As filed with the Securities and Exchange Commission on June 6, 2000
Registration Statement No. 333-36990
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT
ON
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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NETOBJECTS, INC.
(Exact name of registrant as specified in its charter)
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Delaware 94-3233791
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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(Primary Standard Industrial
Classification Code Number)
301 Galveston Drive
Redwood City, CA 94063
(650) 482-3200
(Address, including zip code and telephone number, including area code,
of registrant's principal executive offices)
Mr. Samir Arora
NetObjects, Inc.
301 Galveston Drive
Redwood City, CA 94063
(650) 482-3200
(Name, address, including zip code, and telephone number, including area code,
of agent for service) Copies to:
Alan B. Kalin
Stephen P. Charbonnet
Maha H. Khalaf
McCutchen, Doyle, Brown &
Enersen, LLP
3150 Porter Drive
Palo Alto, California 94304
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Approximate date of commencement of proposed sale of the
securities to the public:
as soon as practicable following the effective date
of this registration statement.
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If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
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, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. |X|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) 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(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 delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
This Registration Statement is filed as Pre-Effective Amendment No. 1
to the Registrant's Form S-1 Registration Statement No. 333-36990 filed on May
12, 2000. All filing fees were paid with the earlier Registration Statement.
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 the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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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.
Subject to completion, dated June __, 2000
NETOBJECTS, INC.
1,780,815 Shares
Common Stock
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The stockholders of NetObjects, Inc. listed below are offering and selling
1,780,815 shares of common stock, under this prospectus. All of the selling
stockholders purchased their shares from us under the terms of a Plan and
Agreement of Reorganization dated October 4, 1999. Some or all of the selling
stockholders expect to sell their shares. The selling stockholders may offer
their shares of common stock through public or private transactions, on or off
the United States exchanges, at prevailing market prices, or at privately
negotiated prices. The common stock is listed on the Nasdaq National Market and
trades on this stock exchange with the symbol "NETO." On June __, 2000 the
closing price of one share of common stock, as quoted on the Nasdaq National
Market was ____.
Investing in our common stock involves a high degree of risk. See "Risk Factors"
beginning on page 3.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of anyone's investment in these
securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The selling stockholders may be deemed to be underwriters within the meaning of
the Securities Act and any profits realized by them may be deemed to be
underwriting commissions. Any broker-dealers that participate in the
distribution of common stock also may be deemed to be "underwriters" as defined
in the Securities Act, and any commissions or discounts paid to them, or any
profits realized by them upon the resale of any securities purchased by them as
principals, may be deemed to be underwriting commissions or discounts under the
Securities Act. The sale of the common stock is subject to the prospectus
delivery requirements of the Securities Act.
__________, 2000
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TABLE OF CONTENTS
Page
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Prospectus Summary ...................................................... 1
Risk Factors ............................................................ 3
Use of Proceeds ......................................................... 13
Dividend Policy ......................................................... 13
Selected Consolidated Financial Data .................................... 14
Management's Discussion and Analysis of Financial Condition
and Results of Operations .......................................... 16
Business ................................................................ 34
Management .............................................................. 47
Certain Relationships and Related Transactions .......................... 57
Principal Stockholders .................................................. 61
Selling Stockholders .................................................... 63
Plan of Distribution .................................................... 65
Description of Capital Stock ............................................ 66
Legal Matters ........................................................... 69
Experts ................................................................. 69
Additional Information .................................................. 69
Incorporation of Certain Information by Reference ....................... 69
Index to Financial Statements ........................................... F-1
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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 subsidiaries, NetObjects Ltd. and Sitematic Corporation.
NetObjects
NetObjects is a leading provider of software, solutions, and services
that enable small businesses to build, deploy and maintain websites, conduct
on-line e-business, and enable large enterprises to effectively create and
manage corporate intranets. Our e-business solutions address the growing
challenges faced by businesses in capturing the explosive growth of the Internet
as an on-line business medium to publish content, deploy web applications, and
manage their e-business operations. In 1996, we pioneered the website building
product category with the introduction of our award-winning flagship product,
NetObjects Fusion, an easy-to-use desktop software application for building
small business websites. We have also built popular on-line resources, including
NetObjects.com and eFuse.com, that target communities of business users and
provide sources of information, products and services for building websites. In
October 1999, we acquired Sitematic Corporation, an application service
provider, or ASP. In December 1999, we combined our on-line resources and
launched GoBizGo.com a web application services site for small businesses. In
March 2000, we began commercial delivery of NetObjects Collage, which offers an
integrated content management environment for teams of web contributors and
developers, while providing centralized control over the site production effort.
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(R), NetObjects Fusion(R), NetObjects Collage(TM), NetObjects
TeamFusion(R), TeamFusion(TM), NetObjects Fusion Personal Edition(TM),
SiteStructure Editor(TM), PageDraw(R), SiteStyles(R), SiteStyles Manager(TM),
SiteProducer(TM), SitePublisher(TM), StyleObject(TM), WebDraw(TM), WebReach(TM),
Efuse.com(TM), Everywhere Html(TM), ESiteStore.com(TM), EScriptZone.com(TM),
PublishSet(TM), AutoSites(TM), The Web Needs You(TM) and NetObjects Collage(TM)
are our registered and unregistered trademarks, service marks and trade names.
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.
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THE OFFERING
Common stock offered by the
selling stockholders...................... 1,780,815 shares
Plan of Distribution ..................... The selling stockholders may
sell their shares on any of
the securities exchanges where
the common stock is listed and
traded; in the
over-the-counter market or in
other transactions; in
connection with short sales of
the shares; by pledge to
secure debts and other
obligations; in connection
with the writing of non-traded
and exchange-traded call
options, in hedge transactions
and in settlement of other
transactions in standardized
or over-the-counter options;
or in combination of any of
the above transactions.
Use of proceeds........................... We will receive none of the
proceeds of the offering.
Nasdaq National Market symbol............. "NETO"
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 below and elsewhere in this prospectus. We
undertake no obligation to update publicly any forward-looking statements for
any reason, even if new information becomes a available or other events occur in
the future.
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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. Any of the following risks could cause
the trading price of our common stock to decline substantially. If any of the
following risks actually occur, our business, results of operations and
financial condition could suffer significantly. In any such case, the market
price of our common stock could decline, and you may lose all or part of your
investment.
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, 2000, we had an accumulated deficit of
approximately $87.8 million. 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 principal products, NetObjects
Fusion and NetObjects Collage, and substantially increase our revenues from
professional and on-line services.
We expect to raise additional capital because our current cash position and cash
flow are unlikely to meet our operating requirements and anticipated growth
significantly beyond the end of the fiscal year ending September 30, 2000.
We believe that our current cash and cash equivalents are adequate to
finance our current level of operations only through the end of the current
fiscal year and for some period thereafter, depending upon several factors,
including the impact of a change in our rate of growth, the effect of any
acquisitions that we may do and the length of our accounts receivable
collections cycle. During the next two quarters, we may raise additional capital
to fund future operations through the sale of additional equity securities, new
borrowings, or some combination of debt and equity. We have not decided upon the
timing, form or amount of capital that we will seek and have no assurances or
commitments that we will succeed in raising additional capital. If we fail to
raise additional capital to fund future operations, our business, financial
condition and results of operations will be materially and adversely affected,
and our stock price probably will decline substantially.
Our relationship with International Business Machines Corporation, or IBM, has
changed substantially over time. While IBM controls us, it is under no
obligation to continue any business relationships with us, and IBM is allowed to
compete with us or act in a manner that is disadvantageous to us.
Although we have a number of license and reseller agreements or
arrangements with IBM, many of which are subject to the terms of our 10-year
license agreement that expires in April, 2007, we have no commitments for future
revenues from IBM. Revenues from IBM have represented a substantial portion of
our total revenues, representing approximately 29% and 36% of our total revenues
for the year ended September 30, 1999 and 1998, respectively, as well as
approximately 20% of our total revenues for the six months ended March 31, 2000.
We have no future revenue commitments from IBM and its subsidiary Lotus
Development Corporation, or Lotus. The amount of revenues we earn from IBM and
Lotus may fluctuate substantially from quarter-to-quarter. Although we expect to
continue licensing our products to IBM and Lotus as OEM resellers, we believe
that revenues from IBM will comprise a substantially lower percentage of our
total revenues in the future than they have during the fiscal year ended
September 30, 1999. During the quarter ended March 31, 2000, we recognized
revenue of $2.3 million from IBM including $2.0 million for licenses to
distribute NetObjects Fusion 5.0 with IBM PCs and committed to reimburse IBM for
up to $500,000 for promotional and advertising expenditures that IBM incurs in
marketing these bundles. During the quarter ended December 31, 1999, we
recognized revenues of $1.0 million from Lotus for licenses to bundle NetObjects
Fusion 3.01 with Lotus SmartSuite during calendar year 2000 and committed to
reimburse Lotus for up to $400,000 for promotional and advertising expenditures
incurred in marketing these bundles. In the past Lotus has created foreign
language, or "localized," versions of our software, for which IBM pays us
reduced royalties on products that it sells outside the United States under a
contract that expired on December 31, 1999. 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.
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.
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IBM controls us and is free to sell its interest in us. As of April 30,
2000, IBM owns approximately 49.4% of our common stock and holds warrants that
if exercised, would increase its ownership to approximately 50% of our
outstanding voting securities. As our largest stockholder, with three
representatives on our board of directors, IBM has substantial influence over
our direction and management, and may be able 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 eligible to sell its stock subject to
applicable securities laws and the terms of a registration rights agreement. IBM
may transfer some or all of its stock, including to our competitors. Such a
transfer could result in a transfer of IBM's interest in us, which could cause
our revenues to decrease and our stock price to fall.
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:
o IBM retains "freedom of action" to conduct its business and
pursue other business opportunities, even in competition with
us;
o IBM has no obligation to refrain from investing in our
competitors, doing business with our customers or hiring away
our key personnel;
o 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 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;
o 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.
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. IBM may obtain access to the source code upon events
of default related to the Company's failure to provide required maintenance and
support or its 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 the Company's rights in the underlying software.
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.
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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.
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 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. We compete
for small business customers with web content software makers like Adobe,
Macromedia, and Microsoft and in the on-line web hosting and services with
providers like Verio, Bigstep, Icat, and Yahoo Store. Microsoft's FrontPage, a
web site building software product, has a dominant market share. Microsoft
bundles FrontPage 2000 in several versions of the Office 2000 product suite that
dominates the market for desktop business application software. For our
enterprise customers, we compete in the Internet application development and
services market with companies such as Interwoven and Vignette. New technologies
and the expansion of existing technologies could also increase the competitive
pressures on us by enabling our competitors to offer lower-cost or superior
products or service. Increased competition could diminish the value of our
products and services and result in reduced operating margins and loss of market
share. We cannot assure you that we will be able to compete successfully against
current or future competitors. For more information, please refer to
"Business--Competition."
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. We generate a substantial percentage of
our revenues from software license fees from bundles of NetObjects Fusion with
products or services provided by our OEM resellers such as IBM, Lotus, Novell,
Inc., or Novell, 1&1 Telecommunications, or United Internet, and Concentric
Networks, Inc., or Concentric. Our revenues may vary substantially from quarter
to quarter depending on our ability to extend existing OEM bundling arrangements
with our OEM resellers or to enter into new OEM reselling arrangements. The
promptness with which sales data used for recognizing product royalties, are
reported to us from third parties, including IBM, also may cause our quarterly
results to be more volatile.
Most of our revenues have been 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.
About 60% of our revenues from software license fees in fiscal year
1999 and approximately 65% of our revenues from software license fees in the
first six months of fiscal year 2000 were derived from versions of one of our
products, NetObjects Fusion, and we expect that this single product will
continue to account for the 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
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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.
Our future financial performance depends substantially on market acceptance and
growth of our enterprise products, professional services and online services. We
increasingly depend on our enterprise products to provide us with revenues.
Our enterprise products are relatively new and have not achieved
significant market penetration. During the quarter ended March 31, 2000, we
introduced NetObjects Collage as our primary enterprise product. We increasingly
depend on NetObjects Collage and other enterprise products to generate revenue,
and we may not receive these revenues for the following reasons:
o The success of NetObjects Collage will depend on its
acceptance as a solution for large enterprise web site and
intranet building products and services;
o 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 or
our competitors' products to create and maintain their sites;
o Our enterprise products may not meet customer performance
needs or be free of significant software defects or bugs;
o Our enterprise products have a longer sales cycle than
NetObjects Fusion due to much higher pricing and different
marketing and distribution characteristics;
o There are no product bundles of our enterprise products with
any of our OEM resellers or other third party distributors;
and
o We may not be able to recruit and retain the additional sales
personnel needed to effectively market our enterprise
products.
Our professional services business, through which we provide training
and other support for our products, may not generate sufficient revenues. 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.
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Our on-line services are new and have not yet received a broad customer
acceptance. Since inception, we have invested resources to create and enhance
our on-line services, which we believe support and add to market acceptance of
our products. With the acquisition of Sitematic and our launch of GoBizGo.com,
providing on-line services to enable small businesses to conduct e-commerce has
become an integral part of our business growth strategy. Including the period
during which Sitematic operated these services they have been offered to
customers generally for less than 12 months. We depend on our distribution
partners to attract small business subscribers for these services for our
on-line business to succeed, and to date their efforts have met with limited
success. We may not be able to expand our distribution channels or sales force.
We expect to offer our on-line small business services through our distribution
partners under those partners' advertising and marketing logos in order to
expand our on-line small business services. We may fail to attract these new
customers and distributors, which would hurt our business and could cause our
stock price to fall.
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 OEM resellers. We need to develop third
party relationships for promoting our on-line offerings. A substantial portion
of our revenues from NetObjects Fusion come from arrangements with a limited
number of customers. A loss of any of these customers or our failure to develop
new customers could cause our revenues to decrease and our stock price fall. We
have shifted our emphasis in distributing NetObjects Fusion from channel sales
to volume distribution arrangements with large companies such as United
Internet, IBM, Lotus, Concentric Networks and Novell. We have no guarantees of
continuing revenues from any of these customers and therefore need to
continuously develop new OEM reseller customers. 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 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 some of our
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. 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.
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 5.0 includes free
web site hosting services. 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 Studio and Lotus SmartSuite.
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 or conclude
suitable software product bundling arrangements could hurt our business, cause
our revenues to decrease and our stock price to fall.
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
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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, and 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 software 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. We 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.
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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.
As of April 30, 2000, IBM owns approximately 49.4% of our outstanding
stock and holds warrants that if exercised, would increase its ownership to
approximately 50% of our outstanding voting securities. 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.
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, we know that other businesses
use the word "Fusion" in their marks alone or in combination with other works.
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 Corporation
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
"shrink-wrap" 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.
Because we are no longer a majority-owned subsidiary of IBM, we no
longer enjoy cross-licensing protection that we received as an IBM subsidiary.
We may face material litigation risk associated with patent infringement claims
that IBM's patent cross-licensees could not assert against us while we were an
IBM subsidiary.
Our international operations continue to expand and may not be successful.
International sales represented approximately 23% of our total revenues
in the year ended September 30, 1999, respectively, and approximately 40% of our
total revenues in the quarter ended March 31, 2000. We intend to expand the
scope of our international operations and
9
<PAGE>
currently have a subsidiary in the United Kingdom. Our continued growth and
profitability will require continued expansion of our international operations,
particularly in Europe.
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:
o difficulties in staffing and managing international
operations;
o lower gross margins than in the United States;
o slower adoption of the Internet;
o longer payment cycles;
o fluctuations in currency exchange rates;
o seasonal reductions in business activity during the summer
months in Europe and other parts of the world;
o recessionary environments in foreign economies; and
o 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:
o implement and improve our operational systems, procedures and
controls on a timely basis;
o expand, train and manage our workforce and, in particular, our
sales and marketing and support organizations in light of our
recent decision to offer on-line and professional services;
o implement and manage new distribution channels to penetrate
different and broader markets, including the market for
intranet software products;
o manage an increasing number of complex relationships with
customers, co-marketers and other third parties; and
o raise additional capital.
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, raise sufficient capital and
10
<PAGE>
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.
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, such as the acquisition of Sitematic in October
1999. 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 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,
11
<PAGE>
may seek to impose sales or other tax obligations on companies that engage in
on-line 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.
Our stock price might have wide fluctuations, and Internet-related stocks have
been particularly volatile.
The market price of our common stock is highly volatile and subject to
wide fluctuations. Recently, the stock market has experienced significant price
and volume fluctuations and the market prices of securities of technology
companies, particularly Internet-related companies, have been highly volatile.
Market fluctuations, as well as general political and economic conditions, such
as recession or interest rate or currency rate fluctuations, could adversely
affect the market price of our common stock.
12
<PAGE>
USE OF PROCEEDS
All net proceeds from the sale of the shares of common stock will go to
the stockholders who offer and sell their shares. Accordingly, we will not
receive any of the proceeds from sales of their shares by the selling
stockholders.
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.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
The selected historical consolidated financial data presented below are
derived from our consolidated financial statements. The financial statements as
of and for the fiscal years ended September 30, 1997, 1998 and 1999, have been
audited by KPMG LLP, independent auditors, and are included elsewhere in this
prospectus. The financial statements as of September 30, 1996 and for the period
from November 21, 1995 (inception) to September 30, 1996, have been audited by
other auditors and are not included herein. The selected historical consolidated
financial data as of and for the six month periods ended March 31, 1999 and 2000
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 this period. 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" and our consolidated financial statements, and the related notes
thereto, included elsewhere in this prospectus. 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.
<CAPTION>
Period from Year Ended Six Months Ended
inception to September 30, March 31,
September 30, -------------------------------------------- ----------------------------
1996 1997 1998 1999 1999 2000
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement of Operations (In thousands, except per share data) (Unaudited)
Data:
Revenues:
Software license fees ........... $ -- $ 7,392 $ 9,703 $ 13,566 $ 5,545 $ 12,465
Service revenues ................ -- -- -- 2,178 630 2,199
Software license fees from IBM .. -- 175 2,700 3,689 2,335 3,539
Service revenues from IBM ....... -- -- 2,867 2,782 2,733 --
------------ ------------ ------------ ------------ ------------ ------------
Total revenues .............. -- 7,567 15,270 22,215 11,243 18,133
Cost of revenues:
Software license fees ........... -- 772 2,531 1,817 948 1,383
Service revenues ................ -- -- -- 2,295 724 3,071
IBM service revenues ............ -- -- 2,562 2,113 2,092 --
------------ ------------ ------------ ------------ ------------ ------------
Total cost of revenues ...... -- 772 5,093 6,225 3,764 4,454
Gross profit ................ -- 6,795 10,177 15,990 7,479 13,679
Operating expenses:
Sales and marketing ............. 2,998 12,161 17,114 18,800 9,026 14,962
Research and development ........ 2,765 8,436 10,231 9,358 3,985 6,389
General and administrative ...... 978 3,762 3,575 4,314 1,966 2,707
Amortization of intangible
assets ........................ -- -- -- -- -- 4,033
Stock-based compensation(3) ..... -- -- 227 559 170 350
------------ ------------ ------------ ------------ ------------ ------------
Total operating expenses .... 6,741 24,359 31,147 33,031 15,147 28,441
Operating loss ..................... (6,741) (17,564) (20,970) (17,041) (7,668) (14,762)
Interest income (expense) .......... 46 (234) (1,194) (715) (1,124) 650
Accretion of discount on debt ...... -- -- -- (1,653) (599) --
Interest charge on beneficial
conversion feature of
convertible debt (1) ............ -- -- -- (7,457) (7,457) --
------------ ------------ ------------ ------------ ------------ ------------
Loss before income taxes .... (6,695) (17,798) (22,164) (26,866) (16,848) (14,112)
------------ ------------ ------------ ------------ ------------ ------------
Income taxes ....................... -- 1 60 44 2 24
Net loss ........................... $ (6,695) $ (17,799) $ (22,224) $ (26,910) $ (16,850) $ (14,136)
Translation adjustment ............. -- -- -- (30) -- (20)
Comprehensive loss ................. $ (6,695) $ (17,799) $ (22,224) $ (26,940) $ (16,850) $ (14,156)
Basic and diluted net loss per
share ........................... $ (4.10) $ (10.45) $ (12.26) $ (2.40) $ (8.33) $ (0.52)
Shares used to compute basic and
diluted net loss per share
(in thousands)(2)................... 1,634 1,703 1,812 11,215 2,023 27,299
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
September 30, March 31,
-------------------------------------------- -------------------------
1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- --------- --------
(In thousands) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash ................................. $ 1,090 $ 303 $ 459 $ 32,954 $ 1,816 $ 16,383
Working capital (deficit) ............ (1,749) (10,116) (30,229) 34,022 (22,962) 23,264
Short-term borrowings from IBM and
IBM Credit Corp.................... -- -- 20,666 -- 22,165 --
Long-term obligations, less current
portion ........................... 173 633 336 54 212 107
Total assets ......................... 2,129 4,605 5,145 42,709 9,158 48,337
Accumulated deficit .................. (6,695) (24,494) (46,718) (73,628) (63,568) (87,764)
Stockholders' equity (deficit) ....... (1,357) (8,913) (28,925) 36,172 (31,038) 38,681
<FN>
(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 4 of notes to NetObjects
consolidated financial statements for the fiscal year ended September 30,
1999.
(2) Does not include the effect of outstanding shares of convertible
preferred stock for the years ended September 30, 1996, 1997 and 1998,
shares from the assumed conversion of convertible notes for the year
ended September 30, 1998, and shares issuable upon the exercise of stock
options and warrants, for all year ends presented 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 2 of the notes to the
NetObjects consolidated annual financial statements, for the year ended
September 30, 1999.
(3) Amortization of deferred employee stock-based compensation combined with
the expense associated with stock options granted to non-employees,
relates to cost of revenues, research and development, sales and
marketing and general and administrative expenses as disclosed in Note 11
and Note 5 of the notes to NetObjects consolidated financial statements
for the fiscal years ended September 30, 1998 and 1999 and for the six
month periods ended March 31, 1999 and 2000, respectively.
</FN>
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We provide both online and software solutions that enable small
businesses to build, deploy and maintain Internet web sites and applications to
conduct e-business and enable large enterprises to create and maintain corporate
websites. For fiscal 2000, our revenues are derived principally from license
fees from our software products and, to a lesser extent, from fees on a range of
services complementing these products. For small business and other customers we
license NetObjects Fusion and offer online services. Our online business,
announced in the quarter ended December 31, 1999 and branded GoBizGo, was
established with the acquisition of Sitematic in October 1999. We derived
limited revenues from online services in the six months ended March 31, 2000.
For enterprise customers we license NetObjects Fusion and NetObjects Collage. In
fiscal year 1999, we began providing training, consulting and design services to
large enterprise customers for creating corporate websites.
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. We provide
most distributors of our software products with rights of return and record an
allowance for estimated future returns based upon our historical experience with
product returns by those distributors. Software license fees earned from
products bundled with OEM resellers are recognized either upfront, if the OEM
vendor commits to a quantity and a fixed price with no right of return or, if
the volumes are not committed, when the OEM reseller ships the bundled products
to its customers. We recognize service revenues as services are rendered, or, if
applicable, using the percentage-of-completion method. 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.
We earn revenues from software license fees through direct licenses to
enterprises, through important strategic relationships such as our relationships
with our indirect distribution channel. Professional services and maintenance
are typically sold through our direct sales organization. Most of our software
license fees to date have come from licenses to our indirect distribution
channel, expecially our OEM resellers. We expect our revenues from license fees
derived from our direct, or enterprise, sales channel to increase as a
percentage of our total revenues as our direct sales organization grows in size.
We derive our international revenues primarily through our indirect distribution
channel.
We acquired Sitematic in October 1999 in order to offer on-line website
building and hosting capabilities to small businesses. In December 1999, we
combined our existing online resources with the Sitematic offering and launched
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<PAGE>
GoBizGo.com. These combined services include website building software, e-mail
list management for communicating with customers, domain name and search engine
registration, auction export, relevant content information for building and
maintaining an e-business online, and web hosting services. Currently, our
online business has two sources of revenue: Subscriptions for web-hosting
services provided directly to small businesses; and fees charged to our GoBizGo
business "partners" for establishing co-branded sites. The Sitematic acquisition
increased our operating expenses incrementally by slightly less than 10% above
pre-acquisition levels. We are incurring additional related expenses as we shift
some of our existing staff to support GoBizGo and to build infrastructure to
maintain and grow our online services. They will increase our cost of revenue
over time. Revenues from our online services business have represented
approximately 2% of total revenues for the period since October, 1999.
