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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 2
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1999
Commission File Number: 0-25427
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NETOBJECTS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 94-3233791
State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
301 Galveston Drive, Redwood City, California 94063
(Address of Principal Executive Offices) (Zip Code)
(650) 482-3200
(Registrant's Telephone Number, Including Area Code)
None
Securities registered pursuant to Section 12(b) of the Act
Common Stock, par value $0.01
Securities registered pursuant to Section 12(g) of the Act
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated herein by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of September 30, 1999, the aggregate market value of voting stock held by
non-affiliates of the Registrant, based upon the closing sales price for the
Registrant's Common Stock, as reported on the Nasdaq National Market, was
approximately $45.7 million Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for any other purpose.
As of November 30, 1999, Registrant had outstanding 26,979,369 shares of Common
Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or parts thereof) are incorporated by reference into
the following parts of this Form 10-K: Certain information required in Part III
of this Form 10-K is incorporated from the registrant's Proxy Statement for its
Annual meeting of Stockholders.
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<PAGE>
Part III
Item 10. Directors and Executive Officers .................................. 1
Item 11. Executive Compensation............................................. 4
Item 12. Share Ownership ................................................... 7
Item 13. Certain Relationships and Related Transactions..................... 8
Signatures ................................................................. 11
This Form 10-K contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," and
similar expressions are intended to identify forward-looking statements. These
forward-looking statements include, without limitation, statements about the
market opportunity for website 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 in Risk Factors and elsewhere in this
report. We undertake no obligation to update publicly any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future.
The following information is contained in the registrant's preliminary
proxy statement filed electronically with the Securities and Exchange Commission
on January 28, 2000 and definitive proxy statement filed electronically with the
Commission on February 11, 2000.
ii
<PAGE>
ITEM 10. Directors and Executive Officers
Directors
The Company's bylaws provide that the number of Directors shall be six
until changed by approval of the stockholders or a majority of the Directors.
Each Director is elected to serve until the next annual meeting of stockholders
and until the election and qualification of his or her successor or his or her
earlier resignation or removal.
The names of the Company's Directors and certain information about them
are set forth below:
Name Age Positions with the Company
---- --- --------------------------
Samir Arora 34 Chairman of the Board, Chief
Executive Officer and President
Robert G. Anderegg 50 Director
Lee A. Dayton 56 Director
Blake Modersitzki 33 Director
John Sculley 60 Director
Michael D. Zisman 50 Director
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
the Company's Chief Technology Architect and Vice President, Engineering Desktop
Products and Online Services.
Robert G. Anderegg has been a Director of the 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 the 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 the Company since April
11, 1997. Mr. Dayton is Vice President, Corporate Development and Real Estate at
IBM. He has been appointed to serve on the 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.
John Sculley has been a Director of the Company since December
20, 1996. Since April 1994, Mr. Sculley has been a partner of Sculley Brothers,
an investment capital firm. Mr. Sculley also is a director of General Wireless,
Inc., a wireless communications services provider, Talk City, Inc., an online
chat community, and NFO Worldwide, Inc., a market research firm. From 1983 to
1993, Mr. Sculley served as Chief Executive Officer of Apple Computer, Inc. Mr.
Sculley holds a B.A. in 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.
1
<PAGE>
Michael D. Zisman has been a Director of the 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 the 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.
Committees of the Board of Directors and Meetings
The Company's Board of Directors has standing Audit and Compensation
Committees. The Audit Committee currently has two members: Robert G. Anderegg
and John Sculley. Christopher M. Stone was a member of the Audit Committee prior
to his resignation from the Board of Directors effective January 25, 2000. The
Compensation Committee currently has two members: Lee A. Dayton and John
Sculley. Samir Arora was a member of the Compensation Committee until the Board
of Directors reduced the Committee's size at its June 30, 1999 meeting. During
the fiscal year ended September 30, 1999, there were eight meetings of the Board
of Directors, no meetings of the Audit Committee and two meetings of the
Compensation Committee. Mr. Stone attended fewer than 75% of the total number of
meetings of the Board of Directors. In addition, the members of the Board of
Directors and the Compensation Committee acted at various times by unanimous
written consent pursuant to Delaware law.
