET FORTH IN THE PRECEDING SENTENCE OR OTHERWISE EXPRESSLY STATED
HEREIN, NEITHER PARTY MAKES ANY GUARANTEE, WARRANTY OR REPRESENTATION, EITHER
EXPRESSED OR IMPLIED, WITH RESPECT TO ITS SOFTWARE (INCLUDING, WITHOUT
LIMITATION, ANY WARRANTY AS TO TITLE, QUALITY, PERFORMANCE, MERCHANTABILITY, OR
FITNESS FOR A PARTICULAR PURPOSE), NOR WITH RESPECT TO ANY OTHER MATTER SET
FORTH IN THIS AGREEMENT.
7.2 LIMITATION OF LIABILITY. NEITHER PARTY SHALL BE LIABLE TO THE OTHER
FOR SPECIAL, INDIRECT, INCIDENTAL, LOST PROFIT, COVER, TORT OR CONSEQUENTIAL
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DAMAGES IN CONNECTION WITH THIS AGREEMENT, EVEN IF AWARE OF THE POSSIBILITY OF
SUCH DAMAGES.
7.3 EXCEPTIONS. None of the foregoing limitations shall apply to the
liability of a party for any damages recoverable under copyright, patent,
trademark or trade secret law for the violation or infringement of the other
party's copyrights, patent rights, trademarks or other proprietary rights, or to
the indemnification obligations of the parties set forth in Section 8 below.
SECTION 8
INDEMNIFICATION
8.1 INDEMNITY BY LOTUS. Lotus shall indemnify and hold NetObjects
harmless from and defend any claim, suit or proceeding, and pay any settlement
amounts or damages finally awarded by a court of competent jurisdiction, arising
out of claims by third parties that the Lotus Product infringes any United
States, Canadian, EU or Japanese copyright, patent, trade secret or trademark of
such third party or parties.
8.2 INDEMNITY BY NETOBJECTS. NetObjects shall indemnify and hold Lotus
harmless from and defend any claim, suit or proceeding, and pay any settlement
amounts or damages finally awarded by a court of competent jurisdiction, arising
out of claims by third parties that the NetObjects Product infringes any United
States, Canadian, EU or Japanese copyright, patent, trade secret or trademark of
such third party or parties.
8.3 CONDITIONS TO INDEMNIFICATION. The obligations to defend and to
provide indemnification under this Section 8 are subject to the following
conditions:
(i) The party claiming indemnification shall promptly notify the party
having the duty of indemnification in writing of any indemnifiable claim or
action for which indemnification is sought (provided that any failure to so
notify shall not limit the indemnifying party's indemnification obligation
except if and to the extent such failure materially prejudiced the indemnifying
party's ability to defend against any claim, suit or other proceeding).
(ii) The indemnifying party shall, at its option, have sole control of the
defense of any such claim or action and all negotiations for any settlement or
compromise, provided that the party seeking indemnification shall have the right
to participate in such defense at its own cost and expense.
(iii) Following notice of any action against the indemnified party based
on a claim that a indemnifying party's product is infringing, the indemnifying
party may at its option (A) procure for the indemnified party the right to
continue using such infringing the indemnifying party's software, (B) replace
such software with a non-infringing product with comparable features and
functionality, (C) modify such software to make it non-infringing, or (D)
terminate this Agreement, provided that this Section 8 will survive such
termination.
(iv) Neither party shall be liable for any claim of infringement based on
the other party's modification to its software, the combination or use of a its
software with any product, program or data not provided by it, if and to the
extent such claim would not have arisen absent such
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modification or combination; or any claim that would have been avoided by use
of the most recent version of the party's software then licensed for use and
distribution by the other party.
SECTION 9
CONFIDENTIALITY
9.1. CONFIDENTIAL INFORMATION. "Confidential Information" consists of (i)
information disclosed by either party in connection with this Agreement, whether
in tangible or intangible form, that, in the case of material in tangible form,
is legended as confidential, or if orally disclosed, is identified at the time
of disclosure as proprietary or confidential; (ii) the parties' business and
marketing plans with respect to their products, including without limitation,
the Lotus Product, NetObjects Authoring Server Suite and NetObjects Connector
Code ; and (iii) the terms and conditions of this Agreement. Confidential
Information does not include information that (a) is already known to the
receiving party without restriction on use or disclosure at the time of
communication to the receiving party; (b) is or becomes publicly known through
no wrongful act or inaction of the receiving party; (c) has been rightfully
received from a third party authorized to make such communication, without
restriction on use or disclosure; (d) has been independently developed by the
receiving party; or (e) is required to be disclosed by the receiving party
pursuant to applicable laws or regulations.
9.2. RESTRICTIONS. Except as expressly authorized in writing by the other
party, neither Licensor nor NetObjects shall disclose to any person or entity
any Confidential Information of the other party except as reasonably necessary
to perform and exercise its rights and obligations hereunder. Neither Licensor
nor NetObjects shall disclose any Confidential Information to any person or
entity that has not agreed in writing to keep such information confidential.