In April 1997, IBM acquired approximately 80% of our outstanding stock
from existing investors. Under the terms of a 10-year license agreement with
IBM, we granted IBM rights to market and sell some of our products to its
customers for 10 years in exchange for 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 were reflected as deferred revenues from IBM on our balance
sheet. By June 1999, IBM had sold sufficient quantities of licenses, and
purchased services from NetObjects to fully utilize this $10.5 million
prepayment. 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 to IBM to make our products compatible with and to integrate them with
IBM's WebSphere products. This services contract with IBM expired on February
28, 1999. Due, in part, to the expiration of this contract, our total revenues
from IBM were substantially lower during the second half of fiscal year 1999
compared to the first six months of the year when they represented 45.1% of
total revenues. During the first half of fiscal year 2000, our revenues from IBM
represented approximately 19.5% of our total revenues for the period. We believe
that our revenues from IBM may fluctuate significantly from quarter to quarter.
Please refer to "Risk Factors--Our Relationship with International Business
Machines Corporation, or IBM, has changed substantially over time. While IBM
controls us, it is under no obligation to continue any business relationships
with us, and IBM is allowed to compete with us or act in a manner that is
disadvantageous to us"
In March 2000, we commenced commercial shipments of NetObjects Collage,
an integrated platform for the management of enterprise web applications.
NetObjects Collage provides an integrated platform that combines collaboration
with content management, enterprise integration, and dynamic application
services.
We provide professional services to help our customers install
NetObjects Collage and to train their personnel in the use and maintenance of
corporate websites with this product.
We have incurred substantial net losses in each fiscal period since our
inception and, as of March 31, 2000, had an accumulated deficit of $87.8
million. Such net losses and accumulated deficit resulted primarily from the
significant costs incurred in the development of our products, establishing
brand identity, marketing organization, domestic and international sales
channels, and general and administrative infrastructure. We intend to increase
our expenditures in all of these areas, particularly for research and
development and sales and marketing.
Our future operating results 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 our business objectives we need to do the following:
17
<PAGE>
o Increase substantially our revenues from our principal
software products, NetObjects Fusion and NetObjects Collage;
o Continue to develop successfully new versions of our products;
o Continue to be a leading provider of e-business software for
building websites and enterprise web applications;
o Respond quickly and effectively to competitive, market, and
technological developments;
o Expand our professional services business;
o Expand our online services business;
o Control expenses;
o Continue to attract, train, and retain qualified personnel in
the competitive software industry; and
o Maintain existing relationships and establish new
relationships with leading internet hardware and software
companies, such as our existing OEM resellers
There can be no assurance that we will achieve or sustain
profitability. Moreover, we may be unable to adjust spending in a timely manner
to compensate for any unexpected revenue shortfall. Accordingly, any significant
shortfall of revenues in relation to expectations would cause significant
declines in operating results.
Due to the foregoing factors, we believe that period to period
comparisons of historical operating results should not be relied upon as an
indication of future performance. Also, operating results may fall below our
expectations or the expectations of securities analysts or investors in some
future quarter and our stock price may decline substantially.
[Remainder of page intentionally left blank]
18
<PAGE>
<TABLE>
Results of Operations
The following table sets forth financial data for the periods indicated
as a percentage of total revenues:
<CAPTION>
Year ended Six Months Ended Three Months Ended
September 30, March 31, March 31,
------------------------------------ ---------------------- -------------------
1997 1998 1999 1999 2000 1999 2000
-------- -------- -------- -------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software license fees 98% 64% 61% 49% 69% 52% 67%
Service revenues -- -- 10 6 12 8 11
Software license fees from IBM 2 17 17 21 20 18 22
Service revenues from IBM -- 19 12 24 -- 22 --
-------- -------- -------- -------- -------- -------- --------
Total revenues 100 100 100 100 100 100 100
Cost of revenues:
Software license fees 10 16 8 8 8 8 8
Royalty adjustment -- -- -- -- -- -- (14)
Service revenues -- -- 10 6 17 10 18
Service revenues from IBM -- 17 10 19 -- 12 --
-------- -------- -------- -------- -------- -------- --------
Total cost of revenues 10 33 28 33 25 30 12
-------- -------- -------- -------- -------- -------- --------
Gross profit 90 67 72 67 75 70 88
-------- -------- -------- -------- -------- -------- --------
Operating expenses:
Sales and marketing 161 112 85 80 83 82 88
Research and development 111 67 42 35 35 32 31
General and administrative 50 23 19 17 15 19 13
Amortization of intangible assets -- -- -- -- 22 -- 20
Stock-based compensation -- 2 3 2 2 1 2
-------- -------- -------- -------- -------- -------- --------
Total operating expenses 322 204 149 135 157 134 154
-------- -------- -------- -------- -------- -------- --------
Operating loss (232) (137) (77) (68) (81) (64) (66)
Interest income (expense) (3) (8) (3) (10) 4 (11) 3
Accretion of discount on debt -- -- (8) (5) -- (7) --
Interest on beneficial conversion feature
of convertible debt -- -- (34) (66) -- (65) --
Loss before income taxes -- -- -- (150) (78) -- --
-------- -------- -------- -------- -------- -------- --------
Income taxes -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net loss (235%) (145%) (121%) (150%) (78%) (147%) (63%)
======== ======== ======== ======== ======== ======== ========
Translation Adjustment -- -- (0.1) -- -- -- --
======== ======== ======== ======== ======== ======== ========
Comprehensive Loss (235%) (145%) (121.1%) (150%) (78%) (147%) (63%)
======== ======== ======== ======== ======== ======== ========
</TABLE>
Six Months Ended March 31, 2000 and 1999
Revenues. Total revenues were approximately $18.1 million and
approximately $11.2 million, respectively, for the six months ended March 31,
2000 and 1999. The 61% year-over-year increase resulted primarily from
additional OEM reseller agreements, in which our Fusion products and related
19
<PAGE>
intellectual property were bundled with products offered by our partners, such
as IBM, Lotus, Concentric, United Internet and Novell. In addition, we
experienced substantial growth in our enterprise business, which consists of
licenses of our enterprise products, NetObjects Authoring Server and NetObjects
Collage, and from the same period in the previous fiscal year. This growth
reflected the expansion of our sales organization, increasing market acceptance
of our enterprise solutions and the introduction of NetObjects Collage in late
March 2000.
For the six months ended March 31, 2000 and 1999, international
revenues were $6.8 million and $1.8 million or 38% and 16% of total revenues,
respectively. The substantial increase resulted primarily from new OEM
arrangements with internet service providers, or ISPs, in Germany, like United
Internet, and the generation of revenues from our professional services
business.
IBM software license fees for the six months ended March 31, 2000 and
1999 were $3.5 million and $2.3 million, respectively. New NetObjects Fusion
product bundling agreements accounted for $3.0 million of revenues during the
most recent six month period, and the remaining $0.5 million was attributable to
license fees from previous bundling arrangements.
We have not earned significant revenues from services to IBM since our
WebSphere development services contract expired in the quarter ended March 31,
1999. We do not anticipate additional service revenue from IBM in the forseeable
future.
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 $1.4 million and $0.9 million for the six
months ended March 31, 2000 and 1999, respectively.
During the first quarter of fiscal 2000, we began shipping NetObjects
Fusion 5.0 with an offer of 12 months of free web hosting services and entered
into an agreement with a leading Internet service provider to deliver those
services. Under the original terms of the agreement, we paid royalties to the
Internet service provider for web hosting services when Fusion 5.0 was shipped
to the customer. During the first quarter of fiscal 2000, the entire amount due
under the contract for these hosting services, which expires in December 2001,
was accounted for as a cost of revenues. In the second quarter of fiscal 2000,
the contract was amended so that royalties for hosting services are due to the
service provider only when the end user registers for the hosting service, or,
up to the minimum committed amount as specified in the agreement. As a result,
in the quarter ended March 31, 2000, we reversed the cost of software licenses
that were expensed in the previous quarter, and recorded it as prepaid expense.
This prepaid expense is being amortized to cost of revenues on the basis of
end-user registration with the hosting ISP.
Our cost of services increased to $3.1 million in the six months ended
March 31, 2000 from $0.7 million in the six months ended March 31, 1999. The
increase corresponded to the revenue growth in services and our continued
investment in hiring and training professional services personnel.
Cost of service revenues for IBM was $2.1 million for the six months
ended March 31, 1999. We have not provided services to IBM since the expiration
of our WebSphere development services contract in February 1999.
Overall, gross margin for the six months ended March 31, 2000 was 75%
versus 67% for the six months ended March 31, 1999. The increase in gross margin
reflects our higher percentage of total revenue from software licenses as
compared to the previous period.
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 to expand
our aggressive brand building and marketing campaign. Therefore, we expect sales
and marketing expenses to continue to increase. Sales and marketing expenses,
20
<PAGE>
were approximately $15.0 million and $9.0 million for the six months ended March
31, 2000 and 1999, respectively, representing 83% and 80%, respectively, of
total revenues for each period. The increased amount resulted primarily from
personnel growth in our enterprise division, increased co-op fees with our
European customers, increased sales commissions, and costs related to the
continued development and implementation of our branding and marketing
campaigns.
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 attain our strategic objectives and, as
a result, we expect research and development expenses to continue to increase in
dollar amounts from current levels. Research and development expenses were
approximately $6.4 million and $4.0 million for the six months ended March 31,
2000 and 1999, respectively, representing approximately 35% of total revenues in
each period. The increase in research and development expenses was due to
increased costs associated with the development and release of Fusion 5.0 and
NetObjects Collage during the period, as well as expenses incurred for future
product development.
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 and incur
additional costs related to growth of our business. General and administrative
expenses were approximately $2.7 and $2.0 for the six months ended March 31,
2000 and 1999, respectively, representing approximately 15% and 17%,
respectively, of total revenues for each period. The increased amount resulted
primarily from additional personnel and facility expenses related to our growth,
and the added cost associated with the financial reporting requirements of a
public company.
Goodwill and amortization. Amortization of goodwill and related
intangible assets was $4.1 million and $0 for the six months ended March 31,
2000 and 1999, respectively. Most of the amortization expense relates to the
Sitematic acquisition in October 1999.
Stock-Based Compensation. For the six months ended March 31, 2000 and
1999, we incurred stock-based compensation charges of $0.4 million and $0.2
million, respectively. These stock-based compensation charges are being
amortized on an accelerated basis over the vesting period of the options in a
manner consistent with Financial Accounting Standards Board (FASB)
Interpretation No. 28. Analyses of these charges by expense category have been
included in the notes to the financial statements for the respective periods.
Other Income (Expense). We earned interest income of $0.7 million for
the six months ended March 31, 2000. The interest income was the result of the
investment of funds obtained at our initial public offering.
Interest Expense. Interest expense for the six months ended March 31,
1999 consisted primarily of interest on our borrowings and amounted to
approximately $1.1 million. In addition, we recognized an interest charge of
approximately $7.5 million on convertible debt to IBM and a related party, and
recognized an accretion of discount on debt to IBM of approximately $0.6 million
for the six months ended March 31, 1999.
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<PAGE>
Income taxes. We have had a net operating loss for each period since
our inception through March 31, 2000. Our accumulated deficit through this
period is approximately $87.8 million. We recorded an income tax provision of
approximately $24,000 in the six months ended March 31, 2000 related to our
international operations.
Translation Adjustment. The functional currency our foreign subsidiary
is its local currency. Adjustments arising from the translation of the
subsidiary financial statements are reflected as a separate component of
stockholder's equity. Foreign currency transaction gains and losses are included
in the consolidated statements of operations.
Three Months Ended March 31, 2000 and 1999
Revenues. Total revenues increased to approximately $10.2 million from
approximately $5.6 million for the three months ended March 31, 2000 and 1999,
respectively. The increase of 81% year over year was primarily due to growth of
our domestic and international partner agreements, in which our Fusion products
and related intellectual property were bundled with products offered by our
partners, as well as growth of license sales to IBM. In addition, our enterprise
business, which is comprised of license and service offerings, grew
substantially from the same period in the previous fiscal year, due to continued
expansion of our sales organization and new product introductions.
For the three months ended March 31, 2000 and 1999, international
revenues were $4.0 million and $0.9 million or 40% and 15% of total revenues,
respectively. The increase in the amount of international revenues from the
comparable quarter in the last fiscal year resulted mainly from new OEM
arrangements with Internet Service Providers (ISP) in Europe and the generation
of revenues from our professional services business.
IBM software license fees for the three months ended March 31, 2000 and
1999 were $2.3 million and $1.0 million, respectively. The increase was due to
increased purchases of NetObjects Fusion 5.0 to bundle with one of their product
offerings.
In the current quarter, we had no IBM revenue from services as compared
to approximately $1.2 million in the quarter ended March 31, 1999. Our contract
to provide services to IBM ended in the second quarter of fiscal 1999. We do not
anticipate additional service revenue from IBM in the future.
Cost of Revenues. We recorded a $0.8 million cost of software license
fees for the three months ended March 31, 2000 as compared to $0.5 million cost
incurred for the three months ended March 31, 1999. In addition we had a royalty
adjustment of negative $1.4 million caused by a contract amendment change, which
is described in the section "Six months ended March 31, 2000 and 1999" under
"Cost of Revenues".
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<PAGE>
Our cost of services increased to $1.8 million from $0.5 million in the
three months ended March 31, 2000 and 1999, respectively. The increase was
driven by the revenue growth in services and our continued investment in
staffing to handle future growth.
Gross margins for the three months ended March 31, 2000 were 88% versus
70% for the three months ended March 31, 1999. Most of the increase in gross
margin was due to the reversal of the cost of software license fees that we
recorded during the previous quarter under an agreement with a leading Internet
service provider.
Sales and Marketing. Sales and marketing expenses were approximately
$9.0 million and $4.6 million for the three months ended March 31, 2000 and
1999, respectively, representing 89% and 82%, respectively, of total revenues
for each period. The increased amount resulted primarily from personnel growth
in our enterprise division, increased co-op fees paid to our European customers,
increased sales commissions, and costs related to the continued development and
implementation of our branding and marketing campaigns.
Research and Development. Research and development expenses were
approximately $3.2 million and $1.8 million for the three months ended March 31,
2000 and 1999, respectively, representing approximately 31% and 32%,
respectively, of total revenues for each period. The increase in research and
development expenses was due to higher staffing levels than the previous period,
costs associated with the release of NetObjects Collage, and the costs of
ongoing product development.
General and Administrative. General and administrative expenses were
approximately $1.3 and $1.1 for the three months ended March 31, 2000 and 1999,
respectively, representing approximately 13% and 19%, respectively, of total
revenues for each period.
Amortization of Intangible Assets. Amortization of goodwill and related
intangible assets increased to $2.1 million from $0 for the three months ended
March 31, 2000 and 1999, respectively. The change was predominately attributable
to the purchase of Sitematic Corporation in October 1999.
Stock-Based Compensation. For both three-month periods ended March 31,
2000 and 1999, we incurred stock-based compensation charges of approximately
$0.1 million. These stock-based compensation charges are being amortized on an
accelerated basis over the vesting period of the options in a manner consistent
with Financial Accounting Standards Board (FASB) Interpretation No. 28.
Other Income (Expense). We earned interest income of $0.3 million for
the three months ended March 31, 2000. The interest income was the result of the
investment of funds obtained at our initial public offering ("IPO").
Interest expense for the three months ended March 31, 1999 consisted
primarily of interest on our borrowings and amounted to approximately $0.6
million. In addition, we recognized an interest charge of approximately $3.7
million on convertible debt to IBM and a related party, and recognized an
accretion of discount on debt to IBM of approximately $0.4 million for the three
months ended March 31, 1999.
Income Taxes. We recorded an income tax provision of approximately
$12,000 in the
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three months ended March 31, 2000 for our international operations.
Translation Adjustment. The functional currency of the Company's
foreign subsidiary is its local currency. Adjustments arising from the
translation of the subsidiary financial statements are reflected as a separate
component of stockholder's equity. Foreign currency transaction gains and losses
are included in the consolidated statements of operations.
Years Ended September 30, 1999 and 1998
Revenues. Total revenues increased to $22.2 million for the year ended
September 30, 1999 from $15.3 million for the year ended September 30, 1998. The
increase was attributable to additional license fees for NetObjects Fusion, the
introduction of NetObjects Authoring Server, and related services. Our software
license revenues were $17.3 million and $12.4 million for the years ended
September 30, 1999 and 1998, respectively. Software license revenue from IBM was
$3.7 million and $2.7 million, respectively, for the two fiscal years.
For the fiscal year ended September 30, 1999 services revenues were
approximately $5.0 million, compared to $2.9 million for the year ended
September 30, 1998. Of these amounts, $2.8 million represented services provided
to IBM in fiscal 1999. The remaining $2.2 million in fiscal 1999 was derived
from our newly formed professional services group.
International sales of software licenses grew steadily over the same
period, increasing to $4.5 million in fiscal 1999 from $2.5 million in fiscal
1998. Increased international sales resulted primarily from increased licenses
of NetObjects Fusion through our distributors in Europe. Total international
revenues, which include the sale of software licenses and services, were 23% and
16% of total revenues for the fiscal years ended September 30, 1999 and 1998,
respectively.
Revenues from IBM were 29% and 36% of total revenues for the fiscal
years ended September 30, 1999, and 1998, respectively. Service revenue from IBM
declined slightly with the expiration of the WebSphere contract. IBM license
fees increased by 37% over the entire period, primarily during the first half of
the year.
Cost of Revenues. The cost of software license fees was approximately
$1.8 million and $2.5 million for the years ended September 30, 1999 and 1998,
respectively, representing approximately 8% and 17%, respectively, of total
revenues. The improvement in percentage terms from fiscal 1998 to fiscal 1999
resulted primarily from better inventory management, more favorable freight
contract terms, and a better sales channel mix.
The cost of service for our new professional services group was $2.3
million, with a gross margin of (-5%). The loss reflected our initial startup
costs for this business in its first year of operation.
Cost of revenues from the sale of services to IBM and affiliates was
approximately $2.1 million and $2.6 million for the years ended September 30,
1999 and 1998, respectively.
Overall our gross margin improved from 67% for the year ended September
30, 1998 to 72% for the year ended September 30, 1999.
Sales and Marketing. Our sales and marketing expenses were
approximately $18.8 million and $17.1 million for the years ended September 30,
1999 and 1998, respectively,
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<PAGE>
representing approximately 85% and 112% respectively, of total revenues. The
increased expenses in fiscal 1999 resulted primarily from growth in the number
of sales personnel, increased sales commissions and costs related to the
continued development and implementation of our branding and marketing
campaigns. The decrease in percentage terms occurred as revenues grew at a
faster rate than expenses.
Research and Development. Our research and development expenses were
approximately $9.4 million and $10.2 million for the years ended September 30,
1999 and 1998, respectively, which was 42% and 67% respectively, of total
revenues. The decrease in percentage terms occurred as revenues grew at a faster
rate than expenses. The savings were achieved through reductions in contractor
costs and selective staffing reductions.
General and Administrative. Our general and administrative expenses
were approximately $4.3 million and $3.6 million for the years ended September
30, 1999 and 1998, respectively, representing approximately 19% and 23%
respectively, of total revenues. The decrease in percentage terms occurred as
revenues grew at a faster rate than expenses. The increase in expenses in fiscal
1999 resulted primarily from hiring additional personnel and related personnel
expenses, as well as increased professional fees needed to operate a public
company.
Stock-Based Compensation. For the twelve month periods ended September
30, 2000 and 1999, we incurred stock-based compensation charges of approximately
$0.6 million and $0.2 million respectively. These stock-based compensation
charges are being amortized on an accelerated basis over the vesting period of
the options in a manner consistent with Financial Accounting Standards Board
(FASB) Interpretation No. 28. Analyses of these charges by expense category have
been included in the notes to the financial statements for the respective
periods.
Interest expense. Interest expense was $0.7 million and $1.2 million
for the years ended September 30, 1999 and 1998, respectively. In fiscal 1999,
we recorded a charge to earnings of $9.1 million, compared to $0.2 in fiscal
1998. Of this amount, approximately $7.5 million was recognized in connection
with the "in-the-money" convertible notes totaling $10.9 million that we issued
to IBM and Perseus Capital LLC during October 1998, and was recorded as interest
expense in accordance with EITF Topic D-60 for the fiscal year ended September
30, 1999. The remaining $1.6 million charge recorded during fiscal 1999 was an
accretion of discount resulting from Series E-2 and Series F warrants issued in
connection with loans obtained from IBM, IBM Credit Corp, and Perseus Capital
LLC in fiscal 1999. The value of the attached warrants, and the resulting
interest expense was determined using a Black-Scholes option pricing model. We
recorded $200,000 in charges during fiscal 1998.
Years Ended September 30, 1998 and 1997
Revenues. Our total revenues increased to approximately $15.3 million
from $7.6 million for the fiscal years ended September 30, 1998 and 1997,
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 international revenues were approximately 16% and 15% of total
revenues for the fiscal years ended September 30, 1998 and 1997, respectively.
The increase in international 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
25
<PAGE>
significant foreign currency translation and transaction exposure from our
operations in fiscal 1998 and 1997.
Our revenues from IBM were approximately 36% and 2% of total revenues
for the fiscal years ended September 30, 1998 and 1997, 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
$2.5 million and $772,000 for the fiscal years ended September 30, 1998 and
1997, respectively, representing approximately 26% and 10% 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.
Sales and marketing. Our sales and marketing expenses were
approximately $17.1 million and $12.2 million for the fiscal years ended
September 30, 1998 and 1997, respectively, representing approximately 112% and
161% 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.
Research and development. Our research and development expenses were
approximately $10.2 million and $8.4 million for the fiscal years ended
September 30, 1998 and 1997, respectively, and 67% and 111% respectively, of
total revenues. The increase in fiscal 1998 resulted primarily 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.
General and administrative. Our general and administrative expenses
were approximately $3.6 million and $3.8 million for the fiscal years ended
September 30, 1998 and 1997, respectively, representing approximately 23% and
50% respectively, of total revenues.
26
<PAGE>
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 to approximately $1.2 million from $234,000 for
the fiscal years ended September 30, 1998 and 1997, 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.
Quarterly Results of Operations
The following table sets forth certain unaudited quarterly results of
operations data for the six quarters ended March 31, 2000. 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.
27
<PAGE>
<TABLE>
The operating results for any quarter are not necessarily indicative of
the operating results for any future period:
<CAPTION>
Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1998 1999 1999 1999 1999 2000
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Software license fees .... $ 2,622 $ 2,923 $ 3,452 $ 4,569 $ 5,662 $ 6,803
Service revenues ......... 190 440 685 563 959 1,170
Software license fees
from IBM ............... 1,318 1,017 980 374 1,288 2,251
Service revenues from IBM 1,487 1,246 50 -- -- --
Total revenues ......... 5,617 5,626 5,167 5,806 7,909 10,224
Cost of revenues:
Software license fees .... 495 453 487 383 1,962 (579)
Service revenues ......... 184 540 820 751 1,225 1,846
IBM service revenues ..... 1,404 688 21 -- -- --
Total cost of revenues . 2,083 1,681 1,328 1,134 3,187 1,267
Gross profit .............. 3,534 3,945 3,839 4,672 4,722 8,957
Operating expenses:
Sales and marketing ...... 4,430 4,596 4,968 4,806 5,947 9,015
Research and development . 2,204 1,781 2,347 3,026 3,229 3,160
General and administrative 894 1,072 1,032 1,315 1,384 1,323
Amortization of
intangible assets ...... -- -- -- -- 2,016 2,017
Stock-based compensation . 100 70 234 155 206 144
Total operating expenses 7,628 7,519 8,581 9,302 12,782 15,659
Operating loss .............. (4,094) (3,574) (4,742) $ (4,630) (8,060) (6,701)
Net other income (expense) .. (714) (1,011) (93) 431 351 276
Accretion of discount on
debt to IBM ............ -- -- (1,055) -- -- --
Nonrecurring interest
charge on beneficial
conversion feature of
convertible debt ....... (3,792) (3,665) -- -- -- --
Net loss .................... $ (8,600) $ (8,250) $ (5,889) $ (4,199) $ (7,709) $ (6,437)
Revenues:
Software license fees .... 46.7% 52.0% 67% 79% 72% 67%
Service revenues ......... 3.4 7.8 13 15 12 11
Software license fees
from IBM ............... 23.4 18.1 19 6 16 22
Service revenues from IBM 26.5 22.1 1 -- -- --
Total revenues ......... 100.0 100.0 100 100 100 100
Cost of revenues:
Software license fees .... 8.8 8.1 9 7 25 (6)
Service revenues ......... 3.3 9.6 16 13 15 18
Service revenues from IBM 25.0 12.2 -- -- -- --
Total cost of revenues ... 37.1 29.9 26 20 40 12
Gross profit ................ 62.9 70.1 74 80 60 88
Operating expenses:
Research and development . 39.2 31.7 45 52 41 31
Sales and marketing ...... 78.9 81.7 96 83 75 88
General and administrative 15.9 19.0 20 23 17 13
Amortization of
intangible assets ...... -- -- -- -- 26 20
Stock-based compensation . 1.8 1.2 5 3 3 1
Total operating expenses 135.8 133.6 166 160 162 153
Operating loss .............. (72.9) (63.5) (92) (80) (102) (66)
Net other expense ........... 12.7 18.0 (2) 7 5 3
Accretion of discount on
debt to IBM ............ -- -- (20) -- -- --
Nonrecurring interest
charge on beneficial
conversion feature of
convertible debt ....... 67.5 65.1 -- -- -- --
Net loss .................... (153.1)% (146.6)% (114)% (72)% (97)% (63)%
</TABLE>
Factors Affecting Quarterly Operating Results. 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
28
<PAGE>
recognition of revenues from strategic arrangements with our other OEM resellers
has contributed to fluctuations in revenues from quarter to quarter.