Compensation of Directors
The Company's Directors do not receive cash compensation for their
services as Directors or members of Committees of the Board of Directors. The
Company's 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. Stone, Sculley and Modersitzki have received these automatic
option grants. Mr. Stone's options ceased vesting upon his resignation from the
Board of Directors, at which time options to purchase 3,333 shares of Common
Stock were vested and exercisable for 30 days following the date of his
resignation. The Company also has 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 reimburses him for certain expenses incurred to
attend Board of Directors meetings.
Contractual Arrangements
The Company is party to a voting agreement with IBM (the "IBM Voting
Agreement") which 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 the
Company. The voting agreement also obligates the Company 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 the
Company's Amended and Restated Bylaws or Restated Certificate of Incorporation
to change the size of the Board of Directors. The IBM Voting Agreement remains
in effect until IBM holds less than 45% of the Company's voting securities on a
fully-diluted basis (as defined in the IBM Voting Agreement) for a period of 180
consecutive days. As of December 31, 1999, IBM held approximately 52% of the
Company's 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
2
<PAGE>
to control any determinations with respect to most material transactions outside
the ordinary course of the Company's business, including mergers or other
business combinations, the acquisition or disposition of the Company's assets,
future issuances of Company equity or debt securities and the payment of
dividends.
Executive Officers
<TABLE>
The names of, and certain information regarding, executive officers of
the Company who are not Directors of the Company are set forth below. The
executive officers serve at the pleasure of the Board of Directors and the Chief
Executive Officer.
<CAPTION>
Name Age Positions with the Company
---- --- --------------------------
<S> <C> <C>
Russell F. Surmanek 42 Executive Vice President, Finance and Operations and Chief Financial Officer
Morris Taradalsky 53 Executive Vice President and General Manager, Enterprise
Mark Patton 42 Executive Vice President and General Manager, Small Business Markets
Peter Shaw 53 Executive Vice President, Corporate Development
Steven Mitgang 38 Executive Vice President, Small Business and Corporate Marketing
Jack Rotolo 39 Senior Vice President, Worldwide Sales
Gagan (Sal) Arora 26 Chief Technology Architect and Vice President, Engineering
</TABLE>
Russell F. Surmanek has served as Executive Vice President,
Finance & Operations, and Chief Financial Officer since April 1999. From 1990 to
1999, Mr. Surmanek served in several senior financial management positions at
Oracle Corporation, most recently as Vice President, Finance & Administration,
Worldwide Operations. From 1989 to 1990, Mr. Surmanek was Controller, North
America Sales & 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.
Morris Taradalsky has served in various senior executive
capacities since joining the Company in April 1997, and was appointed Executive
Vice President and General Manager, Enterprise in August 1999. From April 1994
to April 1997, Mr. Taradalsky served as Chief Executive Officer of MicroNet
Technology, Inc., a privately-held storage systems supplier. From December 1988
to April 1994, Mr. Taradalsky was employed at Apple Computer, Inc. where he was
General Manager of the Apple Business Systems Division. Prior to joining Apple
Computer, Mr. Taradalsky was employed by IBM for 18 years in a number of
positions, including Vice President and General Manager, Santa Teresa
Laboratory. Mr. Taradalsky graduated magna cum laude from Pennsylvania State
University with a B.S. in Mathematics.
Mark Patton was appointed Executive Vice President and General
Manager, Small Business Markets in October 1999, 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 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.
Peter Shaw was appointed Executive Vice President, Corporate
Development in October 1999. Prior to joining the Company, Mr. Shaw was
Chairman, CEO and President of Sitematic Corporation. From December 1995 to June
1997, Mr. Shaw was senior vice president of NetManage, where he was responsible
for the company's international operations and key North American accounts. From
August 1989 to November 1995, Mr. Shaw was President and CEO of AGE Logic, an
Intranet connectivity software company that he founded and subsequently sold to
NetManage. From September 1976 to February 1983, he was founder, President, and
CEO of Megatek Graphic Systems. Mr. Shaw holds a B.S.E. in engineering from City
College of New York, and an MBA from the University of Connecticut.