Any reproduction or copy of Confidential Information shall carry the same
proprietary and/or confidential notices and legends that appear on the original.
9.3. INJUNCTIVE RELIEF. The parties agree that any breach of the
restrictions contained in this Section 9 may cause irreparable harm to the
non-breaching party, entitling such party to seek injunctive relief for such
breach in addition to all other legal remedies with respect thereto.
SECTION 10
TERM AND TERMINATION
10.1 TERM. This Agreement shall have an initial term of one (1) year,
commencing on the date first above written. Upon expiration of such initial
term, this Agreement shall automatically renew for successive one-year renewal
terms unless earlier terminated. Such initial term and renewal terms (if any)
are referred to collectively herein as the "Term."
10.2 TERMINATION FOR BREACH. Either party may terminate this Agreement by
giving written notice to the other party if such other party fails to perform or
comply with this Agreement or any provision hereof in any material respect.
Such termination shall be effective thirty (30) days after written notice from
the non-breaching party unless the occurrence giving rise to the right of
termination and its adverse effects have been cured to the reasonable
satisfaction of the non-breaching party prior to the expiration of such thirty
(30) day period.
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10.3 TERMINATION WITHOUT CAUSE. Either party may terminate this
Agreement as of the end of the then-current Term by providing the other party
with not less than thirty (30) days prior written notice.
10.4 BANKRUPTCY. This Agreement shall terminate automatically if (i) a
party files or has filed against it a petition under the U.S. Bankruptcy Code or
any other law relating to insolvency or the protection of creditors, provided
that, in the case of an involuntary petition, such petition has not been stayed
or dismissed within sixty (60) days following the filing thereof, (ii) a party
makes an assignment for the benefit of creditors or (iii) a receiver or similar
official is appointed for all or a substantial portion of a party's assets.
10.5 END USERS. Notwithstanding anything to the contrary contained
herein, the expiration or earlier termination of this Agreement shall have no
effect on the rights of end-users who have purchased the Lotus Product from
NetObjects, and NetObjects and its distributors, OEMs and dealers shall have
the right to sell copies of the Lotus Product manufactured and packaged prior
to the effective date of such termination, subject to the provisions of this
Agreement.
10.6 REMEDIES. Termination shall not limit or restrict any of the
remedies otherwise available to the parties hereunder in equity or at law.
SECTION 11
GENERAL
11.1 NO AGENCY. The parties hereto are independent contractors. This
Agreement shall not create an agency, partnership, joint venture or any other
form of legal association. Neither party shall have the right to bind the other
to any agreement with a third party nor to represent itself as an agent, partner
or joint venturer of the other or to incur any obligation or liability on behalf
of the other party.
11.2 NOTICES. All notices which any party may be required or desire to
give to any other party shall be given by personal service (by hand or next-day
courier service), registered mail or certified mail to the other party at its
address set forth at the beginning of the Agreement and shall be deemed
effective upon delivery by personal service or five days after the date of
mailing by registered or certified mail.
11.3 FORCE MAJEURE. Neither party shall be liable for damages for any
delay or failure of delivery arising out of causes beyond its reasonable control
and without its fault or negligence, including, but not limited to, acts of
civil or military authority, fires, riots, wars, or embargoes, where such party
provides the other party prompt notice of the event causing its delay or failure
of delivery and where such party uses reasonable and diligent efforts to remove
such causes of non-performance.
11.4 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of The Commonwealth of Massachusetts, excluding its
conflicts of laws rules.
9
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11.5 EXPORT CONTROLS. Each party shall comply with all applicable export
control laws and regulations.
11.6 MERGER AND AMENDMENTS. This Agreement constitutes the entire
agreement and understanding between the parties relating to the subject matter
hereof and supersedes all prior agreements or negotiations, written or oral.
This Agreement may not be amended or modified except in writing and executed by
both parties. No waiver shall be effective unless in writing and duly executed
by the party granting the waiver.
11.7 SEVERABILITY. If any provisions of this Agreement are held by a court
of competent jurisdiction to be illegal, invalid or unenforceable, the remaining
provisions shall continue in full force and effect.
11.8 ASSIGNMENT.
(a) This Agreement shall be binding on the parties and their successors and
assigns. Except as specifically provided in this Agreement, neither party may
assign this Agreement or any license granted hereunder without the prior written
consent of the other party, which consent shall not be unreasonably withheld.
(b) The foregoing notwithstanding, either party may assign this Agreement
to any entity that, directly or indirectly, controls it, it controls, or that it
is under common control with, or (ii) any purchaser or successor to a product
line included within the Lotus Products or NetObjects Products, as the case may
be.
11.9 SURVIVAL. The provisions of Sections 4, 6, 7, 8, 9, 10 and 11 hereof
shall survive the expiration or earlier termination of this Agreement in
accordance with their respective terms.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed by its duly authorized representatives as of the date first above
written.