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 Collage,
and to ship the new products on time. Failure to do so will materially affect
the amount and timing of future revenues.
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. If our revenues continue to grow, however, our continued
investment in staffing and the increased cost of licenses and service revenues
may reduce our net income overall.
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:
o the timing and terms of agreements with OEM resellers to
bundle NetObjects product offers with their products and
services;
o the expiration of commitments from IBM for software license
fees in June 1999 and service revenues in February 1999;
o the timing of the introduction or enhancement of our products
and services and market acceptance of those products and
services;
o a longer sales cycle for products for large enterprise
customers and for NetObjects Collage;
o competitors' introductions of other types of software
products; for example, Microsoft's introduction of Windows 98
adversely impacted our sales temporarily;
o the amount and timing of operating costs and capital
expenditures related to expansion of our business, operations
and infrastructure;
o price reductions by us or our competitors or changes in how
their products and services are priced;
o the mix of distribution channels through which our products
are licensed and sold; and
29
<PAGE>
o the promptness with which sales data are reported to us from
third parties.
In addition to fluctuations in revenues from IBM and other third party
distributors, 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.
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 might cause our stock
price to fall.
Liquidity and Capital Resources
At March 31, 2000, NetObjects had cash, cash equivalents and short-term
investments totaling $16.4 million, a decrease of $16.6 million from September
30, 1999. The decrease was attributable to expenses incurred and cash paid in
the Sitematic acquisition as well as to losses from continuing operations.
Total cash expense for the Sitematic acquisition was approximately $2.0
million, which includes approximately $1.6 million paid to Sitematic preferred
stockholders and transaction costs of $0.4 million.
Net cash used in operating activities was $16.0 million and $15.2
million for the six months ended March 31, 1999 and 1998, respectively. For the
period ended March 31, 2000, net cash used in operating activities included an
increase in accounts receivable of approximately $5.5 million, due to slower
than expected collections, and an increase of approximately $3.4 million in
other accrued liabilities due to accruals for future royalties. Adjustments to
reconcile net loss to net cash used in operating activities for the period ended
December 31, 1999 included amortization of goodwill of approximately $4.0
million related to the Sitematic acquisition. For the period ended March 31,
1999, net cash used in operating activities included a decrease in deferred
revenues of approximately $4.6 million, principally due to recognition of
prepayments from IBM. Adjustments to reconcile net loss to net cash used in
operating activities for the period ended December 31, 1998 included a
nonrecurring interest charge of approximately $7.5 million related to
convertible debt provided by IBM and Perseus. As of March 31, 2000, the portion
of our accounts receivable balance over 90 days increased by approximately $1.0
million from the quarter ended September 30, 1999. The increase resulted
primarily from delays in payment of receivables by one international OEM
reseller and our major US channel distributor which were returning unsold
inventory of
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<PAGE>
Fusion 4.0 and receiving new shipments of Fusion 5.0.
Net cash used in investing activities was $6.4 million for the six
months ended March 31, 2000 compared to $1.1 million net cash used in investing
activities for the six months ended March 31, 1999. The increase resulted in
part from the payment of cash in the Sitematic acquisition.
Net cash provided by financing activities was approximately $2.3
million for the six months ended March 31, 2000 compared to $17.7 million for
the six months ended March 31, 1999. Cash provided by financing activities for
the six months ended March 31, 2000 consisted primarily of proceeds from the
exercise of stock options by employees. Net cash provided by financing
activities for the six months ended March 31, 1999 reflected their receipt of
proceeds from the issuance of a short-term note to IBM and the issuance of
preferred stock, use of proceeds to repay a short-term note to IBM.
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 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 our current cash and cash equivalents are adequate to
finance our current level of operations only through September 30, 2000 and for
some period thereafter, depending upon several factors, including the impact of
a change in our rate of growth, the effect of any acquisitions that we may do
and the length of our accounts receivable collections cycle. During the next two
quarters we intend to raise additional capital to fund future operations through
the sale of additional equity securities, new borrowings, or some combination of
debt and equity. We have not decided upon the timing, form or amount of capital
that we will seek and have no assurances or commitments that we will succeed in
raising additional capital. If we fail to raise additional capital to fund
future operations our business, financial condition and results of operations
will be materially and adversely affected, and our stock price will decline
substantially.
At September 30, 1999, we had cash or cash equivalents of $23.6
million, and short-term investments of $9.3 million, an increase of $32.5
million from September 30, 1998. Net cash used in operating activities was $10.8
million, $19.0 million and $25.9 million for the years ended September 30, 1997,
1998 and 1999, respectively. For the year ended September 30, 1997, the outflow
of cash from operating activities was partially offset by an increase in
deferred revenue attributable to a prepayment by IBM for goods and services. For
the year ended September 30, 1998, an operating loss was partially offset by an
increase in accounts payable. For the year ended September 30, 1999, cash used
in operating activities was primarily attributable to a net loss of $26.9
million, a nonrecurring interest charge on convertible debt obtained from IBM
and Perseus of $7.5 million, a $3.8 million increase in accounts receivable, a
$1.9 million decrease in accounts payable and a $4.3 million decrease in
deferred revenue. The decrease in deferred revenue was due primarily to the
recognition of deferred revenues from license and service fee prepayments by
IBM.
Net cash used in investing activites was $1.0 million, $0.8 million and
$2.2 million for the years ended September 30, 1997, 1998 and 1999,
respectively. For the years ended September 30, 1997 and 1998, the principal
investing activity was the purchase of property and equipment. The increase for
the year ended September 30, 1999 was attributable to expenditures for new
leasehold improvements as the Company moved from smaller facilities to its
current location and to operating loans provided to Sitematic Corporation in
August 1999.
Net cash provided by financing activities was approximately $11.0
million, $20.0 million and $60.0 million for the years ended September 30, 1997,
1998 and 1999, respectively. For the year ended September 30, 1997, the major
financing activity was the issuance of Series E preferred stock and the exercise
of Series B, C and E warrants. For the year ended September 30, 1998, repayments
of about $2.1 million in notes to IBM offset $21 million in proceeds from
short-term notes, principally from IBM and IBM Credit Corp. For the year ended
September 30, 1999, we received $12.9 million in proceeds of convertible debt
from IBM and Perseus, $3.4 million in short-term notes from IBM, $5.3 million in
proceeds from the issuance of preferred stock, and $65.6 million in net proceeds
from our IPO of which we used approximately $26.7 million to repay short-term
notes, convertible debt, and credit facilities to IBM and IBM Credit Corp.
Year 2000 Readiness
As of this date, we are not 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. There can be no
assurance that we will not discover Year 2000 compliance problems in the future
that will require substantial revisions or replacements. Any material Year 2000
problems could require us to incur unanticipated expenses to remedy and could
divert our management's time and attention, which could cause our revenues to
decrease and our stock price to fall.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards 133 (SFAS 133), Accounting for
Derivative Instruments and Hedging Activities, which establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS 133
is effective as of the beginning of the first quarter of the fiscal year
beginning after June 16, 2000. The Company is determining the effect of SFAS 133
on its financial statements.
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In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) no. 101 regarding recognition, presentation and
disclosure of revenue. The Company is determining the effect of SAB 101 on its
financial statements for revenue recognized after September 30, 2000.
In March 2000, the Emerging Issues Task Force reached a consensus on
Issue 00-2, "Accounting for the Costs of Developing a Web Site" (EITF 00-2). In
general, EITF 00-2 states that the costs of developing a web site should be
accounted for under provisions of Statement of Position (SOP) 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use." We
are currently evaluating EITF 00-2 and do not believe that the pronouncement
will have a significant impact on our financial position, results of operations
or cash flows. EITF 00-2 is effective for costs incurred after June 30, 2000.
Also, in March 2000, the Emerging Issues Task Force reached a consensus
on Issue 00-3, "Application of AICPA Statement of Position 97-2, `Software
Revenue Recognition' to Arrangements That Include the Right to Use Software
Stored on Another Entity's Hardware" (EITF 00-3). EITF 00-3 addresses the
accounting issues related to software hosting arrangements. In general, EITF
00-3 states that if the customer does not have the option to physically take
possession of the software, the transaction is not within the scope of SOP 97-2
and revenue should be recognized ratably over the hosting period as a service
arrangement. However, if the customer has the option to take physical delivery
of the software and specific pricing information is available for both the
software and hosting components of the arrangement, then the software revenue
may be recognized when the customer first has access to the software and revenue
from the hosting component should be recognized ratable over the hosting period.
We are currently evaluating EITF 00-3 and do not believe that the pronouncement
will have a significant impact on our financial position, results of operations
or cash flows. We will be required to implement EITF 00-3 for the year ended
September 30, 2001
Qualitative and Quantitative Disclosures About Market Risk
Our exposure to market risks for changes in interest rates relates
primarily to investments in debt securities issued by U.S. government agencies
and corporate debt securities. We place our investments with high quality credit
issuers and, by policy, limit the amount of the credit exposure to any one
issuer. We manage interest rate risk by limiting investments to debt securities
of relatively short maturities. In addition, we maintain sufficient cash and
cash equivalents so that we can hold investments to maturity.
At March 31, 2000, we had cash and cash equivalents of $16.4 million,
including approximately $13.7 million in money market funds and $1.0 million
invested in high-grade commercial paper issued by U.S. companies, with
maturities of less than 90 days. We have classified these debt securities as
available for sale.
Our general policy is to limit the risk of principal loss and ensure
the safety of invested funds by limiting market and credit risk. All highly
liquid investments with a maturity of three months or less at the date of
purchase are considered to be cash equivalents; investments with maturities
greater than three months are considered to be short-term investments. Our
investment policy limits purchases of debt securities to maturities of three
months or less.
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To date, we have not purchased or sold forward contracts to hedge
foreign currency exposure, since the relative amounts of international revenue
transacted in foreign currencies have not been large enough to make hedging
cost-effective.
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BUSINESS
Our Company
We are a leading provider of software, solutions, and services that
enable small businesses to build, deploy and maintain websites, conduct on-line
e-business, and enable large enterprises to effectively create and manage
corporate intranets. Our e-business solutions address the growing challenges
faced by businesses in capturing the explosive growth of the Internet as an
on-line business medium to publish content, deploy web applications, and manage
their e-business operations.
In 1996, we pioneered the website 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
small business websites with an intuitive, visual interface that helps automate
and integrate many site-building functions. Since 1996, we have continued to
enhance and expand NetObjects Fusion, incorporating a wide range of support for
web browsers, database software and web servers. In September 1998, we
introduced NetObjects Authoring Server Suite 3.0, a client-server application
for the corporate intranet market. In addition, to complement our enterprise
solutions, we began offering professional services to our business customers to
better serve their website planning, building and maintenance needs. In March
2000, we commenced commercial shipment of NetObjects Collage, an integrated
platform that combines collaboration with content management, enterprise
integration, and dynamic application services.
We have also built popular on-line resources, including NetObjects.com,
and eFuse.com, that target communities of business users and provide sources of
information, products, and services for building websites. In October 1999, we
acquired Sitematic, and began offering its on-line website building capabilities
for small businesses. In December 1999, we combined these on-line resources and
launched GoBizGo.com, a web application services site where small businesses can
find the solutions and services needed to build a successful web presence.
As part of our strategy to provide complete e-business solutions, we
have formed technology relationships with other Internet companies. We have
worked with many of these companies 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, IBM HotMedia, and
IBM WebSphere, and we have built extensions for the Microsoft ASP Site Server.
These extensions provide us with broader platform connectivity and
interpretability. We offer on-line solutions with key on-line service providers,
including website hoster's such as Concentric Network, United Internet, Verio,
and Strato AG, and banner exchange providers such as SmartAge and BeFree. We
also have product bundling agreements with leading software companies, such as
IBM, Lotus and Novell that help us to create greater brand recognition and
awareness. Further, we have entered into a joint agreement with Sun Microsystems
to offer the NetObjects Authoring Server on the Sun Solaris platform.
On May 7, 1999, we completed an initial public offering of our common
stock, raising about $65.0 million, after underwriters' fees and other expenses,
through the sale of six million
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shares of common stock. On October 4, 1999, we acquired all the outstanding
stock of Sitematic for approximately two million shares of NetObjects common
stock and $1.6 million in cash. Following the acquisition of Sitematic, we have
organized our business into small business and online products, and services to
offer small firms website solutions and on-line application services; and large
organization, or enterprise, products and services, that offer company-wide web
solutions and services for large enterprises.
Industry Overview
Growth of the Web
In fewer than five years, the web has emerged as a universal, rapidly
growing on-line business medium enabling millions of users worldwide to share
information, conduct e-commerce and access business applications. The explosive
growth of the web as an on-line 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. We believe the cycle of growth will accelerate as
an increasing number of web users attracts more businesses to build or enhance
their on-line web sites, which in turn attracts more users.
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 on-line 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 on-line can enhance revenues,
reduce costs and improve performance.
The growth of the web as a global communications medium is also driving
large-scale corporate enterprises to enhance commerce, communication,
collaboration and productivity by building corporate web applications consisting
of numerous internal and external web sites. These sophisticated applications
bring together corporate information and resources that facilitate communication
and information sharing within an organization. These applications can also
streamline business processes such as customer service, sales and marketing as
well as improving the company's business performance.
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 on-line. 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
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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 HTML programmers or highly skilled
designers. 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. The second generation of products, and on-line
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 and did not target the business user.
Our opportunities to provide website solutions in today's environment
lie in multiple areas. We believe that the majority of small businesses have not
strategically embraced the Internet. 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 much 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
Small businesses require easy-to-use integrated solutions that enable
them to build or enhance their websites 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, now shipping as version 5.0, addresses 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, NetObjects Fusion 5.0 includes a feature to easily link
the newly created website to a web hosting service.
For small businesses that wish to start with a simple e-commerce
presence, GoBizGo.com offers on-line site building capabilities using templates,
web hosting, and other application services needed to make these firms fully
e-commerce enabled. GoBizGo.com also provides information for building,
maintaining, and promoting websites, and an on-line site development community
for small businesses.
Large-scale corporate enterprises and departments require an integrated
solution that enables them to manage the entire web production process. They
also need products that integrate with disparate corporate systems and platforms
in order to leverage existing legacy systems, databases, and content. In
addition, teams that develop corporate web applications have requirements
distinctly different from those of individuals who develop external websites.
They need a solution that supports creativity and collaboration, while allowing
an administrator to assert control over the site-building process. Our recently
introduced, award-winning software solution, NetObjects Collage, provides this
solution for corporations that are developing enterprise web
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applications. Our enterprise professional services group can provide the
technical support necessary to manage a seamless implementation of this
solution. In addition, we offer software components that permit rapid
integration with products from other technology companies, including Allaire,
IBM, Lotus, and Microsoft that provide additional web applications, database
publishing, and e-commerce capabilities.
To facilitate the implementation of NetObjects Collage, we provide our
customers with the training and consulting services that large enterprises
typically need to design, build, deploy, maintain their websites, and integrate
their websites 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 for small businesses and large enterprises, by leveraging our
position as a leading provider and brand for website building software. As more
companies seek solutions for capturing the explosive growth of the web as an
on-line business medium, we believe our e-business software and services provide
an ideal starting point. NetObjects Fusion, NetObjects Collage, and GoBizGo.com
on-line position us to aggregate broader solutions, including third party
hosting, 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 website building product category, and as the
recipient of many industry awards, we believe that we have established a premier
Internet brand in the market for website building products and services. Our
customer base and the active on-line communities of builders who use our
products help sustain and promote our brand by participating in our website
forums and bulletin boards and by providing feedback on pre-release versions of
our software. Over 60,000 links exist from other websites to NetObjects.com,
including the websites of complementary products and services providers. 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 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:
o product bundling and distribution arrangements with companies
such as Allaire, IBM, Lotus and Novell to combine NetObjects
Fusion with popular business software;
o IBM/Lotus markets, bundles and sells a version of NetObjects
Fusion with Designer for Domino Application Studio under an
agreement that expires on December 31,
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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
o Novell bundles a version of NetObjects Fusion with its NetWare
for Small Business product offering on a worldwide basis.
Under the terms of this agreement, the contract is
automatically renewed each September 30, unless terminated by
one of the parties with written notice. This agreement was
renewed on September 30, 1999 for an additional year. Novell
also offers end-user training for NetObjects Fusion at over
100 Novell certified training centers worldwide. Novell is a
NetObjects stockholder
o arrangements with companies such as Deluxe Business Forms,
ThemeWare Corporation, US West Communications Services, Inc,
OfficeMax, Inc, Sir Speedy International, and Tickets.com, Inc
to distribute GoBizGo.com services to their small business
customers;
o technology relationships to integrate our products with web
application servers from Allaire, Lotus, IBM, Microsoft,
PeopleSoft, and Sun Microsystems, and e-commerce software from
Breakthrough Software, PDG Software, iCat, and to create
components in Java that provide our products with additional
functions for building web applications and conducting
e-commerce; and
o on-line solutions that combine our products with on-line
service providers such as Concentric Network, T-Online, Verio,
Zip2, Stratos AG and United Internet by offering our products
as part of their on-line 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 greatly enhance our brand recognition and 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.
Technological Leadership and Open Architecture.
NetObjects Fusion and NetObjects Collage 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 automatically generate HTML code by using words and graphics
without programming. In addition, NetObjects Collage offers an integrated
content management environment for teams of web contributors and developers,
while providing centralized control over the site production effort. We have an
open architecture that:
o supports all major Internet protocols;
o is publishable on major web browsers, such as Netscape
Navigator and Microsoft
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Internet Explorer; and
o allows other website 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 other OEM
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
websites to maintaining and promoting them. We believe that other website
solutions providers have compelling incentives to use NetObjects Fusion,
NetObjects Collage and GoBizGo.com 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 websites. 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 on-line services from other website
solutions providers.
Products and Services
We provide solutions for two broad categories of customers: NetObjects
Fusion and GoBizGo.com services for small businesses; and NetObjects Collage and
professional services for the large enterprise web market.
Small Business and Online Services
NetObjects Fusion is an easy-to-use desktop application designed
specifically for small businesses. NetObjects Fusion offers a range of
publishing and e-commerce capabilities to simplify website building and enhance
the productivity of both novice and experienced website builders. NetObjects
Fusion is available in nine languages in addition to English, including German,
French, Spanish, Chinese, and Japanese. The multi-language versions of
NetObjects Fusion, developed through our relationship with IBM, gives us an
opportunity to enter international markets for website building software, with
the exception of Germany we have seen limited development to date.
GoBizGo.com offers small businesses the website services they need to
become e-business participants. These services include website building
software, e-mail list management for communicating to customers, domain name and
search engine registration, auction export, content, and advice to implement an
e-business plan, and web hosting services.
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eFuse.com is an on-line 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 and an
on-line community of forums and newsgroups for webmasters and corporate web
application builders. eSiteStore.com is our on-line retail store that provides a
one-stop shopping destination for businesses to purchase our software, third
party software, components and merchandise, and also offers on-line services to
customers.
Enterprise and Professional Services
To successfully execute on the next generation of enterprise web
strategies, today's corporate enterprises require a solid foundation that can
enable a web production cycle which controls the dynamics involved with creating
and managing the growing complexity of web ever expanding applications. This
platform must enable enterprise-wide collaboration and content contribution,
scaleable management of both static and dynamic content, existing enterprise
application integration, and dynamic application services. NetObjects Collage is
designed to meet all these requirements. It addresses the key elements of
enterprise web management which includes:
Content Mangement. Unlike other web content management systems,
NetObjects Collage is an integrated platform that provides a single, continuous
view and control over the entire content management life cycle; from design,
collaboration and content contribution through content management and delivery.
Flexible workflow, versioning, site administration and reporting features give
content owners and application administrators complete control over any type of
content, anywhere in the development and deployment process.
Dynamic Application Services. NetObjects Collage Dynamic Application
Services greatly simplify the development and deployment of e-business
applications by providing the essential functions every e-business application
needs. The NetObjects Collage built in Dynamic Application Services include user
authentication and security, user session management, dynamic content
publishing, personalization, syndication, enterprise-wide search capabilities,
rapid Java integration, and open support for integration of third-party service.
Collaboration. NetObjects Collage brings distributed web teams closer
together, closing the gap between dynamic contribution, role based security and
access, and skills based contribution methods. Extended web team management and
open desktop solution support enables anyone to contribute content to web sites
in a controlled, efficient manner.
Enterprise Integration. NetObjects Collage includes reusable components
that easily enable the rapid integration of industry leading applications,
databases, and application servers with web applications. To further ease
enterprise integration with content development and management, NetObjects
Collage has integrated IBM's WebSphere Application Server. Enterprises can also
simply integrate their choice of application servers such as BEA WebLogic,
Netscape Application Server, Lotus Domino, Allaire ColdFusion and Microsoft IIS.
With an integrated web development, deployment, and management
platform, NetObjects Collage significantly speeds the process of design to
deployment, thus enabling companies to respond quickly to market changes.
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
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satisfaction and license sales growth. We provide consulting and implementation
services to our customers deploying the NetObjects Collage solution. We provide
these services through our own professional services organization and, through
relationships with third-party service providers. We also offer support and
training services to our customers, including telephone and on-line 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. We believe that approximately 60% of
our customers have been small businesses and approximately 40% have been large
enterprises, including Fortune 1000 companies or departments within these
enterprises. We believe that approximately 40% of our small business customers
are third-party service providers that build websites for other companies.
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
on-line 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 September 30, 1999, 51 of our employees, or
approximately one-third of our work force, were engaged in sales and marketing
activities.
Indirect Distribution Channels
Our indirect distribution channels include domestic and international
distributors, retail vendors, value-added resellers, OEM resellers and other
technology companies with whom we have strategic relationships. Our current
principal OEM resellers are IBM, Lotus, Novell, United Internet and Concentric
Networks. These OEM resellers recently have represented a majority of our
revenues from license fees. We have approximately 20 non-exclusive distributors
worldwide including Ingram Micro and Digital River in North America and Internet
2000 and Unipalm in Europe.
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 representatives have identified as sales prospects through leads generated
from inquiries on our websites, downloads of our trial products and other direct
marketing efforts.
Online Distribution Channel
Our eSiteStore.com website allows users to download and purchase our
products as well as numerous third-party add-ons. In addition, several
third-party e-commerce and distribution sites, including buydirect.com,
beyond.com and download.com, make our products available for sale on-line. The
on-line distribution channel provides us with a low-cost, globally accessible,
24-hour a day sales channel.