3
<PAGE>
Steven Mitgang was appointed Executive Vice President, Small
Business and Corporate Marketing in October 1999. 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 Senior Vice President, Worldwide
Sales in August 1999. 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 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 Chairman of the Board, Chief Executive Officer and President of the Company.
ITEM 11.
EXECUTIVE COMPENSATION
Summary Compensation Table
<TABLE>
The following Summary Compensation Table sets forth summary information
as to compensation received by the Company's Chief Executive Officer and each of
the four other most highly compensated persons who were serving as executive
officers of the Company as of September 30, 1999, (collectively, the "named
executive officers") for services rendered to the Company in all capacities
during the two fiscal years ended September 30, 1999.
<CAPTION>
Long-Term Compensation
Annual Compensation Awards
--------------------------------- ----------------------------
Securities Underlying
Options
Name and Principal Position Fiscal Year Salary Bonus #'s of shares
- ----------------------------------------------------- ----------------- ------------- --------------------------
<S> <C> <C> <C> <C>
Samir Arora 1999 $183,129 $ 55,987 --
Chairman of the Board, Chief Executive 1998 175,338 47,434 --
Officer, and President
Russell F. Surmanek 1999 108,447 113,750 235,000
Executive Vice President, Finance and 1998 -- -- --
Operations, Chief Financial Officer
Morris Taradalsky 1999 176,073 24,343 63,333
Executive Vice President and General 1998 166,048 86,095 --
Manager, Enterprise
Mark Patton 1999 162,525 105,754 71,666
Executive Vice President and General 1998 150,000 35,555 --
Manager, Small Business Markets
Jack Rotolo (1) 1999 119,923 53,774 166,666
Senior Vice President, Worldwide 1998 -- -- --
Sales
<FN>
- --------------------------
(1) Mr. Rotolo became an executive officer in August 1999, and these figures reflect his compensation for the entire fiscal
year.
</FN>
</TABLE>
4
<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 7.375 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 7.375 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 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. See "Executive
Compensation--Employment Contracts."
(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>
5
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Values
<TABLE>
The following table provides information regarding the aggregate
exercises of options by each of the named executive officers. In addition, this
table includes 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 the
Company's Common Stock.
<CAPTION>
Value of the Unexercised
Number of Securities In-The
Underlying Unexercised Money Options at Fiscal Year
Shares Options at Fiscal Year End End(2)
Acquired on Value ------------------------------------------------------------
Name Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 73,358 486,639 16,051 107,255 64,188 177,335
Jack Rotolo 19,069 111,914 13,421 180,627 197,747 85,104
<FN>
- -------------------
(1) The value realized represents the aggregate market value of the shares
covered by the option on the date of exercise less the aggregate exercise
price paid by the executive officer.
(2) The value of unexercised in-the-money options at fiscal year end assumes a
fair market value for the Company's 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.
</FN>
</TABLE>
Employment Contracts
The Company 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, 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. See "Executive Compensation - Option Grants in the Last Fiscal Year."
If Mr. Surmanek's employment is terminated for any reason, other than for cause,
the agreement provides for the acceleration of vesting of his stock options so
that 65% of the shares underlying the options will be vested as of the date of
termination. If the company is acquired by another company, the vesting of Mr.
Surmanek's stock options also will 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.
6
<PAGE>
Loans to Officers and Directors
In October 1999, the Company 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 "Code"). The note is due in full two years from the date of
issuance. Prior to the due date, under the terms of the promissory note, Mr.
Surmanek is obligated to repay the advance only from certain proceeds from the
sale of 15,000 shares to be acquired upon the exercise of stock options.
ITEM 12. SHARE OWNERSHIP
<TABLE>
The following table sets forth information as of December 31, 1999
concerning the ownership of Common Stock by (i) each stockholder of the Company
known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock, (ii) each current member of the Board of
Directors of the Company, (iii) each executive officer of the Company named in
the Summary Compensation Table appearing under "Executive Compensation" below
and (iv) all current Directors and executive officers of the Company as a group.