LOTUS DEVELOPMENT CORPORATION NETOBJECTS, INC.
By: /s/ Jim Burnham By: /s/ Morris Taradalsky
------------------------------------ -------------------------------
Title: General Manager, Lotus SmartSuite Title: EVP
--------------------------------- ----------------------------
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Exhibit 10.23
PROMISSORY NOTE
$2,000,000 DATE: April 23, 1999
FOR VALUE RECEIVED, NETOBJECTS, INC., a Delaware Corporation (the "Obligor")
hereby unconditionally promises, on behalf of itself, its successors and
assigns, to pay to the order of INTERNATIONAL BUSINESS MACHINES CORPORATION,
a New York Corporation (the "Holder"), at the office of the Holder at Route
100, Somers, New York 10589 the principal sum of two million dollars
($2,000,000), together with interest from the date hereof on the outstanding
balance thereof at a rate per annum equal to 10%.
Principal and interest shall be payable in lawful money of the United States
at the aforesaid office of the Holder in the following manner:
On June 23, 1999, the Obligor shall make a payment of principal in the full
amount of $2,000,000, together with interest on the principal, as provided
for above, for the period from April 23, 1999 to and including June 22,
1999.
The Obligor further agrees that interest shall accrue on all principal and
(to the extent permitted by law) interest not paid when due, from the due
date until paid in full, at a rate per annum equal to 10%, and shall be
payable from time to time on demand by Holder.
EVENTS OF DEFAULT. Any one or more of the following events shall constitute
an "Event of Default" by Obligor under this Note: (a) Obligor fails to
perform or observe any term, condition or covenant, or breaches or permits a
breach of any warranty or representation contained in this Note; (b) Obligor
fails to pay any of the obligations hereunder when due and payable or
declared to be due and payable; (c) the Obligor goes into liquidation either
voluntarily or under an order of a court of competent jurisdiction; (d) the
Obligor becomes bankrupt or insolvent or becomes subject to the provisions of
the Federal Bankruptcy Code, state insolvency laws or any act or code for the
benefit of creditors; (e) any receiver is appointed of or for any of the
properties, assets, business or undertakings, or any part thereof, of the
Obligor; or (f) the Obligor is in default, with or without the passage of
time and/or giving of notice, under any agreement, contract, document,
promissory note or other instrument entered into with or for the benefit of
the Holder, for any reason whatsoever. If any Event of Default shall occur
and be continuing, then the entire unpaid principal balance of this Note,
together with interest accrued hereon and with all other sums due or owed by
the Obligor hereunder shall, at the option of the Holder and without notice
to the Obligor, become due and payable immediately (after such default and
acceleration and until the Obligor's indebtedness to the Holder is paid in
full, including the period following entry of any judgment) together with an
attorney's fee for collection equal to ten percent (10%) of the total amount
then due by Obligor to Holder, and payment of the same may be enforced and
recovered by the entry of judgment on this Note and the issuance of execution
thereon.
<PAGE>
WAIVER OF PRESENTMENT/NOTICE. Except as specifically required herein, the
Obligor (and all endorsers, sureties and guarantors) waive presentment of
payment, demand, notice of demand, notice of nonpayment or dishonor, protest
and notice of protest of this Note, and all other notice in connection with
the delivery, acceptance, performance, default, or enforcement of the payment
of this Note, the liability of the Obligor hereunder shall be absolute and
unconditional and shall not be affected in any manner by an indulgence,
extension or time, renewal, waiver or modification granted or consented to by
the Holder.
GENERAL.
(a) The words "Holder" and "Obligor" wherever occurring herein shall be
deemed and construed to include the respective successors and assigns of the
Holder and the Obligor; provided, however, the Obligor may not assign this
Note without the Holder's prior written consent.
(b) This Note shall be construed according to and governed by the laws of
the State of New York, without regard to the principles of conflicts of laws
thereof. Each of the parties irrevocably waives any right to trial by jury
in any legal proceeding arising out of or related to this Note. The parties
agree to submit to the exclusive jurisdiction and venue of the Federal or
State courts of New York, County of Westchester, to resolve any and all
issues that may arise out of or relates to this Note.
IN WITNESS WHEREOF, the Obligor has duly executed this Note the day and year
first above mentioned.
THE OBLIGOR:
NETOBJECTS, INC.
BY: /s/ E. J. Cicogna
----------------------------
NAME: E. J. Cicogna
----------------------------
TITLE: VP Finance
----------------------------
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EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
NetObjects, Inc.
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the Prospectus.
Our report dated December 21, 1998 contains an explanatory paragraph that states
that the Company has suffered recurring losses from the operations and has a net
capital deficiency, which raise substantial doubt about its ability to continue
as a going concern. The Consolidated Financial Statements and Financial
Statement Schedules do not include any adjustments that might result from the
outcome.
Mountain View, California
February 4, 1999