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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 on-line, direct marketing,
including direct mail, newsletters and e-mail, public relations, seminars for
potential customers, participation in trade shows, as well as conferences and
website promotion. 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 have had many
co-marketing and distribution arrangements with well-known companies such as
AT&T, Cisco Systems, Compaq Computer, Inc., Concentric, Microsoft, Netscape,
Verio, Office Max, Deluxe Forms, ADP, Tickets.com, Sir Speedy, Strato AG, United
Internet, Vobis AG, 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. We compete
for small business customers with web content software makers like Adobe
Systems, Inc., Macromedia, Inc., and Microsoft. In the on-line web hosting and
services market, we compete with providers like Verio and many other companies
that offer online subscription services similar to ours. We compete in the
Internet application development and services market for enterprise customers
with companies such as Interwoven, Inc., and Vignette Corporation.
Moreover, Microsoft's FrontPage, a website building software product,
has a dominant market share. Microsoft has introduced FrontPage 2000, in one
version of Microsoft's Office product suite, which dominates the market for
desktop business application software. We believe that NetObjects Fusion
contains features that significantly differentiate it from 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.
Competitive factors in our market segments include:
o the manner in which the software is distributed with other
products;
o quality and reliability;
o features for creating, editing, and developing websites;
o pricing;
o ease of use and interactive user features;
o scalability and cost per user; and
o compatibility with the user's existing computer systems.
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 website building products
industry and related industries such as computer
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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
our market segments.
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 website building software and services. During the
fiscal years ended September 30, 1998 and 1999, respectively, we invested
approximately 67% and 42% of our total revenues on research and development
activities. NetObjects Fusion and NetObjects Collage are among the earliest and
most recognized entrants in the emerging market for website 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 websites. We
intend to continue to devote substantial resources to research and development
for at least the next several years.
Our technology provides the following product advantages:
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<PAGE>
Open Architecture
Our products are built upon a flexible object-oriented architecture,
which has been instrumental in the rapid development of our products. The
architecture provides such significant benefits as:
o separating the visual display of information from its storage;
o supporting multiple databases;
o supporting major Internet protocols;
o allowing any HTML page editor to be used with our products;
o extending our products using components built using the Java
language; and
o allowing access to powerful applications over the Internet via
a browser.
We intend to continue to invest in further development of this
architecture to build and integrate new products and technologies.
Control and Collaboration
Enterprise websites 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 websites face the
conflicting needs of maintaining control and encouraging collaboration.
NetObjects Collage provides the performance needed to support concurrent,
collaborating users across an enterprise-wide deployment with several underlying
technologies such as a browser-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 September 30, 1999, we had 58
employees, or approximately one-third of our workforce, engaged in research and
development activities. Most of 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 "shrink-wrap" 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, a predecessor to our
44
<PAGE>
business that is controlled and majority owned by our CEO, Samir Arora. 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 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, 2000, we had 218 full-time employees and 19 part-time
employees. None of our employees are 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 with the Company 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. We
currently maintain five primary work locations listed below.
Principal Office San Diego Office
301 Galveston Drive 10350 Science Center Drive
Redwood City, California 94063 San Diego, California 92121
Approximate square footage: 26,000 Approximate square footage: 8,000
Lease Term: expires in November 2002 Lease Term: expires in November 2000,
with two one-year options remaining
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Berkeley Office Germany Office
2512 9th Street, Suite 3 Schatzbogen 56
Berkeley, Ca 94710 81829 Munich, Germany
Approximate square footage: 1,000 Approximate square footage: 6,000
Lease Term: expires in February 2001 Lease Term: expires in April 2005
United Kingdom
St. Mary's Court
The Broadway, Old Amersham
Bucks, HP7 OUT, United Kingdom
Approximate square footage: 400
Lease Term: expires in April 2000
Legal Proceedings
From time to time, we may be 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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<PAGE>
MANAGEMENT
Directors and Executive Officers
<TABLE>
Our directors and executive officers as of April 30, 2000 are as
follows:
<CAPTION>
Name Age Position
---------------------------------------- -----
<S> <C> <C>
Samir Arora............................. 34 Chairman of the Board, Chief Executive Officer and President
Russell F. Surmanek..................... 42 Executive Vice President, Finance and Operations and Chief
Financial Officer
Mark Patton............................. 42 Executive Vice President, Products and Services Group
Steven Mitgang.......................... 38 Executive Vice President, Marketing
Jack Rotolo............................. 39 Executive Vice President, Sales
Gagan (Sal) Arora....................... 26 Chief Technology Architect and Vice President, Engineering
Robert G. Anderegg(2)................... 50 Director
Lee A. Dayton(l)........................ 56 Director
John Sculley(l)(2)...................... 60 Director
Blake Modersitzki(2).................... 33 Director
Michael D. Zisman....................... 50 Director
-----------------------------------------------------------------------------------------------------------------
<FN>
---------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
</FN>
</TABLE>
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 Chairman of the Board, Chief Executive
Officer and President since the Company's 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 E 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. From 1989 to 1990, Mr. Surmanek was Controller, North
America Sales and Support for International Computers Limited (ICL). From 1983
to 1989 Mr. Surmanek held various financial management positions at Racal-Milgo,
Inc., a data communications equipment manufacturer. From 1981 to 1983, Mr.
Surmanek held various finance positions at Northern Telecom, Inc. 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.
Mark Patton was appointed Executive Vice President Product and Services
Group in May 2000, having served as 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
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<PAGE>
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.
Steven Mitgang was appointed Executive Vice President, Marketing in May
2000. Prior to joining the Company, Mr. Mitgang was Senior Vice President of
Marketing and Business Development at Sitematic. From December 1995 to August
1998, Mr. Mitgang was Senior Vice President of Marketing for Jostens Learning
Corporation, a curriculum software company. Mr. Mitgang held executive-level
positions with the Upper Deck Company from August 1991 to January 1995 and with
Reebok International from August 1989 to August 1991. From June 1984 to August
1989, Mr. Mitgang managed accounts in the New York office of Chiat/Day
Advertising. Mr. Mitgang holds an A.B. in Architecture from the University of
California, Berkeley.
Jack Rotolo was appointed Executive Vice President, Sales in May 2000.
From 1997 until August, Mr. Rotolo was Vice President, Sales. Prior to joining
the Company, Mr. Rotolo was senior manager of Apple Computer's consumer markets
solution development organization from February 1993 to February 1996. While at
Apple, Mr. Rotolo also managed the business, consumer and higher education
channel strategy organization and held various sales management positions in the
reseller operations group. Before joining Apple, Mr. Rotolo worked as regional
manager for Pepsi-Cola Bottling Group. He holds a B.S. in Finance from the
University of Dayton.
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.A. 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.
Blake Modersitzki has been a director of the Company since January
2000. He has been an employee of Novell for the past five years. He is presently
Managing Director of Novell Ventures, in which position he has served since
March 1998. He served as Business Development Director from January 1997 to
March 1998 and Senior Manager, Sales and Marketing for Small Business Networks
from May 1995 to January 1997. Mr. Modersitzki holds a B.S. in Economics from
Brigham Young University.
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<PAGE>
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 on-line
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 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.
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
The number of directors is fixed at six in our bylaws 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 resignation or
removal, whichever occurs first.
Contractual Arrangements
We are party to a voting agreement with IBM that provides 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 right to elect a greater number of directors under the Delaware General
Corporation Law. 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 us. 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 (as defined in the IBM Voting Agreement) for a period of 180
consecutive days. As of April 30, 2000, IBM held approximately 50% of our voting
securities as calculated on this fully-diluted basis, which takes into account
outstanding warrants and options to purchase shares of Common Stock. While the
IBM voting agreement remains effective, it may allow IBM's representatives on
the 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.
Compensation of Directors
Our directors do not receive cash compensation for their services as
directors or members
49
<PAGE>
of committees of the Board of Directors. Our amended and restated 1997 Stock
Option Plan provides for the automatic grant of options to purchase 20,000
shares of common stock to each outside director upon initially joining the board
of directors. The option exercise price is equal to the fair market value of a
share of common stock at the date of grant, the option term is six years, and
the options 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.
Messrs. Sculley and Modersitzki have received these automatic option
grants. 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 per share, vesting over
four years, and reimburse him for certain expenses incurred to attend Board of
Directors meetings.
Committees of the Board of Directors and Meetings
Our board of directors have standing audit and compensation committees.
The audit committee currently has three members: Robert G. Anderegg, John
Sculley and Blake Modersitzki. The compensation committee currently has two
members: Lee A. Dayton and John Sculley.
Compensation Committee Interlocks and Insider Participation
The compensation committee of the board of directors was formed in May
1999 and comprises Messrs. Lee A. Dayton and John Sculley. Neither of these
individuals was at any time during fiscal 1999, or at any other time, an officer
or employee of ours. Mr. Samir Arora participated in deliberations of the board
of directors and of the compensation committee concerning executive officer
compensation. No executive officer of the Company serves as a member of the or
compensation committee of any other entity that has one or more executive
officers serving as a member of our board of directors or compensation
committee.
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<PAGE>
Executive Compensation
The following table sets forth summary information concerning the
compensation received by our chief executive officer and by each of the other
four most highly compensated executive officers and their titles as of September
30, 1999 and September 30, 1998:
<TABLE>
Summary Compensation Table
<CAPTION>
Annual Compensation
Name and Principal Position Salary Bonus
--------------------------- ------ -----
<S> <C> <C> <C>
Samir Arora
Chairman of the Board, Chief Executive Officer, President............ 1999 $ 183,129 $55,987
1998 175,338 47,434
Russell F. Surmanek
Executive Vice President, Finance and Operations, Chief Financial 1999 108,447 113,750
Officer ............................................................. 1998 -- --
Morris Taradalsky(1)
Executive Vice President and General Manager, Enterprise............. 1999 176,073 24,343
1998 166,048 86,095 (2)
Mark Patton
Executive Vice President Product and Services Group.................. 1999 162,525 105,754
1998 150,000 35,555
Jack Rotolo (3)
Executive Vice President Sales....................................... 1999 119,923 53,774
1998 -- --
<FN>
------------------------
(1) Mr. Taradalsky resigned in April 2000.
(2) Includes $65,745 for relocation expenses.
(3) Mr. Rotolo became an executive officer in August 1999, and these figures
reflect his compensation for the entire fiscal year.
</FN>
</TABLE>
51
<PAGE>
Option Grants in Last Fiscal Year
<TABLE>
The following table provides information regarding the grant of stock
options during fiscal year 1999 to the named executive officers.
<CAPTION>
Individual Grants Potential Realizable Value
----------------------------------------------------- at Assumed Annual Rate of
% of Total Stock Price Appreciation
Number of Options for Option
Shares Granted to Exercise Term (7)
Underlying Employees Price Expiration ----------------------------
Name Options (1) in Fiscal ($/share) Date 5% 10%
------------------------------- ------------- ------------ ------------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Samir Arora -- -- % $ -- -- $ -- $ --
Russell F. Surmanek 235,000(2) 13 7.50 24-Mar-09 1,108,427 2,808,971
Morris Taradalsky 33,333(3) 2 7.50 09-Dec-08 157,223 398,432
30,000(5) 2 7.75 01-Jul-09 139,143 352,615
Mark Patton 41,666(3) 2 7.50 09-Dec-08 196,526 498,037
30,000(5) 2 7.75 01-Jul-09 139,143 352,615
Jack Rotolo 16,666(3) 1 7.50 12-Sep-08 78,609 199,210
10,000(4) 1 12.00 05-May-09 75,467 191,249
40,000(5) 2 8.06 30-Jun-09 202,755 513,823
100,000(6) 5 5.81 25-Aug-09 365,388 925,961
<FN>
-----------------
(1) Options are incentive stock options to the extent qualified and
nonstatutory options otherwise. The options
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<PAGE>
generally terminate 30 days following the executive's employment with the
company or the expiration date, whichever occurs earlier. The exercise
price of each option was determined to be equal to or greater than the fair
market value per share of the Common Stock at the grant date.
(2) Options to purchase 35,000 shares fully vested three months following the
date of grant. Options to purchase 200,000 shares vest as follows: 25%
after six months, 2.5% per month for the next six months; 50% shall vest in
twenty-four equal monthly installments thereafter, and 10% shall vest in
equal monthly installments for the next twelve months.
(3) Options vest as to 25% after one year, and 1/36 monthly thereafter.
(4) Options vest in 12 equal monthly installments.
(5) Options vest in 24 equal monthly installments.
(6) Options vest as to 35,000 shares after three months, and as to the balance
of the shares over the next 24 months in equal installments, and vesting
will accelerate on a change of control so that 70% of the total number of
shares subject to options will be fully vested on the date of the change of
control.
(7) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date. The gains shown are net of the option exercise
price, but do not include deductions for taxes or other expenses associated
with the exercise of the option or the sale of the underlying shares. The
actual gains, if any, on the exercise of stock options will depend on the
future performance of the Common Stock, the option holder's continued
employment throughout the option period and the date on which the options
are exercised.
</FN>
</TABLE>
Employment Contracts
We have entered into an employment agreement with Russell F. Surmanek,
Executive Vice President, Finance and Operations and Chief Financial Officer, as
of April 5, 1999. The employment agreement has a term of 24 months. Under the
agreement, Mr. Surmanek is entitled to receive an annual salary of $220,000 plus
a 15% sales target bonus payable semi-monthly, 20% of his annual salary as an
annual fiscal year bonus to executives and 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. Additionally, under the agreement
the Company granted options to purchase 235,000 shares of Common Stock to Mr.
Surmanek. 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.
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<PAGE>
Unexercised Options in Last Fiscal Year and Fiscal Year-End Values
The following table sets forth information regarding the number of
shares covered by both exercisable and unexercisable stock options as of
September 30, 1999, and the values of "in-the-money" options, which values
represent the positive spread between the exercise price of any such options and
the fiscal year-end value of our common stock. Additional option grants to our
chief executive officer and other executive officers since September 30, 1999
are discussed under "Benefit Plans."
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options
September 30, at September 30,
1999 1999
------------------------ ------------------------
Exercisable/ Exercisable/
Name Unexercisable Unexercisable(1)
---- ------------------------ ------------------------
Samir Arora................. 140,625 / 84,375 $558,984 / $335,390
Russell F. Surmanek......... 35,000 / 200,000 --
/ --
Morris Taradalsky........... 83,055 / 113,611 332,289 / 217,709
Mark Patton................. 16,051 / 107,255 64,188 / 177,335
Jack Rotolo................. 13,421 / 180,627 19,747 / 85,104
----------------------
(1) The value of unexercised in-the-money options at fiscal year end assumes
a fair market value for the common stock of $5.63, the closing market
price per share of the Company's Common Stock as reported on the Nasdaq
National Market on September 30, 1999.
Loans to Officers and Directors
In October 1999, we advanced $200,000 to Russell F. Surmanek, which is
evidenced by a promissory note bearing interest at the applicable federal rate
as defined in Section 1274(d) of the Internal Revenue Code of 1986, as amended.
The note was due in full two years from the date of issuance and was a full
recourse loan. Mr. Surmanek repaid this loan in full in March 2000. In April
2000, we advanced $250,000 to Samir Arora, which is evidenced by a promissory
note bearing interest at 6.45%, the applicable federal rate under Section
1274(d) of the Internal Revenue Code. The note is due in full in two years and
must be repaid before that date from the proceeds of any sale by Mr. Arora of
his shares of common stock.
Limitation of Liability and Indemnification Matters
Our amended and restated certificate of incorporation 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.
Our amended and restated bylaws 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.
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<PAGE>
We have entered into agreements with our directors and executive
officers that 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
Amended and Restated 1997 Stock Option Plan
The amended and restated 1997 Stock Option Plan was adopted in April
1997 and was amended and restated upon board of directors and stockholder
approval effective May 12, 1999 to provide for 4,500,000 shares of common stock
reserved for issuance upon the exercise of options granted under the plan. On
November 22, 1999, the board of directors approved an amendment to the plan to
increase the maximum aggregate number of shares of common stock reserved for
issuance under the plan from 4,500,000 shares to 7,600,000 shares, which
amendment was ratified by the stockholders on March 15, 2000.
At April 30, 2000, options covering an aggregate of 6,006,080 shares
were outstanding under the Plan and 405,754 shares remained available for future
grants. In fiscal year 1999, we issued options to purchase 235,000, 63,333,
71,666 and 166,666 shares of common stock, respectively, to Russell F. Surmanek,
Morris Taradalsky, Mark Patton and Jack Rotolo, respectively. In April 2000, we
granted new options to purchase a total of 1,528,000 shares of common stock
under the plan to key employees, including the grant of options to purchase
400,000 shares to Mr. Arora, 50,000 shares each to Messrs. Patton, Surmanek and
Rotolo, and 10,000 shares to Steven Mitgang. The exercise price of the options
was set at market price on the grant date, and they vest monthly based upon
continued employment over 24 months.
Executive Stock Option Agreements
In November, 1999, we issued options to purchase 200,000 shares of
common stock at $7.125 per share to each of Samir Arora , Sal Arora, Russell
Surmanek, Morris Taradalsky, Mark Patton, Jack Rotolo, and Steven Mitgang.
Generally, these options vest monthly over 24 months, and for Messrs. Surmanek,
Mitgang and Rotolo, they vest upon a change of control following which their
positions are eliminated or their compensation is decreased. In addition, Mr.
Rotolo's options vest monthly over 12 months. All of these options are subject
to the terms of an Executive Stock Option Agreement which provide that none of
the options could be exercised until the stockholders had ratified the option
grants. At our annual meeting on March 15, 2000 the stockholders approved a
proposal to ratify all of these option grants.
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 Samir Arora who received a grant to purchase 225,000
shares. 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
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does not intend to grant any more options under this stock option plan.
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, took effect upon the closing of
our initial public 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
commenced on the first trading day after the closing of our initial public
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
could be purchased at the end of each of July 31, 1999, January 31, 2000 and
July 31, 2000.
The ESPP is 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 RELATIONSHIPS AND RELATED TRANSACTIONS
Set forth below is a summary of certain material transactions since
October 1, 1998 between us and any of our directors, executive officers or
holders of more than 5% of our common stock, or between us and persons in which
directors, executive officers or such stockholders have a direct or indirect
material interest.
Transactions with IBM
Notes and Warrants. In October and December 1998, we issued 10%
convertible notes for approximately $10.1 million and $825,000, respectively, to
IBM. The notes, including accrued interest, converted into 1,979,875 shares of
common stock on the closing of our initial public offering. With the notes, we
also issued warrants to purchase shares of Series E-2 preferred stock to IBM at
an exercise price of approximately $6.68 per share, which converted into the
right to purchase 189,062 shares of common stock on the closing of the initial
public offering. These warrants are exercisable for five years from their
respective issuance dates and, at IBM's option, are exercisable on a net basis
by surrendering shares of common stock as payment of the exercise price.
On February 4, 1999, IBM agreed to purchase up to approximately $3.4
million of 10% notes and additional warrants. The notes were similar to the
earlier issued notes, but were not convertible into preferred stock. The warrant
terms were identical to the earlier issued warrants. We issued a note in the
amount of $2.0 million and a warrant to purchase shares of Series E-2 preferred
stock to IBM on February 18, 1999. On March 23, 1999, we issued a note for
approximately $1.41 million and an additional warrant to purchase shares of
Series E-2 preferred stock to IBM. We repaid all indebtedness under the
additional notes upon the closing of the initial public offering, at which time
the two warrants became exercisable for the purchase of a total of 64,132 shares
of common stock.
On April 23, 1999, we obtained an additional $2.0 million loan from IBM
under a 10% unsecured demand note. We repaid the principal and interest due
under the note from the proceeds of our initial public offering.
On March 23, 2000, IBM exercised warrants to purchase 3,482,838 shares
of common stock at an exercise price of approximately $6.68 per share on a net
basis by surrending shares of common stock as payment of the exercise price. As
a result, we issued 2,739,679 shares of common stock to IBM.
Software License Agreement. We and IBM have a 10-year software license
agreement, originally entered into on March 18, 1997. The agreement 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. The agreement has been amended a
number of times. The agreement obligates us to place all 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 its 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 and certain transactions occurring under the agreement as amended
since October 1, 1998 are as follows:
o Amendment Number 1 and Amendment Number 4 license IBM to use
our products in its internal operations by paying 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
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by IBM with IBM products. These rates are based on the
percentage which the value of our 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.
o 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. This agreement expired on
December 31, 1999.
o 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.
o We agreed to perform services for IBM to make its products
compatible with and to integrate its 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 license fees equal to the total amount of our
expenditures on the project, plus a 20% profit margin.
Amendment No. 8 modified the 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 provided for us to receive license fees on bundles of
its products with IBM's WebSphere products, calculated,
generally, at 50% of the applicable software license agreement
royalty rate, as described above.
o 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.
o We and IBM amended a letter agreement subject to all other
terms of the software license agreement to bundle NetObjects
Fusion with Lotus' Designer for Domino, extending the term
from September 30, 1998 to June 30, 1999 and increasing the
minimum amount of license fees payable under the agreement by
$500,000 and the minimum number of copies. In April 1999, we
entered into a new contract to bundle a version of NetObjects
Fusion with Lotus Designer Application Studio for Domino R5,
which expired on December 31, 1999. We and IBM also entered
into a letter agreement, dated December 22, 1999, in which we
granted IBM the right to bundle copies of NetObjects Fusion
3.01 with Lotus SmartSuite during calendar year 2000, for
which IBM paid us a one-time fee of $1.0 million. We agreed to
reimburse IBM for
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up to $400,000 for promotional and advertising expenditures
that IBM incurs in marketing these bundles.
o IBM granted us a non-exclusive right to incorporate utilities
for Lotus FastSite into NetObjects Fusion 5.0 for a one-time
fee of $75,000.
o In March 2000, we and IBM entered into a letter agreement in
which we granted IBM the right to bundle copies of NetObject
Fusion 5.0 with IBM PC's for a 12-month period, for which IBM
agreed to pay us a one-time fee of $2.3 million. We agreed to
reimburse IBM for up to $500,000 for promotional and
advertising expenditures that IBM incurs marketing these
bundles.
Other License Agreements.
During fiscal year 1999:
o We entered into a trademark license agreement with IBM that
permits IBM to use the NetObjects trademark on certain
products developed by IBM in Japan. IBM must pay us fifty
cents for each use.
o 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 it distributes
the software. There is a minimum royalty of $5 and a maximum
royalty of $20 per software bundle.
o Lotus granted us a license to copy and distribute Lotus
FastSite for NAS, version 2.0, a document conversion program
for use with NetObjects Authoring Server, for a one-year term.
We are obligated to pay Lotus a per copy royalty of 25% of our
average selling price up to 5,000 units and 20% of our average
selling price for copies in excess of that, but in no event
less than $15 per copy. We have granted to Lotus a
royalty-free, perpetual right to copy and distribute software
it developed that facilitates integration between Lotus
FastSite and NetObjects Authoring Server.
Loan and Security Agreement. Upon completion of our initial public
offering in May 1999, we repaid approximately $19.0 million in total principal
amount under convertible revolving credit notes issued to IBM Credit corp
pursuant to the terms of a revolving loan and security agreement dated December
23, 1997.
Voting Agreement. In January 1999, we and IBM entered into the IBM
Voting Agreement.
Distribution Agreement with Novell
During fiscal year 1999, Novell bundled NetObjects Fusion with Novell's
NetWare for Small Business product offering under a license agreement providing
for royalties on a per unit basis as products are sold by Novell. We were
entitled to receive a minimum of $500,000 of royalties under the Novell
agreement. this license agreement automatically renews for additional one-year
periods unless terminated by either party, and is currently in effect. After
September 30, 2000, either party may terminate the agreement on 90 days' written
notice. Christopher M. Stone, a former Executive Vice President with Novell, was
a Director of the Company until January 25, 2000. Blake Modersitzki, Managing
Director of Novell Ventures, was elected as a director on January 25, 2000.
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Other Transactions
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 received the right to have an observer
attend meetings of the 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. The board of directors may terminate
this right in its discretion at any time as of October 26, 1999.
During the fiscal year ended September 30, 1999, we sold 44,918 and
37,432 shares of Series E preferred stock at a purchase price of approximately
$6.68 per share to Samir Arora and one former executive officer, David
Kleinberg, respectively.
We are a licensee of Rae Technology, Inc. patents under an April 10,
1997 license agreement. Samir Arora is a director, President and a majority
shareholder of Rae Technology, Inc. During fiscal year 1999, we reimbursed Rae
Technology approximately $30,000 for patent prosecution expenses under the terms
of the license agreement.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of the common stock as of April 30, 2000, as adjusted to reflect the
sale of the shares of common stock in this 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 April 30, 2000 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:
Shares Beneficially
Owned Prior to the Offering (1)
-------------------------------
Name of Beneficial Owner Number Percent
------------------------ ------ -------
International Business Machines Corporation (2) 15,552,010 50.0%
New Orchard Road
Armonk, NY 10504
Current Directors:
Samir Arora (3)....................... 1,806,825 5.8
c/o NetObjects, Inc.