<CAPTION>
Shares Beneficially
Name and Address Owned (1)
---------------- -------------------------------------------
Number Percent
------------------ -------------------
<S> <C> <C>
International Business Machines Corporation (2) 16,295,208 52.7%
New Orchard Road
Armonk, NY 10504
Current Directors:
Samir Arora (3) 1,688,406 6.2%
Robert G. Anderegg -- --
Lee A. Dayton -- --
Blake Modersitzki -- --
John Sculley (4) 68,684 *
Michael D. Zisman -- --
Named Executive Officers who are not Directors:
Russell F. Surmanek (5) 161,334 *
Morris Taradalsky (6) 189,491 *
Mark Patton (7) 173,470 *
Jack Rotolo (8) 126,084 *
All executive officers and Directors as a group (13 persons) (9) 3,194,796 11.4%
<FN>
- -------------------
* 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 December 31,
1999 was 27,102,781. 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 December 31, 1999 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 3,482,838 shares of Common Stock at
approximately $6.66 per share that are exercisable on a net basis and
expire on April 11, 2000, 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 191,841 shares subject to options to purchase Common Stock held by
Mr. Arora that are exercisable within 60 days of December 31, 1999, and
warrants to purchase 59,672 shares of Common Stock at $10.80 per share that
are exercisable on a net basis and expire on March 14, 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.
7
<PAGE>
(4) Includes 18,959 shares subject to options to purchase Common Stock held by
Mr. Sculley that are exercisable within 60 days of December 31, 1999. Also
includes warrants to purchase 13,580 shares of Common Stock at $10.80 per
share that are exercisable on a net basis and expire on March 14, 2000.
(5) Includes 160,554 shares subject to options to purchase Common Stock held by
Mr. Surmanek that are exercisable within 60 days of December 31, 1999.
(6) Includes 165,554 shares subject to options to purchase Common Stock held by
Mr. Taradalsky that are exercisable within 60 days of December 31, 1999.
Also includes warrants to purchase 3,563 shares of Common Stock of $10.80
per share that are exercisable on a net basis and expire on March 14, 2000.
Also includes 20,374 shares of Common Stock held by Rae Technology II LLC,
which represent Mr. Taradalsky's indirect pecuniary interest therein. Mr.
Taradalsky is a member of the Board of Managers of Rae Technology II LLC
and may be deemed to have voting and dispositive power over the shares that
it holds. He disclaims beneficial ownership of all such shares except to
the extent of his pecuniary interest.
(7) Includes 100,112 shares subject to options to purchase Common Stock held by
Mr. Patton that are exercisable within 60 days of December 31, 1999.
(8) All 126,084 shares are subject to options to purchase Common Stock held by
Mr. Rotolo that are exercisable within 60 days of December 31, 1999.
(9) Includes 865,250 shares subject to options to purchase Common Stock that
are exercisable within 60 days of December 31, 1999 and 362,129 shares of
Common Stock held by Rae Technology II LLC.
</FN>
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Set forth below is a summary of certain material transactions between
the Company and any of its Directors, executive officers or holders of more than
5% of the Company's Common Stock, or between the Company and persons in which
Directors, executive officers or such stockholders have direct or indirect
material interests for the period October 1, 1998 through December 31, 1999.
Transactions with IBM
Notes and Warrants. In October and December 1998, the Company 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 the Company's initial public
offering. With the notes, the Company 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. The Company 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, the Company
issued a note for approximately $1.4 million and an additional warrant to
purchase shares of Series E-2 Preferred Stock to IBM. The Company 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, the Company obtained an additional $2.0 million loan
from IBM under a 10% unsecured demand note. The Company repaid the principal and
interest due under the note from the proceeds of the Company's initial public
offering.