301 Galveston Drive
Redwood City, CA 94062
Robert G. Anderegg -- --
Lee A. Dayton -- --
Blake Modersitzki(6) 2,083* --
John Sculley (4) 35,483* --
Michael D. Zisman -- --
Named Executive Officers who are not Directors:
c/o NetObjects, Inc.
301 Galveston Drive
Redwood City, CA 94063
Russell F. Surmanek (5) 173,248*
Morris Taradalsky (10) 195,422*
Mark Patton (7) 194,516*
Jack Rotolo (8) 184,790*
All directors and executive officers as a group
(10 persons) (9) 2,592,367 8.4
--------------------------------------------------------------------------------
* Represents beneficial ownership of less than 1% of the Company's Common Stock.
(1) The number of shares of Common Stock issued and outstanding on April 30,
2000 was 30,791,638. The calculation of percentages is based upon the
number of shares of Common Stock issued and outstanding on such date, plus
shares of Common Stock subject to options and/or warrants held by the
respective persons on
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April 30, 2000 and exercisable within 60 days thereafter. Such shares are
not deemed outstanding for the purpose of computing the percentage
ownership of any other person. Warrants are assumed to be exercised in full
notwithstanding the warrant holders' right to exercise the warrant on a
"net" basis by surrendering shares of Common Stock having a value equal to
the warrant exercise price upon exercise of the warrant. The persons and
entities named in the table have sole voting and dispositive power with
respect to all shares shown as beneficially owned by them, except as
described below.
(2) Includes warrants to purchase 253,194 shares at approximately $6.68 per
share that are exercisable on a net basis and expire on various dates in
2003 and 2004, and warrants to purchase 83,333 shares of Common Stock at
$10.80 per share that are exercisable on a net basis and expire in December
2000.
(3) Includes 318,924 shares subject to options to purchase Common Stock held by
Mr. Arora that are exercisable within 60 days of April 30, 2000. Also
includes 299,457 shares of Common Stock owned by Information Capital LLC,
wholly owned by Mr. Arora, and 362,129 shares of Common Stock held by Rae
Technology II LLC, of which he is President and owns a majority of the
equity interests. Mr. Arora exercises shared voting and dispositive power
over the shares held by Rae Technology II LLC, but disclaims beneficial
ownership of those shares except to the extent of his pecuniary interest
therein.
(4) Includes 23,334 shares subject to options to purchase Common Stock held by
Mr. Sculley that are exercisable within 60 days of April 30, 2000.
(5) Includes 171,390 shares subject to options to purchase Common Stock held by
Mr. Surmanek that are exercisable within 60 days of April 30, 2000.
(6) Includes 2,083 shares subject to options to purchase Common Stock held by
Mr. Modersitzki that are exercisable within 60 days of April 30, 2000.
(7) Includes 95,118 shares subject to options to purchase Common Stock held by
Mr. Patton that are exercisable within 60 days of April 30, 2000.
(8) All 174,497 shares are subject to options to purchase Common Stock held by
Mr. Rotolo that are exercisable within 60 days of April 30, 2000.
(9) Includes 971,041 shares subject to options to purchase Common Stock that
are exercisable within 60 days of April 30, 2000 and 362,129 shares of
Common Stock held by Rae Technology II LLC.
(10) Includes 185,695 shares subject to options to purchase Common Stock held by
Mr. Taradalsky that are subject to expiration on May 18, 2000.
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SELLING STOCKHOLDERS
<TABLE>
The following table sets forth the name and the number of shares of
common stock beneficially owned by the stockholders listed below as of March 31,
2000, the number of shares of common stock that may be offered by selling
stockholders and the number and percentage of shares to be owned beneficially by
the selling stockholders assuming the sale of the shares offered by this
prospectus. In this prospectus, the term "selling stockholders" includes donees
and pledgees selling shares received from a named stockholder after the date of
this prospectus. Except as otherwise described below, none of the selling
stockholders has held any office with, been employed by, or otherwise had a
material relationship with us or our affiliates since October 1, 1999.
<CAPTION>
Percentage of
Shares of Common Stock Number of Shares of Outstanding Shares of
Beneficially Owned Before Common Stock Stock After
Name of Selling Stockholder Offering (1),(2) Offered Hereby Offering (3)
___________________________ _______________ ______________ ____________
<S> <C> <C> <C>
Donald Cruickshank 33,284 29,101 *
Keith Cruickshank 627,115 564,403 *
DHR International 3,350 3,015 *
Dominion Capital Management, LLC 8,757 7,881 *
Mason Flemming 11,676 10,508 *
GC&H Investments 12,481 10,912 *
James R. Goode 6,030 5,427 *
Joel T. Grushkin 4,029 3,626 *
Chuck Kimmel 1,884 1,695 *
Roy Lessard 11,676 10,508 *
Mission Ventures Affiliates, LP 89,971 78,665 *
Mission Ventures, LP 430,096 376,051 *
Jeff Phillips 1,103 992 *
Lee Sharp 3,350 3,015 *
Jennifer Lynn Shaw Minors Trust 67,935 61,141 *
Jeremy Andrew Shaw Minors Trust 67,935 61,141 *
Peter J. Shaw & Elaine R. Shaw Family
Trust 279,589 250,921 *
Gary Shields 11,676 10,508 *
The Townsend Agency 4,126 3,713 *
Warren Weiner 16,884 14,762 *
Windward Ventures, LP 312,041 272,830 *
-
<FN>
------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission which generally attribute beneficial
ownership of securities to persons who possess sole or shared voting power
and/or investment power with respect to those securities that the person
has the right to acquire within 60 days of March 31, 2000. Unless otherwise
indicated, the persons or entities identified in the table have sole voting
and investment power with respect to all shares shown beneficially owned by
them.
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(2) In connection with the Sitematic acquisition, each selling shareholder,
except as otherwise indicated above, placed in escrow a number of shares
equal to one-tenth of the NetObjects stock into which Sitematic shares were
converted, plus an additional one-tenth of the number of shares of
NetObjects stock into which the cash received by the Sitematic shareholders
could be converted at a price of $6.567 per share, until October 4, 2000,
under the terms of an escrow agreement dated October 4, 1999, will not be
subject to the identified stockholder's direct ownership and control before
release from escrow and have not been registered for sale under this
prospectus.
(3) Less than one percent of outstanding shares of Common Stock indicated by
"*".
</FN>
</TABLE>
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PLAN OF DISTRIBUTION
The selling stockholders may offer their shares of common stock at various times
in one or more of the following transactions:
o on any of the United States securities exchanges where the common stock is
listed and traded, including the Nasdaq National Market;
o in the over-the-counter market;
o in transactions other than on such exchanges or in the over-the-counter
market;
o in connection with short sales of the shares;
o by pledge to secure debts and other obligations;
o in connection with the writing of non-traded and exchange-traded call
options, in hedge transactions and in settlement of other transactions in
standardized or over-the-counter options; or
o in a combination of any of the above transactions.
The selling stockholders may sell their shares of common stock at market prices
prevailing at the time of sale, at prices related to such prices, at negotiated
prices, or at fixed prices.
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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. Our authorized capital stock consists of
120,000,000 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 April 30, 2000, 30,791,638 shares of common stock were
outstanding and held of record by 227 stockholders. Each holder of common stock
is entitled to the following:
o one vote per share;
o 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
o 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 April 30, 2000, 1,567,714 shares of common stock were
issuable upon exercise of outstanding options at a weighted average exercise
price of $5.59 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. As of April 30, 2000, there are no shares of preferred stock outstanding
and we have no current intention to issue any shares of preferred stock.
Warrants to Purchase Common Stock
As of April 30, 2000, IBM held outstanding warrants to purchase 189,062
and 64,133 shares of common stock with an exercise price of $6.68, that expire
in October 2003 and February 2004, respectively, and 83,333 shares of common
stock with an exercise price of $10.80 and an expiration date in December 2000.
Voting and Other Matters
The board of directors 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
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<PAGE>
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: 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."
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.
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Registration Rights
In the event we propose to register any of our securities under the
Securities Act is an underwritten primary registration our second amended and
restated registration rights agreement gives IBM rights to 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. 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. 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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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 11,583
shares of the common stock.
EXPERTS
The consolidated balance sheets of NetObjects, Inc. and subsidiaries as
of September 30, 1997, 1998 and 1999, the related financial statement schedule
and the consolidated statements of operations and comprehensive loss,
stockholders' deficit and cash flows for each of the years in the three-year
period ended September 30, 1999, have been included and incorporated by
reference herein and in the registration statement in reliance upon the report
of KPMG LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The balance sheet of Sitematic Corporation as of September 30, 1999 and
the related statements of operations, stockholders' deficit and cash flows for
the year then ended, have been included herein and in the registration statement
in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
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.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The information incorporated by reference is considered to be part of
this prospectus, and information we file later with the SEC will automatically
update and supersede this information. We incorporate by reference the documents
listed below and any future filings made by us with the SEC under Sections
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until the sale
of all of the shares of common stock that are part of this offering. The
documents we are incorporating by reference are as follows:
o Our Annual Report on Form 10-K and an amendment thereto on a
Form 10-K/A for the year ended September 30, 1999;
o Our Quarterly Reports for the three and six months ended
December 31, 1999 and March 31, 2000, respectively;
o Our Current Report on Form 8-K filed on October 19, 1999 and
our Amended Current Report on Form 8-K/A filed on December 20,
1999;
o Our Preliminary Proxy Statement filed on January 28, 2000 and
our Definitive Proxy Statement on Form 14A filed on February
11, 2000;
o Our Registration Statement on Form S-8 filed on March 22,
2000;
o Our Registration Statement on Form S-1 to which this amendment
relates, filed on May 12, 2000; and
o The description of our common stock contained in our
registration statement on Form S-1 declared effective by the
SEC on May 7, 1999, including any amendments or reports
filed for the purpose of updating that description.
Any statement contained in a document that is incorporated by reference
will be modified or superceded for all purposes to the extent that a statement
contained in this prospectus (or in any other document that is subsequently
filed with the SEC and incorporated by reference) modifies or is contrary to
that previous statement. Any statement so modified or superceded will not be
deemed a part of this prospectus except as so modified or superceded.
We will provide to each person, including any beneficial owner of
securities, to whom a prospectus is delivered, a copy of any or all the
information that has been incorporated by reference in the prospectus but not
delivered with the prospectus. You may request a copy of these filings at no
cost (other than exhibits unless such exhibits are specifically incorporated by
reference therein) by writing or telephoning our investor relations department
at the following address and telephone number:
NetObjects, Inc.
301 Galveston Drive
Redwood City, CA 94063
(650)482-3200
69
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
<S> <C>
NETOBJECTS, INC. AND SUBSIDIARIES
Annual Financial Statements for the Fiscal Year Ended September 30, 1999
Independent Auditors' Report F-2
Consolidated Balance Sheets as of September 30, 1999 and 1998 F-3
Consolidated Statements of Operations and Comprehsensive Loss for
the years ended September 30, 1999, 1998, 1997 F-4
Consolidated Statements of Stockholders' Equity/(Deficit) for the years ended
September 30, 1999, 1998, 1997 F-5
Consolidated Statements of Cash Flows for the years ended September 30, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7
Financial Statement Schedules F-19
Interim Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of March 31, 2000 and 1999 F-20
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss
for the three- and six-months ended March 31, 2000 and 1999 F-21
Unaudited Condensed Consolidated Statements of Cash Flows for the six-months ended March 31, 2000 and F-22
1999
Notes to Unaudited Condensed Consolidated Financial Statements F-23
Unaudited Pro Forma Financial Information
Unaudited Pro Forma Financial Information Basis of Presentation F-28
Unaudited Pro Forma Condensed Combined Statement of Operations
for the year ended September 30, 1999 F-29
Notes to Unaudited Pro Forma Condensed Combined Financial Statements F-30
SITEMATIC CORPORATION
Independent Auditors' Report F-32
Balance Sheet as of September 30, 1999 F-33
Statement of Operations for the years ended September 30, 1999 F-34
Statement of Cash Flows for the year ended September 30, 1999 F-35
Statement of Stockholders' Deficit for the year ended September 30, 1999 F-36
Notes to Financial Statements F-37
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
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, 1999 and 1998, and the related consolidated statements of
operations and comprehensive loss, stockholders' equity (deficit), and cash
flows for each of the years in the three-year period ended September 30, 1999.
In connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedules as listed in the accompanying
index. These consolidated financial statements and related financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and related
financial statement schedule 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, 1999 and 1998, and the results of their operations and
comprehensive loss and their cash flows for each of the years in the three-year
period ended September 30, 1999, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG LLP
Mountain View, California
November 5, 1999
F-2
<PAGE>
<TABLE>
NETOBJECTS, INC.
AND SUBSIDIARY
(A Majority Owned Subsidiary of IBM Corporation)
Consolidated Balance Sheets
(In thousands, except share and per share data)
<CAPTION>
September 30,
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 23,623 $ 459
Short-term investments 9,331 --
Accounts receivable, net of allowances of $908 and
$2,263 as of September 30,
1999 and 1998, respectively 6,065 2,292
Prepaid expenses and other current assets 1,486 754
--------- ---------
Total current assets 40,505 3,505
Property and equipment, net 2,204 1,640
Total assets $ 42,709 $ 5,145
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,489 $ 4,723
Notes payable to IBM and IBM Credit -- 20,666
Accrued compensation 1,068 1,690
Other accrued liabilities 1,657 1,066
Deferred revenue from IBM -- 5,121
Other deferred revenue 988 169
Current portion of capital lease obligations 281 299
--------- ---------
Total current liabilities 6,483 33,734
Capital lease obligations, less current portion -- --
--------- ---------
54 336
--------- ---------
Stockholders' Equity (Deficit):
Convertible preferred stock, $0.01 par value, 0 and 15,783,333 shares
authorized as of September 30, 1999 and 1998, respectively. 0 and 11,576,937
shares issued and outstanding as of September 30, 1999 and 1998, respectively -- 109
Preferred stock, $0.01 par value, 6,000,000 and 0 shares authorized as of
September 30, 1999 and 1998, respectively. 0 shares issued and outstanding as
of September 30, 1999 and 1998 -- --
Common stock, $0.01 par value; 60,000,000 and 28,333,333 shares authorized as
of September 30, 1999 and 1998, respectively. 24,755,960 and 2,001,186 shares
issued and outstanding as of September 30, 1999 and 1998, respectively 248 20
Additional paid in capital 110,810 18,318
Notes receivable from stockholders (23) (113)
Accumulated other comprehensive income (losses) (30) --
Deferred stock-based compensation (1,205) (541)
Accumulated deficit (73,628) (46,718)
--------- ---------
Total stockholders' equity (deficit) 36,172 (28,925)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 42,709 $ 5,145
========= =========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
F-3
<PAGE>
<TABLE>
NETOBJECTS, INC.
AND SUBSIDIARY
(A Majority Owned Subsidiary of IBM)
Consolidated Statement of Operations and Comprehensive Loss
(In thousands, except share and per share data)
<CAPTION>
Year Ended September 30,
--------------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Software license fees $ 13,566 $ 9,703 $ 7,392
Service revenues 2,178 -- --
Software license fees from IBM 3,689 2,700 175
Service revenues from IBM 2,782 2,867 --
------------ ------------ ------------
Total revenues 22,215 15,270 7,567
------------ ------------ ------------
Cost of revenues:
Software license fees 1,817 2,531 772
Service revenues 2,295 -- --
Service revenues from IBM 2,113 2,562 --
------------ ------------ ------------
Total cost of revenues 6,225 5,093 772
------------ ------------ ------------
Gross profit 15,990 10,177 6,795
------------ ------------ ------------
Operating expenses:
Sales and marketing 18,800 17,114 12,161
Research and development 9,358 10,231 8,436
General and administrative 4,314 3,575 3,762
Stock-based compensation 559 227 --
------------ ------------ ------------
Total operating expenses 33,031 31,147 24,359
------------ ------------ ------------
Operating income (loss) (17,041) (20,970) (17,564)
Interest income (expense) (715) (1,194) (234)
Accretion of discount on debt (1,653) -- --
Interest on beneficial conversion feature of
convertible debt (7,457) -- --
------------ ------------ ------------
Income (loss) before income taxes (26,866) (22,164) (17,798)
------------ ------------ ------------
Income taxes 44 60 1
------------ ------------ ------------
Net income (loss) (26,910) (22,224) (17,799)
Translation adjustment (30) -- --
Comprehensive loss $ (26,940) $ (22,224) $ (17,799)
============ ============ ============
Basic and diluted net income (loss) per share $ (2.40) $ (12.26) $ (10.45)
============ ============ ============
Shares used to calculate basic and diluted
net income (loss) per share 11,215,118 1,812,484 1,702,726
============ ============ ============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
F-4
<PAGE>
<TABLE>
NETOBJECTS INC. AND SUBSIDIARY
(A Majority Owned Subsidiary of IBM)
Consolidated Statements of Stockholders' Equity/(Deficit)
Three Years Ended September 30, 1999
(In thousands)
<CAPTION>
Preferred Stock Common Stock Additional Deferred
---------------- --------------- Paid- Stock-Based
Shares Amount Shares Amount in-Capital Compensation
------ ------ ------ ------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1996 6,300 45 1,892 19 5,417 -
Exercise of stock options - - 127 1 15 -
Issuance of common stock - - 2 - 1 -
Repurchase of restricted stock - - (164) (2) (18) -
Warrants exercised 4,871 48 - - 8,400 -
Issuance of Series E and F warrants - - - - 298 -
Conversion of Series A, B, and C (1) 12` - - (12) -
preferred stock to Series E
preferred stock
Issuance of Series E preferred stock 225 2 - - 1,498 -
Net loss - - - - - -
------ ------ ------ ------ ------- ------------
Balance at September 30, 1997 11,395 107 1,857 18 15,599 -
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 182 2 - - 1,213 -
Repayment of stockholder notes
receivable - - - - - -
Deferred compensation related to - - - - 768 (768)
stock option grants
Amortization of stock-based - - - - - 227
compensation
Net loss - - - - - -
------ ------ ------ ------ ------- ------------
Balance at September 30, 1998 11,577 109 2,001 20 18,318 (541)
Exercise of stock options - - 541 5 588 -
Issuance of common stock to - - 33 - 316 -
non-employees
Issuance of common stock pursuant to - - 13 - 76 -
ESPP
Repurchase of restricted stock - - (30) - (6) -
Warrants exercised 652 7 - - 1,181 -
Warrants to purchase Series E - - - - 120 -
preferred stock
Issuance of in-the-money convertible - - - - 8,776 -
debt and warrants to purchase
Series E preferred stock
Issuance of Series F preferred 389 4 - - 3,466 -
stock, net of $30 in issuance
costs
Issuance of Series E preferred 82 1 - - 482 -
stock, net of $67 in issuance
costs
Cashless exercise of C warrants for - - 1,356 14 (14) -
common stock
Issuance of common stock at IPO, net - - 6,000 60 64,862 -
of $7,076 in issuance costs
Conversion of Series A, C, E, and F (12,700) (121) 12,700 127 (6) -
preferred stock to common stock
Issuance of common stock for Series
A, C, E and F preferred stock
Convertible debt and interest - - 2,142 22 11,428 -
converted to common stock
Repayment of stockholder notes - - - - - -
receivable
Deferred compensation related to - - - - 1,223 (1,223)
stock option grants
Amortization of stock-based - - - - - 559
compensation
Translation adjustment - - - - - -
Net loss - - - - - -
------ ------ ------ ------ ------- ------------
Balance at September 30, 1999 - - 24,756 248 110,810 (1,205)
====== ====== ====== ====== ======= ============
Notes Receivable Accumulated Other Total
from Comprehensive Accumulated Stockholders'
Stockholders Loss deficit Equity (Deficit)
---------------- ----------------- ------------ -----------------
Balance at September 30, 1996 (143) - (6,695) (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) (17,799)
---------------- ----------------- ------------ -----------------
Balance at September 30, 1997 (143) - (24,494) (8,913)
Exercise of stock options - - - 91
Issuance of common stock - - - 116
Repurchase of restricted stock - - - (2)
Warrant to purchase Series F - - - 535
preferred stock
Issuance of Series E preferred stock - - - 1,215
Repayment of stockholder notes 30 - - 30
receivable
Deferred compensation related to - - - -
stock option grants
Amortization of stock-based - - - 227
compensation
Net loss - - (22,224) (22,224)
---------------- ----------------- ------------ -----------------
Balance at September 30, 1998 (113) - (46,718) (28,925)
Exercise of stock options - - - 593
Issuance of common stock to - - - 316
non-employees
Issuance of common stock pursuant to - - - 76
ESPP
Repurchase of restricted stock - - - (6)
Warrants exercised - - - 1,188
Warrants to purchase Series E - - - 120
preferred stock
Issuance of in-the-money convertible - - - 8,776
debt and warrants to purchase
Series E preferred stock
Issuance of Series F preferred - - - 3,470
stock, net of $30 in issuance
costs
Issuance of Series E preferred - - - 483
stock, net of $67 in issuance costs
Cashless exercise of C warrants for - - - -
common stock
Issuance of common stock at IPO, net - - - 64,922
of $7,076 in issuance costs
Conversion of Series A, C, E, and F - - - -
preferred stock to common stock
Issuance of common stock for Series - - - -
A, C, E and F preferred stock
Convertible debt and interest - - - 11,450
converted to common stock
Repayment of stockholder notes 90 - - 90
receivable
Deferred compensation related to - - - -
stock option grants
Amortization of stock-based - - - 559
compensation
Translation adjustment - (30) - (30)
Net loss - - (26,910) (26,910)
---------------- ----------------- ------------ -----------------
Balance at September 30, 1999 (23) (30) (73,628) 36,172
================ ================= ============ =================
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
F-5
<PAGE>
<TABLE>
NETOBJECTS, INC. AND SUBSIDIARY
(A Majority Owned Subsidiary of IBM)
Consolidated Statements of Cash Flows
(In thousands)
<CAPTION>
Year Ended September 30,
------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash used in operating activities:
Net loss $(26,940) $(22,224) $(17,799)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 1,119 1,104 697
Accretion of discount on borrowings 1,653 201 --
Nonrecurring interest charge on beneficial conversion feature of
convertible debt 7,457 -- --
Amortization of deferred stock-based compensation 559 227 --
Changes in operating assets and liabilities: --
Accounts receivable (3,772) (275) (2,018)
Prepaid expenses and other current assets (234) (306) 27
Accounts payable (1,919) 2,205 721
Accrued compensation (622) 649 699
Other accrued liabilities 810 382 685
Deferred revenue (4,301) (999) 6,186
Interest payable 321 -- --
-------- -------- --------
Net cash used in operating activities (25,869) (19,036) (10,802)
-------- -------- --------
Cash used in investing activities:
Purchases of property and equipment (1,684) (792) (1,028)
Bridge loan to Sitematic Corporation (500) -- --
Purchases of short-term investments (16,000) -- --
Maturities of short-term investments 6,669 -- --
-------- -------- --------
Net cash used in investing activities (11,515) 792) (1,028)
-------- -------- --------
Cash used in financing activities:
Proceeds from short-term borrowings 3,421 21,000 1,050
Repayments of short-term borrowings (24,421) (2,050) --
Proceeds from convertible debt 12,910 -- --
Repayment of convertible debt (2,000) -- --
Payment on capital lease obligations (298) (300) (252)
Proceeds from issuance of preferred stock, net of issuance costs 5,262 1,215 10,246
Proceeds from issuance of common stock, net of issuance costs 65,584 91 17
Repurchases of common stock -- (2) (20)
Repayment of stockholder notes receivable 90 30 --
-------- -------- --------
Net cash provided by financing activities 60,548 19,984 11,041
-------- -------- --------
Net increase (decrease) in cash 23,164 156 (789)
Cash and cash equivalents at beginning of period 459 303 1,092
-------- -------- --------
Cash and cash equivalents at end of period $ 23,623 $ 459 $ 303
======== ======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 1,471 $ 753 $ 293
Noncash investing and financing activities:
Equipment recorded under capital leases $ 335 $ 634 $ 934
Deferred stock-based compensation $ 1,223 $ 768 $ --
Discount on borrowings $ 1,653 $ 535 $ 298
Stock issued in exchange for services $ 316 $ -- $ --
Common stock issued in exchange for note receivable $ -- $ 116 $ --
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
F-6
<PAGE>
NETOBJECTS, INC. AND SUBSIDIARY
(A Majority Owned Subsidiary of IBM)
Notes to Consolidated Financial Statements
(in thousands, except share and per share data)
1. Description of the Business
The Company was incorporated in Delaware on November 21, 1995 and
became a majority-owned subsidiary of IBM on April 11, 1997. The transaction did
not result in a new accounting basis for financial reporting purposes of the
Company. 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.
On May 7, 1999, the Company completed its initial public offering. At
that time, all series of convertible preferred shares outstanding were converted
to common stock.
NetObjects provides software and solutions that enable small businesses
and large enterprises to build, deploy and maintain Internet and intranet web
sites and applications.
2. Summary of Significant Accounting Policies
The accompanying consolidated financial statements of NetObjects,
Inc. and subsidiary (a majority owned subsidiary of IBM) ("the Company" or
"NetObjects") have been prepared in accordance with generally accepted
accounting principles. Certain 1998 amounts have been reclassified to conform to
the 1999 basis of presentation.
Consolidation Principles
The accompanying consolidated accounts and financial statements
include the accounts of the Company and its wholly-owned subsidiary, NetObjects,
Ltd. All intercompany transactions have been eliminated in consolidation.
Estimates and Assumptions
In preparing these financial statements, management has made
estimates and assumptions that effect the reported amounts of assets,
liabilities, revenues and expenses and disclosures of contingent assets and
liabilities at the date of the financial statements. Actual results may differ
from these estimates.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiary is its
local currency. Adjustments arising from the translation of the subsidiary
financial statements are reflected as a separate component of stockholder's
equity. Foreign currency transaction gains and losses are included in the
consolidated statements of operations.
Revenue Recognition
The Company recognizes revenue in accordance with American
Institute of Certified Public Accountants (AICPA) Statement of Position (SOP)
97-2, Software 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.
Under SOP 97-2, which was adopted by the Company in fiscal 1999,
software license revenue is recognized upon delivery of the software, when
persuasive evidence of an agreement exists, and provided the fee is fixed,
determinable, and collectible, and the arrangement does not involve significant
customization of the software.
F-7
<PAGE>
Maintenance and service revenue are recognized on a straight-line basis over the
term of the maintenance agreement. 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.
Software license fees are 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 either
upfront, if the OEM vendor commits to a quantity and a fixed price with no right
of return or, if the volumes are not committed, upon the OEM shipping bundled
products to its customer. IBM and Lotus are considered OEMs for purposes of this
accounting policy. See Note 8 for a discussion of software license fees from
IBM.
Service revenue 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. Service revenue for training and
consulting services are recognized as the services are performed. See Note 8 for
a discussion of service revenue from IBM.
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. The Company will adopt SOP 98-9 in fiscal 2000 and does not expect
that its adoption will have a significant impact on the Company's results of
operations.
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 the grant, the current market value of the
underlying stock exceeds the exercise price. The Company amortizes deferred
stock-based compensation in accordance with FASB Interpretation 28.
Net Loss Per Share
Basic net loss per share is computed using the weighted-average
number of outstanding shares of common stock, excluding shares of common stock
subject to repurchase. 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 stock subject to repurchase, options and
warrants to purchase common stock using the treasury stock method and from
convertible securities using the "as 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. 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, 1999,
does not include the effect of approximately 3,045,869 stock options with a
weighted-average exercise price of $4.42 per share, 4,614,550 common stock
warrants with a weighted-average exercise price of $7.49 per share, or 37,594
shares of common stock issued and subject to repurchase at a weighted-average
exercise price of $0.12, because their effects are antidilutive.
Diluted net loss per share for the year ended September 30, 1998,
does not include the effect of approximately 11,576,937 (on an "as if-converted"
basis) shares of convertible preferred stock outstanding, 2,466,694 stock
options with a weighted-average exercise price of $1.32 per share, 6,650,006
preferred stock
F-8
<PAGE>
warrants with a weighted-average exercise price of $5.60 per share, or 88,177
shares of common stock issued and subject to repurchase at a weighted-average
exercise price of $0.12, because their effects are antidilutive.
Diluted net loss per share for the year ended September 30, 1997, does
not include the effect of approximately 11,394,965 (on an "as if-converted"
basis) shares of convertible preferred stock outstanding, 2,517,670 stock
options with a weighted-average exercise price of $1.20 per share, 6,650,006
preferred stock warrants with a weighted-average exercise price of $5.60 per
share, or 134,524 shares of common stock issued and subject to repurchase at a
weighted-average exercise price of $0.12, because their effects are
antidilutive.
Property and Equipment
Fixed assets are stated at cost and depreciated over the useful
life of the related asset on a straight-line basis. 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
asset and its fair value. To date, the Company has made no adjustments to the
carrying values of its long-lived assets.
Research and Development
Research and development costs are expensed as incurred up to the
point that technological feasibility is established. To date, the Company has
not capitalized any software development costs as software development has been
completed concurrent with the establishment of technological feasibility.
Accumulated Other Comprehensive Losses
Other comprehensive income refers to revenues, expenses, gains and
losses that under generally accepted accounting principles are included in
comprehensive income but excluded from net income. To date, accumulated other
comprehensive losses have consisted entirely of foreign currency translation
adjustments. The tax effects of translation adjustments were not significant.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards 133 (SFAS 133), Accounting
for Derivative Instruments and Hedging Activities, which establishes accounting
and reporting standards for derivative instruments and hedging activities. SFAS
133 is effective as of the beginning of the first quarter of the fiscal year
beginning after June 16, 2000. The Company is determining the effect of SFAS 133
on its financial statements.
In February 1998, the Accounting Standards Executive Committee (AcSEC)
issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP 98-1 provides guidelines to
assist management in determining when software products developed or purchased
for internal use should be expensed or capitalized. The Company does not expect
SOP 98-1 to have a material effect on its financial condition or results of
operations. The Company is determining the effect of SAB101 on its financial
statements for revenue recognized after September 30, 2000.
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.
F-9
<PAGE>
Cash, cash equivalents and short-term investments
The Company considers cash held in checking accounts and highly
liquid investments held in money-market funds and certificates of deposit with
maturities of 90 days or less at the date of purchase to be cash equivalents.
Short-term investments consisting of high-quality commercial paper
having maturities of 90 to 180 days at September 30, 1999, were classified as
held to maturity, and measured at amortized cost. The Company does not hold
equity securities for investment purposes.
Concentration of Credit Risk
Accounts receivable has the potential to subject the Company to
concentrations of credit risk. The Company evaluates its customer's financial
condition prior to extending terms, performs ongoing credit evaluations of its
customers and generally does not require collateral for accounts receivable. As
necessary, the Company maintains an allowance for doubtful accounts and to date
the use of such allowances has been within management estimates.
For the year ended September 30, 1999, software license fees and
service revenue from IBM represented approximately 29% of total revenues, while
three other customers accounted for approximately 24% of total revenues. No
other customer accounts for more than 5% of total revenues.
For the year ended September 30, 1998, software license fees and
service revenue from IBM represented approximately 36% of total revenues. Sales
to one other customer accounted for 29% of total revenues.
The Company's principal markets are North America, Europe and
Japan. International sales represented approximately 23%, 16% and 15% of
revenues for the fiscal years ended September 30, 1999, 1998 and 1997.
Fair Value of Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial
Instruments, requires that fair values be disclosed for most of the Company's
financial instruments. The carrying amounts of cash and cash equivalents, short
term investments, account receivable, accounts payable, accrued compensation,
other accrued liabilities, and notes payable approximate fair value because of
the short maturity of these instruments.
Advertising Expense
The cost of advertising is expensed as incurred and included in
selling and marketing expenses. For the years ended September 30, 1999, 1998 and
1997, those expenses totaled approximately $7.2 million, $5.8 million, and $4.9
million, respectively.
Employee Benefits Plan
The Company has established a qualified savings plan for employees
under Section 401(k) of the Internal Revenue Service Code, in which employees
may defer as much as 15% of their pretax annual salary up to the statutory
limits. The Company does not contribute to the Benefit Plan.
F-10
<PAGE>
3. Property and Equipment
Property and equipment consisted of the following (in thousands):
September 30,
--------------------
1999 1998
------- -------
Computer equipment and software $ 2,963 $ 2,166
Furniture and equipment 651 559
Leasehold improvements 1,589 795
------- -------
5,203 3,520
Less accumulated depreciation and amortization (2,999) (1,880)
------- -------
Total property and equipment $ 2,204 $ 1,640
======= =======
Equipment recorded under capital leases is $1.2 million and the related
accumulated amortization is $912 thousand as of September 30, 1999.
4. Stockholder's Equity (Deficit)
Capital stock
On March 14, 1997, the Company 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, the Company 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. At the closing of the Company's initial public
offering (IPO), these warrants became exercisable for common stock. 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.
In connection with IBM's acquisition of approximately 80% of our
stock on April 11, 1997, the Company 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. This warrant expires on April 11, 2000 and became
exercisable for common stock at the closing of the IPO.
On October 8, 1998, the Company entered into Convertible Note and
Warrant Purchase Agreements with IBM and Perseus Capital LLC. Principal and
accrued interest on these notes was converted into Series E-2 preferred stock at
$5.35 per share upon the completion of the Company's initial public offering
(IPO). The Company recorded a $7.5 million nonrecurring interest charge in
fiscal 1999 to account for the "in-the-money" conversion right of the
convertible notes. These notes totaling $10.9 million were converted
automatically into 2,141,713 shares of common stock at the IPO.
In connection with the Convertible Note and Warrant Purchase
Agreement, 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 Company determined
the fair value of these warrants at the date of grant 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 interest expense of $887,000, which appears on our statement of
operations as a portion of the accretion of discount on debt, was fully
amortized during the year ended September 30, 1999. The warrants remain
outstanding and are exercisable for shares of common stock at any time before
October, 2003.
On October 16, 1998, NetObjects entered into a Stock Purchase
Agreement with Novell 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. At
that time, Novell received a warrant to purchase an additional 16,666 shares of
Series F-2 preferred stock at $9.00 per share. The warrant
F-11
<PAGE>
was exercisable only if the Company did not complete an initial public offering
with aggregate proceeds of more than $30 million by December 31, 2000 and it
expired unexercised.
On October 28, 1998, NetObjects entered into a Stock Purchase
Agreement with MC Silicon Valley, a subsidiary of Mitsubishi, 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. At the time of the IPO, these share of Series F-2
preferred stock were converted into common stock.
In connection with notes issued to IBM, 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 Company determined the fair value of these
warrants at the date of grant using the Black-Scholes pricing model. The
resulting discount of $432,000 was accounted for as additional paid-in capital
and was fully amortized in fiscal 1999. The warrants are exercisable for common
stock at any time before February, 2004.
In May 1999, the Company sold 6,000,000 shares of its common stock
through its IPO. Net proceeds from the offering were approximately $65 million
after deducting the underwriting discount and other offering expenses. At the
time of the IPO, all of the Company's then authorized shares of preferred stock
were eliminated and all outstanding shares of preferred stock and convertible
debt automatically converted into 14,056,093 and 2,141,713 shares of common
stock, respectively. All outstanding warrants that were not exercised upon the
IPO became warrants to purchase common stock.
In the fiscal year ended September 30, 1999, the Company issued
common stock with a fair value of approximately $316,000 to various vendors in
exchange for services.
Stock split
On February 4, 1999, the Board of Directors authorized a
recapitalization of the Company's equity structure, including changes in par
value, 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. The reverse
stock split took effect upon the closing of IPO. All share and per share amounts
have been restated to reflect the reverse stock split for all periods presented.
Stock option plans
The Company's 1997 Stock Option Plan provides for the issuance of
incentive stock options under the Internal Revenue Code of 1986 and for the
issuance of nonqualified stock options to purchase common stock to employees,
non-employee directors or consultants at prices not less than 85% of the fair
market value at the date of grant. A total of 2,158,943 shares of common stock
have been authorized for issuance under the 1997 Plan. The board of directors,
or the compensation committee of the board of directors, determines the fair
market value of the common stock. 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. Options expire ten years from the date of grant.
In connection with IBM's acquisition of approximately 80% of our
outstanding stock in April 1997, the 1996 Stock Option Plan was canceled 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 the 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 since April 11,
1997 under the 1997 Plan. At September 30, 1999, 37,594 shares of common stock
were subject to our right of repurchase, and 1,631,079 shares of common stock
were available for future option grants, under the 1997 Plan.
In March 1997, the board of directors adopted, and in April 1997,
the 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, the 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. 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. The board of directors does not intend to grant any more options under
this stock option plan.
F-12
<PAGE>
In connection with options granted in fiscal year 1999 and 1998, the
Company has recorded deferred stock-based compensation of $1,223,000 and
$768,000, respectively, representing the difference between the exercise price
and the fair value of the Company's common stock at the date of grant.
Amortization of deferred stock-based compensation of $559,000 and $227,000 was
recognized during the fiscal years ended September 30, 1999 and 1998,
respectively.
<TABLE>
The Company's stock option plans and related activity are summarized in
the table below:
<CAPTION>
Year ended Year ended Year ended
September 30,1999 September 30,1998 September 30,1997
---------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Options Price Options Price Options Price
--------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 2,466,694 $ 1.32 2,517,670 $ 1.20 758,051 $ 0.12
Granted at market value 848,180 $ 7.28 173,362 $ 2.10 2,251,557 $ 1.05
Granted at less than market value 939,361 $ 7.47 167,940 $ 2.10 - -
Exercised (541,498) $ 1.09 (144,410) $ 0.60 (126,353) $ 0.12
Canceled (666,868) $ 3.70 (247,768) $ 1.26 (365,585) $ 0.48
--------- --------- ---------
Outstanding at end of period 3,045,869 $ 4.42 2,466,694 $ 1.32 2,517,670 $ 1.20
========= ========= =========
Vested at period end 973,735 852,158 128,388
========= ========= =========
Weighted-average fair value of options
granted during the period with
exercise prices equal to market value
at date of grant $ 5.41 $ 0.66 $ 1.08
Weighted-average fair value of options
granted during the period with
exercise prices less than market
value at date of grant $ 5.65 $ 0.69 $ -
</TABLE>
<TABLE>
The following table summarizes outstanding and exercisable options at September 30, 1999:
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- --------------------------------
Weighted average
Range of exercise Number contractual life Weighted average Number Weighted average
prices Outstanding remaining (in years) exercise price Exercisable exercise price
------ ----------- -------------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
0.12 166,293 7.55 0.12 125,091 0.12
0.30 - 0.60 94,668 7.54 0.81 46,336 0.39
1.50 - 2.10 1,236,547 7.66 1.61 728,890 1.58
5.31 - 6.91 456,693 9.86 6.02 5,334 6.09
7.06 - 7.94 844,489 9.43 7.51 48,898 7.53
8.06 - 12.00 247,179 9.67 9.55 20,834 9.87
----------- -------------------- -------------- ----------- --------------
3,045,869 8.64 4.44 975,383 1.83
=========== ==================== ============== =========== ==============
</TABLE>
Employee stock purchase plan.
The Company's board of directors approved the 1999 Employee Stock
Purchase Plan (ESPP), which became effective on May 28, 1999, and 300,000 shares
were reserved under the plan.
The ESPP permits an eligible employee to purchase common stock, in an
amount 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.
F-13
<PAGE>
During the first offering period of the ESPP, which concluded on July
31, 1999, 12,983 shares were purchased at $5.87 per share. The weighted average
fair market value of the stock purchase rights granted during fiscal 1999 was
$2.20.
Stock compensation
<TABLE>
The Company accounts for stock-based compensation using the intrinsic
method. Had compensation expense for the Company's stock compensation plans been
determined using the fair-value method, as described by SFAS 123, Accounting for
Stock-Based Compensation, pro forma losses for 1999, 1998 and 1997 would have
been as follows (in thousands, except per share amounts):
<CAPTION>
Year Ended September 30,
-----------------------------------------
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
Net income (loss)
As reported $ (26,940) $ (22,224) $ (17,799)
Pro forma (28,011) (22,417) (17,851)
Net income (loss) per share - basic and diluted
As reported (2.40) (12.26) (10.45)
Pro forma (2.50) (12.37) (10.48)
Weighted average common shares outstanding 11,215,118 1,812,484 1,702,726
</TABLE>
For the fiscal year ended September 30, 1999 fair value was determined
for all of the Company's stock-based compensation plans using the Black-Scholes
option pricing method with the following weighted-average assumptions: an
expected life of two years, a risk-free interest rate of 5.875%, expected
volatility of 0.85 and no dividend yield. Expected volatility was calculated
using an average of NetObjects share price volatility and the share price
volatility of similar companies.
For the fiscal years ended September 30, 1998 and 1997, the fair value
of each option granted was estimated using the minimum value method on the date
of grant, assuming a risk-free interest rate of 6.5%, an expected life of four
years, and no dividend yield.
Deferred Stock-based Compensation
The amortization of deferred employee stock-based compensation combined
with the expense associated with stock options granted to non-employees, relates
to the following items in the accompanying consolidated statements of operations
and comprehensive loss (in thousands):
Year ended September 30,
------------------------
1999 1998
---- ----
Cost of revenues 8 4
Sales and marketing 134 96
Research and development 73 100
General and administrative 344 27
--- ---
TOTAL 559 227
=== ===
5. Income Taxes
The Company's deferred tax assets are as follows (in thousands):
Year ended September 30,
------------------------
1999 1998
-------- --------
Net operating loss carryforwards $ 29,821 $ 17,506
Research and development credit carryforwards 1,811 1,649
Accruals and reserves not currently deductible 1,059 1,767
Depreciation on property and equipment 739 488
-------- --------
Gross deferred tax assets 33,430 21,410
-------- --------
Valuation allowance (33,430) (21,410)
-------- --------
Net deferred tax assets $ -- $ --
======== ========
The Company has recorded a valuation allowance on its deferred tax
assets due to uncertainty of future realization of such amounts. The valuation
allowance increased by approximately $12.0 million from fiscal 1998 to fiscal
1999, and by $10.8 million from fiscal 1997 to fiscal 1998.
F-14
<PAGE>
As of September 30, 1999, the Company had net operating loss
carryforwards of $70.2 million and $67.3 million for federal and state income
tax purposes, respectively. The federal tax loss carryforwards expire in years
2012 through 2020, while the state tax loss carryforwards expire in the year
2005. As of September 30, 1999 the Company has research and development credit
carryforwards for federal and state tax purposes of approximately $1,041,000 and
$770,000 respectively. The federal research and development credit carryforwards
expire in the years 2012 through 2020. 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.
The Company's actual tax expense for the years ended September 30,
1999, 1998, and 1997 differs from the benefit at the federal statutory tax rate
of 34%, as follows (in thousands):
Year ended September 30,
-------------------------------
1999 1998 1997
------- ------- -------
Statutory federal income tax benefit $(9,243) $(7,556) $(6,051)
Losses not benefited 9,243 7,556 6,051
State taxes 1 1 1
Foreign taxes 43 59 --
------- ------- -------
$ 44 $ 60 $ 1
======= ======= =======
The components of income taxes for the years ended September 30, 1999,
1998, and 1997 are as follows (in thousands):
Year ended September 30,
---------------------------------
1999 1998 1997
--- --- ---
Current:
Foreign $43 $59 $--
State 1 1 1
--- --- ---
Total $44 $60 $ 1
=== === ===
6. Commitments
Operating leases
Total rental expense for operating leases was approximately $686,000,
$683,000, and $341,000 for the years ended September 30, 1999, 1998 and 1997,
respectively. Future minimum rental payments under noncancelable leases are
approximately $893,000 $884,000, and $869,000 for the years ended September 30,
2000, 2001, and 2002, respectively. As of September 30, 1999, approximately
$360,000 of the Company's cash balance is pledged as security for a lease line
for furniture and fixtures.
7. Segment Information
The Company conducts its business in two distinct segments: Enterprise
and Small Business Online. The principal product of the Enterprise segment is
NetObjects Authoring Server, which is targeted toward the large business
intranet market. The principal product of the Small Business and Online segment
is NetObjects Fusion, which is targeted to small businesses that would like to
establish a website or upgrade an existing site.
F-15
<PAGE>
The Company uses a direct sales force to distribute NetObjects Collage
domestically and through resellers in international markets. The Company
distributes NetObjects Fusion through resellers, distributors, and a dedicated
website.
The Company's Chief Operating Decision Maker (CODM) is the Chief
Executive Officer. During fiscal 1999, the CODM received only revenue
information on a disaggregated basis for the Company's two segments. All other
operating information was prepared on a basis consistent with the consolidated
statement of operations.
Revenue information for the Company's two segments is as follows:
Small Business
and Online Enterprise Total NetObjects
-------------- -------------- ----------------
Revenues:
Domestic license 10,600 2,200 12,800
International license 4,400 - 4,400
Domestic service - 1,500 1,500
International service - 700 700
IBM service 2,800 - 2,800
-------------- -------------- ----------------
Total Revenue 17,800 4,400 22,200
============== ============== ================
In the Small Business and Online segment, $3.7 million in software
license fees from IBM for the year ended September 30, 1999 represented the only
significant customer concentration. This compares to $2.7 million from IBM for
the year ended September 30, 1998, when the Company operated in a single
segment. There were no significant customer concentrations in the Enterprise
segment. The accounting policies of each segment are the same as those described
in the summary of significant accounting policies.
License fees for the Small Business Online segment were concentrated in
the United States and Europe, representing approximately $13.4 million and $4.4
million, respectively. License fees for the Enterprise segment were concentrated
in the United States and Europe, representing approximately $3.7 million and
$0.7 million, respectively.
The Company did not begin licensing NetObjects Authoring Server until
September 1998 and did not begin operating in two segments until the end of
fiscal 1999. As a result, a comparison with previous fiscal years would not be
meaningful.
Substantially all of the Company's assets are located within the United
States.
8. IBM Relationship
Sales and Service Agreements with IBM
The Company entered into a Master License Agreement with IBM in 1997
that was subsequently amended. The salient terms of the agreement were as
follows:
o IBM could sublicense the Company's software products in exchange for
per unit royalty payments.
o IBM was to make prepaid royalty payments of $1.5 million on a quarterly
basis beginning April 1, 1997 and ending October 1, 1998. However, the
Company could and did request that these prepayments be made in advance
of the due date. IBM made payments of $10.5 million to the Company
between April 1 and December 31, 1997, for which the Company paid
interest at the rate of 7.5% per annum.
o The Company agreed to integrate certain of the Company's software
products into IBM's WebSphere software products as part of a service
agreement with IBM, for which the Company was to be paid an amount not
to exceed $6.0 million.
F-16
<PAGE>
In January 1999 the Company and IBM amended the Master License Agreement as
follows:
o Under an agreement with Lotus, a certain number of units of the
Company's products were to be bundled with Lotus products in a
promotional period that was to end September 30, 1998. The promotional
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.
o 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 Master 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
began on January 1, 1999 and ends on December 31, 1999.
For the year ended September 30, 1999 and 1998, the Company recognized
license revenue from IBM of approximately $3.7 million and $2.7 million,
respectively. Service revenue from IBM for the same periods were approximately
$2.8 million and $2.9 million, respectively.
Debt and Equity Financing from IBM
IBM acquired controlling interest of NetObjects on April 11, 1997,
receiving 10,495,968 shares of Series E convertible preferred stock at $6.68 per
share. This represented about 80% of the Company's voting securities at the
time. In connection with this transaction, the Company issued a warrant to IBM
to purchase up to 3,482,838 shares of Series E convertible preferred stock at an
exercise price of approximately $6.68 per share. This warrant is currently
exercisable for common stock and expires April 11, 2000. The Series E preferred
stock issued to IBM when they acquired 80% of our voting shares was converted to
common stock at our IPO.
In December 1997, the Company obtained a line of credit from IBM Credit
Corp. that was eventually increased to a total of $19 million. The interest rate
on this line was LIBOR + 1.5%. In connection with this line, we issued warrants
to purchase 83,333 shares of Series F convertible preferred stock at $10.80 per
share to IBM Credit Corp. This note was repaid with proceeds from our initial
public offering in May 1999. The warrant is currently exercisable for common
stock and expires December 23, 2002. The Company determined the fair value of
these warrants using the Black-Scholes option pricing model. Interest expense of
$535,000, which appears on the statement of operations as a portion of the
accretion of discount on debt to IBM, has been fully amortized as of Sept. 30,
1999.