Software License Agreement. The Company 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 the Company in connection with sales
of product bundles that include the Company's products and for payment to the
Company for services performed in connection with the IBM WebSphere project. The
agreement has been amended a number of times. The agreement obligates the
Company to place all of its source code into an escrow. 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. 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:
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o Amendment Number 1 and Amendment Number 4 license IBM to use the
Company's 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 the Company's products if they are bundled and sold by
IBM with IBM products. These rates are based on the percentage
which the value of the Company's product bears to the total value
of all of the other products in the bundle. If the value of the
Company's product is equivalent to or less than the total value of
all of the other products in the bundle, the Company receives 37%
of IBM's average selling price for a stand-alone license of the
Company's product during a calendar quarter. If the value of the
Company's product is more than the value of the other products,
the Company receives 69% of IBM's average selling price for a
stand-alone license of the Company's product during a calendar
quarter. If IBM sells the Company's products alone, the Company
receives 75% of IBM's average selling price for a stand-alone
license of the Company's product during a calendar quarter.
o In Amendment Number 3 and Amendment Number 7, IBM agreed to
translate the Company's 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 the
Company's products outside of the United States by IBM and Lotus
by reducing the royalty rate otherwise due to us by 50%. The
Company is 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 The Company became an IBM "Business Partner" under Amendment
Number 5, which permits the Company to resell IBM products and pay
IBM 50% of the royalty payment received by the Company.
o The Company 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, the Company was 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 the Company's
receipt of services revenues equal to the total amount of our
expenditures plus a 5% profit margin instead. These amendments
further provided for the Company 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 the Company $350,000 for developing a capability in
one of our products so that it supports wireless markup language
for IBM's wireless group.
o The Company 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, the Company 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. The Company and IBM also entered into a letter
agreement, dated December 22, 1999, in which the Company granted
IBM the right to bundle copies of NetObjects' Fusion 3.01 with
Lotus SmartSuite during calendar year 2000, for which IBM paid the
Company a one-time fee of $1.0 million. The Company agreed to
reimburse IBM for up to $400,000 for promotional and advertising
expenditures that IBM incurs in marketing these bundles.
o IBM granted the Company a non-exclusive right to incorporate
utilities for Lotus FastSite into NetObjects Fusion 5.0 for a
one-time fee of $75,000.
Other License Agreements.
During fiscal year 1999:
o The Company 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 the Company fifty
cents for each use.
o IBM granted the Company 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. The
Company 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.
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<PAGE>
o Lotus granted the Company 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. The
Company is 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. The Company has 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 the Company's initial
public offering in May 1999, the Company 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, the Company 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. The Company
was 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.
Other Transactions
Novell purchased 333,333 shares of the Company's 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 the Company's stock, assuming the
exercise or conversion of all options and warrants. The Company's Board of
Directors may terminate this right in its discretion at any time after October
26, 1999.
During the fiscal year ended September 30, 1999, the Company 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.
The Company is 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, the
Company reimbursed Rae Technology approximately $30,000 for patent prosecution
expenses under the terms of the license agreement.
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<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 11th day of
February, 2000.
NetObjects, Inc.
By: /s/ Samir Arora
--------------------------------------------
Samir Arora
Chairman of the Board, Chief Executive Officer,
and President (principal executive officer)
/s/ Russell Surmanek
--------------------------------------------
Russell Surmanek
Executive Vice President, Finance & Operations,
and Chief Financial Officer (principal financial officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this amendment has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ Samir Arora
- --------------------------- Chairman of the Board, February 11, 2000
Samir Arora Chief Executive Officer,
and President
/s/ Russell F. Surmanek
- --------------------------- Executive Vice President, February 11, 2000
Russell F. Surmanek Finance & Operations, and
Chief Financial Officer
*/s/ Robert G. Anderegg
- --------------------------- Director February 11, 2000
Robert G. Anderegg
*/s/ Lee A. Dayton
- --------------------------- Director February 11, 2000
Lee A. Dayton
/s/ John Sculley
- --------------------------- Director February 11, 2000
John Sculley
/s/ Michael D. Zisman
- --------------------------- Director February 11, 2000
Michael D. Zisman
* By /s/ Russel F. Surmanek
----------------------
Russel F. Surmanek
As attrorney-in-fact, pursuant
to power of attorney previously
filed with the Commission.
11