In October 1998, the Company entered into a Convertible Note and
Warrant Purchase Agreement with IBM and Perseus Capital LLC, under which the
Company borrowed $10.9 million and issued warrants to purchase an additional
163,715 shares of Series E-2 preferred stock at $6.68 per share. These notes
totaling $10.9 million were converted automatically into 2,141,713 shares of
common stock at the IPO. The warrant is currently exercisable for common stock
and expires October 8, 2003. The preferred warrants automatically convert to
common stock upon exercise.
From February 1999 through March 1999, the Company borrowed an
additional $3.4 million from IBM at an interest rate of 10% per annum, for which
IBM received warrants to acquire 51,335 shares of Series E-2 preferred stock at
$6.68 per share. In April 1999, the Company borrowed an additional $2 million
from IBM under the Convertible Note and Warrant Purchase Agreement. The Company
repaid both notes with proceeds of its IPO. The warrant is currently exercisable
for common stock and expires February 19, 2004. The Company determined the fair
value of these warrants using the Black-Scholes option pricing model. Interest
expense of $432,000, which appears on the statement of operations as a portion
of the accretion of discount on debt, has been fully amortized as of Sept. 30,
1999.
As of September 30, 1999 IBM held 12,475,843 shares of the Company's
common stock and warrants to purchase an additional 3,819,365 shares of common
stock. If all outstanding warrants were exercised, IBM would own approximately
53% of the Company's common stock. All of these warrants may be exercised by
foregoing the receipt of that number of shares of common stock that would
otherwise have been issued upon exercise, equal in value to the exercise price
of all warrants exercised.
F-17
<PAGE>
9. Other Related Party Transactions
During fiscal 1999 the Company received royalty payments of $777,000
from Novell Corporation, a stockholder of the Company.
10. Subsequent Events
On October 4, 1999, the Company acquired Sitematic Corporation, an
Application Services Provider (ASP) that offers e-business solutions for small
businesses. Under the terms of the acquisition, which will be accounted for as a
purchase, the Company exchanged approximately two million shares of common stock
for all issued and outstanding Sitematic equity.
In addition to conversion of its preferred shares to the Company's
common stock, Sitematic preferred shareholders received approximately $1.6
million for their shares. All issued and outstanding Sitematic options were
converted to options to purchase the Company's common stock.
Sitematic's operating results for the year ended September 30, 1999
included revenue of approximately $0.2 million and a net loss of approximately
$2.6 million.
Total consideration, including transaction costs of approximately $0.5
million, was $15.5 million. Allocation of the purchase price that is in excess
of Sitematic Corporation's net book value will result in the addition of about
$15.7 million in intangible assets to the Company's balance sheet, of which
about $14.1 million represents goodwill. The goodwill and intangible assets will
be amortized on a straight-line basis over 2 years.
F-18
<PAGE>
<TABLE>
Financial Statement Schedules:
------------------------------
<CAPTION>
BALANCE AT ADDITIONS
BEGINNING OF CHARGED TO BALANCE AT
PERIOD EXPENSE DEDUCTIONS END OF PERIOD
----------------------------------------------------------------------------------------
Accounts Receivable Reserve
---------------------------
<S> <C> <C> <C> <C>
Year ended September 30, 1997 -- 1,850 (1,094) 756
Year ended September 30, 1998 756 4,691 (3,183) 2,263
Year ended September 30, 1999 2,263 1,698 (3,053) 908
</TABLE>
All other financial statement schedules required by Item 14(a)(2) have
been omitted because they are inapplicable or because the required information
has been included in the consolidated financial statements or notes thereto.
F-19
<PAGE>
<TABLE>
CONSOLIDATED QUARTERLY FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MARCH 31, 2000
NETOBJECTS, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(unaudited)
<CAPTION>
March 31, September 30,
2000 1999
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 16,383 $ 23,623
Short-term investments -- 9,331
Accounts receivable, net of allowances for doubtful accounts of
$644 and $908 as of March 31, 2000 and September 30, 1999,
respectively 11,653 6,065
Prepaid expenses and other current assets 4,777 1,486
--------- ---------
Total current assets 32,813 40,505
Property and equipment, net 3,219 2,204
Intangible assets, net of amortization of $4,079 and $0 as of
March 31, 2000 and September 30, 1999, respectively 12,305 --
--------- ---------
Total assets $ 48,337 $ 42,709
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,115 $ 2,489
Accrued compensation 1,266 1,068
Other accrued liabilities 3,655 1,657
Deferred revenue 2,214 988
Current portion of capital lease obligations 299 281
--------- ---------
Total current liabilities 9,549 6,483
--------- ---------
Capital lease obligations, less current portion 107 54
--------- ---------
Total liabilities 9,656 6,537
--------- ---------
Stockholders' Equity:
Common stock, $0.01 par value; 120,000,000 shares authorized
as of March 31, 2000 and September 30, 1999,
respectively, 30,784,464 and 24,755,960 shares issued and
outstanding as of
March 31, 2000 and September 30, 1999, respectively 308 248
Additional paid in capital 126,955 110,810
Notes receivable from stockholders (22) (23)
Deferred stock-based compensation (746) (1,205)
Accumulated other comprehensive losses (50) (30)
Accumulated deficit (87,764) (73,628)
--------- ---------
Total stockholders' equity 38,681 36,172
--------- ---------
Total liabilities and stockholders' equity $ 48,337 $ 42,709
========= =========
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
</FN>
</TABLE>
F-20
<PAGE>
<TABLE>
NETOBJECTS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except share and per share data)
(unaudited)
<CAPTION>
Three months ended March 31, Six months ended December 31,
------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Software license fees and online revenues $ 6,803 $ 2,923 $ 12,465 $ 5,545
Service revenues 1,170 440 2,129 630
Software license fees from IBM 2,251 1,017 3,539 2,335
Service revenues from IBM -- 1,246 -- 2,733
------------ ------------ ------------ ------------
Total revenues 10,224 5,626 18,133 11,243
------------ ------------ ------------ ------------
Cost of revenues:
Software license fees and online revenues 839 453 1,383 948
Royalty adjustment (1,418) -- -- --
Service revenues 1,846 540 3,071 724
Service revenues from IBM -- 688 -- 2,092
------------ ------------ ------------ ------------
Total cost of revenues 1,267 1,681 4,454 3,764
------------ ------------ ------------ ------------
Gross profit 8,957 3,945 13,679 7,479
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing 9,015 4,596 14,962 9,026
Research and development 3,160 1,781 6,389 3,985
General and administrative 1,323 1,072 2,707 1,966
Amortization of intangible assets(*) 2,017 -- 4,033 --
Stock-based compensation 144 70 350 170
------------ ------------ ------------ ------------
Total operating expenses 15,659 7,519 28,441 15,147
------------ ------------ ------------ ------------
Operating loss (6,702) (3,574) (14,762) (7,668)
Interest income (expense) 276 (603) 650 (1,124)
Accretion of discount on debt -- (408) -- (599)
Interest on beneficial conversion feature of
convertible debt -- (3,665) -- (7,457)
------------ ------------ ------------ ------------
Loss before income taxes (6,426) (8,250) (14,112) (16,848)
------------ ------------ ------------ ------------
Income taxes 12 -- 24 2
------------ ------------ ------------ ------------
Net loss $ (6,438) $ (8,250) $ (14,136) $ (16,850)
------------ ------------ ------------ ------------
Translation adjustment (9) (20) --
------------ ------------ ------------ ------------
Comprehensive loss $ (6,447) $ (8,250) $ (14,156) $ (16,850)
============ ============ ============ ============
Basic and diluted net loss per share $ (0.23) $ (3.90) $ (0.52) $ (8.33)
============ ============ ============ ============
Shares used to calculate basic and diluted net
loss per share 27,769,924 2,114,000 27,299,084 2,023,214
============ ============ ============ ============
<FN>
(*) Note: Amortization of intangible assets exclude $46 thousand of amortization which is included in the cost of software
license fees.
The accompanying notes are an integral part of these condensed consolidated financial statements.
</FN>
</TABLE>
F-21
<PAGE>
<TABLE>
NETOBJECTS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
<CAPTION>
Six months ended March 31,
---------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash used in operating activities:
Net loss $(14,136) $(16,850)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 814 522
Accretion of discount on borrowings -- 599
Nonrecurring interest charge on beneficial conversion feature of -- 7,457
convertible debt
Amortization of intangible assets 4,079 --
Amortization of deferred stock-based compensation 350 170
Changes in operating assets and liabilities:
Accounts receivable (5,526) (1,366)
Prepaid expenses (3,410) (683)
Other current assets (351)
Accounts payable (592) (852)
Accrued compensation 197 (335)
Other accrued liabilities 1,455 260
Deferred revenue 1,173 (4,564)
Interest and income taxes payable -- 451
-------- --------
Net cash used in operating activities (15,947) (15,191)
-------- --------
Cash provided by (used in) investing activities:
Purchases of property and equipment (1,593) (1,129)
Cash paid for Sitematic Corporation, net of cash acquired (1,297) --
Maturities of short-term investments 9,331 --
-------- --------
Net cash provided by (used in) investing activities 6,441 (1,129)
-------- --------
Cash provided by financing activities:
Proceeds from short-term borrowings -- 3,421
Repayments of short-term borrowings -- (2,000)
Proceeds from convertible debt -- 10,910
Payment on capital lease obligations (159) (130)
Proceeds from issuance of preferred stock, net of issuance costs -- 5,262
Proceeds from issuance of common stock, net of issuance costs 2,447 133
Repurchases of common stock -- (6)
Issuance of stockholder notes receivable -- 90
-------- --------
Net cash provided by financing activities 2,286 17,680
-------- --------
Effect of exchange rate changes on cash (20) (3)
-------- --------
Net increase (decrease) in cash (7,240) 1,357
Cash and cash equivalents at beginning of period 23,623 459
-------- --------
$ 16,383 $ 1,816
======== ========
Cash and cash equivalents at end of period
Supplemental disclosures of cash flow information:
Interest paid $ 13 $ 608
Noncash investing and financing activities:
Equipment recorded under capital leases 229 --
Discount on borrowings -- $ 8,776
Stock issued in exchange for services -- $ 316
Issuance of common stock for acquisitions $ 13,478 $ --
Deferred stock-based compensation $ 108 $ 1,467
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
</FN>
</TABLE>
F-22
<PAGE>
NETOBJECTS, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of the Business
The Company was incorporated in Delaware on November 21, 1995 and
became a majority-owned subsidiary of IBM on April 11, 1997. 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.
On May 7, 1999, the Company completed its initial public offering.
At the time, all series of convertible preferred shares outstanding were
converted to common stock.
On October 4, 1999 NetObjects acquired Sitematic Corporation and
issued common stock that brought IBM's ownership to less than 50%.
NetObjects provides software, solutions, and services that enable
small businesses to build, deploy, maintain websites online, and conduct
e-business; and enable large enterprises to effectively create and manage
corporate intranets.
2. Summary of Significant Accounting Policies
Basis of Presentation of Interim Financial Statements
The accompanying unaudited condensed consolidated financial
statements of NetObjects, Inc. and subsidiaries ("the Company" or "NetObjects")
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three- and six- month
periods ended March 31, 2000 are not necessarily indicative of the results that
may be expected for the fiscal year ending September 30, 2000. For further
information, refer to the audited financial statements and footnotes thereto for
the fiscal year ended September 30, 1999 included in the Company's Annual Report
on Form 10-K/A.
Net Loss per Share
Basic net loss per share is computed using the weighted average
number of outstanding shares of common stock, excluding shares of common stock
subject to repurchase. 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 anti-dilutive. To date, the Company has not had any
issuances or grants for nominal consideration.
Diluted net loss per share for the three- and six-months ended
March 31, 2000, does not include the effect of warrants to purchase 336,528
shares of common stock with a weighted average exercise price of $7.70, options
to purchase 6,785,305 shares of common stock with a weighted-average exercise
price of $8.11 per share, or 34,607 shares of unvested common stock issued and
subject to repurchase by the Company at a weighted-average price of $0.16,
because their effects are anti-dilutive.
Diluted net loss per share for the three- six-months ended March
31, 1999, does not include
F-23
<PAGE>
the effect of 12,700,399 shares of convertible preferred stock outstanding,
warrants to purchase 6,229,499 shares of convertible preferred stock with a
weighted average exercise price of $6.04, options to purchase 2,900,087 shares
of unvested common stock with a weighted-average exercise price of $3.13 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, because their effects are
anti-dilutive.
At March 31, 2000, the Company had outstanding warrants to
purchase 189,062 shares of common stock with an exercise price of $6.68 that
expire in October 2003 and February 2004, respectively, and 83,333 shares of
common stock with an exercise price of $10.80 and an expiration date in December
2000.
Recent accounting pronouncements
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin (SAB) no. 101 regarding recognition, presentation and
disclosure of revenue. The Company is determining the effect of SAB101 on its
financial statements for revenue recognized after September 30, 2000.
In March 2000, the Emerging Issues Task Force reached a consensus
on Issue 00-2, "Accounting for the Costs of Developing a Web Site" (EITF 00-2).
In general, EITF 00-2 states that the costs of developing a web site should be
accounted for under provisions of Statement of Position (SOP) 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use." We
are currently evaluating EITF 00-2 and do not believe that the pronouncement
will have a significant impact on our financial position, results of operations
or cash flows. EITF 00-2 is effective for costs incurred after June 30, 2000.
Also, in March 2000, the Emerging Issues Task Force reached a
consensus on Issue 00-3, "Application of AICPA Statement of Position 97-2,
`Software Revenue Recognition' to Arrangements That Include the Right to Use
Software Stored on Another Entity's Hardware" (EITF 00-3). EITF 00-3 addresses
the accounting issues related to software hosting arrangements. In general, EITF
00-3 states that if the customer does not have the option to physically take
possession of the software, the transaction is not within the scope of SOP 97-2
and revenue should be recognized ratably over the hosting period as a service
arrangement. However, if the customer has the option to take physical delivery
of the software and specific pricing information is available for both the
software and hosting components of the arrangement, then the software revenue
may be recognized when the customer first has access to the software and revenue
from the hosting component should be recognized ratable over the hosting period.
We are currently evaluating EITF 00-3 and do not believe that the pronouncement
will have a significant impact on our financial position, results of operations
or cash flows. We will be required to implement EITF 00-3 for the year ended
September 30, 2001.
3. Balance Sheet Components
Accounts receivable
The accounts receivables at March 31, 2000 increased by $5.6
million from September 30, 1999. The increase is primarily attributable to
increased sales to IBM and a customer in Europe. At March 31, 2000, the portion
of our accounts receivable balance over 90 days increased by approximately $1.1
million from September 30, 1999. The increase was due primarily to delays in
payment from a European OEM partner and our major US distributor as we made the
transition to Fusion 5.0.
Prepaid Expenses
Prepaid expenses were approximately $4.3 million at March 31,
2000, an increase of $3.4 million from September 30, 1999. Most of this increase
was due to an arrangement with a European
F-24
<PAGE>
customer that increased prepaid expenses by $1.5 million and a $1.4 million
royalty payment due to a leading Internet service provider that was expensed
during the first quarter than reclassified as a prepaid expense in the second
quarter. This prepaid will be amortized to cost of revenues on the basis of
end-user registration with the hosting ISP.
Intangible Assets
On October 4, 1999 the Company acquired the Sitematic Corporation
for total consideration of approximately $16.7 million. Approximately $16.1
million was allocated to intangible assets, which included $14.5 million in
goodwill and $1.6 million of identifiable intangible assets. At March 31, 2000,
intangible assets related to the Sitematic acquisition were $12.1 million.
Amortization expense for the six months ended March 31, 2000 for Sitematic was
approximately $4.0 million.
Other Accrued Liabilities
Other accrued liabilities increased by approximately $2.0 million
from September 30, 1999. This increase was the result of increased co-op and
marketing fees due to our domestic and international customers.
4. Segment Information
The Company conducts its business in two distinct segments:
Enterprise and Small Business Online. The principal product of the Enterprise
segment is NetObjects Collage, which is targeted toward the large enterprise
market. The principal product of the Small Business Online segment is NetObjects
Fusion, which is targeted to small businesses that would like to establish a web
site or upgrade an existing site. The Company uses a direct sales force to
distribute NetObjects Collage domestically and through resellers in
international markets. The Company sells NetObjects Fusion through resellers,
distributors, and a dedicated web site.
<TABLE>
The Company's Chief Operating Decision Maker (CODM) is the Chief
Executive Officer. During the three and six months ended March 31, 2000, the
CODM received only revenue information on a disaggregated basis for the
Company's two segments. All other operating information was prepared on a basis
consistent with the consolidated statement of operations. Revenue information
for the Company's two segments follows:
<CAPTION>
For the three months For the six months
period ended March 31, 2000 period ended March 31, 2000
------------------------------------------ -----------------------------------------
Small Business Small Business
& Online Enterprise Total & Online Enterprise Total
Markets Markets NetObjects Markets Markets NetObjects
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Domestic license and Online $ 1,726 $ 1,275 $ 3,001 $ 4,291 $ 1,877 $ 6,168
International license 3,728 74 3,802 5,987 310 6,297
Domestic service -- 927 927 -- 1,614 1,614
International service -- 243 243 -- 515 515
IBM license 2,171 80 2,251 3,349 190 3,539
------- ------- ------- ------- ------- -------
Total Revenue $ 7,625 $ 2,599 $10,224 $13,627 $ 4,506 $18,133
======= ======= ======= ======= ======= =======
</TABLE>
In the Small Business & Online segment, two customers accounted
for approximately 43% of the outstanding accounts receivables at March 31, 2000.
There were no significant customer concentrations in the Enterprise segment.
For the six months ended March 31, 2000, revenues for the Small
Business & Online segment were concentrated in the United States and Europe,
representing approximately $7.6 million and
F-25
<PAGE>
$6.0 million, respectively. Sales for the Enterprise segment were concentrated
in the United States and Europe, representing approximately $3.7 million and
$0.8 million, respectively.
<TABLE>
<CAPTION>
For the three months For the six months
period ended March 31, 1999 period ended March 31, 1999
------------------------------------------ -----------------------------------------
Small Business Small Business
& Online Enterprise Total & Online Enterprise Total
Markets Markets NetObjects Markets Markets NetObjects
------- ------- ------- ------- ------- -------
Revenues:
<S> <C> <C> <C> <C> <C> <C>
Domestic license and Online $ 1,641 $ 615 $ 2,256 $ 3,003 $ 1,028 $ 4,031
International license 666 1 667 1,513 2 1,515
Domestic service -- 247 247 -- 301 301
International service -- 193 193 -- 329 329
IBM license 1,017 -- 1,017 2,335 -- 2,335
IBM service 1,246 -- 1,246 2,732 -- 2,732
------- ------- ------- ------- ------- -------
Total Revenue 4,570 1,056 5,626 $ 9,582 $ 1,661 $11,243
======= ======= ======= ======= ======= =======
</TABLE>
In the Small Business & Online segment, one customer accounted for
approximately 42% of the outstanding accounts receivables at March 31, 1999.
There were no significant customer concentrations in the Enterprise segment.
For the six months ended March 31, 1999, revenues for the Small
Business & Online segment were concentrated in the United States and Europe,
representing approximately $8.1 million and $1.5 million, respectively. Sales
for the Enterprise segment were concentrated in the United States and Europe,
representing approximately $1.3 million and $0.3 million, respectively.
5. Acquisition of Sitematic Corporation
On October 4, 1999, the Company acquired Sitematic Corporation, an
Application Services Provider (ASP) that offers e-business solutions for small
businesses. Under the terms of the acquisition, which was accounted for as a
purchase, the Company exchanged approximately two million shares of common stock
for all issued and outstanding Sitematic equity.
In addition to conversion of its preferred shares to the Company's
common stock, Sitematic preferred shareholders received approximately $1.6
million for their shares. All issued and outstanding Sitematic options were
converted to options to purchase the Company's common stock.
Total consideration, including transaction costs of approximately $0.6
million, was $15.5 million. Allocation of the purchase price that is in excess
of Sitematic Corporation's net book value resulted in the addition of
approximately $16.1 million in intangible assets to the Company's balance sheet,
of which about $14.1 million represents goodwill. The goodwill and intangible
assets are being amortized on a straight-line basis over 2 years.
The following unaudited pro forma information presents a summary of our
consolidated results of operations and the acquired ASP business of Sitematic
Corporation as if the acquisition had occurred on October 1, 1998.
(In thousands, except Six month period ended
for per share data) March 31,
------------------ 2000 1999
---- ----
Revenues 18,134 $11,296
Net Earnings (14,152) (17,872)
Net Earnings Per Share (.52) (4.56)
F-26
<PAGE>
These unaudited pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of operations which would have
actually resulted had the combinations been in effect on October 1, 1998 or of
future results of operations.
F-27
<PAGE>
Unaudited Pro Forma Financial Information Basis of Presentation
The unaudited pro forma condensed combined financial statement gives
effect to the acquisition of Sitematic, Corporation, using the purchase method
of accounting, whereby the total cost of the acquisition has been allocated to
the tangible and identifiable intangible assets acquired and liabilities assumed
based upon their respective fair values. The unaudited pro forma condensed
combined financial statement has been prepared on the basis of assumptions set
forth below.
The unaudited pro forma condensed combined financial statement for the
year ended September 30, 1999 gives effect to the acquisition of Sitematic
Corporation as if it had occurred on October 1, 1998. The condensed combined
financial statement should be read in conjunction with the historical
consolidated financial statements of NetObjects, and Sitematic, included herein.
This statement is not necessarily indicative of what the actual operating
results would have been had the acquistion occurred on the date indicated and
does not purport to indicate future results of operations. In addition, it does
not reflect any cost savings or other synergies resulting from the acquisition.
F-28
<PAGE>
<TABLE>
NETOBJECTS, INC.
AND SUBSIDIARIES
(A Majority Owned Subsidiary of IBM)
Pro Forma Condensed Combined Statement of Operations
(In thousands, except per share data)
Year ended September 30, 1999
(Unaudited)
<CAPTION>
Pro Forma Pro Forma
NetObjects Sitematic Adjustments Combined
<S> <C> <C> <C> <C>
Revenues:
Software license fees $ 13,566 -- -- $13,566
Service revenues 2,178 203 -- 2,381
Software license fees from IBM 3,689 -- -- 3,689
Service revenues from IBM 2,782 -- -- 2,782
Total revenues 22,215 203 -- 22,418
Cost of revenues:
Software license fees 1,817 -- -- 1,817
Service revenues 2,113 29 -- 2,142
Service revenues from IBM 2,295 -- 2,295
Total cost of revenues 6,225 29 -- 6,254
Gross profit 15,990 174 -- 16,164
Operating expenses:
Sales and marketing 18,800 1,270 -- 20,070
Research and development 9,358 647 -- 10,005
General and administrative 4,314 924 7,845 (c) 13,083
Stock-based compensation 559 -- -- 559
Total operating expenses 33,031 2,841 7,845 43,717
Operating loss (17,041) (2,667) (7,845) (27,553)
Interest income (expense), net (715) 33 (62)(b) (744)
Accretion of discount on debt to IBM (1,653) -- -- (1,653)
Interest on beneficial conversion
feature of convertible debt to IBM (7,457) -- -- (7,457)
Loss before income taxes
(26,866) (2,634) (7,907) (37,407)
============= ============= ============== ============
Income taxes 44 1 -- 45
Net Loss (26,910) (2,635) (7,907) (37,452)
============= ============= ============== ============
Basic and diluted net loss
per share $ (2.40) $ (2.84)
============= ============
Shares used to calculate basic and
diluted net loss per share 11,215,118 2,005,000 (a) 13,220,118
============= ============== ============
</TABLE>
F-29
<PAGE>
NETOBJECTS, INC.
AND SUBSIDIARIES
(A Majority Owned Subsidiary of IBM)
NOTES TO THE UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
On October 4, 1999, NetObjects, Inc. acquired all of the outstanding
capital stock of Sitematic Corporation. The total value of the capital invested
in Sitematic was approximately $15,482,000, which includes common stock valued
at approximately $12,657,000, $1,554,000 in cash, common stock options issued of
$821,000 and transaction costs of $450,000, and assumed liabilities.
At the close of the transaction, 7,968,260 shares of Sitematic common
and 8,200,000 shares of Sitematic preferred were converted to approximately
2,005,000 shares of NetObjects common stock. In addition to conversion of their
preferred shares to NetObjects common, Sitematic preferred shareholders received
about $0.19 for each share of preferred, representing total consideration of
$1,554,000. All issued and outstanding Sitematic options were converted to
options to purchase 269,000 shares of NetObjects common stock.
The unaudited pro forma condensed combined financial statement gives
effect to the acquisition using the purchase method of accounting, whereby the
total cost of the acquisition has been allocated to the tangible and
identifiable intangible assets acquired and liabilities assumed based upon their
respective fair values. The unaudited pro forma condensed combined financial
statement has been prepared on the basis of assumptions set forth below.
The unaudited pro forma condensed combined financial statement for the
year ended September 30, 1999 gives effect to the acquisition of Sitematic
Corporation as if it had occurred on October 1, 1998. The condensed combined
financial statement should be read in conjunction with the historical
consolidated financial statements of NetObjects, and Sitematic, included herein.
This statement is not necessarily indicative of what the actual operating
results would have been had the acquisition occurred on the date indicated and
does not purport to indicate future results of operations. In addition, it does
not reflect any cost savings or other synergies resulting from the acquisition.
Intangible assets will be amortized on a straight-line basis over a
period of two years. The following table represents the allocation of the
purchase price based upon the fair value of Sitematic's assets and liabilities
as of the acquisition date.
Assets Acquired:
Cash $ 257
Trade receivables, net 61
Deposits 4
Property and equipment 236
Other assets 26
-------
584
-------
Intangible assets
Developed product technology 490
Assembled workforce 340
Non-compete agreements 740
-------
1,570
-------
Liabilities assumed (793)
-------
F-30
<PAGE>
Net assets acquired 1,361
---------
Purchase price 15,482
---------
Goodwill $ 14,121
=========
Pro Forma adjustments are as follows:
(a) The pro forma basic and diluted net loss per share is calculated
by assuming that the 2,005,000 shares of NetObjects common stock
issued in the acquisition were outstanding for the entire year.
(b) To record the reduction of interest income on cash paid as part of the total
consideration.
(c) To record one year's amortization expense of goodwill and identified
intangible assets on a straight line basis over their estimated useful lives
of two years.
F-31
<PAGE>
Independent Auditors Report
The Board of Directors
NetObjects, Inc.
We have audited the accompanying balance sheet of Sitematic Corporation
as of September 30, 1999, and the related statements of operations,
stockholders' deficit, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Sitematic
Corporation as of September 30, 1999, and the results of its operations and its
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
KPMG LLP
San Diego, California
October 22, 1999
F-32
<PAGE>
SITEMATIC CORPORATION
Balance Sheet
Year Ended September 30, 1999
(in thousands, except share and per share data)
Assets
Current assets:
Cash and cash equivalents $ 257
Trade receivables, net of allowance for
doubtful accounts of $8 61
Deposits 4
-------
Total current assets 322
Property and equipment, net 236
Other assets 26
-------
Total Assets $ 584
=======
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable 218
Accrued expenses 124
Accrued payroll 80
Accrued commissions 89
Notes payable 500
Current portion of obligations under capital leases (Note 4) 79
Deferred revenue 53
-------
Total current liabilities 1,143
Obligations under capital leases 150
-------
Total Liabilities 1,293
=======
Redeemable preferred stock, no par value
Series A Convertible Preferred Stock:
Authorized shares - 8,200,000
Issued and outstanding shares - 8,200,000, liquidation
preference of $2,216,900 plus $0.02 per share dividend
preference 2,067
-------
Stockholders' Deficit
Common stock, no par value:
Authorized shares - 19,100,000
Issued and outstanding shares - 7,645,990 89
Additional paid-in capital 58
Unearned compensation (57)
Accumulated deficit (2,866)
-------
Total stockholders' deficit (2,776)
-------
Commitments --
Total liabilities stockholders' deficit $ 584
=======
The accompanying notes are an integral part of these financial statements
F-33
<PAGE>
SITEMATIC CORPORATION
Statement of Operations
Year Ended September 30, 1999
(in thousands, except share and per share data)
Service revenues $ 203
Cost of sales 29
-----------
Gross profit 174
-----------
Operating expenses:
Sales and marketing 1,270
Research and development 647
General and administrative 924
-----------
Total operating expenses 2,841
-----------
Loss from operations (2,667)
Interest income 43
Interest expense (10)
-----------
Loss before income taxes (2,634)
-----------
Income tax expense 1
-----------
Net loss $ (2,635)
===========
Basic and diluted net loss per share $ (0.35)
Weighted average common shares outstanding 7,592,150
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
SITEMATIC CORPORATION
Statement of Cash Flows
Year Ended September 30, 1999
(in thousands)
Cash flows used in operating activities
Net loss $(2,635)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 56
Stock compensation for services 45
Compensatory charge for issuance of stock options 2
Changes in operating assets and liabilities:
Trade receivables, net (61)
Current deposits (4)
Other assets (26)
Accounts payable and accrued liabilities 428
Deferred revenue 53
-------
Net cash used in operating activities (2,142)
-------
Cash flows used in investing activities
Purchases of property and equipment (21)
-------
Net cash used in investing activities (21)
-------
Cash flows used in financing activities
Net proceeds from issuance of preferred stock 1,921
Repayment of capital leases (22)
Proceeds from borrowing 500
Proceeds from exercise of stock options 1
-------
Net cash provided by financing activities 2,400
-------
Net decrease in cash and cash equivalents 237
-------
Cash and cash equivalents at beginning of year 20
Cash and cash equivalents at end of year $ 257
=======
Supplemental disclosures of cash flow information:
Interest paid $ 10
Income taxes $ 2
=======
Noncash investing and financing activities:
In 1999, the Company entered into capital leases
for property and equipment
in the amount of $250,667
Conversion of promissory notes outstanding at
September 30, 1998 to Series
A preferred stock in fiscal 1999 $ 80
=======
Issuance of common stock as a payment for services
rendered by third-parties $ 45
=======
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
<TABLE>
SITEMATIC CORPORATION
Statement of Stockholders' Deficit
Year Ended September 30, 1999
(in thousands)
<CAPTION>
Common Stock Additional Total
-------------------- Paid-in Unearned Accumulated Stockholders'
Shares Amount Capital Compensation Deficit Deficit
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance at September 30, 1999 6,452 $ 43 -- -- (231) (188)
Conversion of Series A
preferred stock into
common stock 1,018 -- -- -- -- --
Issuance of common stock
for services rendered 168 45 -- -- -- 45
Issuance of stock options -- -- 58 (58) -- --
Amortization of unearned
compensation -- -- -- 1 -- 1
Exercise of stock options 8 1 -- -- -- 1
Net Loss -- -- -- -- (2,635) (2,635)
------ ------ ------ ------ ------ ------
Balance at September 30, 1999 7,646 $ 89 58 (57) (2,866) (2,776)
====== ====== ====== ====== ====== ======
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
F-36
<PAGE>
SITEMATIC CORPORATION
September 30, 1999
NOTES TO FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
(a) Organization
Sitematic Corporation (the Company), based in San Diego,
California, offers a web-based service that enables small business users to
build simple e-commerce-enabled websites. The Company's products compete in the
market for Internet application development tools.
(b) Cash and Cash Equivalents
The Company considers all investments with an original maturity of
less than three months to be cash and cash equivalents. The Company evaluates
the financial strength of institutions at which significant investments are made
and believes the related credit risk is limited to an acceptable level.
(c) Concentration of Credit Risk
Credit is extended based on an evaluation of a customer's
financial condition and collateral generally is not required. To date, credit
losses have been minimal and such losses have been within management's
expectations.
For the year ended September 30, 1999, sales to two customers
accounted for 22% and 20% of total revenue. Outstanding receivables from these
customers accounted for 50% and 8% of trade accounts receivable at September 30,
1999.
(d) Long-Lived Assets
Long-lived assets and certain identifiable intangibles are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows (undiscounted and without interest) expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
(e) Property and Equipment
Property and equipment are recorded at cost net of accumulated
depreciation. Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets which are generally three years.
Amortization of assets under capital lease is recorded using the straight-line
method based on the shorter of the lease term or the estimated useful lives of
the assets.
(f) Revenue Recognition
Revenue is derived from providing server-based web publishing and
e-commerce tools and services and the web hosting of those services and is
accounted for under the provisions of Statement of Position (SOP) 97-2, Software
Revenue Recognition. Revenue from software services sold to end users is
deferred and recognized ratably over the life of the service contract. Revenue
from customers for website preparation is recognized upon delivery of the
completed website.
(g) Research and Development Expenses
Expenditures for research and development costs are expensed in
the year incurred.
F-37
<PAGE>
(h) Fair Value of Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial
Instruments, requires that fair values be disclosed for most of the Company's
financial instruments. The carrying amounts of cash and cash equivalents, trade
receivables, accounts payable, accrued expenses, accrued payroll, accrued
commissions and notes payable approximate fair value because of the short
maturity of these instruments.
(i) Stock-Based Compensation
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations, in accounting for its
fixed plan stock options. As such, compensation expense would be recorded for
options granted to employees on the date of grant only if the current market
price of the underlying stock exceeded the exercise price. SFAS No. 123,
Accounting for Stock-Based Compensation, permits entities to recognize as
expense over the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net income and
pro forma earnings per share disclosures for employee stock option grants made
in 1996 and future years as if the fair-value-based method defined in SFAS No.
123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS No. 123.
(j) Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. 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. 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.
(k) Earnings per Share
The Company computes basic and diluted earnings per share in
accordance with SFAS No. 128, Earnings per Share (EPS). Basic EPS excludes the
dilutive effects of options, warrants and other convertible securities. Diluted
EPS reflects the potential dilution of securities that could share in the
earnings of the Company. For the year ended September 30, 1999, options,
warrants and convertible preferred stock representing 10,630,857 shares were
excluded from the computation of diluted net loss per share as their effect was
antidilutive.
(l) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets, liabilities, revenues and
expenses and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
F-38
<PAGE>
2. Property and Equipment
Property and equipment consists of the following as of September 30,
1999:
Computer equipment $ 18,148
Software 6,500
Assets under capital lease 289,603
--------
314,251
Less accumulated depreciation
and amortization (78,062)
--------
$236,189
========
Accumulated depreciation and amortization includes $53,295 of accumulated
amortization related to assets under capital lease.
3. Notes Payable
On August 19, 1999, the Company entered into a Bridge Loan Agreement in
the form of an unsecured promissory note, (the Note), with NetObjects, Inc.
(NetObjects). Under the terms of the Note, the Company received $250,000 in
August and an additional $250,000 in September. Principal is to be repaid upon
demand of NetObjects Inc. (plus applicable interest). Interest accrues at the
annual rate of 9%. As of September 30, 1999, no payments had been made by the
Company. As discussed in Note 11, NetObjects purchase the Company in October
1999.
4. Lease Commitments
The Company leases its administrative offices and certain equipment under
noncancelable lease agreements. Future minimum lease payments under
noncancelable operating leases (with initial or remaining lease terms in excess
of one year) and future minimum capital lease payments as of September 30, 1999
are:
Operating Capital
Year ending September 30, leases leases
---------- ---------
2000 $ 126,699 94,815
2001 22,907 94,815
2002 460 67,759
---------- ---------
Total minimum lease payments $ 150,066 257,389
Less estimated executory costs --
---------
Net minimum lease payments 257,389
Less amount representing interest (at
rates ranging from 3.0% to 8.5%) (28,466)
---------
Present value of net minimum
capital lease payments 228,923
Less current portion (79,272)
---------
Long-term obligations under capital leases $149,651
=========
Total rent expense was $85,677 for the year ended September 30, 1999.
5. Stock Option Plan
In August 1998, the Company adopted the 1998 Equity Incentive Plan (the
"Plan"). The maximum number of shares of common stock which may be optioned and
sold under the Plan to officers, employees, directors, and certain other
individuals providing services to the Company is 2,668,726. Options granted
under the Plan generally vest over four years and are exercisable for a period
of up to ten years from the date of grant. The following table summarizes stock
option activity:
F-39
<PAGE>
Weighted-average
Shares exercise price
Balance at September 30, 1998
Granted 2,988,000 $ 0.03*
Exercised (8,125) 0.03
Canceled (1,011,375) 0.03
----------------- -----------------
Balance at September 30, 1999 1,968,500 $ 0.03
================= =================
Balance exercisable at
September 30, 1999 215,250 $ 0.03
================= =================
* The weighted-average remaining contractual life of the outstanding options
at September 30, 1999 was 9.4 years. The exercise price of the options
outstanding at September 30, 1999 was $0.03, except for 35,500 shares that
had an exercise price of $0.25 per share.
For the year ended September 30, 1999, compensation expense was recorded
in the amount of $1,568 for options granted to employees for which the current
market price of the underlying stock on the date of grant exceeded the exercise
price.
In applying SFAS No. 123, pro forma information regarding net loss has
been determined as if the Company has accounted for its employee stock options
under the fair value method of that statement. The fair value of the options was
estimated at the date of grant, using the Black-Scholes option pricing model
with the following weighted-average assumptions: risk-free interest rates
between 4.57% and 5.86%; dividend yield of zero; expected volatility of zero;
and expected life of options of 5.0 years. The estimated fair value of the
options is amortized to expense over the options' vesting period. The
weighted-average fair value of the options granted in fiscal 1999 was $0.05.
Had the Company determined compensation cost based on the fair value at
the grant date for its stock options under SFAS No. 123, the Company's net loss
for the year ended September 30, 1999 would have been increased to the pro forma
amounts indicated below:
Net loss As reported $(2,634,871)
Pro forma $(2,637,031)
Net loss per share As reported $ (0.35)
Pro forma $ (0.35)
6. Redeemable Convertible Preferred Stock
In August 1998, the Company issued 1,263,170 shares of Series A
convertible preferred stock and 1,736,830 shares of common stock for aggregate
net proceeds of $75,000 to a single stockholder. In connection with the issuance
of the Series A convertible preferred stock, the Company amended its Articles of
Incorporation to effect a 500-for-1 split of the common stock, to create a new
class of preferred stock, and to increase the authorized shares of common stock
and preferred stock to 15,000,000 and 5,000,000, respectively.
In October and December 1998 and March 1999, the Company issued an
aggregate of 7,954,705 shares of Series A convertible preferred stock at
$0.2703536 per share for cash and conversion of promissory notes. Net proceeds
of $2.0 million were received from the issuance of Series A convertible
preferred stock. In connection with the issuance of Series A convertible
preferred stock, the Company amended its Articles of Incorporation to increase
the authorized shares of common stock and preferred stock to 19,100,000 and
8,200,000, respectively. In addition, 1,017,875 shares of Series A convertible
preferred stock previously issued to a shareholder in August 1998 were converted
to common stock.
The holders of the Series A convertible preferred stock were entitled to
receive dividends at the rate of $0.02 per share, per annum. Preferred stock
dividends were payable if and when dividends were declared by the Board of
Directors. The right to such dividends was not cumulative. Series A convertible
preferred stock was redeemable at the option of a majority of the holders of
Series A, at any time after October 1, 2003 in six equal semi-annual
installments. See Note 11(unaudited), for information concerning the proceeds
F-40
<PAGE>
from the sale of the company that were paid to the Series A convertible
preferred stockholders.
7. Stockholders' Deficit
Certain shares of common stock are restricted and subject to a repurchase
by the Company in the event the shareholder leaves the employment of the
Company. As of September 30, 1999, 999,995 shares of common stock were subject
to repurchase under this restricted stock agreement.
(a) Warrants
In fiscal 1999, in connection with the issuance of the Series A
convertible preferred stock, warrants to purchase 369,885 shares of the
Company's common stock at $0.2703536 per share were issued. These warrants are
exercisable upon issuance and expire at the earlier of an initial public
offering or on October 4, 2003. The fair value of the warrants was zero.
In connection with certain equipment leasing agreements entered
into during 1999, a warrant for 92,472 shares of the Company's common stock was
issued. This warrant entitles the holder to purchase 92,472 shares of the
Company's common stock at $0.2703536 per share. The warrant is exercisable at
the earlier of nine years from the date of grant or four years from the
effective date of the Company's initial public offering. The fair value of the
warrant of $185 was estimated using the Black-Scholes option pricing model with
the following weighted average assumptions: risk-free interest rate of 4.70%;
dividend yield of zero; expected volatility of zero; and expected life of 9.0
years.
(b) Shares Reserved for Future Issuance
Shares of common stock were reserved for issuance at September 30,
1999 as follows:
Conversion of preferred stock $ 8,200,000
Exercise of options 2,660,601
Exercise of warrants 462,357
Convertible note 720,000
-----------
$12,042,958
===========
8. Related Party Transactions
The outstanding balance on a promissory note issued to a related party in
1998 was converted into 259,909 shares of Series A preferred stock during 1999.
9. Income Taxes
Significant components of the Company's deferred tax assets as of
September 30, 1999 are shown below:
Deferred tax assets:
Net operating loss and credit carryforwards $ 1,156,011
Accrued vacation 15,086
Other - net 39,936
-----------
Total deferred tax assets 1,211,033
Valuation allowance for deferred tax assets (1,211,033)
-----------
Net deferred tax assets $ --
===========
The Company has recorded a 100% valuation allowance against the deferred
tax assets as management has determined that it is not more likely than not that
these assets will be realized.
As of September 30, 1999, the Company had net operating loss
carryforwards for federal and California income tax purposes of approximately
$2,698,600 and $2,698,600, respectively. The California tax loss carryforwards
will begin expiring in 2006, unless previously utilized.
F-41
<PAGE>
As a result of the "change in ownership" provisions of the Tax Reform Act
of 1986, utilization of the Company's tax net operating loss carryforwards is
subject to an annual limitation in future periods. As a result of the annual
limitation, a portion of these carryforwards may expire before ultimately
becoming available to reduce future taxable income.
10. Employee Benefit Plan
The Company's 401(k) plan is for the benefit of substantially all
employees. Contributions to the plan by the Company are at the discretion of the
Board of Directors and are subject to certain limitations described in the plan.
There were no contributions made by the Company to the plan during the year
ended September 30, 1999.
11. Subsequent Events (Unaudited)
NetObjects purchased the Company in October 1999. Subsequent to September
30, 1999, but immediately prior to the acquisition of the Company by NetObjects,
all outstanding principal and accrued interest under the Note was converted into
566,152 shares of the Company's common stock. Upon the acquisition of the
Company by NetObjects, these shares were canceled.
On October 4, 1999, the Company was merged into SDI Acquisition Corp., a
wholly owned subsidiary of NetObjects, in a stock-for-stock plus cash
transaction. A total of approximately 2,005,000 shares of unregistered
NetObjects common stock plus $1,554,088 in cash were issued in consideration for
all of the outstanding shares of the Company. Each Sitematic preferred share was
converted into $0.189523 cash and 0.112482 share of NetObjects common stock for
a total of 922,352 shares. Each Sitematic common share was converted into
0.135870 share of NetObjects common stock for a total of 1,038,863 shares. The
remaining consideration of 43,785 shares of NetObjects common stock was received
by the former holders of Sitematic warrants who converted their warrants into
shares of Sitematic common stock just prior to the merger under a net issuance
conversion option. Shares issued in conjunction with the acquisition are to be
registered by NetObjects no later than May 12, 2000. All of the outstanding
stock options in the Company were converted into similar options in NetObjects
common stock at a ratio of 0.135870 shares of NetObjects for each share of the
Company. The Company incurred legal costs of approximately $100,000 with respect
to the acquisition, all of which were paid for by NetObjects. Shares
approximating 10% of the total consideration paid were placed in escrow for a
period of one year against undisclosed claims and breaches of representations
and warranties.
F-42
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses payable by the Company (the
"registrant") in connection with the offering of the securities being
registered. All of the amounts are estimates except for the SEC registration
fee, the NASD filing fee and the Nasdaq National Market filing fee.
SEC registration fee................................................. $ 5,364
Blue Sky fees and expenses........................................... 0
Printing and engraving expenses...................................... ______
Legal fees and expenses.............................................. 35,000
Accounting fees and expenses......................................... 75,000
Miscellaneous expenses............................................... 2,000
--------
Total....................................................... $_______
========
Item 15. 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, the registrant's 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 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 bylaws would permit
indemnification. The registrant intends to obtain 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 certain of its
directors and executive officers and intends to enter into agreements with its
remaining officers and directors 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.
i
<PAGE>
<TABLE>
<CAPTION>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
Exhibit Description of Document
Number
<S> <C>
2.1+++ Agreement and Plan of Reorganization
3.1.1 Restated Certificate of Incorporation of the Registrant
3.2.1+ Bylaws of the Registrant
4.1+ Specimen Stock Certificate
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
10.1.1+ NetObjects, Inc. Amended and Restated 1997 Stock Option Plan
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
10.1.5++ Form of Executive Stock Option Agreement
10.2+ NetObjects, Inc. 1997 Special Stock Option 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,
ii
<PAGE>
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
10.10+ 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* Promissory Note from Samir Arora to the Company.
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 KPMG LLP
23.2 Consent of KPMG LLP
24.1* Power of attorney (included on the signature page of this Form S-1)
27.1* Financial Data Schedule
<FN>
--------------
* Previously filed.
+ Incorporated by reference to the same-numbered exhibit to our Registration
Statement on Form S-1, as amended, originally filed February 5, 1999, declared
effective May 7, 1999 (Commission File No. 333-71893).
++ Incorporated by reference to the form of Executive Option Agreement filed as
Exhibit A to the Registrant's preliminary proxy statement, filed with the
Securities and Exchange Commission on January 28, 2000 (No. 000-25427).
iii
<PAGE>
+++ Incorporated by reference to the Sitematic Agreement and Plan of
Reorganization filed as an exhibit to the Form 8-K filed with the Securities and
Exchange Commission on October 19, 1999.
</FN>
</TABLE>
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(a) (1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
provided however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) That for purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Exchange Act (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to Section 15(d) of the
Exchange Act) that is incorporated by reference in this Registration Statement
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
iv
<PAGE>
(c) To deliver or cause to be delivered with the prospectus, to each
person to whom the prospectus is sent or given, the latest annual report, to
security holders that is incorporated by reference in the prospectus and
furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3
under the Securities Exchange Act and, where interim financial information
required to be presented by Article 3 of Regulation S-X is not set forth in the
prospectus, to deliver, or cause to be delivered to each person to whom the
prospectus is sent or given, the latest quarterly report that is specifically
incorporated by reference in the prospectus to provide such interim financial
information.
(d) Insofar as indemnification for liabilities under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 15 above, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission and indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable. In the event that a claim of
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 a 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 of 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.
(e) That for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(f) That for purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bonafide offering thereof.
v
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this
Pre-Effective Amendment No. 1 to Form S-1 Registration Statement on Form S-3 to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Redwood City, State of California on June 6, 2000.
NETOBJECTS, INC.
By /s/ Samir Arora
-------------------------------------
Samir Arora, Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Samir Aurora as his true and
lawful attorney-in-fact and agent for him and on his behalf and in his name,
place and stead, and in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement and any
registration statement for the same offering that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act of 1933 (and any amendments
thereto), and to file the same, with exhibits and any and all other documents
filed with respect thereto, with the Securities and Exchange Commission (or any
other governmental or regulatory authority), granting unto said attorney full
power and authority to do and to perform each and every act and thing requisite
and necessary to be done in and about the premises in order to effectuate the
same as fully to all intents and purposes as he himself might or could do if
personally present, hereby ratifying and confirming all that said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
<TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Samir Arora Chief Executive Officer June 6, 2000
--------------------------------------
Samir Arora
/s/ Russell F. Surmanek* Chief Financial Officer June 6, 2000
--------------------------------------
Russell F. Surmanek
/s/ Robert G. Anderegg* Director June 6, 2000
--------------------------------------
Robert G. Anderegg
/s/ Lee A. Dayton* Director June 6, 2000
--------------------------------------
Lee A. Dayton
/s/ John Sculley* Director June 6, 2000
--------------------------------------
John Sculley
/s/ Michael D. Zisman* Director June 6, 2000
--------------------------------------
Michael D. Zisman
/s/ Blake Modersitzki* Director June 6, 2000
--------------------------------------
Blake Modersitzki
--------------------------------------
*By Samir Arora, as attorney-in-fact
</TABLE>
